Yet, in the fine print, the agency also effectively empowered a handful of select banks to continue controlling the $700 trillion derivatives market. … Just five banks hold more than 90 percent of all derivatives contracts.
Overhaul Derivatives Market, but With a Caveat | NYTimes.com
“$700 trillion derivatives market”
More: Deja Vu on the Hill: Wall Street Lobbyists Roll Back Finance Reform, Again by Matt Taibbi
All of these stories collectively pointed to the same thing: These banks, which already possess enormous power just by virtue of their financial holdings – in the United States, the top six banks, many of them the same names you see on the Libor and ISDAfix panels, own assets equivalent to 60 percent of the nation’s GDP – are beginning to realize the awesome possibilities for increased profit and political might that would come with colluding instead of competing. Moreover, it’s increasingly clear that both the criminal justice system and the civil courts may be impotent to stop them, even when they do get caught working together to game the system. If true, that would leave us living in an era of undisguised, real-world conspiracy, in which the prices of currencies, commodities like gold and silver, even interest rates and the value of money itself, can be and may already have been dictated from above. And those who are doing it can get away with it. Forget the Illuminati – this is the real thing, and it’s no secret. You can stare right at it, anytime you want.
The Biggest Price-Fixing Scandal Ever | Rolling Stone (via gonzodave)
› Most Payments in Foreclosure Settlement Under $1,000 | WSJ.com
The vast majority of borrowers being compensated for mortgage-related abuses will get less than $1,000 apiece, a sobering coda to a protracted attempt to help those who may have been placed into foreclosure as a result of banks’ mistakes.
About 4 million borrowers will share $3.6 billion in cash as part of a settlement between federal regulators and banks accused of foreclosure-processing mistakes. U.S. regulators said Tuesday that banks wrongfully took away homes from 1,082 borrowers who were members of the U.S. military. Another 53 borrowers were found to have lost their homes despite not actually defaulting on their loans. Those 1,135 individuals will receive checks of $125,000.
Most borrowers, however, will see far less, with about 80% receiving checks ranging from $300 to $1,000, according to data released by the Office of the Comptroller of the Currency and the Federal Reserve.
Because the foreclosure review was shut down by regulators, it isn’t clear in many cases how badly the borrowers were wronged, if at all.
And even though banks compensated borrowers, they didn’t acknowledge wrongdoing.
› The Fed Is Still Way Out to Lunch on Financial Bubbles | Dean Baker
If the folks at the Fed, and the people who cover the Fed in the media, still cannot see the difference between the sorts of bubbles that pose real risks for the economy and the bubbles that only pose a risk for those speculating in narrow markets, then we have learned nothing from the economic crisis.
Borrowers with good credit who can meet the standard down payment requirement (usually 10 percent) can secure financing without too much trouble. The problem is that the banks don’t want to be limited to creditworthy applicants alone, because there aren’t enough creditworthy applicants interested in buying a house. That’s why they want Obama to loosen regulations on ‘government insured’ mortgages so they can lend money to anyone they want knowing that Uncle Sam will pay the bill when the loans go belly-up. That is what this is all about; Obama wants congress to slap their seal of approval on a new regime of crappy loans that will eventually be dumped on US taxpayers.
Obama, Housing and the Next Big Heist (via azspot)
Household debt, which in 1952 was at 36% of total personal income, had by 2006 hit 127%. Even financing poverty became a lucrative enterprise. Taking advantage of the low credit ratings of poor people and their need for cash to pay monthly bills or simply feed themselves, some check-cashing outlets, payday lenders, tax preparers, and others levy interest of 200% to 300% and more. As recently as the 1970s, a good part of this would have been considered illegal under usury laws that no longer exist. And these poverty creditors are often tied to the largest financiers, including Citibank, Bank of America, and American Express. Credit has come to function as a ‘plastic safety net’ in a world of job insecurity, declining state support, and slow-motion economic growth, especially among the elderly, young adults, and low-income families. More than half the pre-tax income of these three groups goes to servicing debt. Nowadays, however, the ‘company store’ is headquartered on Wall Street.
Steve Fraser, Another Day Older and Deeper in Debt
Debt remains, as it long has been, the Dr. Jekyll and Mr. Hyde of capitalism. For a small minority, it’s a blessing; for others a curse. For some the moral burden of carrying debt is a heavy one, and no one lets them forget it. For privileged others, debt bears no moral baggage at all, presents itself as an opportunity to prosper, and if things go wrong can be dumped without a qualm. Those who view debt with a smiley face as the royal road to wealth accumulation and tend to be forgiven if their default is large enough almost invariably come from the top rungs of the economic hierarchy. Then there are the rest of us, who get scolded for our impecunious ways, foreclosed upon and dispossessed, leaving behind scars that never fade away and wounds that disable our futures. Think of this upstairs-downstairs class calculus as the politics of debt. British economist John Maynard Keynes put it like this: ‘If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.’
If Dimon means what he says, he shouldn’t be complaining about how society at large is obliged to fix the problem. JPMorgan should be doing something about JPMorgan to make sure it’s not too-big-to-fail — like break itself up. That’s a pipe dream. JPMorgan isn’t going to voluntarily give up the reduced cost of capital and other competitive advantages that come with the federal government’s backing of systemically important financial institutions. Jamie Dimon complaining that the world must end too-big-to-fail is like Darth Vader bemoaning the intergalactic dominance of the Death Star.
Jonathan Weil, Jamie Dimon Laments Too-Big-to-Fail? Give Me a Break
When individuals or corporations profit from their involvement in an activity that imposes costs on society as a whole, that activity functions as a commons, and if that commons is unmanaged the tragedy of the commons is a likely result. The American banking industry before 1933 and after 1999 functioned, and currently functions, as an unmanaged commons; between those years, it was a managed commons. While it was an unmanaged commons, it suffered from exactly the outcome Hardin’s theory predicts; when it was a managed commons, by contrast, a major cause of banking failure was kept at bay, and the banking sector was more often a source of strength than a source of weakness to the national economy.
Restoring the Commons
› Hank Greenberg Should Be Shot into Space For Suing the Government over the AIG Bailout | Matt Taibbi
A lot of people are wondering what to think about the news that the board of AIG is considering joining the lawsuit filed by former AIG head Maurice “Hank” Greenberg against the Fed and the U.S. government – a suit that one news outlet describes as charging the state with handing out an “insufficiently generous bailout.”
The editorial in today’s Daily News captures the public feeling over this confusing news story quite well, I think:
If chutzpah were a crime, Hank Greenberg, American International Group’s former chief, would be going away for a long, long time.
Long since driven out of AIG, Greenberg is waging a lawsuit claiming the U.S. hurt the firm’s shareholders — including him — when the government rescued the insurance giant with the most humongous bailout of all time.
If you just read the headlines, the story that AIG is considering suing the government for bailing it out makes no sense at all. What could even be the basis for such a suit? One reader asked the question this way: “If a cop bursts into a motel room and stops you just as you’re about to blow your head off with a shotgun, can you sue him? If the answer is yes, should I try it?”
Former bailout inspector Neil Barofsky put it this way, in an interview with Bloomberg: “The idea that AIG would have been better off by going bankrupt, for the shareholders is a very, very hard thing to sell, I think.”
But here’s the funny thing about the lawsuit filed against the government: It isn’t all wrong. In fact, parts of it are quite on the mark.
The only problem is, the suit is being filed by maybe the biggest douchebag of all time, Hank Greenberg (and his company, Starr International), a man who has not only been proven to be corrupt and a fraud, but who perhaps more than anyone else was responsible for the galactic balance-sheet goat-fuck that caused AIG’s implosion in the first place. If there is such a person as an innocent AIG shareholder who was harmed by the government’s conduct, it sure as hell isn’t Hank Greenberg.
In fact, since the collapse of AIG was perhaps the most important event in causing the financial crisis of 2008 to spiral out of control, you can put Hank Greenberg on the very short list of individuals who are most responsible for the economic catastrophe. A few weeks ago I put former Countrywide chief Angelo Mozilo, former Lehman head Dick Fuld and Greenberg’s former subordinate Joe Cassano (the former head of AIG’s Financial Products unit) on that list, but Greenberg should be right there riding the bus of shame with all of those excellent folks.
It’s this fact, not the merits of the actual lawsuit, that make this news story so outrageous. [continue]
› America’s Deceptive 2012 Fiscal Cliff, Part III – Why Today’s Fiscal Squeeze Imposes Needless Austerity | Michael Hudson
The Federal Reserve’s three waves of Quantitative Easing since 2008 show how easy it is to create free money. Yet this has been provided only to the largest banks, not to strapped homeowners or industry. An immediate $2 trillion in “cash for trash” took the form of the Fed creating new bank-reserve credit in exchange for mortgage-backed securities valued far above market prices. QE2 provided another $800 billion in 2011-12. The banks used this injection of credit for interest rate arbitrage and exchange rate speculation on the currencies of Brazil, Australia and other high-interest-rate economies. So nearly all the Fed’s new money went abroad rather than being lent out for investment or employment at home.
U.S. Government debt was run up mainly to re-inflate prices for packaged bank mortgages, and hence real estate prices. Instead of alleviating private-sector debt by writing down mortgages in line with the homeowners’ ability to pay, the Federal Reserve and Treasury created money to support property prices – to push the banking system’s balance sheets back above negative net worth. The Fed’s QE3 program in 2012-13 created money to buy mortgage-backed securities each month, to provide banks with money to lend to new property buyers.
For the economy at large, the debts were left in place. Yet commentators focused only on government debt. In a double standard, they accused budget deficits of inflating wages and consumer prices, yet the explicit aim of quantitative easing was to support asset prices. Inflating asset prices on credit is deemed to be good for the economy, despite loading it down with debt. But public spending into the “real” economy, raising employment levels and sustaining consumer spending, is deemed bad – except when this is financed by personal borrowing from the banks. So in each case, increasing bank profits is the standard by which fiscal policy is to be judged!
[…] So despite the fact that the financial system is broken, it has gained control over public policy to sustain and even obtain tax favoritism for a dysfunctional overgrowth of bank credit. Unlike the progress of science and technology, this debt is not part of nature. It is a social construct. The financial sector has politicized it by pressing to privatize economic rent rather than collect it as the tax base. This financialization of rent-extracting opportunities does not reflect a natural or inevitable evolution of “the market.” It is a capture of market structures and fiscal policy. Bank lobbyists have campaigned to shift the economic arena to the political sphere of lawmaking and tax policy, with side battlegrounds in the mass media and universities to capture the hearts and minds of voters to believe that the quickest and most efficient way to build up wealth is by bank credit and debt leverage.
As Bloomberg News reported Wednesday, Goldman finished the year with a flurry of regulatory filings revealing that 10 top executives, including CEO and Chairman Lloyd Blankfein and President and COO Gary Cohn would be paid a total of $65 million in restricted stock award 2012—ahead of schedule—enabling them to avoid higher tax rates in 2013. Goldman spokesman Michael DuVally declined to comment. And remember the eleventh hour deal struck by Congress to avoid the fiscal cliff? Goldman will indirectly get a piece of that as well. Section 328 of the bill extends tax-exempt financing for the ‘New York Liberty Zone,’ which includes the area around Goldman’ shiny new headquarters at 200 West St. Goldman already got $1.5 billion in ‘Liberty Bonds’ to help pay for the construction of its headquarters, according to this Bloomberg News investigation, and now it can be sure developers will have every incentive to build more fancy high rises to house Goldman’s workaholics as close to the office as possible. Not that they needed such incentives. Meanwhile, Congress couldn’t find the time to approve a $60.4 billion package to help genuinely distressed coastal neighborhoods in New York and New Jersey that have been wiped out by Hurricane Sandy.
Goldman Weasels Its Way Into 2013
Still doing “God’s work” at Goldman Sachs.
› Why socialize finance? | Matt Bruenig
For whatever reason, the dominant left-intellectual gripe with capitalism these days finds its origins in Marx’s theory of alienation. That is not to say all the criticisms come with cites to the Economic and Philosophical Manuscripts of 1844, but that is the intellectual tradition those criticisms are working within. In that tradition, the terribleness of capitalism is manifested in the way that wage labor causes various sorts of alienation and commodification. Among other things, workers have little control over their productive energies or the resulting product (bosses and owners control both). Workers also find themselves estranged from their co-workers and everyone else for that matter as competition puts their interests at odds with everyone else. This capitalist reality generates terrible psychic harm and pain because it undermines humanity’s natural tendency towards community and creativity.
Although this is an important tradition in the history of anti-capitalism, it is not the only one. Marx himself seemed far more interested in another critique of capitalism that focused on the unearned incomes of capitalists. In very simple terms, capitalism enables owners of enterprises to capture income that they do not work for.
The modern stockholder is a fantastic example of such capturing. The stockholder buys some equity in a company, has absolutely no role in the company, and then sells the equity down the line at a gain (and in the meantime receives dividends). That stockholder did no work at all to generate that gain or the dividends. Workers in the firm did all of the work, but they did not receive all of the gain. So not only does the stockholder capture income that she did not earn, but the workers in the company are deprived of income that they did earn. That is classic exploitation.
Outrage at unearned income is the classic domain of theories of desert. Under desert theory, individuals are owed compensation equal to their economic contribution, nothing more and nothing less. This theory has its problems, but it has a massive intellectual pedigree, even on the left. For a modern take on it, Gar Alperovitz and Lew Daly cannot be beaten.
Capitalist systems are riddled with payouts that have nothing to do with economic contribution. Early theorists focused on land rents as a troubling type of unearned income. In Wealth of Nations, Adam Smith noted that “[a]s soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed and demand a rent even for its natural produce.” John Stuart Mill, noted market socialist, said it best:
Suppose that there is a kind of income which constantly tends to increase, without any exertion or sacrifice on the part of the owners: those owners constituting a class in the community, whom the natural course of things progressively enriches, consistently with complete passiveness on their own part. In such a case it would be no violation of the principles on which private property is grounded, if the state should appropriate this increase of wealth, or part of it, as it arises. This would not properly be taking anything from anybody; it would merely be applying an accession of wealth, created by circumstances, to the benefit of society, instead of allowing it to become an unearned appendage to the riches of a particular class.
It is under this desert theory tradition — which Marx’s theory of exploitation makes him a part of — that socialization of finance finds its strongest justification. Financial wealth delivers passive incomes to owners through no exertion of their own. Capturing those financial gains and distributing them socially corrects that injustice. It eliminates the technical exploitation that Marx fixated on in Capital. All else equal, that seems like a very commendable achievement to me at least.
Although socialization of finance is most supported by the desert tradition, it can do things which should appeal to other traditions as well. Among other things, it provides a revenue stream that can be used to pursue egalitarian goals (through cash transfers for instance), and even worker empowerment goals (through basic incomes for instance). Additionally, and perhaps more importantly, socialization of finance is completely compatible and can exist alongside other sorts of left programs. It may not fully solve alienation and commodification problems (if indeed you think they exist), but it certainly does not preclude them from being solved.
› America’s Deceptive 2012 Fiscal Cliff: Part I | Michael Hudson
… This $13 trillion debt creation to save banks from having to suffer a loss was not accused of threatening economic stability. It enabled them to resume paying exorbitant salaries and bonuses, dividends to bondholders and also to pay counterparties on casino-capitalist arbitrage bets. These payments helped the 1% receive a reported 93% of the gains in income since 2008. The bailout thus polarized the economy, giving the financial sector more power over labor and consumers, industry and the government than has been the case since the late 19th-century Gilded Age. All this makes today’s financial war much like the aftermath of World War I and countless earlier wars. The effect is to impoverish the losers, appropriate hitherto public assets for the victors, and impose debt service and taxes much like levying tribute. “The financial crisis has been as economically devastating as a world war and may still be a burden on ‘our grandchildren,’” Bank of England official Andrew Haldane recently observed. “‘In terms of the loss of incomes and outputs, this is as bad as a world war.’ he said. The rise in government debt has prompted calls for austerity – on the part of those who did not receive the giveaway. ‘It would be astonishing if people weren’t asking big questions about where finance has gone wrong.’”
But as long as the financial sector is winning its war against the economy at large, it prefers that people believe that There Is No Alternative. Having captured mainstream economics as well as government policy, finance seeks to deter students, voters and the media from questioning whether the financial system really needs to be organized in the way it is. Once such a line of questioning is pursued, people may realize that banking, pension and Social Security systems and public deficit financing do not have to be organized in the way they are. There are much better alternatives to today’s road to austerity and debt peonage.
› The Red and the Black | Seth Ackerman
Long, but great essay.
For a short postscript, also read: Socialize finance! | Matt Bruenig