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Dylan Ratigan and Elizabeth Warren discuss the Congressional Oversight Panel's findings that the implicit guarantee of future bailouts is keeping us from having any real reform of our financial systems in this country.

From The Hill--TARP oversight report: 'Implicit guarantee' of future bailouts hampering reform:

Unwinding the Treasury Department's $700-billion rescue program will be difficult, so long as there is an "implicit guarantee" that the federal government will continue to save failing banks, according to a new report.

The 2008 Troubled Asset Relief Program (TARP) has ultimately prompted banks to adjust "to the notion... [they] will be safe, no matter what," explained Elizabeth Warren, chairwoman of the Congressional Oversight Panel that has been tracking those dollars."The whole market has adjusted to the notion that the big banks will be safe no matter what, and they can start planning their business approaches accordingly," Warren told CNBC on Thursday. "And thats dangerous."

"This business of regulatory reform that's going through Congress... is really where this is going to all come down," she added, as those reforms would allow the federal government to "credibly say to any large financial institution, 'If you screw this up badly enough, you really can be liquidated.'"

Without that legislation, "At the end of the day, when TARP is over, it's not really over," the chairwoman continued.

Warren's remarks on Thursday coincide with the Congressional Oversight Panel's latest look at the TARP's management and execution. The report, released this morning, stresses the legacy of the 2008 bailout program might be a lingering impression that the federal government will rescue failing firms that pose systemic risks to the nation's economy.

"This belief distorts prices, giving large financial institutions an advantage in raising capital that mid-sized and smaller banks – those not too big to fail – do not enjoy," Warren and her colleagues found. "These implicit guarantees also encourage major financial institutions to take unreasonable risks out of the belief that, no matter what happens, taxpayers will not allow their failure."

"So long as markets continue to believe that an implicit guarantee exists, moral hazard will continue to distort prices and endanger the nation’s economy, even after the last TARP program has been closed and the last TARP dollar has been repaid," the panel concluded.

Continue reading...

So we continue to prop up the housing market, probably because it provides the only positive economic news lately. Is this good for the long-term economy? I dunno, I guess it depends on how talented you are at pretending:

The Obama administration pledged Thursday to provide unlimited financial assistance to mortgage giants Fannie Mae and Freddie Mac, an eleventh-hour move that allows the government to exceed the current $400 billion cap on emergency aid without seeking permission from a bailout-weary Congress.

The Christmas Eve announcement by the Treasury Department means that it can continue to run the companies, which were seized last year, as arms of the government for the rest of President Obama's current term.

But even as the administration was making this open-ended financial commitment, Fannie Mae and Freddie Mac disclosed that they had received approval from their federal regulator to pay $42 million in Wall Street-style compensation packages to 12 top executives for 2009.

The compensation packages, including up to $6 million each to Fannie Mae and Freddie Mac's chief executives, come amid an ongoing public debate about lavish payments to executives at banks and other financial firms that have received taxpayer aid. But while many firms on Wall Street have repaid the assistance, there is no prospect that Fannie Mae and Freddie Mac will do so.

The administration faced a congressionally mandated deadline of Dec. 31 to increase the amount of aid it could provide to Fannie Mae and Freddie Mac, which together have already received $111 billion in assistance.

Treasury said Thursday that its decision did not mean the firms would need $200 billion or more apiece, but that it instead was seeking to assure markets that the government would stand behind the companies. In a statement, Treasury said the move "should leave no uncertainty about the Treasury's commitment to support these firms as they continue to play a vital role in the housing market during this current crisis."

But hey, look over there! Ben Bernanke's the Man of the Year!

WASHINGTON — The value of loans held by the biggest beneficiaries of the government's bank bailout fell for the ninth consecutive month in October, the Treasury Department reported Tuesday, a day after President Barack Obama criticized top bankers for not doing enough to boost lending.

The department's monthly report, which monitors the top 22 recipients of support from the government's $700 billion rescue fund, showed that their average loan balances dropped in October by $36.8 billion, or 0.9 percent. That followed a decline of 1.1 percent, or $45.9 billion, in September.

Obama on Monday urged the nation's big banks to make "extraordinary" efforts to increase lending to help consumers and businesses who have been staggered by the worst recession since the 1930s.

Republicans have been flogging the notion that if we have health care reform, your premiums will go up. They have no data to back up the claim, but they repeat it endlessly. Here's a new report that throws cold water on their heads. Will this new report get the attention it deserves by the media?

Jonathan Gruber, an economist at the Massachusetts Institute of Technology provides the information for this MIT study:

A new analysis by a leading MIT economist provides new ammunition for Democrats as the Senate begins formally debating the historic health-reform bill being pushed by President Barack Obama.

The report concludes that under the Senate’s health-reform bill, Americans buying individual coverage will pay less than they do for today's typical individual market coverage, and would be protected from high out-of-pocket costs.

So Democrats will argue that under the Senate bill, Americans would pay less for more.

The new document arms Democrats with a response to the contention of Senate Minority Leader Mitch McConnell (R-Ky.) that the bill would mean “higher premiums, higher taxes, and massive cuts to Medicare.”

The “microsimulation” analysis is by Jonathan Gruber, an economist at the Massachusetts Institute of Technology and a Treasury Department official under President Bill Clinton. Gruber used data from the Congressional Budget Office.

Gruber concludes that people purchasing individual insurance would save an annual $200 (singles) to $500 (families) in 2009 dollars. And people with low incomes would receive premium tax credits that would reduce the price that they pay for health insurance by as much as $2,500 to $7,500.

The report will be circulated to Capitol Hill this week. Read the four-page report here.

As Digby says:

Now David Broder has talked to every "expert" at the Washington Post (well almost every expert) and got a different answer, so take all this with a grain of salt. Still, it's important to know what the "scientists" are saying. They often have undue influence on decision making.

Gruber should expect a fair amount of vicious attacks to be heaped on him as republican operatives will surely try to discredit him on every way possible. That's their standard MO.

Interesting. So Dodd's proposal would effectively remove Sheila Bair's role as one of the few senior administration officials advocating for consumers. (We already know bankers don't like her.) Still, it sounds like a few good ideas here, I'll wait to see how this shakes out.

Nov. 10 (Bloomberg) -- Senator Christopher Dodd will propose creating a single U.S. regulator that would strip the Federal Reserve and Federal Deposit Insurance Corp. of bank-supervision authority, said a person familiar with the matter.

Dodd, chairman of the Senate Banking Committee, would eliminate the Office of the Comptroller of the Currency and the Office of Thrift Supervision and fold the Treasury Department units into the new bank regulator, according to the person, who spoke on condition of anonymity because the plan isn’t public. The Connecticut Democrat is scheduled to release a draft of his financial-regulation overhaul plan today in Washington.

“It makes sense to have one regulator that deals with supervision,” Gilbert Schwartz, a former Fed attorney and a partner at Washington law firm Schwartz & Ballen LLP, said in an interview. “You’ll see a real battle by the Fed and the FDIC to retain their supervisory authority.”

Dodd has faulted the U.S. bank regulation system, saying it encourages charter shopping and a “race to the bottom” by agencies to win oversight roles. His proposal goes further than proposals by President Barack Obama and House Financial Services Committee Chairman Barney Frank to merge the OTS and OCC.

[...] Dodd will also propose creating a Consumer Financial Protection Agency, a council of regulators to monitor large firms for disruptive effects on the industry and the economy, and giving the FDIC power to unwind failed firms whose collapse in bankruptcy could shake the economy, the person said.

I just don't know what the best options are here, but I'm not feeling reassured that the people advising Geithner were making so much money from the people they're supposed to be regulating:

Oct. 14 (Bloomberg) -- Some of Treasury Secretary Timothy Geithner’s closest aides, none of whom faced Senate confirmation, earned millions of dollars a year working for Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms, according to financial disclosure forms.

The advisers include Gene Sperling, who last year took in $887,727 from Goldman Sachs and $158,000 for speeches mostly to financial companies, including the firm run by accused Ponzi scheme mastermind R. Allen Stanford. Another top aide, Lee Sachs, reported more than $3 million in salary and partnership income from Mariner Investment Group, a New York hedge fund.

As part of Geithner’s kitchen cabinet, Sperling and Sachs wield influence behind the scenes at the Treasury Department, where they help oversee the $700 billion banking rescue and craft executive pay rules and the revamp of financial regulations. Yet they haven’t faced the public scrutiny given to Senate-confirmed appointees, nor are they compelled to testify in Congress to defend or explain the Treasury’s policies.

“These people are incredibly smart, they’re incredibly talented and they bring knowledge,” said Bill Brown, a visiting professor at Duke University School of Law and former managing director at Morgan Stanley. “The risk is they will further exacerbate the problem of our regulators identifying with Wall Street.”

Gee, ya think?

[...] Treasury spokesman Andrew Williams said the department needs people with a deep understanding of markets and the financial system, especially as it works to fend off the worst recession in half a century.

“The secretary thought that the best way to utilize their talents was to allow these individuals to provide advice to the secretary on policy issues through appointments as counselor,” Williams said.

All of Geithner’s counselors are subject to federal ethics rules, including a pledge to avoid contact with their former firms for at least a year, Williams added.

Most officials at the Treasury who have been approved by Congress come from academic, legal or non-Wall Street backgrounds.

Midwest Voices: Bob Dole outs naysayer Mitch McConnell

TalkLeft: Sully: It's Hillary's Fault

Blue Gal: Halliburton Rape

evilslutopia: Getting to the point of #nestlefamily

Wall St. Cheat Sheet: The Treasury Department endorses lying to the public

William K. Wolfrum Chronicles: I'm heterosexual - and wow, do I have a lot of rights

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.

It's not as though I didn't already think this, but hearing someone like Joseph Stiglitz say it out loud is pretty chilling. And he's not the only one, either:

Sept. 13 (Bloomberg) -- Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

Okay, let's see if I'm following this. The administration is talking about lending money to small businesses because the banks to which they've already funneled billions didn't do the thing all that money was supposed to do: make them open up the taps and lend working capital to businesses.

Are we clear now?

The Obama administration is developing an initiative to take money from the $700 billion program for the banking system and make it available to millions of small businesses, which officials say are essential to any economic recovery because they employ so many people, according to sources familiar with the plan.

The new effort -- which would represent a striking shift from the rescue program's original mandate -- would direct billions of bailout dollars toward a program that aims more at saving jobs than righting the financial system.

A proposal being floated by senior Treasury Department officials calls for using the bailout funds to expand an existing government program that helps small companies borrow money from banks a low rates to keep their businesses going, the source said. These "working capital" loans would come with few restrictions and could be used for buying inventory, holding onto employees and paying off short-term debt.

The initiative would expand a Small Business Administration lending program called 7(a), the agency's most popular lending program. Lines of credit for small companies could greatly increase in size. If the firm failed despite receiving this help, the government would cover most of the losses on the federal loan, perhaps as much as 90 percent. Lines of credit act like the credit cards for companies -- short-term revolving debt used to pay a variety of immediate expenses.

Discussions about the plan have reached the highest levels of the administration. In a meeting at the White House last week, Treasury Secretary Timothy F. Geithner expressed support of his staff's proposal, while National Economic Council director Lawrence Summers was more skeptical. Neither has made up his mind, officials said.

"Larry has supported every small business idea we have implemented so far," said Gene Sperling, a counselor to Geithner, who has been working on small business issues. "When we have a brainstorming session on new ideas, Larry as always asks the toughest questions in the room."

The debate over the proposal has centered on whether taxpayers would be protected and whether banks that make these loans would lower their standards if the government promises to cover most of any loan losses, according to participants present or briefed on the discussions. The spoke on condition of anonymity because the conversations were considered private.

On one hand, administration officials want to prevent healthy small businesses from closing their doors and adding their workers to the growing ranks of the unemployed. But small companies have poorer record of repaying loans compared to large corporations and would be the riskiest investment made under the bailout program to date.

The officials said the discussions are in the early stages and that no plan is expected before the fall. Ideas currently on the table may evolve or be scrapped altogether, they said.

Anything that creates or maintains jobs is good, but I wonder if this will really do that. I think too many of those small businesses are already gone.

The New Yorker has a great profile of Sheila Bair, the populist Republican who's at the helm of the FDIC. (h/t Riverdaughter)

As you may already know, Bair is not well liked by the Wall St. crowd that's running the White House show. (Apparently she has this bizarre idea that her job is to look out for working folk. Crazy talk!) Well, she's very popular with regular people - the administration wouldn't get rid of her, it would make a stink. Instead, they've just neutered her:

These debates entered into the Administration’s discussions about building a new regulatory architecture. In late March, Geithner previewed for Congress some of the key concepts that Treasury wanted. The outline seemed to match the Bair camp’s ideas. [Ladies, has this ever happened to you?] A new authority with the power to take over large financial institutions that posed a systemic risk to the economy was modeled on the F.D.I.C., which, Geithner suggested in his testimony, would be an equal partner with Treasury in resolving such firms if they failed. He seemed to be saying that although he and Bair may have disagreed about how to handle the current crisis, there was much more consensus about how to deal with a future one.

But in the white paper detailing the new legislation, which the Administration released on June 17th, all the new authority to regulate firms that posed systemic risk was vested in the Federal Reserve. During Geithner’s testimony before the Senate, Jim Bunning, of Kentucky, echoing Bair, was incredulous. “It took fourteen years for the Fed to write one regulation on mortgages after we gave it the power to do that,” he said. “What makes you think that the Fed will do better this time around?” In addition, while the March plan said that the “Secretary and the FDIC would decide” how to resolve a failing firm, the new plan said such power should “be vested in Treasury.” Geithner could appoint the F.D.I.C. to do the technical work of cleaning up the firm, but between late March and mid-June — when Bair’s aggressive ideas about how to handle Citigroup leaked to the press — Bair’s agency had been downgraded from Treasury’s equal partner to a sidekick.

The senior Treasury official said that stripping authority from the F.D.I.C. had nothing to do with pressure from the banks. “Making a group decision on something that must be done really quickly is not easy,” he said. “At the end of the day, someone has to have the ability to make a call, and it’s better to have that authority vested in one person.”

When I asked Bair about the plan, she said, “I think it reflected a lot of input from a lot of different agencies, and the private sector, and insurance and consumer groups. It’s a very difficult task to try to balance all the different perspectives and come up with a package, and every compromise is going to have people who are unhappy about various parts of it. So I think it’s a starting point.” I said that she sounded disappointed. “I don’t know if ‘disappointed’ is the right word,” she replied.

It's getting to the point where I don't even want to read Simon Johnson anymore. Yes, he's right. If we reduce oversight safeguards to "trust us," we have a system far too ripe for corruption - in fact, almost asking for it:

Buried in the late wire news on Friday – and therefore barely registering in the newspapers over the weekend – Treasury announced the rules for pricing its option to buy shares in banks that participated in TARP.

The Treasury Department said the banks will make the first offer for the warrants. Treasury will then decide to sell at that price or make a counteroffer. If the government and a bank cannot agree on a fair price for the warrants, the two sides will have the right to use private appraisers.

This is a mistake.

The only sensible way to dispose of these options is for Treasury to set a floor price, and then hold an auction that permits anyone to buy any part – e.g., people could submit sealed bids and the highest price wins.

In Treasury’s scheme, there is significant risk of implicit gift exchange with banks - good jobs/political support/other favors down the road – or even explicit corruption. For sure, there will be accusations that someone at Treasury was too close to this or that bidder. Why would Treasury’s leadership want to be involved in price setting in this fashion?

Treasury apparently sees corruption as an issue about personalities (i.e., WE aren’t ever corrupt) rather than about institutional structure. For example, if you create an arrangement that easily permits corruption, such as through nontransparent decision making or negotiation around warrant pricing, you set up incentives to be corrupt. Either existing people change their behavior, or new people will seek appointment in order to participate in corruption.

This is also a point, by the way, that Treasury has been making for years through its representatives at the International Monetary Fund – including during the Clinton Administration, when the same people were running U.S. economic policy as now. It’s a good point and never easy for countries-with-potential-corruption to hear. It applies as much to the United States as to anywhere else.

Treasury will argue the disposal of warrants is a one-off event, but this is not a plausible line: it is part of a much longer series of nontransparent decisions over finance. The attitude that “we can be nontransparent because we will never be corrupt” creates reputational risk for both Treasury and participating banks. If extraordinary support for the financial sector lasts several years, we will likely have at least one time-consuming and damaging investigation into all the details of these settlements.

Don't kid yourself that this means these banks are healthy - far from it. It means they want to go back to their old carefree, criminal ways:

The Treasury Department cleared the way for 10 big banks on Tuesday to start repaying billions of dollars in taxpayer aid, a crucial step in easing the government’s grip after an unprecedented series of interventions.

The banks were deemed strong enough to leave the Troubled Asset Relief Program, or TARP, after months of lobbying and strong performances on recent stress tests. The banks are expected to return about $68.3 billion to the Treasury Department, more than double the administration’s initial estimate of about $25 billion in funds to be returned this year. The timetable is also earlier than government officials originally intended.

Although the Treasury did not identify the banks, people briefed on the situation said they include American Express, Bank of New York Mellon, the BB&T Corporation, Capital One Financial, Goldman Sachs, JPMorgan Chase, the State Street Corporation and US Bancorp. All passed the stress test and applied to return their TARP funds. Another bank, Morgan Stanley, which needed to raise $1.8 billion after the stress test, was also said to have received permission, as was Northern Trust, a large custodial bank that did not undergo the stress test.

The $68.3 billion represents about a quarter of the TARP money given to banks. So far, 22 small community banks have been allowed to return $1.9 billion in government money.

Within the next few days, the big banks will be able to wire the money back to the Treasury Department. Still, they will not fully get out from under the government’s thumb until they rid themselves of warrants giving taxpayers a share of the potential upside on their investments.

Analysts say warrants for the 10 big banks could be worth as much as $4.6 billion. Treasury officials have not disclosed how they plan to value and sell them.

Kerry is a great person to be handling this, with his background in the BCCI investigation. Can't wait to see what he digs up!

May 29 (Bloomberg) -- John Kerry has never run for sheriff. As chairman of the Senate Foreign Relations Committee he is starting to act like one, and the world is his jurisdiction.

The Massachusetts Democrat is wielding his gavel with an investigative zeal, and plans to take on Iran’s nuclear program, gun-running on the Mexican border, terrorism, narcotics and human trafficking, all through the prism of money laundering. He has hired a former investigative reporter, an ex-CIA agent and a one-time managing director of Bear Stearns Cos. LLC to help him.

“There are lots of big pieces out there that depend on money moving,” he said in an interview in his office in the Senate, where he is serving his 24th year.

Kerry, who was a prosecutor and attorney in Massachusetts before starting his political career in 1982, said the lack of congressional oversight during the Bush administration left behind a target-rich environment for his panel. The Treasury Department “has its hands full” and is “inadequately resourced” to pursue these inquiries, he said.

“For the last eight years we’ve had an administration that has done its utmost to protect, hide, obfuscate, neglect, void, simply not even care about these issues,” said Kerry, 65.

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?