Alpha Baboon in his/her prime.

One of the bills deletes a provision of Dodd-Frank that requires banks to put their derivative business into a separate corporation with its own capital base. That way the derivatives won’t pose a risk to the FDIC insured bank affiliate. Jim Hines, D-Goldman Sachs supported this bill. Zach Carter at HuffPo gives a good description of the money behind the vote here, which, by the way, was 31-14. In other words, this bill was so rotten that eight Republicans couldn’t stomach it.

This preposterous legislation comes the week after Senator Carl Levin ripped JPMorgan Chase and the Office of the Comptroller of the Currency to shreds over the billions of dollars lost by the London whale traders. New York Times writer Floyd Norris reminds us of one of my favorite parts of the Report issued by the Senate Permanent Subcommittee on Investigations. Bruno Iksil, the whale himself, made a presentation to senior management on January 26, 2012, offering a strategy to deal with the losses in the portfolio which at the time were about $400 million.

Mr. Iksil’s presentation then proposed executing “the trades that make sense.”
“The trades that make sense:
Specifically, it proposed:
• sell the forward spread and buy protection on the tightening move
o Use indices and add to existing position
o Go long risk on some belly tranches especially where defaults may realize
o Buy protection on HY and Xover in rallies and turn the position over to monetize volatility”

This proposal encompassed multiple, complex credit trading strategies, using jargon that even the relevant actors and regulators could not understand. Because the traders themselves declined the Subcommittee’s request for interviews and were outside of the Subcommittee’s subpoena authority, the Subcommittee asked other current and former CIO personnel to explain the proposal. Ina Drew, CIO head, told the Subcommittee that the presentation was unclear, and she could not explain exactly what it meant. Irvin Goldman, then the CIO’s Chief Risk Officer, told the Subcommittee that the presentation did not provide enough information to clarify its meaning. Peter Weiland, the CIO Market Risk Officer, offered the explanation that Mr. Iksil was basically describing a strategy of buying low and selling high. Report at 74, footnotes omitted.

Norris says he didn’t understand it either. His conclusion is that these people are out of control, their banks are too big to manage, and that they should be broken into small units that don’t threaten us all with financial annihilation. He points out that fraud flourishes when management doesn’t understand what the help is doing. I think he misses an important point. Often the help has no clue either.

In fact, one big problem is that the skills it takes to advance in management rarely have anything to do with the technical skills it takes to run a business. Can you imagine the head of an IT department writing trading algorithms? Or the head quant managing a portfolio of failed small business loans? The people who climb the greasy pole to the C-Suite have a set of skills visible in alpha males and females in baboon tribes: a drive to dominate and unwavering confidence in their intelligence. Trot one of these people out in front of a Congressional Committee consisting of beta males and females and watch the betas bow and scrape. Of course, it doesn’t hurt to have a set of cufflinks with the Presidential Seal on them.

So, our beta Congressionals of both parties, those who lust after bankster money, like Democrat David Scott, GA-13, who has raised more than $1.7 million from the financial sector; or like Jim Himes, completely unable to separate his own background from his public duties; or just ideological slugs; they are all happy to help their Alpha brethren, enthusiastic, even to put the taxpayer on the hook for bank derivative gambling habits.

Floyd Norris quotes Nick Leeson whose reckless trades caused the bankruptcy of Barings Bank:

“Luckily for my fraud, there were too many chiefs who would chat about it at arm’s length but never go further,” Mr. Leeson wrote in his memoir. “And they never dared ask me any basic questions, since they were afraid of looking stupid about not understanding futures and options.”

I would love to have seen Levin ask Dimon what the heck Iksil was talking about. Not that it would have made any difference to the slavish Uniparty Congressional Betas.

The Business Roundtable is an association of the CEOs of America’s biggest companies. Their total revenues are more than $7.3 trillion, and they employ nearly 16 million people somewhere in the world. Their big priority, supported by millions from their corporate treasuries, is to cut corporate taxation from 35% to 25%, which is hilarious when you realize that most of their members don’t pay anywhere near either rate. Among the members are GE, Tenet Healthcare, PG&E Corporation, and a host of other tax dodging companies. And lest you think that matters, Carter Wood, Senior Communications Advisor at Business Roundtable, will be happy to tell you that whatever they pay is way too much, and they are all moving off-shore.

Taxes are the price we pay to live in a civilized society, you know, a society that respects the legal and property rights of GE, Tenet Healthcare, PG&E and the rest of the tax haters. A society that builds ports and roads so people and goods can move in commerce or across the ocean. If someone weren’t paying taxes corporations like Carnival Cruise line wouldn’t be able to operate at all. According to David Leonhart in the New York Times, Carnival has paid only 1.1% of its cumulative 5 year earnings in taxes of any kind. Its big benefit is that it is a Panama corporation, not an American company, (ignore that corporate headquarters in Florida) so under 26 USC § 883(a)(1) it doesn’t owe taxes. That provision was inserted by the Tax Reform Act of 1986, one of many spineless caves by the Democrats to Ronald Reagan’s tax cutting mania.

Anyway, as I was saying, 99% of us human Americans are allowed to exist so we can pay the taxes and serve in the Armed Forces that enable Business Roundtable corporations to operate around the world. It’s best if those taxes are paid by poor people, and the two major parties are hell bent on creating as many poor people to pay those taxes as possible. Mammon forbid that any dribble of taxation should fall on the feral rich, their thug corporations or their merely wealthy minions. Taxes are for you and me.

And with the job creators all lined up for reducing the nominal rate, they insist on revenue neutrality, the idea that when we reduce corporate rates, we don’t somehow increase the amount of corporate tax revenue, currently at absurdly low levels. They may be in favor of cutting some tax loopholes, but their good friends in Congress must be vigilant to insure that they don’t increase their share of the burdens of civilization. Problems, problems. Someone in this crowd is going to have to pay more, depending on which loopholes get closed. Maybe Carnival is a good choice, because it has such a crappy image right now. Or maybe we just cut the rates without cutting the loopholes. Leonhart isn’t sure the Business Roundtable supports ending loopholes anyway. They sure haven’t said they do.

So what do they support? Cutting Social Security, Medicare and Medicaid. Gary Loveman, President and CEO of Caesars Entertainment Corp., a gambling company, and Chair of the Business Roundtable Committee on Health and Retirement, published an op-ed in the Wall Street Journal explaining that we, presumably including his own gold-plated butt, can’t afford our government, so we should raise the eligibility ages for Medicare and Social Security, increase private sector involvement in Medicare, and cut Medicare and Social Security for anyone who has a pittance of their own until they are reduced to abject poverty and can’t afford to go to Caesar’s anymore. “We” need to cut Social Security and raise taxes by switching to Chained CPI. That ought to be enough to give Caesars a big tax cut. Oh wait. Caesars doesn’t pay taxes. It’s been losing money for years.

I think Loveman deserves a free trip on Carnival, assuming any of its ships is ever fit to sail again.

Sen. Carl Levin, you need to smart like him.

I watched and listened to the hearings on the London fail whale hearings today, and here are some lessons I learned.

Lesson 1: For listeners: these things are really tedious, and you can’t rewind streaming video. It’s important to have a good twitter feed going so you don’t lose your place, and also so that you don’t lose your mind as the set-up questions go forward. It helps to have the report handy so you can figure out what the set-up is about.

Lesson 2. For witnesses: a) it’s important to have a row of lawyers behind you to make you feel safe. You hired them to teach you how to cope with your ugly reality, and they deserve to see how well you were paying attention and whether you learned anything.

b) “That wasn’t my job” is a very important line. When asked if the regulator was provided with relevant documents and information, you say TWMJ. When asked how data entry was done on a $350 billion portfolio, you say TWMJ, and add, I was stunned when I learned months later that data entry was done by hand from spreadsheets that contained bad macros. See, e.g. testimony of Ina Drew, the woman fall guy who was Chief Investment Officer when the whale trades piled up and crashed.

c) “I don’t recall”. Try to reserve that for really unpleasant situations, like when the question is did you say something specific to someone who isn’t here. I don’t have good examples for that, because, you know, I just don’t remember that specifically.

d) Always be technically accurate. It’s best to have those lawyers read your actual statements carefully, and then explain exactly what you were trying to convey, and you just wish your words were better chosen, but as Mammon is your witness, you believed it at the moment you said it. Douglas Braunstein, Current Vice Chairman of JPM is a perfect example. According to the very long report, in an earnings call shortly after news of the fail whale trades, Braunstein said that the positions in the London book were “fully transparent to regulators”, who “get information on those positions on a regular and recurring basis as part of our normalized reporting.” What he meant was that the results of operations of the London book were included in some daily information and some positions were disclosed sometimes. Close enough cried a chorus of lawyers. It didn’t play well on TV, as Braunstein’s eyeblink rate moved into the red zone.

e) Don’t say really stupid things. Braunstein thinks that the way you calculate risk can be changed mid-year with no disclosure as long as all the JPM people agree, because it complies with Generally Accepted Accounting Principles. Senator Levin made a note, and asked OCC head Thomas Curry whether that complied with GAAP. No, but I’ll get you a report, said Curry. When a bureaucrat takes that strong a position on the fly, you said something really stupid, violating this rule.

f).) Don’t say things that are contradicted by records you gave the investigator. The London book was a long-term hedge position, in which all the securities were bought in March. Really? The London book was meant to hedge against deterioration of the financial conditions of borrowers. That makes people think you have a short position on credit. After you say that, it’s really hard to explain why the balance in the account was long credit.

g.) If you made mistakes, admit them. The OCC made a bunch of mistakes and the investigation revealed them. Although JPM refused to provide some documents and concealed a bunch of other stuff, they still had a shot at finding this problem, but they weren’t adequately suspicious. They admit this and have changed some internal practice which they hope will fix the problem. They readily admitted to several other failures.

h) When caught, try “I misunderstood”. Levin asked Michael Cavanaugh, Co-Chief Executive Officer – Corporate & Investment Bank at JPM whether it was a coincidence that changing the method of calculating a credit risk ratio concealed losses. Oh yes said Cavanaugh, just a coincidence. Levin follows up for several minute. Well, yes, said Cavanagh, it was to conceal losses. I misunderstood.

Lesson 3. For would-be staff of the Senate Permanent Subcommittee on Investigations.

We let you vote, leave us alone.

Long-term interest rates are the sum of expected inflation, expected real short-term interest rates, and a term premium. Expected inflation has been low and stable, reflecting central bank mandates and credibility as well as considerable resource slack in the major industrial economies. Real interest rates are expected to remain low, reflecting the weakness of the recovery in advanced economies (and possibly some downgrading of longer-term growth prospects as well). This weakness, all else being equal, dictates that monetary policy must remain accommodative if it is to support the recovery and reduce disinflationary risks. Put another way, at the present time the major industrial economies apparently cannot sustain significantly higher real rates of return; in that respect, central banks–so long as they are meeting their price stability mandates–have little choice but to take actions that keep nominal long-term rates relatively low, as suggested by the similarity in the levels of the rates shown in chart 1. Finally, term premiums are low or negative, reflecting a host of factors, including central bank actions in support of economic recovery.

So that’s the reason savers are getting screwed: our fabulous economic system can’t pay decent interest, just like it can’t pay decent wages. The giant corporations that dominate our system, that are sitting on trillions of dollars, that don’t pay taxes, that hide money overseas, that cheat us at every step, that cut the pay of the average worker, that own the media and control public discourse, the poor babies just can’t afford to pay a decent interest rate to the dummies who scrimped and saved for a lifetime so they would be able to retire comfortably.

And there is nothing that the Fed, or any central bank, can do to help. They just sat there and watched the financial sector destroy the real economy. Housing Bubble? No such thing. Stock market froth? No, the market allocates capital wisely and generously. In the wake of the financial crisis, Bernanke has a simple suggestion: Screw you if you don’t want to put your money into the Wall Street casino; no returns for you. And @FixTheDebt adds to that: let’s cut Social Security, Medicare and Medicaid.

Now it’s only fair to point out that this means that those rancid corporations don’t get much in the way of a real return on their Treasuries. In fact, after inflation, they may be losing money. Maybe the point of low interest is to encourage them to invest. But that’s pushing on a string: with widespread underutilization of existing capital stock, why buy more capacity? And with the ability to screw workers, why pay more? It isn’t like the shareholders need the money; most of the stock is owned by the rich. It’s no different from blind support of banks in the hope they will increase lending.

Savers are toast in this brutal version of capitalism, but savers, like the unemployed, the foreclosed upon, people with underwater homes, government employees, corporate workers and just about everyone, except the feral rich, aren’t ever going to be helped by the captured Obama Administration, the vicious Republicans or the spineless Democrats. We’re all on our own.

Flour Mill, Wolverhampton, England, photo by alienwatch via Flickr

As this financial disaster grinds through its fifth year, US economists haven’t seemed to change much about their analysis or explanations. The people who got it wrong continue to push their false theories, insisting that if we clap louder their reputations will be saved. It’s working for the hyper-rich. We’ve all seen the figures:

The numbers, produced by Emmanuel Saez, an economist at the University of California, Berkeley, show overall income growing by just 1.7 percent over the period. But there was a wide gap between the top 1 percent, whose earnings rose by 11.2 percent, and the other 99 percent, whose earnings declined by 0.4 percent.
…
Median household income, which was $50,054 in 2011, is about 9 percent lower than it was in 1999, after accounting for inflation.

Economists comfortable with progressive ideas offer the same solutions they always do: infrastructure repair paid for with borrowed money, hikes in the minimum wage, tax cuts for the workers who still have jobs, and so on. Perhaps they are familiar with some of the thinking that offers a better way forward. But let’s be realistic. There is little point in trying to teach any new ideas to Democrats in the legislature. They absolutely refuse to deviate from the standard American view: Chicago School Capitalism Good, Everything Else Bad. Heaven forbid anyone accuse them of being a liberal on economic matters.

Fortunately, some economists in the rest of the world saw that the economic theories they learned in college aren’t working, and are saying so in public. Lord Adair Turner is the Executive Chairman of the Financial Services Authority, presently the top banking and securities regulator in England. He recently gave a lecture entitled Debt, Money and Mephistopheles: How do we get out of this mess? Martin Wolf discussed it in this article.

In normal times, says Turner, monetary policy should work. The central bank lowers interest rates and that leads to an increase in bank lending. That isn’t working now, Turner says, because this is a balance sheet recession. People are paying down their debt, not taking out new loans. It doesn’t matter how low the interest rate goes, they don’t want to borrow, they want to get out of debt. Turner calls it pushing on a string. Turner points to long-term problems created by continuing on this feeble course. Japan is the primary school for this kind of failure.

Turner then addresses fiscal policy, deficit spending to provide tax cuts or infrastructure repairs. This tool has been ridiculed by economists for the last 30 years for several reasons the validity of which was unquestioned by any serious economist. Turner discusses a recent paper by Brad DeLong and Larry Summers arguing that those reasons aren’t applicable in the current crisis. He also points out that even so, they may have long term problems. That is because all deficits are financed using borrowed money. Deficit spending means the issuance of debt, and at some point that will be a serious problem, even if it isn’t right now.

But, of course, it is a huge problem right now, a problem not acknowledged by Turner, or by DeLong and Summers. The deficit hawks are insisting that the existing deficit is going to kill us and our children and their children, and it has to be stopped now, by suffocating cuts to Social Security, Medicare and Medicaid, and tax cuts for their corporate sponsors like @FixTheDebt.

Turner then opens the door to another idea that he calls Overt Money Finance. In the US, it would work like this. The Treasury has an account at the Fed. Congress appropriates money to pay for a program, say, purchase of new building in Pittsburg. Right now, that would be financed by issuing new Treasury bills. With Overt Money Finance, the Fed would simply credit the account of the Treasury with the amount appropriated. There would be no new debt, but the Treasury would have the money to pay for the building. You will note the similarity to the idea of the Trillion Dollar Coin. You will also notice the similarity to the way the Fed lends money to banks.

Overt Money Finance isn’t really a new idea. The most famous proponent was Milton Friedman in a 1948 paper, but it has been studiously ignored by all right-thinking people as much too dangerous. Turner explains that economists think that if politicians realized that they could just issue fiat money, they would destroy the currency by issuing more and more until we had hyperinflation. To prevent that bad outcome, we hobble ourselves with all sorts of laws and institutional rules about debt. One of those is the rule that the Fed can’t just lend money directly to the government. It finances the government by buying and selling Treasury debt in the open market. I suppose the theory is that the Fed is independent, so it won’t destroy the currency. Maybe, but let me point out that the Fed could easily have popped the last two bubbles, and didn’t, so its record on protecting the economy doesn’t give me much hope.

FDL readers will recognize Overt Money Finance, because we know about Modern Money Theory, thanks to the efforts of letsgetitdone and other diarists and commenters, and an excellent Book Salon with L. Randall Wray. Wray discusses Milton Friedman’s paper in Chapter 6 of his Modern Money Theory, A Primer on Macroeconomics for Sovereign Monetary Systems, and goes on to explain how it would work today and the steps that would be taken to prevent inflation. Turner has some ideas about that too.

Martin Wolf provides some helpful framing in his article in the Financial Times:

…[I]t is impossible to justify the conventional view that fiat money should operate almost exclusively via today’s system of private borrowing and lending. Why should state-created currency be predominantly employed to back the money created by banks as a byproduct of often irresponsible lending? Why is it good to support the leveraging of private property, but not the supply of public infrastructure? I fail to see any moral force to the idea that fiat money should only promote private, not public, spending.

I fail to see any moral force to that idea either. Why should those criminals get any help from government after wrecking the economy and ruining the lives of hundreds of millions of people around the world? Let’s do something nice for ourselves, preferably at the expense of the hyper-rich. Maybe we could fix some of those 70,000 structurally deficient bridges.

Big lawsuits are great opportunities to look at the state of mind of reporters, pundits and bloggers. I have posts on the case focused on the facts, the law and what they say about the Department of Justice. Of course, my biases are obvious: I think the DOJ refused to enforce the laws against fraud by Wall Street executives, that the refusal to investigate and enforce the law was a deliberate policy choice by President Obama, and that policy was intentionally put into practice by Attorney General Eric Holder and the head of the DOJ Criminal Division, Lanny Breuer. Others show their biases as well.

John Tamny, writing for Steve Forbes’ rag, tells us that S&P was a bunch of second raters, and if the big Wall Street players couldn’t see the coming market crash no one should expect the “financial equivalent of the last player picked for a pickup basketball game” to catch it. Funny, yes, accurate, no. Tamny uses John Paulson’s massive bet against the market as proof that the big boys were ignorant. That’s just false. I discussed the SEC suit against Goldman Sachs here. Paulson and Goldman Sachs were not wild-eyed speculators, they were consciously selling garbage to unsuspecting small banks. In fact, Goldman Sachs made $3.7 billion shorting CDOs just before the Great Crash. The S&P complaint says that the big Wall Street players knew the crash was coming, and they were desperate to get the garbage off their books. The complaint says that S&P knew that, and still they continued to use the same rating system instead of one they had that was more accurate. Forbes isn’t going to let the facts get in the way of a good story.

The Wall Street Journal Op-Ed page explains that the S&P suit is a result of failed regulation and revenge. The evil feds regulated the ratings agencies and “ forced investors to rely on them”. That, of course, is nonsense. There is a rule that some financial institutions, including credit unions, can’t invest in securities that receive low ratings. That rule assumes that the ratings agencies are doing their jobs. If they don’t, they can and do cause enormous losses, and they should be sued.

And look, they say, Moody’s wasn’t sued, and they were just as bad. The decision to end the Moody’s investigation, if that happened, was made at the time S&P downgraded the US. And, get this:

… that’s also coincidentally when White House Chief of Staff Jack Lew was aggressively promoting the President’s campaign to prevent entitlement reform. Mr. Lew had worked in the heart of Citigroup’s subprime investment factory, and the President has not only been willing to forgive and forget. He’s even nominated Mr. Lew to become Secretary of the Treasury. But the company that put a shot across the Beltway bow over deficit spending is now the only target of a credit-ratings prosecution.

Those pesky facts again: Obama and the rest of his minions were perfectly willing to slash Social Security, Medicare and Medicaid to achieve his Grand Bargain, and that’s still on the table. The Wall Street Journal: once a valuable source of business reporting, now the print version of Fox News.

One more example from Red State’s Ed Morrisey, who managed to read a story from Bloomberg on the lawsuit. Bloomberg points out that the complaint says that Citibank and Bank of America are both the underwriters and purchasers of some of the overrated securities listed in the complaint. On its face this does seem odd. But recall that the investment banking arms of the company aren’t the same as the commercial banking group. Another Bloomberg writer, Jody Shenn, has an explanation. The suit is brought under FIRREA, the statute passed in the wake of the S&L disaster of the late 1980s in recognition of the fact that insiders at banks used their control to benefit themselves at the expense of shareholders and at the expense of federal insurance programs and taxpayers. The CEO of Citi testified to Congress that he didn’t know that the ratings system was corrupt. I imagine that this is true, and some employees of the bank were dumping the bad deals on the bank to enrich themselves.

Well, we all have our biases, don’t we, but that doesn’t mean we can’t agree on some things. I too want to know why Moody’s and Fitch weren’t sued. And why no one was indicted for fraud.

Lanny Breuer on Frontline defending the Obama Get Out of Jail Free Card for banksters

Despite the best efforts of Lanny Breuer to hide it, the complaint filed against Standard and Poor’s by Los Angeles US Attorney André Birotte, Jr. proves that the Department of Justice is fully aware of the corruption on Wall Street in the run-up to the Great Crash. The alleged facts point directly at the issuers of real estate mortgage-backed securities and collateralized debt obligations as the leading cause of the losses of the victims of S&P’s alleged frauds.

In a nutshell, the issuers, a term which deal underwriters, played a major role in creating the software and techniques used to rate RMBSs and CDOs. They used that role to delay and water down changes to the ratings systems. They played the ratings agencies against each other, and they got much higher ratings than were justified by the mortgage loans that underlay the securities. The issuers had mountains of these bad loans, and were desperate to get them off their baoks to protect their balance sheets. Those issuers include Too Big To Fail Banks, and some others as well.

The complaint explains the role played by issuers in developing the RMBS ratings systems at S&P, beginning at ¶ 123. In April 2004 S&P executives met to discuss changes to the process for creating and implementing changes to its ratings criteria. The new policy

… required consideration of “market insight” and “rating implications” and the polling of both “3 to 5 investors in the product” and “and appropriate number of issuers and investment bankers for a full 360-market perspective.”

¶ 125. That policy was implemented on July 1, 2004. The complaint says that issuer feedback led S&P to limit, adjust and delay updates to ratings criteria in order to preserve profits and market share. I described this in more detail here. The impact was dramatic. One internal S&P document says that “Competition among ratings agencies has helped drive down support levels in deals”, meaning that RMBS securities became more risky. ¶ 131.

S&P also invited input from issuers into its CDO ratings process. The discussion begins at ¶ 158. In response to one group of changes, Bear Stearns allegedly said Bear Stearns would quit using S&P. The changes were not implemented. Issuer input resulted in weakened ratings criteria and delays in implementation in this and other cases^.

Issuers were trying to get that garbage off their books. In 2006, it was becoming clear to S&P that RMBSs and CDOs were not performing as predicted by their ratings. Line-level personnel at S&P wanted to change a policy that permitted analysts to rate CDOs based in part on the initial ratings of RMBS tranches included in the CDO, even when S&P knew downgrades were likely. ¶ 207. S&P executives discussed the actions of issuers:

Issuers were shtting down and liquidating their warehouses i.e., stores of RMBS temporarily held by issuers as they assembled assets for future CDOs), in part to enable the issuers to avoid being required to mark their positions to market — and being stuck with collateral that had suffered losses.

¶ 233(b). What this means is that issuers were taking advantage of the lag time they actively created in adjusting ratings criteria to shovel more of their garbage off their books and onto actively misled investors.

Who were these issuers? The complaint doesn’t name any specific issuers, but it names a large number of securities. Here are some names:

Gemstone CDO VII: $1.1 billion, sold by Deutsche Bank, relationship of managers unclear; litigation pending; March 2007.

Sorin CDO VI: $550 million, Bear Stearns (now owned by JPMorgan), March 2007

Cairn Mezzanine ABS CDO III Limited: $1.78 billion, RBS Greenwich Capital Markets (the securities trading arm of Royal Bank of Scotland), March 2007.

Stack 2007-1: $1.5 billion, Citigroup, April 2007

Octonion I CDO: $1 billion, Citigroup, April 2007

Corona Borealis CDO Ltd.: $1.5 billion, underwritten by Lehman Brothers, other relationships unclear, April 2007.

Vertical Capital LLC, distributed by UBS: Vertical ABS-CDO 2007-1, $1.5 billion April 2007.

And these are just some of the issues rated or for which final ratings were issued. The complaint says S&P rated more than $135 billion in securities from March to June 2007, long after it was obvious that the housing market had collapsed.

The Department of Justice knows this, but it refuses to indict anyone. This complaint makes it clear that it wasn’t just an accident or a matter of greed, as the President and his henchmen claim. With the departure of Tim Geithner and Lanny Breuer, the most offensive proponents of the get out of jail free card, there is an opening for change.

We have this Progressive Caucus in the legislature. Why haven’t some of them taken on the task of learning about this stuff and asking out loud why there are no indictments? Once you know the Obama Administration is making crap up, it’s easy to get past their false explanations. This is one area of bipartisan agreement: every single American hates these cheats.
——–
* The complaint doesn’t say why, so it may or may not have been requested by issuers; but one change S&P made was to change to zero the correlation assumption “…between ‘a CDO of ABS asset” and ‘an RMBS asset in a CDO/ABS transaction.” Correlation in this sense refers to the statistical relation between the failure of two assets: if one fails, what is the probability that the other will. Readers may recall that one of the tools that made RMBSs seem plausible was the Gaussian Copula, which theoretically is a way to measuring the likelihood of correlation of defaults in a large group of mortgage loans. Intuitively, if the portfolio of loans is spread geographically and by other criteria of separation, there should be low likelihood that if a loan in Boston fails, so will a loan in Las Vegas. The model had a number of weaknesses.

There is a close relationship between two tranches of the same RMBS. If one fails, it raises the likelihood that another will fail. Calling it zero removes that relationship, and gives the CDO a higher rating than it should have.