Senator Blanche Lincoln said she isn’t sure her plan to make banks wall off their swaps-trading desks has enough support to become part of financial-regulatory overhaul, while calling the provision effective change.
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“I don’t know if I have the votes” for the provision, Lincoln said today. When the measure comes to the floor for debate, senators could vote to remove her plan, Lincoln said.
Let’s be clear, Senators don’t say things like this about proposals of theirs that they want to pass, they say it about proposals of theirs that they want someone else to kill.
So, the Senate attempted to begin debate on the financial reform package, and the vote failed by 57-41, with Ben Nelson (DINO-NE) voting with the ‘Phants.
Reid voted “no” as well, but included a motion to reconsider, which is a parliamentary trick to get a do-over.
Still, the most effective thing that the Dems could do right now is to take action against Ben Nelson.
If they start taking real actions against recalcitrant members of their own caucus, it makes it that much easier for them to deal with the Republicans, because they won’t get knifed by the Liebercrats.
Unlike with healthcare, where he sat by idly while he allowed Ben Nelson (DINO-NE) to confab with 3 Republicans in the hopes of making the bill bipartisan, this time Harry Reid has said that, “The games of stalling are over.
Basically, he is saying that if Republicans want a deal, they had better talk now, and if not, they will filibuster financial reform, and the ads will go up, the ugly ones in black and white with the sinister music and the gravely voided announcer, in the states of the ‘Phants who are up for reelection in 2010.
I only wish that he had slapped down Nelson about this on healthcare. It would have made for a much better bill.
But the fact is that we’ve been devoting far too large a share of our wealth, far too much of the nation’s talent, to the business of devising and peddling complex financial schemes — schemes that have a tendency to blow up the economy. Ending this state of affairs will hurt the financial industry. So?
Until people in power realize that the basic problem with our financial system is that it is too big relative to the rest of the economy, and that it needs to be cut down to size, we will continue to have failures like these.
The FDIC has just seized the bank, so his opponent, Republican Mark Kirk, who has already made much of his involvement with the bank, will doubtless be using this as a club with with to beat Mr. Giannoulias.
While it is true that senior enforcement personnel at the SEC spent a lot of time downloading pr0n on their PC’s, this story has been around for years, as ProPublica notes, and the reason that it’s hitting the media spin cycle now is because the Republicans, Darrell Issa specifically, are pushing the story because they want to stop reform.
Basically, they want to say that the failures were because of a few bad apples at the SEC, and pr0n is a good way for them to illustrate this, because pr0n attracts the media, and it is a simple narrative, which attracts the incompetent.
So it’s a win-win for the Republicans who want to side-track reform: It’s a pretty bauble to distract the press with, and they can claim that it shows that government shouldn’t regulate.
They had claimed that the crowded skys in New York (Philly for USAir) made delays of 3 hours or greater likely, and they wanted relief, but Transportation Secretary Ray LaHood (who is, BTW a Republican, credit where credit is due), denied the request, leaving them unsatisfied:*
Five U.S. airlines lost a bid to exempt New York-area flights from a rule requiring carriers to release passengers from planes stuck on tarmacs for three hours.
Concerns that runway construction at New York’s Kennedy airport will lead to excessive cancellations “can be resolved through more careful flight scheduling,” Transportation Secretary Ray LaHood wrote today in denying the request. Passengers “have a right to know that they will not be held hostage.”
LaHood’s three-hour rule, effective April 29, fines carriers up to $27,500 per passenger for failing to give them an option to exit planes sitting on the tarmac. JetBlue Airways Corp. March 4 requested the Kennedy exemption until Dec. 1 when runway work is complete.
The evidence is fairly clear, that this is a way to avoid having to pay to house and feed passengers on flights that should have been canceled, and it is an egregious excess.
Good for Sec. LaHood
*Yes, I know, a cheap rhetorical twist, but it’s all I got.
I’m with David Dayen, this all happened within days of her primary challenger, Bill Halter (Reminder, he’s on My Act Blue Page) releasing ads saying that she was too close to the banking industry.
Everyone on Capitol hill know that her proposals will never go beyond a press release, and that behind the scenes, she will continue to do the big banks’ bidding.
This is just electoral politics, and a full court press from her Congressional Colleagues and the White House.
And sure as the sun rises in the east, and sets in the west, it’s happening.
Basically, when an incumbent needs an electoral boost, they come out with a populist proposal, and then it gets killed by someone else, and when that person needs an electoral boost, they change places.
I saw it, actually read it in the closed caption, I was at the gym on a stationary bicycle, and my reaction was that it was a missed opportunity.
He asked the banks to get on board, basically scolding them, but did not name names, or otherwise get medieval on them.
The American public hates the big banks, which, BTW, should be referred to exclusively as Wall Street Banks, even if the effect on poll numbers on financial reform are minor, as I have argued.
The bankers are not stake holders, they are malefactors, and should be treated as such.
Saying, “Can’t we all just get along,” is both bad politics, and bad policy.
On Morning Joe, Mark Halperin, a long time hack best known for the phrase, “Matt Drudge rules our world,” feels compelled to call it for what it is when he says, “They are willfully misreading the bill or they are engaged in a cynical attempt to keep the president from achieving something.” (emphasis mine)
Except for the fact that he should have said and not or, he is telling the truth, and when Mark Halperin feels compelled to call bullsh%$, you know that Republican spin has crossed some sort of “Shoe Event Horizon” where the normal punditocracy simply ceases to function.
The first part of the video is Austan Goolsbee ably defending the program (full disclosure, I made a post that he objected to in the comments, see here, and I posted his response here),* but Joe turns to Halperin for a “fair and balanced appraisal, and Halperin calls them full of it too.
H/t Steve Benen. *I don’t have a problem with his objecting, my family calls me full of it all the time, it sticks in my head because I was stunned that he read my little old blog in his capacity as an economic advisor to the Obama campaign.
So, Gallup has a poll, which reveals a much higher level of support for regulating “Wall Street” than it does for regulating “Big Banks”.
The net goes from +3% to +14% thus “showing” that regulating Wall Street is much more popular.
The thing is, the delta for “In Favor” is only +4%, and the delta for “No Opinion” is only +3%, and, “Qne can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points.”
So, we can say that while the drop in opposition -7% is significant, but the other ones are within the margin of error, though the sample size is ½ that of the full survey, and I am not sure that it effects the MOE.
If you want to argue that this points to a good frame to use on the argument for reform, feel free.
There is a measurable improvement in the polling by using “Wall Street”, but the change in terminology is not a silver bullet to Mitch McConnell’s filibuster werewolf.
It will be interesting to see where things goes from here.
Even with all the the opprobrium directed at the firm (see the Taibbi quote below), the consensus was that they would skate, because they were “too powerful” for any meaningful action to be taken against them.
If this case cracks that shell, I think that we will see many more rocks overturned to see what lurks beneath.
My guess is that this will all end with a token fine and no admission of wrong-doing, but I would be happy to be wrong.
*Alas, I cannot claim credit for the bon mot describing Goldman Sachs as a, “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” This was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.
Certainly, this is better than their strategy on healthcare reform, which was to let Senator Olympia Snowe (R-ME) sandbag them by engaging in extensive negotiations when she had not the slightest intention of voting for cloture.
It also makes it clear just how unethical, and possibly illegal, these actions were.
Goldman Sachs deliberately crippled products that they created, and then took out insurance policies against them, “naked” Credit Default Swaps (CDS), even though they did not own what they were insuring, and made lots of money when the US government bailed out AIG, so that AIG could pay off the policies.
And Timothy “Eddie Haskell” Geithner, our Treasury Secretary, still has not backed down from his position that the “naked” CDS is essential for “price discovery.”
This is not true. It was Paulson & Co. Inc., run by John Paulson, the protagonist of the book The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History, about his fabulously successful shorting of the subprime market.
My guess is that he’s going to seem a Paulson, no relation to the former Treasury Secretary, will find his star dimmed a bit, particularly since the SEC has made it clear that he is under investigation as well.
I guess he sounds a bit less like a brave hero now.
The SEC has charged Goldman Sachs and one of its VPs with, “defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter.”
It sounds to me like they assembled a particularly crappy CDO at the request of a hedge fund, most likely the now infamous Magentar:
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
So it sounds like Goldman Sachs assembled CDOs, a form of mortgage backed security, at the request and to the specifications of the hedge fund Magetar, which demanded that the CDOs that it funded be as crappy as possible so that it could win on bets against high rated tranches.
This was apparently fairly common knowledge on the street, and Goldman did it anyway, and then sold the instruments as being “rock solid”. Oopsie
Background, and links to Pro Publica‘s and This American Life‘s stories on Magnetar’s, “burn down your neighbor’s house for the insurance money,” investment strategy are here.
There are two potential outcomes:
A tepid settlement followed by an inconsequential fine.
That the string is being pulled, and a whole lot of stuff comes unraveled.
I hope for the latter, but I expect the former.
*Alas, I cannot claim credit for the bon mot describing Goldman Sachs as a, “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” This was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm, The Great American Bubble Machine.
Full complaint and embedded PDF of the filing are after break:
Washington, D.C., April 16, 2010 — The Securities and Exchange Commission today charged Goldman, Sachs & Co. and one of its vice presidents for defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. Additional Materials
The SEC alleges that Goldman Sachs structured and marketed a synthetic collateralized debt obligation (CDO) that hinged on the performance of subprime residential mortgage-backed securities (RMBS). Goldman Sachs failed to disclose to investors vital information about the CDO, in particular the role that a major hedge fund played in the portfolio selection process and the fact that the hedge fund had taken a short position against the CDO.
“The product was new and complex but the deception and conflicts are old and simple,” said Robert Khuzami, Director of the Division of Enforcement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”
Kenneth Lench, Chief of the SEC’s Structured and New Products Unit, added, “The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress.”
The SEC alleges that one of the world’s largest hedge funds, Paulson & Co., paid Goldman Sachs to structure a transaction in which Paulson & Co. could take short positions against mortgage securities chosen by Paulson & Co. based on a belief that the securities would experience credit events.
According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, the marketing materials for the CDO known as ABACUS 2007-AC1 (ABACUS) all represented that the RMBS portfolio underlying the CDO was selected by ACA Management LLC (ACA), a third party with expertise in analyzing credit risk in RMBS. The SEC alleges that undisclosed in the marketing materials and unbeknownst to investors, the Paulson & Co. hedge fund, which was poised to benefit if the RMBS defaulted, played a significant role in selecting which RMBS should make up the portfolio.
The SEC’s complaint alleges that after participating in the portfolio selection, Paulson & Co. effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Co. had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Co.’s short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.
The SEC alleges that Goldman Sachs Vice President Fabrice Tourre was principally responsible for ABACUS 2007-AC1. Tourre structured the transaction, prepared the marketing materials, and communicated directly with investors. Tourre allegedly knew of Paulson & Co.’s undisclosed short interest and role in the collateral selection process. In addition, he misled ACA into believing that Paulson & Co. invested approximately $200 million in the equity of ABACUS, indicating that Paulson & Co.’s interests in the collateral selection process were closely aligned with ACA’s interests. In reality, however, their interests were sharply conflicting.
According to the SEC’s complaint, the deal closed on April 26, 2007, and Paulson & Co. paid Goldman Sachs approximately $15 million for structuring and marketing ABACUS. By Oct. 24, 2007, 83 percent of the RMBS in the ABACUS portfolio had been downgraded and 17 percent were on negative watch. By Jan. 29, 2008, 99 percent of the portfolio had been downgraded.
Investors in the liabilities of ABACUS are alleged to have lost more than $1 billion.
The SEC’s complaint charges Goldman Sachs and Tourre with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Exchange Act Rule 10b-5. The Commission seeks injunctive relief, disgorgement of profits, prejudgment interest, and financial penalties.
# # #
For more information about this enforcement action, contact:
Lorin L. Reisner Deputy Director, SEC Enforcement Division (202) 551-4787
Kenneth R. Lench Chief, Structured and New Products Unit, SEC Enforcement Division (202) 551-4938
Reid A. Muoio Deputy Chief, Structured and New Products Unit, SEC Enforcement Division (202) 551-4488
It seems that they think that it will cost, “13 of the largest banks $20 billion in annual earnings.”
This is probably right. When things are going well, going in hock up to your eyeballs is a good way to maximize your profits, and since the executives of these banks are paid largely on the basis of year to year profits, and the taxpayer bails them out when they fail, it means that they may have to forgo that 5th vacation for a year or so.
As to the dire consequences of such restrictions:
Standard & Poor’s said the new Basel rules could force some banks to change their business models.
“We expect smaller, deposit-funded retail banks to find it easier to comply with more stringent liquidity and capital requirements than larger wholesale-funded institutions with extensive trading operations or large loan books and securities holdings,” the credit rating company said in a report today. “For investment banks, the increase in capital requirements could be sizable.”
I don’t know about you, but it seems to me that this is a plus, not a minus.
I still favor a small (20-50 basis point) Tobin tax on all financial transactions and leverage, as well as a larger tax on M&A activity, but that is in addition to much larger capital requirements.
