Fed’s Bernanke: Reappointment?
November 28, 2009
Huffington Post – Will the Senate vote another term for Ben Bernanke as head of the Federal Reserve? Should it?
Two months ago, Bernanke looked like a lock. But now unemployment is over 10% and rising, while Wall Street bankers are stocking up on vintage champagne, ready to celebrate the highest bonuses in history. As head of the Fed, Bernanke committed trillions to bail out the banks while Main Street got left behind. Should the Senate vote to reward him with another term?
Many in the financial press consider Bernanke a hero in the piece. (See for example, the laudatory book by Wall Street Journal’s David Wessel, In Fed We Trust). He’s the button-down academic, calm in the midst of the tempests, who — once he (belatedly) figured out that the financial system was headed over the cliff — worked creatively, ceaselessly, making it up as he went along, doing “whatever it takes” to save the day. Denying him another term would seem a good case of no good deed goes unpunished. Moreover, with the dollar already shaky, Bernanke is one of the few financial stewards that global investors might trust to sell off the billions in junk that the Fed put on its balance sheet without once more throwing the economy over the cliff. If his nomination is questioned, financial barons from London to Shanghai will start rending their garments, and issuing jeremiads about impending doom.
But take another look. In the lead up to the financial crisis, Bernanke was Sancho Panza to Greenspan’s Quixote, gleefully touting banking deregulation while blind to the dangers of an $8 trillion dollar housing bubble. He celebrated an economy where incomes of most Americans were declining, household debt was soaring, and inequality reached Gilded Age extremes. Once named Fed Chair, he chose not to exercise the regulatory powers he had to curb predatory lending, police the Wall Street casino, or crack down on the derivatives that Warren Buffett among others warned were financial weapons of mass destruction. Instead he scorned the worriers, and predicted steady growth — even after the recession began.
When the bubble began to burst, Bernanke was late to recognize it, consistently underestimated its impact, and failed repeatedly to get ahead of the crisis.
It was only when he finally woke up to the spreading panic that Bernanke threw literally trillions into bailing out the banks — but without restructuring them, without replacing many of the folks that caused the mess, without requiring that they lend to Main Street or renegotiate mortgages. Bernanke and Treasury Secretaries Hank Paulson and Tim Geithner were the creative architects of a bailout that has resulted in a far more concentrated financial sector, with major financial houses enjoying an explicit guarantee that they are too big to fail, even as they reopen the casino, start up the same games again, and mobilize to fend off any serious regulatory reform.
The Federal Reserve is charged with pursuing price stability and maximum employment. Now we’re experiencing the highest levels of unemployment in over a quarter century, and the dollar is in decline. Foreclosures continue, and one in four mortgage holders owe more than they own. Bernanke and Geithner et al may have staved off a Depression, but we sure aren’t ending up where anyone would want to be.
Keeping Derivatives in the Dark
November 27, 2009
NYT – Opaque markets breed insider profits and abuse of investors. Sunshine can bring competition and lower costs even if regulators do little beyond letting the sunlight shine.
You might think that as Congress considers just how much regulation is needed for the shadow financial system — the one that largely escaped regulation in the past — letting in such light would be an easy and uncontroversial move.
But it is not proving to be easy at all, and is one part of the Obama administration’s financial reform package that is most in jeopardy.
Timothy Geithner, the secretary of the Treasury, will testify before the Senate Agriculture Committee next week in an effort to hold on to important provisions of the proposal that have come under attack by banks fearful of losing one of their most profitable franchises — the selling of customized derivatives to corporate customers. Remarkably, the banks have persuaded customers that keeping the market for those products secret is in their interest.
Last week, Gary Gensler, the chairman of the Commodities Futures Trading Commission, faced the same panel, and ran into questions that indicated at least some senators were sympathetic to efforts to keep large parts of the derivatives market in the dark.
Those markets allow companies to bet on — or, if you prefer, hedge themselves against losses from — changing interest rates and commodity prices. They also allow investors to use credit-default swaps to bet on whether a company will go broke. The administration wants to standardize those products when possible, and force the trading of them onto exchanges when possible.
Banks want to whittle away the reforms if they can, and to minimize the roles of the C.F.T.C. and the Securities and Exchange Commission, experienced market regulators who have been generally kept away from over-the-counter derivatives in the past. Instead, the banks would like to leave it to banking regulators to oversee the dealers, something regulators totally failed to do in the past. Unless Mr. Geithner can persuade legislators otherwise, one of the great bank lobbying campaigns will have succeeded, in large part because some companies that buy derivatives from banks have been persuaded that their costs will rise if needed reforms were made.
The opposite is probably true. The history of nearly all markets is that customers suffer if dealers are able to keep them ignorant of what is actually going on.
Until the beginning of this decade, that was true in the corporate bond market, where actual trades were kept confidential. That made it easy for bond dealers to charge big markups when they sold bonds to customers.
After regulators forced timely disclosures, the bid-ask spreads — the difference between what customers paid when they bought bonds and what they could get when selling them — declined significantly. The result was smaller profits for bond dealers, and better returns for bond investors.
“It is now time,” Mr. Gensler testified, “to promote similar transparency in the relatively new marketplace” for derivatives traded over the counter.
“Lack of regulation in these markets,” he added, “has created significant information deficits.”
China Derivative Rule Change
November 26, 2009
FT – When, at the beginning of 2008, Antoine Castel took control of the fixed-income unit in Beijing of Calyon , the investment banking arm of Crédit Agricole, the world’s biggest banks were making fat profits in China’s nascent derivatives markets.
But just weeks into his new job at the French bank, Mr Castel watched in horror as Chinese companies began to lose billions of dollars on the bespoke trades they had struck with western dealers. It was the start of a chain reaction that this summer unleashed a fierce backlash from regulators and local banks.
In stark contrast to the slow pace of reform in derivatives markets in the US and Europe, China’s regulators have in recent months shut down the main route by which foreign banks sold derivatives from offshore operations and have banished speculative deals – moves that have important implications not only for Chinese companies and foreign banks, but also for the evolution of China’s capital markets and the internationalisation of the renminbi.
As a result of the sweeping regulatory overhaul, trading volumes have plunged and foreign banks are scrambling to adapt to doing business in the new environment. “If you compare the business we are doing today with the business we were doing two years ago, it’s completely different,” says Mr Castel. “You have to forget about [the old] market. It’s gone.”
Previously, dozens of western banks such as Goldman Sachs and Morgan Stanley were striking huge deals with mainland companies that wanted to manage their exposure to swings in commodity prices, interest rates and currencies.
In two cases where trades went spectacularly wrong, Citic Pacific, the Hong Kong-listed arm of China’s largest investment conglomerate, lost $1.9bn last year on bets against the Australian dollar, while Air China, the country’s flag carrier, lost $1.1bn on oil derivatives.
They were just two of hundreds of companies that entered trades that were wildly mismatched with their hedging requirements, market participants say.
Chinese regulators suspect that in some instances companies used derivatives as a way to speculate, rather than hedge, while banks frequently sold overly complex products – the most profitable – without fully explaining the potential downside.
Products with names such as “snowballs” and “snowblades” proliferated, many with so-called “zero cost” structures that failed to live up to their name. Dealers say billions of dollars of trades are being renegotiated in private, some under pressure from Sasac, the shareholder and regulator of hundreds of state companies.
The Dollar Bubble
November 26, 2009
Dollar Hits 14-year Low Against Yen
November 26, 2009
AFP – The dollar slumped to a 14-year low point against the yen on Thursday, prompting fears that a further surge could hurt a fragile recovery in Japan, the world’s second largest economy. Gold scored yet another record high, breaching 1,195 dollars an ounce as the US currency waned. During Asian trading, the dollar slid to 86.28 yen, the lowest level since July 1995.
In later European deals, the dollar stood at 86.64 yen compared with 87.38 yen late on Wednesday in New York. The euro fell to 1.5085 dollars from 1.5127 dollars late Wednesday.
Responding to the yen’s surge, Japan’s Prime Minister Yukio Hatoyama said his government must take measures to avoid a double-dip recession.
“We must take measures so that the economy will not fall into a double-dip” recession, said Hatoyama, without specifying what measures his government may take to boost the world’s second largest economy.
The premier stressed that “rapid and drastic movements in foreign exchange are not desirable” but added that the day’s fluctuations were due mainly to the fall of the dollar rather than a rise of the yen.
The Card Game – New Full Length Documentary
November 26, 2009
PBS Frontline – As credit card companies face rising public anger, new regulation from Washington and staggering new rates of default and bankruptcy, FRONTLINE correspondent Lowell Bergman investigates the future of the massive consumer loan industry and its impact on a fragile national economy.
In The Card Game, a follow-up to the Secret History of the Credit Card and a joint project with The New York Times, Bergman and the Times talk to industry insiders, lobbyists, politicians and consumer advocates as they square off over attempts to reform the way the industry has done business for decades.
“The card issuers could do anything they want,” Robert McKinley, CEO of CardWeb.com, tells FRONTLINE of the industry’s unchecked power over consumers. “They could change your interest rate. They could impose an annual fee. They could close your account.” High interest rates along with more and more penalty fees drove up profits for the industry, Bergman finds, as the banks followed the lead of an aggressive upstart: Providian Bank. In an exclusive interview with FRONTLINE, former Providian CEO Shailesh Mehta tells Bergman how his company successfully targeted vulnerable low-income customers whom Providian called “the unbanked.”
“They’re lower-income people-bad credits, bankrupts, young credits, no credits,” Mehta says. Providian also innovated by offering “free” credit cards that carried heavy hidden fees. “I used to use the word ‘penalty pricing’ or ’stealth pricing,’” Mehta tells FRONTLINE. “When people make the buying decision, they don’t look at the penalty fees because they never believe they’ll be late. They never believe they’ll be over limit, right? … Our business took off. … We were making a billion dollars a year.”
It took the economic collapse in the fall of 2008 to set the stage for potentially historic change in the consumer credit business. President Obama and his team pushed through a credit card reform bill in May, and they’re now looking to establish a new Consumer Finance Protection Agency. But the banking and financial services industries contribute huge amounts of money to Congress — and the jury is still out on whether the new regulations can pass. “It’s a step in the right direction, but it’s a modest step,” says Harvard law professor Elizabeth Warren. “It’s a set of very discrete new laws. And the credit industry instantly set to work on how they could run around them. By itself, that set of rules won’t change the game.”
“It’s hard for them to get a bill through the U.S. Senate when the industry is pouring money into Washington,” says Martin Eakes of the Center for Responsible Lending of the banks’ political clout. “As Sen. [Dick] Durbin from Chicago recently said, ‘the banks, even as unpopular as they are right now in this crisis, still own this place.’”
Concentration of Credit-Default Risk Needs Remedy
November 26, 2009
Bloomberg – The concentration of the credit- default swaps market in the hands of a few players is increasing risk and should be remedied by more transparent reporting, according to Celent.
Five banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. accounted for about 90 percent of the credit-default swaps market in 2009, the Boston-based research firm said in a Nov. 25 report.
“The leading banks and dealers in the over-the-counter derivatives market are the main buyers and sellers of CDS and hence the chances of having them as a counterparty are quite high,” Anshuman Jaswal, a Celent analyst and author of the report, wrote in an e-mailed note. “This circularity within the system increases risk and we need to tackle it.”
Moves to regulate the OTC derivatives market by introducing measures such as central clearinghouses accelerated after President Barack Obama’s administration described the securities as a “major source of contagion” in the global financial crisis. The derivatives market outside exchanges relies on counterparties negotiating their own buy and sell orders, with no guarantees either will complete the trade.
Daily reporting of individual transactions to regulators and central data repositories would “help build an important check into the system,” the report said. It also said clearer guidelines are needed on conflicts of interest.
Credit-default swaps are contracts investors use to protect against bonds defaulting. Traders use them to speculate on credit quality and the contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements.
Barclays Plc, Deutsche Bank AG and Morgan Stanley round out the top five banks. U.S. banks Goldman Sachs, Morgan Stanley, JPMorgan, Bank of America Merrill Lynch and Citigroup Inc. account for $29 trillion of the total outstanding U.S. credit derivatives market, Celent said. That’s 95 percent of the market, leaving $1.38 trillion for all other firms.
“This poses a dilemma for the participants as well as the regulators as the counterparty risk is quite concentrated,” the report said.
SEC Probes Derivatives in Insider Trading Cases
November 26, 2009
Reuters – U.S. regulators are increasingly looking beyond stocks in their insider trading investigations to examine derivatives and credit default swaps, a top Securities and Exchange Commission official said.
The expansion comes as the SEC, state and federal criminal authorities pursue the biggest insider trading case involving hedge funds — a case that has already ensnared the billionaire founder of Galleon Group, traders, lawyers and other Wall Street personnel.
“Insider trading can take place in several different venues,” Scott Friestad, SEC associate director of enforcement, said in an interview. “In many of these investigations, we are looking at trading across markets whether it involves options, the underlying common stock, or nontraditional securities like credit default swaps.”
Friestad had no comment on Galleon and its founder Raj Rajaratnam, both targets of an SEC civil lawsuit.
The government remains under heavy political and investor pressure to more aggressively bring perpetrators of financial fraud and illegal profits to justice.
Earlier in November, the Obama administration set up a task force that includes the SEC, the Treasury Department and the Justice Department to thwart financial fraud after a rise in mortgage scams and Wall Street trading scandals.
The SEC, headed by chairman Mary Schapiro, faces its own pressure to be more vigilant, after ignoring tips that could have led it to stop Bernard Madoff’s $65 billion fraud sooner.
HARDER TO DETECT
In April, the SEC said it had about 150 active hedge fund investigations and more than 50 probes involving credit default swaps, collateralized debt obligations, and other derivatives.
“Individuals with material nonpublic information have the potential to profit through nontraditional means,” Friestad said. “In some cases, people believe that they can avoid detection by trading where they think investigators aren’t looking.”
In May, the SEC brought its first case involving credit default swaps, which insure corporate debt against default. It charged a former hedge fund manager and a Deutsche Bank AG (DBKGn.DE) bond salesman with trading swaps of Dutch media conglomerate VNU NV.
Yet unlike stocks, options and bonds that trade on exchanges, credit default swaps and most derivatives trade over the counter, making it harder for regulators to rout out wrongdoing.
“It is much more difficult for the SEC to detect insider trading using derivatives because there is no central market and hence no ability to conduct real-time surveillance,” said Mark Schonfeld, a former director of the SEC’s New York office.
“Insider trading in equities and options is almost always detected by market surveillance,” said Schonfeld, who now co-chairs the securities enforcement group at law firm Gibson Dunn & Crutcher LLP.
Bills pending in Congress would impose new rules designed to shed light on the $450 trillion over-the-counter private swaps market, including requiring derivatives dealers to report trades and forcing more derivatives onto exchanges.
Even if new rules are imposed, some parts of the market will remain opaque.
The challenge of detecting insider trading in some markets was highlighted at the height of the financial crisis in September 2008.
When the SEC was trying to figure out whether investors were manipulating the stock of financial institutions, it ordered two dozen hedge funds, broker-dealers and investors to hand over information about their trading and credit default swap positions in several companies.
New York Fed’s Secret AIG Deal
November 25, 2009
Bloomberg Markets – Taxpayers may have spent $13 billion more than necessary when government officials, acting in private, struck deals with big banks on AIG’s credit-default swaps.
In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.
Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.
Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.
By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.
The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps — insurance-like contracts that backed soured collateralized-debt obligations.
Subprime Mortgages
CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.
Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.
The New York Fed’s decision to pay the banks in full cost AIG — and thus American taxpayers — at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.
Habayeb, who left AIG in May, did not return phone calls and an e-mail.
Goldman Sachs
The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.
In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.
AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.
AIG ‘Backdoor Bailout’ Hearing Sought by Republicans
November 24, 2009
Bloomberg – Republican lawmakers demanded a Congressional hearing to review whether the Federal Reserve Bank of New York was unprepared to deal with the bailout of American International Group Inc. last year.
The rescue, which funneled billions of dollars to banks that traded with AIG, amounted to a “backdoor bailout” of the firms, Representatives Roy Blunt of Missouri and Spencer Bachus of Alabama wrote in a letter to Barney Frank, the Massachusetts Democrat who heads the House financial services committee.
The New York Fed, led at the time by Timothy Geithner, gave up efforts to save taxpayer money on AIG’s rescue after the insurer’s trading partners refused to make concessions, the special inspector for the Troubled Asset Relief Program said in a report this week. Geithner, now the Treasury Department secretary, needs to tell Congress whether regulators got the best deal possible in the bailout, which swelled to $182.3 billion, the lawmakers said.
The inspector general’s report “paints a devastating picture of government regulators ill-prepared to deal with the failure of complex financial institutions like AIG, and who failed to fight for what was in the best interest of the taxpayers,” Blunt and Bachus said in the letter today.
Geithner today urged the Joint Economic Committee to pass a financial regulation overhaul intended to strengthen the banking system to avoid a repeat of the worst financial crisis since the Great Depression.
‘So Devastating’
“We should never again face a situation — so devastating in the case of AIG — where a virtually unregulated major player in the derivatives market can impose risks on the entire system,” Geithner said.
AIG’s bailout includes a $60 billion credit line, a Treasury investment of as much as $69.8 billion and up to $52.5 billion to fund facilities to buy mortgage-backed assets owned or backed by the insurer.
The Fed gave up efforts after two days last year to negotiate discounts from banks that purchased credit-default swaps from AIG backing securities, and opted to pay them in full, according to the report from Special Inspector Neil Barofsky.
Jack Gutt, a spokesman for the New York Fed, declined to comment. In a letter to Barofsky included in his report, the Fed said it “would not have been appropriate to use our supervisory authority on behalf of AIG to obtain concessions from domestic counterparties.” Doing so would have been a “misuse” of power, the letter said.
Before the Fed stepped in late last year, AIG tried to persuade banks to accept so-called haircuts of as much as 40 cents on the dollar, according to people familiar with the matter. The Fed’s decision to pay the banks in full may have cost taxpayers $13 billion, or 40 percent of the $32.5 billion AIG paid to retire the swaps, the people said.
AIG and Goldman: Blind Eye to a Web of Risk
November 24, 2009
“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”
— Joseph J. Cassano, a former A.I.G. executive, August 2007
NYT – Two weeks ago, the nation’s most powerful regulators and bankers huddled in the Lower Manhattan fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.
As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one of America’s oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American International Group, the world’s largest insurer, was teetering. A.I.G. needed billions of dollars to right itself and had suddenly begged for help.
One of the Wall Street chief executives participating in the meeting was Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr. Blankfein had particular reason for concern.
Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to its rivals’ woes, was A.I.G.’s largest trading partner, according to six people close to the insurer who requested anonymity because of confidentiality agreements. A collapse of the insurer threatened to leave a hole of as much as $20 billion in Goldman’s side, several of these people said.
Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline to A.I.G., ended up bailing out the insurer for $85 billion.
Their message was simple: Lehman was expendable. But if A.I.G. unspooled, so could some of the mightiest enterprises in the world.
A Goldman spokesman said in an interview that the firm was never imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in the Fed discussions to safeguard the entire financial system, not his firm’s own interests.
Yet an exploration of A.I.G.’s demise and its relationships with firms like Goldman offers important insights into the mystifying, virally connected — and astonishingly fragile — financial world that began to implode in recent weeks.
Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.
Climategate: Gore and the Carbon Tax Scam
November 24, 2009
With more and more people changing their minds about ‘global warming’ as a consequence of the increase in alarmist propaganda on behalf of the warmists, Al Gore’s lies are increasingly being confronted in the public arena. He is shamelessly profiteering off this global warming hoax and will make billions more when new, pointless, very expensive and wide ranging ‘carbon taxes’ are soon to be forced on everyone.
Alex Jones, the renowned filmmaker and radio host, dubs the ‘global warming’ scandal as one of the biggest hoaxes and financial frauds in the history of mankind. He says that it appears to be a global ‘Ponzi scheme’ which allowed bankers to profit from bogus carbon taxes for years.
