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The Uniparty Fights Back Against Regulating Derivatives

2:55 pm in Banksters by masaccio

Alpha Baboon in his/her prime.


Last week, the House Agriculture Committee voted to cut regulation of derivative transactions, and to insure that derivative transactions could take place inside FDIC insured banks. Six Democrats voted for the bill according to Gaius Publius at AmericaBlog, including Ann Kuster NH-2, one of those true progressives supported by the likes of EMILY’s List. It certainly is discouraging to see the party that claims to represent the interests of everyday Americans holding hands with the banksters.

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. Read the rest of this entry →

It’s Much More than the Appearance of Corruption

1:36 pm in Courts by masaccio

Photo by Praline3001 via Flickr

As we move into heavy campaigning season, let us reflect on Citizens United. Perhaps the silliest statement in the opinion written by Justice Anthony Kennedy is this:

For the reasons explained above, we now conclude that independent expenditures, including those made by corporations, do not give rise to corruption or the appearance of corruption.

The “reasons explained above” are in fact one reason: in an earlier case, Buckley v. Valeo, the Court ruled that a ban on direct contributions was justified to prevent corruption or the appearance of corruption, but that a ban on expenditures, as opposed to direct contributions, was not. Kennedy quotes Buckley:

“The absence of prearrangement and coordination of an expenditure with the candidate or his agent not only undermines the value of the expenditure to the candidate, but also alleviates the danger that expenditures will be given as a quid pro quo for improper commitments from the candidate.”

The naïveté, or something worse, of Kennedy and the concurring judge/politicians is breath-taking, as Stephen Colbert and Jon Stewart convincingly demonstrated. But this isn’t funny. There are a raft of academic studies showing that Kennedy and the rest of the CU majority are fools if they really believe what they wrote, and viciously political if they don’t. I reviewed a couple of them here, studies showing that political contributions and lobbying affect law enforcement against corporations and the humans who work for them.

Here are some more. I include some lobbying papers, because the two are closely related. I note that these papers don’t make the inane distinction between expenditures and direct contributions that Kennedy loves so much, probably because they live in the real world. I found all of these papers at SSRN. Quotes are from the abstracts; I haven’t read the papers.

1. Do Corporate Political Contributions Enhance Shareholder Value?

Overall, the results suggest that corporate political contributions cause an increase in the equity value of the contributing firms, and the valuation effects of these contributions are larger for firms that make larger contributions as well as for firms more affected by government policies.

2. Crony Capitalism and Antitrust

In August 2011, the United States brought a landmark antitrust lawsuit to prevent the merger of two of the nation’s four largest mobile wireless telecommunications services providers, AT&T Inc. and T Mobile USA, Inc. But why are so many elected officials asking the Obama administration to intercede in the Department of Justice’s lawsuit to force a settlement? Why are they approving a merger that would likely lead to higher prices, fewer jobs, less innovation, and higher taxes for their constituents? Does it have anything to do with the money they are receiving from AT&T and T-Mobile?

This Essay examines the recent lobbying efforts in the AT&T/T-Mobile merger. AT&T spent $11.69 million on political lobbying in the first six months of 2011. In addition to hefty campaign contributions, it lobbied lawmakers with $52 steaks and $15 gin-and-cucumber puree cocktails.

But lobbyists, as this Essay outlines, are not the problem. The problem is the combination of lax campaign finance rules and antitrust’s prevailing legal standard, a flexible fact-specific rule of reason.

Read the rest of this entry →

Obama Fails to Meet Emotional Needs Of Bankers

7:08 pm in Financial Crisis by masaccio

Bankster Scrooge McDuck wonders where his White House invitation may be, while insisting on anonymity. (photo: dreamagicjp via Flickr)

Once again President Obama has failed to meet the needs of his constituents. This time, it’s the bankers he has failed.

On the mental list of slights and outrages that just about every major figure on Wall Street is believed to keep on President Barack Obama, add this one: When he met recently with a group of CEO’s at Blair House there was no representative from any of the six biggest banks in America.

Not one!

“If they don’t hate us anymore, why weren’t any of us there?” a senior executive at one of the Big Six banks said recently in trying to explain his hostility toward the president.

Maybe because he knew the only thing you want to talk about is you and your needs? Maybe because you have produced nothing for the rest of the country except loss and misery? Maybe because the President is embarrassed that he can’t afford that special shower that throws money directly onto your bare skin?

It’s all personal with these weepy people:

“You have to understand, it is very personal. He raised money from us,” one executive at a top six bank said. “Then he started calling us bad people. So forgive us for not wanting to buy him a drink after getting punched in the eye.”

We outsiders think it doesn’t count as a punch in the eye when Obama signs off on that tax gift in direct violation of his pledge to the rest of us, refuses to consider prosecutions for your crimes, rejects controls on your outrageous bonuses paid out of direct taxpayer transfers, agrees to wimpy regulation of your thieving industry, and appoints your drinking buddies to be his personal economic advisers. We like action. Your feelings are hurt by some words.

You Wall Streeters think Obama and the lackeys you sent to run the economy are ignorant putzes:

“You go down to the White House now and sit down to talk with members of the inner circle and the issue is no longer so much hostility as it is sheer incomprehension,” said one senior private equity executive. “You wind up talking about things they are not at all interested in and are generally outside their area of competence.”

So you admit that Geithner and Summers and the rest of that crowd are incompetent. That’s exactly what we all think, maybe for different reasons. I hope it means Obama has figured out that you are a bunch of crooks. That hope gets a tiny boost from this:

A senior Wall Street lobbyist explained his feelings this way: “This president came into office in the midst of an economic crisis and started off by demonizing insurance companies and then going after Wall Street banks. Never did he try to bring together CEOs and say, ‘We are in this together, we are Team America and we are going to go out and get things done.’ That’s the power you have as president. Instead this White House pushed people away and they did it consciously and they are still doing it.”

This is a perfect example of narcissism. I bet it never dawned on this arrogant jerk that from the far right of the political spectrum to the far left, and from the least to the most politically alert citizen, there is one area of absolute agreement: Team America was held hostage by Team Banker, Team Banker paid a corrupt congress and a compliant administration to salvage it from its gambling losses and theft, and Team America’s underwater homeowners, savers, retirees and workers were sold into serfdom to protect the wealth of Team Banker.

This time the President got it right: nobody can stomach you or your pestilential business. You got the money. You won’t get the love.