The American Bear

› Google Wants to Be a Bank Now

infoneer-pulse:

Google, the search engine company that also happens to do 35 other things, is expanding its horizons once again with a new financial services division. On Monday, the multi-billion dollar corporation is set to launch a new credit business in the United Kingdom with plans to expand to other countries in the next few weeks, according to the Financial Times.

» via The Atlantic

› Michael Hudson on the Federal Reserve System | naked capitalism

Michael Hudson is one of those people I read immediately when a new article pops up. I always learn something.

The Fed is officially supposed to perform two functions: First, to promote “price stability.” This means in practice, fight against wage inflation and preserve sufficient unemployment so that wages will not increase. The “prices” that are supposed to stabilize are the price of labor (wages) and commodity prices.

Meanwhile, the Fed seeks to inflate asset prices, above all real estate prices. Under Alan Greenspan, the aim of the Bubble Economy was to inflate housing prices by enough so that homeowners could borrow the interest to pay the bankers each year, and even enough to spend on consumer goods that their stagnant wage levels were not sufficient to buy. The result was to vastly increase the volume of debt – and debt service became a rising element of prices throughout the economy. Debt-leveraged housing prices ended up absorbing about 40 percent of typical family budgets, and a rising share of corporate income as well, leaving less for spending on current production of consumer goods and capital goods.

The second function the Fed was supposed to perform was to promote full employment. Mr. Greenspan made it clear that he believes that this is incompatible with the ideal of price stability. He pointed out before Congress that the virtue of loading down homeowners, college students and others with debt was that they were afraid to go on strike or even complain about working conditions or seek higher wages, for fear of being fired and missing a mortgage payment or credit-card payment. Going on strike or losing as job would threaten them with loss of a home, and an immediate increase in the credit-card interest rates and penalties that they had to pay. So the Fed became the leading administrator in Wall Street’s war against labor.

Under Mr. Greenspan’s tenure and that of his successor, Ben Bernanke, the Fed has overseen the greatest shift of wealth n American history since the Robber Barons.

Finally, the Fed has taken over the functions of government by threatening to close down the economy if the government does not bail out the banks at taxpayer expense, and protect the wealthy 1% against losing money.

Read the whole thing →

› Push to End Too-Big-To-Fail Goes Mainstream | Matt Taibbi

[Whether] you think modern American capitalism needs to be fundamentally reformed or whether you think it just needs a few tweaks here and there, you probably can at least agree, for starters, that our system definitely can’t work if corrupt, failing companies escape consequence by leaning on an endless supply of bailouts and low-interest financial patronage by the Federal Reserve.

The conservative argument on TBTF is beginning to blend in with, and become indistinguishable from, the progressive argument. You can say the current system is private enterprise corrupting government, or you can call it repressive government corrupting private enterprise, but it increasingly amounts to the same thing.

By now, virtually everybody who has an informed opinion on the matter thinks the TBTF system makes no sense and must end — the only people who really disagree are the leaders of those firms, and the politicians who depend on their money. There may not be many more papers like this Dallas Fed report coming down the pipe from influential political sources, but there will be even fewer arguing the converse, i.e that TBTF is a good idea that’s been great for America. There isn’t anyone outside Jamie Dimon’s inner circle who’d even think about writing that paper.

Reports like this one by the Dallas Fed are important because they add legitimacy to the argument for breaking up TBTF. Intellectually, pretty much everybody likely agrees with Rosenbaum. But they need someone with the right credentials to tell them that saying so isn’t revolutionary socialism. Once people on both sides of the aisle start realizing they agree about breaking up these banks, who knows? It might even happen.

› Michael Hudson on the Federal Reserve System | naked capitalism

“There is no inherent need for a monetary agency to exist outside of the national government, except to serve the interests of the financial class as distinct from those of government, industry and labor. And the banking sector’s business plan is to load down real estate, labor, industry and the government with as much interest-bearing debt as possible.”

Prior to the Federal Reserve’s founding in 1913, U.S. monetary policy was conducted by the Treasury. Like the Fed, it had district sub-treasuries that performed nearly all the financial functions that the Fed later took over: providing credit to move the crops in autumn, managing government debt, and so forth.

But after the severe 1907 financial crisis, a National Monetary Commission was reformed. Under the then-Republican administration, it recognized a need for more active government intervention to prevent future financial crises. It also recognized the desirability of moving away from the Anglo-Dutch-American system of “merchant banking” based on short-term lending against collateral in place, or for shipping of goods already produced. The National Monetary Commission’s longest volumes were on the great German industrial banks, and Republican policy aimed at bringing banking into the industrial era, to provide long-term funding after the model of German and other Central European banks.

However, the leading bankers sought to use the crisis as an opportunity to grab power for Wall Street, away from the Treasury. In this sense, the Fed was founded in large part to take monetary control away from Washington’s elected officials and appointees, and privatize the supply of money and credit.

So its place in the U.S. financial and economic structure is to allocate credit, primarily to serve Wall Street financial interests. That explains the insistence on the financial class here and abroad in insisting on an “independent” central bank. It means that instead of serving the public interest, it serves the interests of the banking class. The hoped-for transformation of commercial banking into long-term industrial banking was not achieved.

Read the rest →

› 49-State Foreclosure Fraud Settlement Will Be Finalized Thursday | David Dayen

“[The settlement] pales in comparison to the negative equity in the country, which sits at $700 billion.”

Forty-nine states, every one but Oklahoma, as well as federal regulators will participate in a foreclosure fraud settlement that will release the five biggest banks (Wells Fargo, Citi, Ally/GMAC, JPMorgan Chase and Bank of America) and their mortgage servicing units from liability for robo-signing and other forms of servicer abuse, in exchange for $25 billion in funding for legal aid, refinancing, short sales, restitution for wrongful foreclosures and principal reduction for underwater borrowers. The announcement will be made on Thursday.

[…]

The deal caps a 16-month process that had several fits and starts, and closed with the final holdouts, New York and California, coming to terms. The deal will release claims from state Attorneys General, but individual homeowners retain private rights of action to sue over foreclosure fraud and other abuses. As part of the settlement, states will get a fixed amount in hard dollars that would go to fund legal aid services. “This will get a lawyer for everyone facing foreclosure in the state,” said one source in an Attorney General’s office. “This will stop every wrongful foreclosure.”

Oklahoma stayed out of the deal because the state’s Attorney General, Scott Pruitt, did not believe that the banks should face any penalty.

As far as the release goes, AG offices that signed onto the lawsuit claimed it was narrowly crafted to only affected foreclosure fraud, robo-signing and servicing (which I don’t feel is all that narrow, but I’m trying to just-the-facts this -ed). The lawsuit that New York AG Eric Schneiderman filed last Friday, suing MERS and three banks for their use of MERS, was preserved fully. There was a last-minute request by the banks to dissolve that lawsuit, but it was not successful. In addition, Schneiderman reserves the right to sue other servicers for their use of MERS along the same lines as the current lawsuit.

In addition, all securitization claims, tax fraud claims, insurance fraud claims, and more will be able to be investigated and prosecuted by individual AGs and the RMBS working group, set up at the Financial Fraud Task Force, with Schneiderman as one of five co-chairs. They will be able to use all findings gathered in multiple investigations into servicing and foreclosures in their investigation.

[…]

[Then] there’s the settlement price: $25 billion, divided up several ways. $3 billion will go toward refinancing for current borrowers who are underwater on their loans, as well as short sales. $5 billion will go as a hard cash penalty to the states, which can use them for legal aid services, foreclosure mitigation programs, and ongoing fraud investigations in other areas (one official close to the talks feared that much of that hard cash payout will go in some Republican states toward filling their budget holes). The federal government will get a cash penalty as well. Out of that $5 billion, up to 750,000 borrowers wrongfully foreclosed upon will get a $1,800-$2,000 check if they sign up for it, the equivalent of saying to them “sorry we stole your home, here’s two months rent.”

The bulk of the money, around $17 billion, will go to principal reduction credits for troubled borrowers. The banks will not get dollar-for-dollar credit for every write-down; reductions on loans bundled in private-label mortgage-backed securities, for example, will be under 50 cents on the dollar, and write-downs for second liens (mostly home equity lines of credit) will be more like 10 cents. Housing and Urban Development Secretary Shaun Donovan believes that they will be able to get between $35-$40 billion in principal reduction in real dollars out of the settlement.

[…]

[Now] the only hope for accountability and justice for the crimes of the financial crisis lie in some scattered lawsuits grandfathered in and Schneiderman’s RMBS working group. One thing is clear – the banks relieved themselves of a significant portion of liability at a price they believe they can easily handle.

› Public Money for Public Purpose: Toward the End of Plutocracy and the Triumph of Democracy | Dan Kervick

This is an excerpt from Part One of a six-part series at Naked Capitalism:

The task the new activists have set themselves is formidable, because the economic disorders in need of repair are so numerous. The maladies here in the United States are particularly acute: Real unemployment is well up into the double digits – despite standard government habits of cooking the official unemployment books by not counting various classes of people without jobs. Unemployment rates among the young are especially appalling. Income disparities and polarization are staggering: For example, CEO pay in the US is now many hundreds of times higher than average worker pay, and the share of national income going to workers is now at its lowest level since the country began measuring that share almost 60 years ago. The share of income going toward corporate profits, on the other hand, is at the highest level since 1950, and yet many of these profits have been harvested by firing workers and cutting costs, not from new production. And by some recent measures, the proportion of Americans who count as either “poor” or “lower income” is close to 50%. As always, political power follows wealth, and that ineluctable social fact poses a large part of the challenge for reform. The greater the gap between the rich and the not-rich, the greater the capacity of the rich to buy the kinds of political influence they need to prevent change.

So the problems are not small, and they will not be easy to address and fix. We therefore need to battle for social and economic changes along many fronts. But as the new generation of activists point our societies toward these necessary reforms, so many of which pertain to the oppressive and unjust power derived from the control of concentrated money, they would be well advised to focus significant attention on the monetary system itself. The monetary systems that currently exist are deeply flawed: they are antiquated; they are socially inefficient; they are undemocratic; they lack openness and accountability; and they privilege elite financial interests over the interests of ordinary citizens and the public interest. Citizens in every country must begin to work together to reassert public control over their monetary systems, and assure that those systems are subject to democratic governance. And they must resist calls to expand the rule of private sector wealth over our monetary systems, and to reduce the public’s control over money even further below the level at which it currently stands. The public’s money must remain in public hands, so it can be mobilized for public purposes. […]

there is good reason to believe that the public’s monetary system is broken, and that the public purposes for which it is supposed to exist are being thwarted. As we can now clearly see, banks and other financial institutions blew up a vast speculative bubble of financial products leading up to the crash in 2008, a bubble filled with airy, foolish and fraudulent promises leveraged and re-packaged many times over. The Fed did nothing to prevent this international-scale Ponzi scheme from unfolding, and we are all now dealing with the financial carnage that resulted. And, as I will argue, the powerful monetary tools that could now be deployed to restore full employment and prosperity are locked up in an outdated and elitist system designed more to protect the reckless financial institutions that caused the disaster than to serve the public that is paying the price of the disaster. This deeply undemocratic monetary system is still directly supervised by the Fed.

But it would be a mistake to focus too single-mindedly on the Fed and its failures. The key monetary malefactors in the current crisis are a derelict and increasingly malevolent US Congress, a Congress which appears actively hostile to the very people it was elected to represent, and which works daily to serve the plutocratic masters who fund Congressional campaigns and sit atop our society’s financial hierarchies. It doesn’t have to be this way. The Fed is a creature of the US Congress; it was created by the US Congress; and it continues to play its role in the formation of monetary policy at the pleasure of the US Congress. Congress has all the power and capacity it needs to seize control of our monetary system on behalf of the broad public it represents, and to steer latent and untapped US financial power toward full employment and broad prosperity. But it refuses to make use of its inherent Constitutional powers to answer these pressing national needs, and works instead to protect the vested financial interests of the very few. The Congress that currently exists has been bought by the plutocracy. So it will be up to the American people to lead the charge on behalf of monetary democracy.

Read whole →

› Petition to reinstate the Glass-Steagall act

jonathan-cunningham:

Remember those billions of dollars spent rescuing banks that were “too big to fail”? Well, the reason we don’t want to those banks to fail is because everyone keeps their money there. After the great depression, lawmakers saw a need to separate the investment money (the money that was spent on speculation and that had a chance to be lost) with individual savings and checking accounts. The result was that if a big investment bank made a risky investment (say, if they lost a bunch of money on complex derivative bets) a savings bank wouldn’t crumble. The bank could fail and the investor lose money without harming the public. This law was called the Glass-Steagall act, and it was repealed in 1999 with a Republican congress and signed by Clinton. This basic separation of investment vs. commercial banks is a vital part of keeping “too big to fail” out of our economy. 

Last year (and the year before), I mentioned my incredulity that Obama opposed reinstating this rule:

Obama administration officials have dismissed the idea that the financial sector should or can be changed in more fundamental ways than they are now proposing. You can’t turn back the clock, they say, and the new requirements they plan to impose on big banks to hold more capital in reserve, put up $150 billion for a rainy-day rescue fund, and disclose more of their risky trades should be enough to keep the financial sector from imploding again. Many of these requirements, among others, are contained in two giant bills making their way through Congress—one that passed the House last week and another that will be debated in the Senate in the new year. “I think going back to Glass-Steagall would be like going back to the Walkman,” says one senior Treasury official.

Here’s another good description of the Glass-Steagall act’s importance:

The Glass-Steagall Act was enacted to remedy the speculative abuses that infected commercial banking prior to the collapse of the stock market and the financial panic of 1929-1933. Many banks, especially national banks, not only invested heavily in speculative securities but entered the business of investment banking in the traditional sense of the term by buying original issues for public resale. Apart from the special problems confined to affiliation three well-defined evils were found to flow from the combination of investment and commercial banking.

I’ve linked to a petition to reinstate this important separation of the Glass-Steagall act. If you are concerned with corruption on Wall Street or exploitation of the taxpayer by the 1%, please sign this White House petition.

› The Emperor's Strip Tease Is Down to the Naughty Bits

andrewgraham:

Banks are essential to an economy. Their proper role is to facilitate commerce. Today, banks do facilitate commerce, but they also do a lot of other things that, entirely by design, enrich few at a great cost to many.

This isn’t particularly new. But now regular folks who don’t work in this ridiculous field are learning more about its design, which is no longer limited to facilitating commerce. They might not know what a weather derivative is or be able to explain what happened to their mortgage after they secured it. But they do know that they are no longer the customer. They know banks can make money without them. They don’t much like that. Who would?

That’s why the Occupy Wall Street protest is happening. That’s why it is newsworthy. And that’s why those protesters will have done more to strengthen the economy than any trader who goes to work tomorrow.

Period. Full stop.

› The 2 Billion UBS Incident: 'Rogue Trader' My Ass | Matt Taibbi

[The] brains of investment bankers by nature are not wired for “client-based” thinking. This is the reason why the Glass-Steagall Act, which kept investment banks and commercial banks separate, was originally passed back in 1933: it just defies common sense to have professional gamblers in charge of stewarding commercial bank accounts.

Investment bankers do not see it as their jobs to tend to the dreary business of making sure Ma and Pa Main Street get their $8.03 in savings account interest every month. Nothing about traditional commercial banking – historically, the dullest of businesses, taking customer deposits and making conservative investments with them in search of a percentage point of profit here and there – turns them on.

In fact, investment bankers by nature have huge appetites for risk, and most of them take pride in being able to sleep at night even when their bets are going the wrong way. If you’re not a person who can doze through a two-hour foot massage while your client (which might be your own bank) is losing ten thousand dollars a minute on some exotic trade you’ve cooked up, then you won’t make it on today’s Wall Street.

Nonetheless, thanks to the Gramm-Leach-Bliley Act passed in 1998 with the help of Bob Rubin, Larry Summers, Bill Clinton, Alan Greenspan, Phil Gramm and a host of other short-sighted politicians, we now have a situation where trillions in federally-insured commercial bank deposits have been wedded at the end of a shotgun to exactly such career investment bankers from places like Salomon Brothers (now part of Citi), Merrill Lynch (Bank of America), Bear Stearns (Chase), and so on.

These marriages have been a disaster. The influx of i-banking types into the once-boring worlds of commercial bank accounts, home mortgages, and consumer credit has helped turn every part of the financial universe into a casino. That’s why I can’t stand the term “rogue trader,” which is always tossed out there when some investment-banker asshole loses a billion dollars betting with someone else’s money.

They’re not “rogue” for the simple reason that making insanely irresponsible decisions with other peoples’ money is exactly the job description of a lot of people on Wall Street. Hell, they don’t call these guys “rogue traders” when they make a billion dollars gambling.

› Rogue trader costs UBS $2 billion | CNN.com

(CNN) — A rogue trader has cost UBS an estimated $2 billion, the Swiss banking giant announced Thursday, revealing what could be the third-largest loss of its kind in banking history.

A $2 billion rogue trading loss would be all but unprecedented, market analyst Ralph Silva told CNN.

“We have only had three or four other situations… in the billions, and that is exactly what happened,” he said.

Police arrested a man on suspicion of fraud in an early-morning operation in London’s banking district hours before the loss was announced, they said.

UBS contacted the police at 1 a.m. about an allegation of fraud, and a 31-year-old man was arrested at work two and a half hours later, police commander Ian Dyson said.

Rogue, rogue, and more rogue - not systemic. Do not look any further than the “bad apple” roguey rogue. Rogue rogue rogue your boat, you get the point.

› The corrupt arithmetic of the Federal Reserve | Dean Baker

Last month the Federal Reserve Board’s Open Market Committee (FOMC) voted 7 to 3 to commit itself to keep its short-term interest rate at near zero for the next two years. Given the persistence and severity of the downturn this was a modest step for the Fed to take to boost the economy.

There were several more aggressive actions that the Fed could have taken.[…] However, the three dissenters did not want the Fed to pursue any of these paths. They were uncomfortable even with a statement that the Fed would continue to keep its short-term rate near zero. This is in spite of the fact that the unemployment rate remains over 9.0 per cent and growth has averaged less than 1.0 per cent over the last 6 months.

The dissenters were worried about inflation. The concern about inflation seems positively bizarre for an economy with such high unemployment and so much excess capacity. Workers have almost no bargaining power. They are lucky if their wages just keep pace with inflation; they have little hope of wage increases that are in line with productivity growth.

The core inflation rate continues to hover just under 2.0 per cent. It has remained pretty much constant since the start of the downturn. […]

This raises the question of why the hawks are so concerned about a seemingly non-existent inflation threat. It is worth noting that all three of the dissenting votes were Fed district bank presidents. The presidents of the Fed’s 12 district banks all sit on the FOMC, with five of them voting at any one time. Three of the five bank presidents voted against any action to spur growth.

The bank presidents essentially represent the banks within their district. Banks tend to be very concerned about inflation since it erodes the value of their loans. They tend to be less concerned about unemployment, probably because the bankers have jobs, as do most of their friends.

While the bank presidents voted three to two against taking any action to boost the economy, the five governors voted unanimously in support of the statement committing the Fed to keep its short-term rate at zero for the next two years. In contrast to the bank presidents, the governors are appointed through the political process. Interestingly there was no partisan divide on this vote. Three of the governors were appointed by President Obama, one by President Bush, and one (Chairman Bernanke) by both. Yet all five felt that the Fed’s mandate to promote full employment required stronger action.

The sharp split between the FOMC members appointed by the banks and the members appointed through the political process is very disturbing. It suggests that the financial industry is using an agency of the government (the Fed) to advance its own interests.

While industry capture is a problem with all regulatory bodies, in no other case does the industry directly appoint members to the body. Comcast and General Electric have to lobby the Federal Communications Commission (FCC); they don’t get their own votes on the FCC.

There is no reason that the banks should get the special privilege of being assigned seats on the Fed, the most powerful regulatory agency of them all. There is no place in a democracy for the bankers’ direct role in setting Fed policy. The banks should have to buy their influence just like everyone else.