Author: Matthew G. Saroff

Great Googly Moogly: Larry Summers Wants to be Fed Chairman

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It appears that Barney Frank and Chris Dodd have differences in the future course of regulation.

Specifically, Frank favors giving the Federal Reserve the job of managing “systemic risk” under any new regulations, and Dodd thinks that the Fed, with its history of unresponsiveness and opacity is ill suited to the task.

Well, it now appears that much of the smear campaign against Dodd may have come from Larry Summers, who would be first in line to be Federal Reserve chairman if Obama does not reappoint Bernanke, and so he went after Dodd in order to strengthen Frank’s hand in making the Fed the chief regulator.

I’m beginning to think that anyone who has “friend of Robert Rubin” on their resume should be barred from any position of authority.

Un-dirtyword-believable.

The Cemeteries of the World are Full of Indispensable Men*

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The former chief economist of the IMF has an Op-Ed in the New York Times, and he makes the point that removing the “geniuses” who created the problem has to be the first step of fixing the problem:

A.I.G. can hardly claim that its generous bonuses attract the best and the brightest. So instead, it defends the payments by arguing they’re needed to retain employees who are crucial for winding down transactions that are “difficult to understand and manage.” In other words, only the people who stuck the knife into the American International Group can neatly extract it for a decent burial.

There is no reason to believe this.

Similar arguments made during the 1997 Asian financial crisis, when currencies and stock markets collapsed in much of Southeast Asia, turned out to be a smokescreen to protect the executives who were partly responsible for the mess. Recovery from that crisis required Indonesia, South Korea and Thailand to close or consolidate banks. In all three countries, bankers protested, claiming that their connections with borrowers were critical to recovery.

…

The lesson of all this is that when insiders have broken a financial institution, the most direct remedy is to kick them out. Traders are hardly in short supply, and you don’t need to rely on the ones who made the toxic trades in the first place. Companies must always plan around the potential departure of even their star traders, or they are certain to fail. A.I.G. does not need to keep all of its traders, especially since it takes far fewer people to unwind a portfolio than to build it up.

The longer that we put this off, the worse it will be.

*Charles de Gaulle, a man not known for his own sense of personal dispensablity, coined this bon mot.

Cows…Barn Doors…And the US Government

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So, we have the government looking to legislation giving them the authority that the FDIC does when it shuts down banks for not bank entities, such as bank holding companies and hedge funds.

And in related news, the FDIC is looking for additional authority to acutally write regulations, a function which is currently does not have.

It has strong enforcement powers, but, “but only the Federal Reserve, Office of Thrift Supervision and National Credit Union Administration can write the regulation it enforces.”

It’s about time.

What Prima Donnas

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Well, it appears that Senator Evah Bahy’s (DINO-IN) new moderate caucus is getting some pushback from their constituents, and they are crying like a bunch of “girlie men”, to quote the governator.

It appears that Rachel Maddow covered this, and called them “conservadems”, and they are getting some calls from voters in their states telling them to get with the program.

How many calls are they getting?

Maddow’s five-minute “conservadem” segment last Thursday provoked at least 20 calls Monday to Udall’s office and more than a dozen e-mails to Democratic Party headquarters in Colorado.

So now they are crying about how awful people are to them.

Seriously, these folks are used to obstructing progressive programs, and then getting a pat on the head from villagers inside the beltway, but now, with someone pointing them out as trying to stifle change, they get 20 phone calls and more than a dozen emails, and they are whining about how people are mean to them.

Listen, if you suck up to Wall Street, who destroyed our 401(k)s, and you suck up to large food processors, who put poison in our peanuts, because they contribute to your campaign, you deserve whatever flak that you catch.

Cry me a fracking river.

Economics Update

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So, the commodities markets surged as a result of the Fed’s quantitative easing, which means that they are expecting inflation there, which has, among other things, put oil at a 4-month high,

The fact that the 2009 US budget deficit has just been revised higher may also be contributing to traders’ positions.

Of course, Bernanke is primarily interested in preventing deflation, so this is a good thing, though I wonder how effective he will be.

Case in point: investors requested only $4.7 billion out of $200 billion available for the Fed small business and consumer lending program, the TALF.

It’s a confidence problem, and I really think that the first step to restoring confidence needs to be removing the malefactors in finance who screwed this up in the first place.

The dollar rose today, largely on the belief that yesterday’s drop indicated a time for profit taking.

And Some Public Floggings Would Be Nice Too

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Yves Smith at Naked Capitalism calls for aggressive criminal investigations, and I agree.

It’s clear that there was a lot of outright criminality, and the broken window theory of law enforcement works with white collar criminals too:

Of course, it isn’t clear whether deterrence works against white collar criminals, but the flip side is William Bratton style zero tolerance policing was successful in seemingly ungovernable New York. The theory was that allowing minor infractions, like window breaking, to go unpunished sent a very visible signal that misdeeds were tolerated. Of course, zero tolerance wasn’t the only technique used by Bratton (he also was big on flexible deployment, shifting officers to neighborhoods that suffered an increase in crime), but it is considered to be an effective policing tool. And Wall Street is so far from having any meaningful policing that it’s a joke.

It seems anything short of regulatory or legal moves that limit career options (read future earning power) is an insufficient disincentive to risky trader and investor behavior.

I would argue that the Wall Street crooks have more to lose than a corner dope dealer.

After all, if they get caught, thrown in jail, and their assets,and possibly those of their spouses and perhaps their children’s college funds, are forfeit, that’s a lot more to lose than getting 3 to 5 in a prison when you had nothing before.

Geithner Fesses Up

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Well, I suppose that it’s an improvement that we now have people in cabinet positions who, when caught in a bald faced lie, will, when absolutely forced to, tell the truth.

Compared to Dick Cheney, or Alberto Gonzalez, the fact that Timothy Geithner is now admitting that it was the Treasury that demanded the bonus loophole is a step forward.

Of course, this followed 24 hours of “pin the bonus on Chris Dodd,” and only when people went back to contemporaneous news reports, and his fellow senators pushed back against the smear, did they change their tune, but considering the fact that Ari Fleischer accused Saddam Hussein of planning 911 just 6 days ago, this is a step forward, but still, Geithner needs to realize that he works for Barack Obama, who works for us, and not the banks.

House Passes Bonus Tax Bill

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Just over half of the ‘Phants voted against it, and all but 6 Democrats (I’ll post who and what should be done later) voted for a 90% tax on bonuses of companies getting bailed out by the government.

On some level I understand just how this is really a very small part of the bailout, but from news, to outrage, to bill passing the house is about 4 days, and it means something, though I’m not sure who gets that yet.

More Nails in Eddie Haskell’s Coffin

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I think that Geithner will be gone by June….He should have rented a house, because we now have a report that Treasury was informed of the bonuses two weeks before Geithner says that he knew, which makes him either a liar, or incompetent.

Me, I’ll go with liar, as it is clear that the Obama administration is lying their asses off about Dodd’s role in proposed bonus restrictions in the bailout legislation, and the logical people lying about it right now are all on the Geithner/Summers “axis of weasels”:

After the recent furor relating to the AIG payments, lawmakers returned to make a forensic examination of the provision seeking to assign blame for what some called a secret agreement to spare the tottering insurance giant, which has received more than $170 billion in federal aid. The provision and its genesis consumed Capital Hill Wednesday.

“The president goes out and says this is not acceptable and then some backroom deal gets cut to let these things get paid out anyway,” said Sen. Ron Wyden, (D., Ore.), author of an earlier, alternative pay amendment, told the Associated Press.

The Obama administration had not tried to hide its concern about the moves to clamp down on executive compensation. Both Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers lobbied Mr. Dodd to make changes.

Administration officials said the Treasury didn’t suggest any language or say how the amendment should be changed. They said they noted legal issues that could likely lead to challenges, but was the end of their involvement. The official said Mr. Dodd and Congress made the final changes on their own.

At issue were competing provisions in the stimulus bill that capped executive compensation for recipients of bailout funds. One, drafted by Sens. Wyden and Olympia J. Snowe (R, Maine), would have capped bonuses at $100,000, retroactive to 2008. Companies awarding bonuses above that level would face the choice of returning those funds to the Treasury or having them taxed at 35%.

“Administration Officials” means someone under Geithner’s or Summers’ control here.

What’s more, the rest of the world does not have any confidence in Geithner either, as evidenced by the IMF criticizing his plan as “lacking detail.”

The IMF never criticizes a Secretary of the Treasury, and the fact that they are now indicates that there are a number of foreign nations that are sick of him, and signed off on this statement.

We need someone who will hold the financial industry to account, and Geithner still has knee pads on.

I’d Say It’s Self-Evident, Only Not

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Nemo at Self Evident makes a convincing case that Bernanke and Geithner are not doing anything but trying to protect the incumbent banking giants.

I agree. While we need a functioning credit system, there is no need for the current banks to continue to exist in their current form, and the Fed and Treasury’s frantic effort to keep these banks on life support is a detriment to the rest of the economy:

If I were in charge and I wanted to prevent banks from failing at all costs, what might I do?

I might relax mark-to-market accounting. This would allow assets to be carried at inflated valuations, both for purposes of regulatory capital requirements and for purposes of getting loans from the Fed.

I might provide non-recourse loans to private equity to create inflated marks where mark-to-market still applies.

I might try to convince the FDIC to exercise forbearance in seizing banks. Of course, the primary day-to-day mission of the folks at FDIC is to preserve the integrity of their insurance fund. So they might object to my suggestion. I might have to give them assurances that they will have the necessary resources should my great plan fail. A $500 billion credit line from the Treasury, say.

If the FDIC agreed, they might suddenly go from 3-4 bank seizures per week to 0-1 per week.

Once my plan leaked to certain troubled banks, they might suddenly halt their attempts to raise capital at $0.20/share.

And of course, once Wall Street got wind of it, shares in financial companies would rocket higher.

Let me know if you notice anything like this happening.

Good point, and good snark.