The next time some bobblehead starts talking about how this crisis "is about people living beyond their means", remind them of this latest proof that the financial services industry was thoroughly and aggressively corrupt, and that was a much bigger problem:

WASHINGTON -- As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.

A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.

Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."

As Congress tackles the broadest proposed overhaul of financial regulation since the 1930s, however, lawmakers still aren't fully aware of what went wrong at the bond rating agencies, and so they may fail to address misaligned incentives such as granting stock options to mid-level employees, which can be an incentive to issue positive ratings rather than honest ones.

The Securities and Exchange Commission issued a blistering report on how profit motives had undermined the integrity of ratings at Moody's and its main competitors, Fitch Ratings and Standard & Poor's, in July 2008, but the full extent of Moody's internal strife never has been publicly revealed.

Moody's, which rates McClatchy's debt and assigns it quite low value, disputes every allegation against it. "Moody's has rigorous standards in place to protect the integrity of ratings from commercial considerations," said Michael Adler, Moody's vice president for corporate communications, in an e-mail response to McClatchy.

Insiders, however, say that wasn't true before the financial meltdown.

"The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997.
"This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.

After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.

The Bush years are certainly the gift that keeps on giving, aren't they? All those people who had jobs with what they thought was a secure future are all going to be scraping by on Social Security. Oh, and I just read that one of the largest long-term care insurers is about to collapse. Sure would be nice if FDR was around - maybe he could dream up some real solutions, like national health insurance...

The financial crisis has blown a hole in the rosy forecasts of pension funds that cover teachers, police officers and other government employees, casting into doubt as never before whether these public systems will be able to keep their promises to future generations of retirees.

The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.

Within 15 years, public systems on average will have less than half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade.

After losing about $1 trillion in the markets, state and local governments are facing a devil's choice: Either slash retirement benefits or pursue high-return investments that come with high risk.

The urgent need for outsize returns by these vast public pension funds, which must hit high investment targets year after year to keep pace with rising retirement costs, is in turn fueling a renewed appetite for risk on Wall Street.

Before the crisis, many public pension funds had experimented with risky trading techniques or committed more of their money to hedge funds and other nontraditional firms, which in turn invested some of it in complex mortgage securities. When these melted down, pension funds got burned.

Now, facing an even bigger funding gap, some systems are investing in the same securities, betting that a rebound in their value will generate huge returns.

"The amount that needs to be made up is enormous," said Peter Austin, executive director of BNY Mellon Pension Services. "Frankly, they are forced to continue their allocation in these high-return asset classes because that's their only hope."

The big news this week on the financial front was the Independent’s claim that Gulf Arabs and France, Japan, Russia and Japan were planning to move from buying oil in dollars to buying it in a basket of currencies, including gold and a new universal currency shared by the Gulf nations.

Buying oil in dollars is one of the foundations of the dollar’s role as the world’s primary reserve currency. Because the the dollar is the world’s primary reserve currency Americans have been able to borrow money for significantly less than other countries are able to. This has both made America more prosperous, and through the perverse incentives of cheap money, helped lead to the high indebtedness of American citizens and the financial crisis.

In addition, buying oil in dollars is one of the things which allowed strong dollar policies to drive the price of oil down. Making dollars extremely scarce in the 80’s and nineties was one key factor leading to a price per barrel under $20. Oil prices started their rise upwards after Greenspan’s Federal Reserve let loose the money spigot in the Asian crisis and the Long Term Capital fiasco. Greenspan essentially never took his foot off the pedal from that point onwards, and oil prices soared, until last year at one point they were over $150/barrel.

So one consequence of going off the dollar is that a major benefit of the strong dollar play is taken off the table, and the US loses its ability to control the price of oil. Since at this time, contrary to what the Feds are saying, a strong dollar play isn’t in the cards (the US needs to borrow way too much money) that’s not a big deal in the short run—in the long run it is.

But buying oil in dollars isn’t the only thing that underpins the dollar as the world’s reserve currency and to understand what buying oil in something other than dollars would mean we need to understand what else makes, or perhaps more accurately, made, the dollar so important.

Continue reading »

Oops, just kidding! Just think, if they'd actually admitted the banks were in deep trouble, and that their assets weren't worth a dime, the crisis might have bottomed out a lot sooner - and the banks wouldn't have been able to use TARP funds to buy up their competitors!

Senior U.S. officials deliberately misled the American people about the health of banks receiving huge government cash infusions last year, according to a report released today from the Treasury Department TARP watchdog.

The officials believed they were telling noble lies. The idea was that confidence needed to be restored and panic stemmed, even if this meant misleading the public about the actual health of our financial institutions.

Of course, this backfired. The government and the bailout lost public credibility when the financial crisis deepened, according to TARP watchdog Neil Barofsky's report.

Worse, the lies may have made the crisis worse by creating false expectations that the bailed out banks would be able to increase lending. Businesses and individuals planning to borrow would have discovered that their projects were impossible and their savings inadequate as banking lending continued to fall.

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke that the $125 billion injection into nine banks in October 2008 was a program for "healthy" institutions. But privately senior officials believed several of those firms were less than healthy. Hank Paulson himself believed one of those institutions might fail.

"By stating that healthy' institutions would be able to increase overall lending, Treasury may have created unrealistic expectations about the institutions' condition and their ability to increase lending," the report said.

You can view this video right here by getting the latest version of Flash Player!

DOWNLOADS: 960

PLAYS: 950

(Welcome to California!)

With the current state of eternal/ongoing financial crisis in California, I thought it would be a good idea to revisit the day where things went south. On June 8, 1978; the day after the election and the "voters revolt", California was poised to go from budget surplus to bankruptcy in a very short time.

Gov. Brown: “The message is, that the Property Tax must be sharply curtailed and that government spending, wherever it is, must be held in check. We must look forward to lean and frugal budgets.”

Lots of people forget just how this thing got started, since it was 31 years ago - time has a tendency to cloud things over, particularly events that seemed like a good idea at the time, but over the long haul just spelled disaster.

So in case you were wondering . . .

You can view this video right here by getting the latest version of Flash Player!

DOWNLOADS: (82)

PLAYS: (251)

We need a whole lot more Bernies out there.
h/t Sen. Sanders

From The Daily Show:

President Obama takes a soft pedal approach to reform when addressing a humbled Wall Street.

I agree with Stewart. A year later and we're still talking about reform in the future tense instead of the past tense? Shameful.

Now why doesn't President Obama nominate more judges like this one?

As President Obama traveled to Wall Street on Monday and chided bankers for their recklessness, across town a federal judge issued a far sharper rebuke, not just for some of the financiers but for their regulators in Washington as well.

Giving voice to the anger and frustration of many ordinary Americans, Judge Jed S. Rakoff issued a scathing ruling on one of the watershed moments of the financial crisis: the star-crossed takeover of Merrill Lynch by the now-struggling Bank of America.

Judge Rakoff refused to approve a $33 million deal that would have settled a lawsuit filed by the Securities and Exchange Commission against the Bank of America. The lawsuit alleged that the bank failed to adequately disclose the bonuses that were paid by Merrill before the merger, which was completed in January at regulators’ behest as Merrill foundered.

He accused the S.E.C. of failing in its role as Wall Street’s top cop by going too easy on one of the biggest banks it regulates. And he accused executives of the Bank of America of failing to take responsibility for actions that blindsided its shareholders and the taxpayers who bailed out the bank at the height of the crisis.

The sharply worded ruling, which invoked justice and morality, seemed to speak not only to the controversial deal, but also to the anger across the nation over the excesses that led to the financial crisis, and the lax regulation in Washington that permitted those excesses to flourish.

Implicit in the judge’s remarks were broader questions on the anniversary of one of the most tumultuous weeks in Wall Street’s history: What do the giants of finance owe their shareholders and the investing public? And who will adequately oversee these behemoths?

Congress is pondering these issues as it prepares to reshape the power structure of financial regulators in Washington, including the S.E.C. President Obama is pushing lawmakers to pass tougher regulations this year that would touch everything from bonuses to the structural soundness of Wall Street’s most powerful banks, even as some Democrats fret that the health care debate makes it unlikely that financial reform can be achieved.

“We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis,” Mr. Obama said in his speech before several hundred banking executives, lawmakers and Mayor Michael R. Bloomberg of New York.

Such consequences were at the heart of the dispute that came before Judge Rakoff, who had demanded that the S.E.C. and the bank explain which executives were responsible for failing to tell the bank’s shareholders about the payout of Merrill’s bonuses. That information, together with evidence of large undisclosed losses at Merrill, may have led shareholders to reject the merger at a time when the government wanted to forestall a worse meltdown of the financial system.

The judge accused Bank of America and the S.E.C. of concocting the settlement to effectively absolve themselves of further responsibility.

“The S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger,” he wrote, and “the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.”

I wrote a short piece last week in which I tried to remind Congress that we need to have hearings on the financial meltdown for obvious reasons:

Just a reminder.

I know we've asked for a Truth Commission on torture over and over again, but what about the financial catastrophe the world just experienced? When will hearings be held to uncover the facts that led us and the world to financial ruin? I know we have many basic facts of what happened, but when will an actual hearing take place? If nothing is officially uncovered then how can we stop another one from taking place?

Bill Scher of CFAF heard a little birdy and it sounds quite promising on that front now:

Word is circulating in Washington that members for the Financial Crisis Inquiry Commission will be named this week.

The commission is supposed to resemble the 1930s Pecora commission that dug into the culprits behind the Great Depression and laid the groundwork for major bank reform. But that will only be true if the commission is run by aggressive seekers of truth, independent of the financial industry, willing to use their subpoena power, knowledgeable enough to have warned us of impeding crisis in the first place despite market cheerleading from the political and media establishments.
--
Speculation from Reuters last week on who might be named was not terribly encouraging, though most of the names floated clearly were coming from conservative circles, as Republican leaders will pick four of the 10 members.

Cut...OK, here's where we come in. Updated: No members of Congress can be on the commission, but
I think an Alan Grayson or Henry Waxman type would be good choices for the commission. . We do need a panel of brilliant minds that has real progressive representation, but what we also need are people that have an appreciation for the "dramatic." That is, they should know how to ask questions with their allotted time in such a way that it will be highly informative and entertaining at the same time. These are the moments that can really educate Americans, but the commission needs members that understand how to use their valuable time---not to pontificate---but to educate and uncover. And it needs to be riveting while getting to the truth of this mess.

Please ask Speaker Pelosi and Harry Reid to make sure they put together a great panel. Nancy was almost scheduled to do a live chat on C&L last week, but because of my family issues, we are rescheduling. However, I think if we let her know how strongly we feel about the new Pecora Commission and ensuring that progressives are solidly represented, she'll come through.

Here's her contact info.

Harry Reid is another story. Here's Reid's office info, so please let him know too.

Continue reading »

Legal Schnauzer: The criminal prosecution of former Alabama Governor Don Siegelman is perhaps the best known case that apparently was infected with judicial bias. But recent news about cases that orginated in West Virginia and Georgia indicate the problem is widespread and difficult to combat.

Wonk Room: McCain reminds us of the bullet we...kinda dodged last November, and Obama takes Dennis Ross out of the diplomatic kitchen

The Baseline Scenario: The Geithner/Summers proposals for financial regulation lay the foundation for another financial crisis

Nashville Is Talking: GOP state senator's aide circulates racist image of Obama

Mad Kane: Don't Ask, Don't Tell...Just Sign!

Collateral News: Medical Marijuana

Amos Elon (1926–2009)

I didn't need the CJR to do a report on the CNBCs of our media to tell me what results they found on the coverage of the financial collapse, but it's good so see it in print.
Bruce Watson:

Columbia Journalism Review this month took the first steps toward transforming the ghost stories and urban legends of America's current recession into the formalized analysis of history. In "The List," a table of 727 stories from the business media, CJR tracks the history of the recession's coverage from its first rumbles and murmurs in 2000 to the cataclysms of 2007. In the process, the publication explores whether the media did, in fact, do everything that it could to protect its readers.

In its final analysis, the answer seems to be a resounding "no."...read on

Are you shocked? I found this report over at Digby's place so I'll let her explain what this means:

In all the navel gazing about the future of journalism, it seems to me that one of the most important is consideration of the cracking of the insider culture. The media's failures of the past decade can be at least partially explained by its insular nature and class based identification with those they cover. (As James Wolcott so pithily illustrated with his description of Judy Miller and Scooter Libby "buttering each others' toast" at the St. Regis.)

Good journalism requires something that is in short supply among many establishment journalists: a healthy skepticism toward power, money, celebrity and elite opinion. Unfortunately, all too many elite journalists swim in the same social and professional pool as the people they cover. I thought it was bad in politics, but when you watch the financial media it's almost dizzyingly cozy and self-reinforcing.

Continue reading »

I'm not too optimistic about this improving matters. How can you ever foresee every potential conflict when they're all in bed with each other? Break these "too big to fail" companies up and make them smaller, that's what I say!

Senior administration officials are considering the creation of a single agency to regulate the banking industry, replacing a patchwork of agencies that failed to prevent banks from falling into the worst financial crisis since the Great Depression, sources said.

The agency would be a key element in the administration's sweeping overhaul of financial regulation, which officials hope to unveil in coming weeks, including the creation of a new authority to police risks to the financial system as well as a new agency to protect consumers, according to three people familiar with the matter. Most of the proposals would require legislation.

"The president is committed to signing a regulatory reform package by the end of the year, and officials at the White House and the Treasury Department are continuing work with Congress on the final phases of a proposal, but there is no final proposal in place and any announcement will not be for a couple of weeks," said White House deputy spokesman Jennifer R. Psaki.

Senior officials have reached agreement on aspects of the plan, according to a person familiar with the discussions.

They favor vesting the Federal Reserve with new powers as a systemic risk regulator, with broad responsibility for detecting threats to the financial system. The powers would include oversight of previously unregulated markets, such as the derivatives trade, and of market participants such as hedge funds.

Officials also favor the creation of a new agency to enforce laws protecting consumers of financial products such as mortgages and credit cards.

And they want to merge the Securities and Exchange Commission and the Commodity Futures Trading Commission, which share responsibility for protecting investors from fraud.

Other aspects of the plan remain under discussion, sources said, speaking on condition of anonymity because they were not authorized to disclose details.

Among these ideas is the creation of a single agency to regulate banks. The new regulator would assume responsibility for the safety and soundness of banks, currently divided among the Fed and three other agencies: the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. The OCC and the OTS would probably disappear, while the Fed and the FDIC would retain other responsibilities.

Under the current system, banks can choose their regulator. Because the OCC, OTS and FDIC are funded by fees from the banks, the regulators have an incentive to compete for business by offering more lenient oversight. The system also divides supervision of the largest financial conglomerates among multiple agencies, each with responsibility for certain subsidiaries, creating gaps in coverage that companies have exploited. Many experts say these failures of regulation contributed to the financial crisis.

Gee, ya think?

It was my understanding that there were penalties for early repayment of TARP loans, but this Daily Beast story doesn't mention it. According to them, Goldman Sachs will soon be out from under government control:

Wall Street may have another reason to hate Goldman Sachs: The venerable firm with contacts throughout the federal government looks as though it may be the first financial institution to be allowed to repay government bailout money, The Daily Beast has learned. Repaying its TARP loan would free Goldman from various restrictions, including those on the compensation of key executives.

The decision as to which banks would be given the green light from banking regulators, most notably the Federal Reserve and the Treasury Department, could be made as early as next week, these people say. Goldman already has a tentative approval from the Treasury and is awaiting approval from the Federal Reserve, according to one person with knowledge of the matter.

JP Morgan feels comfortable they have convinced both the Treasury and Fed that they should be allowed to repay the money along with the first group of banks.

During the height of the financial crisis the federal government handed out billions in aid to the big banks in an effort to boost capital levels depleted by bad real estate loans and bonds. While the bailout money helped stabilized a spreading financial panic, it also led to massive government ownership of some of the nation's largest banks and controls on business practices and compensation.

As the financial crisis has abated, some banks, most notably Goldman Sachs, JP Morgan Chase, Bank of America, and Morgan Stanley have said they can now repay the money and get out from under federal control. The government must first approve the measure; last week it announced results of so-called stress tests to determine which banks have the most capital to withstand further erosion in business conditions. The government also announced two conditions to repay the money: The issuance of debt that is not backed by FDIC insurance and sufficient so-called "tier one" capital levels. Tier one capital is the strongest capital in the market.

Based on the stress tests, Goldman Sachs and JP Morgan were deemed to be among the strongest of the big banks; unlike Morgan Stanley, Bank of America and Citigroup, both Goldman and JP Morgan were not required by regulators to raise capital levels. Since that time, officials at Goldman and JP Morgan have been pressuring regulators to allow them to repay the bailout money that was granted from the Troubled Asset Relief Program or TARP.

DOWNLOAD (99)

PLAY (148)

From Democracy Now March 24, 2009. Amy Goodman talked to recent House candidate Thomas Geoghegan about how the dismantling of usury laws is highly responsible for the destruction of the American economy.

The Obama administration unveils its $1 trillion plan to buy toxic assets from banks and restore the financial system. But should we return to the way it was? We speak with Chicago lawyer Thomas Geoghegan about his new Harper’s Magazine cover story, “Infinite Debt: How Unlimited Interest Rates Destroyed the Economy.” Geoghegan writes, “We dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter’s term.”

Transcript below the fold.

Continue reading »

DOWNLOAD (38)

PLAY (110)

From the Newshour with Jim Lehrer March 23, 2009. Paul Krugman is not impressed with the idea of buying these toxic assets.

JEFFREY BROWN: Well, Paul Krugman, you wrote critically of the plan this morning. Now you've heard Lawrence Summers. Are you persuaded?

PAUL KRUGMAN: No. You know, I wish Larry the best; I hope he's right. But this is a plan that treats a fairly minor symptom of the problem.

You know, that maybe some of these toxic assets -- I guess they're now toxic legacy assets, whatever -- are being under-priced in the market. And maybe there's a problem there.

But the fact of the matter is that the banks made a huge bet. They made a bet that the housing bubble was nonexistent, that, you know, historically unprecedented levels of consumer debt were not a problem. They lost that bet.

And this plan does almost nothing to rescue them from the consequences of that bad debt. So I'm kind of saddened. It's kind of a punt. They've decided to sort of not really take on the critical issue of fixing the banks and instead hope that a little bit of rearranging of the financial furniture will solve the problem.

JEFFREY BROWN: Well, you heard Larry Summers in our interview. He used the phrase "vicious cycles turn into virtuous circles," that this would get the banks lending again. So you just don't see that enough is done here?

PAUL KRUGMAN: It's a very poorly targeted instrument. What you have is banks that have taken huge losses. And those are real losses. They're not just because the markets aren't working so well in toxic paper.

And to get the markets, to get capital flowing, to get credit flowing to the real economy, you actually need to make the banks sound again. It would take a huge increase in these prices. It would take a tremendous -- basically, you'd have to convince people that all these bum mortgages are actually pretty good in order to make the banks secure enough to start, you know, a lot of new lending.

This is not going to do that. It's going to help a little bit, maybe. Certainly it's -- you know, basically the plan hands out gold-plated toasters to anybody who participates. It's a very sweet deal for the investors. And it's going to push up the prices, but a lot of the benefits will go to financial institutions that are actually not in any trouble. A fair bit of the benefits will go to people who are not in the financial industry at all.

Only a little bit of it is going to trickle to the really critically injured banks. So it's just not -- it's a plan that kind of mistakes the nature of the problem that we face.