Nomi, Welcome back to the Lake.

Max, Thank you for Hosting this Book Salon.

Welcome to Firedoglake – glad you could be here today!

Great to be here and thanks for the book.

Some questions:

What are you most surprised to see unchanged in the way of regulation?

Do you think we will see another financial crisis soon?

What does the lack of real change mean for the Obama Admin and Congress?

So okay, I’m only on page 53.
It’s slow reading, seeing as how I end up with endless notes in the margins (ALL the margins). Many of them obscene, a few of them (I hope) witty.

What a gobsmacker this book is.
Wow…!!!!

Today’s comments from the G20 almost sound like a response to some of the chapters of your book?

Thank you so much! And Max, thank you for hosting.

Do you think we will see another financial crisis soon?

Until some really fine teevee outlets (since that is how so many people get their newz) explain:

1. leverage, and
2. securitization

too many people think it’s still about mortgages, even though they know it has to be a lot ‘bigger’ but without a grasp of 1 and 2, they’re just really confused (but seething), is my sense.

Love the title

I found the last chapter very poweful. I think it is very important to be honest about the high and low points of the new administration in dealing with the crises economic and financial

The biggest surprise to me is that the banks that were deemed too big to fail, are now bigger than before. So, while Congress is having these endless session, and Giethner and Obama are talking about sweeping reforms, they are doing so on the back of a system that is more consolidated and risky than ever – yet no one is addressing what to do about this in any meaningful way.

Debt, securitization and originate to distribute lending still are very poorly understood in America, great point!

thanks, can’t wait to see some of the comments. writing this book made me more angry than my other books – because there was such a willful, calculated subsidization of private banking by public money, in a greater quantity than at any time in our, or any other country’s history.

Nomi makes several great points in response 10 and the book. Big banks are now bigger banks. The big three issue 5 of 10 mortgages and 2 of 3 credit cards while holding 35 of every 100 deposit dollars!

Giethner and Obama are talking about sweeping reforms, they are doing so on the back of a system that is more consolidated and risky than ever -

Yeah, but hey — they updated the TARP website with a new look, so what’s the fuss? (p. 192)

/s

Leverage is borrowing. To put it in Vegas terms – you put $5 on the Black jack table, your buddy loans you 95. You are now 20 times leveraged. If you win, you win on $100 dollars, if you lose you have to pay back the $5, and the $95, that you never had to begin with.

Securitization – taking a little bit of real assets, say subprime loans to which borrowers are paying interest, and add to that a lot of debt, or more borrowing from investors where investors get their investment back from the borrowers. And then do this again and again and again. If something defaults on the bottom of the securitized bond, the whole thing collapses, or becomes toxic.

you got to go to this website :) finding actual numbers is very complicated, as I mention in the book.

yes and the top 5 banks control 96% of credit derivatives. The federal government actually created monsters – okay, while Hank Paulson was Treasury Secretary, and under the Bush administration. But, Obama & Co. aren’t touching those big firms. A five year old can tell you that if you keep building blocks or legos up too high, they will fall. You can instead divide up the legos or blocks into two stacks and have a much better shot at stability.

Everything not nailed down was securitized 2001-2008, $3.5trillion in activity

Thank you for writing this essential book which I must confess I have not yet read. From a personal angle, how have you been treated by your former colleagues on Wall Street? Are they angry you’ve told so much out-of-school? Or are many of them also no longer employed there?

Can’t wait to read this one! (Thanks also for the great intro, Max)

because there was such a willful, calculated subsidization of private banking by public money, in a greater quantity than at any time in our, or any other country’s history.

Well, I ‘prescanned’ the book, and now I’m reading it.

One thing that makes me disgusted, but really rang true for me having seen it on a smaller scale than Wall Street — but in two industries where jackasses could have shown up hung over and still made tons of money in the late 90s and early 2000s — was the sense that it’s really a ‘game’ to the Wall Street luminati. They compare themselves to one another; it’s about who has the biggest deals, the most employees, the hottest… whatever.

That sense of social dynamics, of a social system that glamorizes greed, ego, and hustle, rang very true for me in the Intro. Made tons of sense.

But I’m still writing plenty of obscenities in the margins. Figure I may as well vent by writing the wittiest scorn I can manage 8-0

What if your blocks fund your elections?

thank you. I didn’t want to just write a book outlining how we get here, but also analyze the discussions in DC about how we get out. There are important issues, like too big to fail not being addressed with more than cosmetic reforms – like banks should have more capital behind their risks. This is intuitively true, but the problem is that if banks are allowed to keep merging, indeed encouraged to merge and grow, they will keep using their new consumer deposits as collateral to take care of their capital requirements, and still do other risky things.

Yeah, I think that you explain both VERY well (pp 43 – 45).

Thank you for the kind words Teddy

Teddy, this book is going to knock you sidewise.
It is THAT good.

Interesting point, there are many people at Goldman that would have no interest in talking to me, both for what I write and since they were never friends. Some of my old bosses for example. And, Lloyd Blankfein didn’t exactly call me to congratulate me on the book. Others talk to me, and even come to book events, but most of those have left the firm, and when they were at the firm, some received heat for their relationship with me. I do take care not to disclose anything someone tells me off the record, just in terms of ethical journalism, unless it points me to an issue I can find public information about.

I like Nomi’s work because she is gifted at explaining and does not fall back on a shock politics of moral expose. That is why I always read, suggest and benefit from her work

yes, this is the key problem. we as citizens are angry at this incredible financial injustice, in terms of the bailout related choices the government has made, but don’t have a team of lobbyists we can call on to step up for us.

This year, for the first time, there are some groups who have not historically worked too closely together, banding together to call for better financial reform. check out: http://www.ourfinancialsecurity.org.

Also, we have got to be far more annoying to our elected officials, in the end, they can get tons of lobby money and political contributions, but if they don’t get our votes, they dont’ stay in office.

Thank you Max.

I would like to also say here that if you haven’t read Max’s articles – on Huffington Post regularly and many other places, you should. He has more facts supporting his ideas than most other journalists and has been someone I have regularly turned to when I need an explanation for topics I uncover.

maybe we should just do a top ten most anger-inducing items and send them to Barney Frank and Chris Dodd.

One of my epiphanies, since I often have to visualize to help me grasp an idea or concept.

I started reading Chpt 2 and suddenly very clearly had the image of an inverted pyramid in which there was a ‘bottom dot’ = $1.4 Trillion (the value of US mortgages). Then on top of that, I saw an inverted pyramid = $140 trillion.

So the bottom tip of the pyramid = 1/100th of the rest.

In other words, the actual mortgages were only about 1/100th of the total amount they were used to ‘leverage’.

But that ratio seems just incredible.

Did I estimate incorrectly?!

— Sorry about comment delays; keep getting interrupted. Grrrr…

I feel the same way about Nomi. Her knowledge and insight are valuable

Poor Lloyd, he has a terrible week ahead wrestling with how to YET AGAIN disclose record massive quarterly profits. What a horribly challenging job he has.

Do you think we need to return to the very old-time (though in my lifetime!) rules about no banking across state lines, as well as different types of banking and never the twain shall meet? Will making our monster banks small mean we can’t compete with London or Dubai to be the financial world center? Will reducing our banks activities mean a brain drain of talent? (I can’t believe I just typed that!)

How do we maintain (or regain) our edge without monster banks?

I think they would actually appreciate that.

That is a fairly accurate assessment – it is public data how many mortages existed ($1.4 trillion subprime), and how many securitized bonds were created on top of them ($14 trillion from 2002-2007). If anything $140 trillion of debt is conservative. Those securitized bonds could be used as further collateral for all kinds of debt globally. Investment banks leveraged on average 30 to 1, and banks 8 to 1. The number could be higher – your visual is right.

There were $10.4trillion in US home mortgages outstanding on 30 June 2009.

good free numbers at:
http://federalreserve.gov/rele…../z1r-5.pdf

Oh, lord!
I think we could easily manage to make them a lot more interesting than ‘a dining room table’ ;-)))

So is the occasional snark and the fact that she just writes about money as if it’s ’stuff’. She doesn’t get too awed by it.

Damn refreshing.

The idea of global competitiveness is what drove Robert Rubin, Larry Summers (part I) and Phil Gramm in Clinton’s time to repeal Glass Steagal and allow all sorts of different financial institutions to merge. They thought if other countries could do it, we should be able to. The problem is that in other countries, banks didn’t then go on to take the same risks to the same extent that US banks did. I think though, we need a global solution to too big to fail, and the G20 would have been the time to bring up sheer size. Instead, there was a lot of talk about increasing capital requirements for big banks, not making them smaller. So the next financial crisis will be equally global, with more blame to spread.

What recommendations have you regarding the bond-rating industry? Should the government do that? It seems to me that an awful lot went wrong right there.

Then we need to stick around until they digest it, and realize they truly are in a position to do something about it.

I was at a talk a couple months ago, where Bob Kuttner remarked that we should nationalize the rating agencies, and it struck me as so logical that I was a little dismayed I hadn’t thought of it earlier myself. If rating agencies are incentivized by deal size and volume, and paid fees by the very same banks incentivized by the same things, there’s no checks and balances. So agencies did, and will continue to, rate securities as of higher quality than they actually are, just to keep themselves afloat.

Will making our monster banks small mean we can’t compete with London or Dubai to be the financial world center?

I think this is a great question — but have you read about Dubai lately…? It’s not as shining as it was, methinks.

But question for Nomi: do you think that many (any?!) in the Federal Reserve or Treasury actually understand how the derivatives are created? If you asked them to explain the process and create one or two — just to show a bit of mastery — could they?

Because it seems to me that if the Fed employees actually realized that the securitization DEPENDS UPON secrecy, they’d wake up and actually get their butts in gear.

Or am I simply a dreamer?

There is another brewing crisis at Fannie Mae and Freddia Mac. Without much attention the gov has taken over 70%+ of the buying of bundled mortgages. What do you Nomi, and all the great guests, think of this ticking time bomb. The values is $6.5trillion and counting there

I truly don’t believe they are that knowledge about how to create a derivative, perhaps the simplest versions of derivatives – but there is no money in simplicity on Wall Street – but not much beyond that. When I was at Goldman, I was asked to do an internal seminar on credit derivatives (this was back in 2001), and the idea was that the most senior managers would have to attend to learn more about the nuts and bolts of this new product. They all sent their junior guys to attend.

Good question. Since the government is backing $6.5 trillion in packaged mortgages, its on the hook for all the continued losses coming into the market. A year after the banking crisis, foreclosures are up, defaults are up, delinquencies are up and unemployment is up. This means the likelihood of further losses into those packages is 100%. Will that mean the government will lose $6.5 trillion, no – but it will lose money.

That is insanity, as near as I can tell.
And with **no regulations against leverage**, with commodities still unregulated, with hedge funds still in the Wild West mentality where they don’t have to tell anyone anything — why don’t we just say, “Hell, we’re too gutless and stupid to stop criminals from destabilizing our economy.”

It seems that even if you improved transparency, stopped leverage, and then said, that all payments from Fannie Mae mortgages will be used solely to fund pensions, we’d have more economic stability.

Money for ‘innovation’ can come from elsewhere.
But risking pension funds is just dumb, dumb, dumb.

Unless I’m really missing something…

You’re absolutely correct. I think there are some esteemed Elders in Congress who “have game”, but are so far behind the curve due to their isolated environments that they don’t understand how to use it. I’m happy you, Max, and others can be mentors for them. I also hope to see symbiotic relationships form between Progressives and established Statesmen.

Sorry, haven’t read the book, yet, but will

The biggest surprise to me is that the banks that were deemed too big to fail, are now bigger than before. So, while Congress is having these endless session, and Giethner and Obama are talking about sweeping reforms, they are doing so on the back of a system that is more consolidated and risky than ever – yet no one is addressing what to do about this in any meaningful way.

Not that you need my affirmation, but there’s this article backing you up

A recent analysis of the 2007 financial markets of 48 countries has revealed that the world’s finances are in the hands of just a few mutual funds, banks, and corporations. This is the first clear picture of the global concentration of financial power, and point out the worldwide financial system’s vulnerability as it stood on the brink of the current economic crisis.

A pair of physicists at the Swiss Federal Institute of Technology in Zurich did a physics-based analysis of the world economy as it looked in early 2007. Stefano Battiston and James Glattfelder extracted the information from the tangled yarn that links 24,877 stocks and 106,141 shareholding entities in 48 countries, revealing what they called the “backbone” of each country’s financial market. These backbones represented the owners of 80 percent of a country’s market capital, yet consisted of remarkably few shareholders.

Here’s their paper

Thanks Nomi

I agree, the most hopeful thing that happened this week in DC is that Paul Volcker, former Federal Reserve Chairman, actually stated that current reforms will not address the too big to fail problem (at the core of everything), and even mentioned the words Glass Steagal – first time out of the mouth of anyone surrounding Obama – publicly.

Welcome Nomi and Max — do you see anything in the current “reforms” to reverse the view that the largest institutions will be bailed out again — the moral hazard problem — do we have less of a check on risk than before, and applied to more institutions?

Thanks John,

Yes – this shows what a global problem over concentration in the banking sector is – as if trillions of dollars of bailout money shouldn’t be doing the trick.

What’s the fetishization of Globalization about? Do those in charge not realize it is a double-edged sword(so to speak)?

Reading Tea Leaves:
State and private pensions are another shoe to drop. I was at the Pensions and Investing meeting this week and I can tell you there are a lot of coming troubles in the pension space. At 350,000 per month the foreclosure rates remain very high and a lot of pension money is bet on housing and commercial real estate

I believe risk is higher for two reasons:

1) consumer and commercial credit losses are continuing to rise
2) several of the largest banks posted record profits last quarter, and Goldman will probably again.

Since these profits are not coming from amelioration of loans, they are coming from increased trading, or speculation – on the back of government capital, this time. T

That’s what got us into this mess.

Which is very scary. If pension funds start posting more losses, will there be an increase in retirees digging into their life insurance policies, and if so , what else is left?

Why has Volcker been sidelined? He’s the only one of his stature known to be able to make the tough choices.

Great point, we have already created a situation where our leading firms are too big to fail but also TOO BIG TO BAIL!

I truly don’t believe they are that knowledge about how to create a derivative, perhaps the simplest versions of derivatives – but there is no money in simplicity on Wall Street – but not much beyond that.

This is hugely important.

I mean honestly, it’s true for all of us that what we actually UNDERSTAND, we can affect. What we don’t understand bites us in the ass.

This strikes me as breathtaking.

So now I’m waiting for Michael Moore (who may be the only guy with enough guts) or someone to interview Geithner and Bernanke and have them EXPLAIN how a derivative is created.

Because a regular poster here (masaccio) mentioned Black Scholes last year at some point, and once I looked at a BS formula, I went… “Aha! Thus doth the Emperor have no clothes…”

Early in this book you make a sly point that financiers mostly engage with stuff they don’t really understand. In that sense, they’re really in a world that has no tangible, tactile existence.

If the Fed employees actually had to CREATE a few derivatives, I think it would remove the veil of wonder from their eyes. They’d go, ‘That’s all there is to a derivative?!! People made gazillions from math formulas?! you gotta be kiddin’ me…!”

That’s part of my contempt for this whole mess.
At core, there’s a lot of ego, b.s., and sharp elbows.
Beyond that… not so much.

Unless I’m really missing a ton, that’s what it looks like as I read about it all.

Yeah, there was a NY Times article earlier this week about how Goldman was looking at a possibly record bonus pool for the year and that Blankfein was worried about how to balance giving bonuses to people and deal with the guaranteed uproar over the bonuses.

(IIRC the Goldman bonus pool was nearly $16B and the record they said was $18+B)

There seems to be either a severe lack of understanding by certain global leaders as to how much control the biggest banks wield over the global economy, or a kind of starry eyed fear that renders them powerless to change this. It’s very bizarre. The German Chancellor seems to get this, but she was overwhelmed by others. Which is why the G20 are all proud of themselves for agreeing to raise capital limits, and regulate derivatives – and call it ’sweeping reforms’ . I hate the word sweeping.

We are watching the gutting of the middle class
1) wages stagnate
2) debt rises
3) housing gets borrowed against and tanks in value
4) pension trouble, dollar drops making us globally poorer
5) Middle class is a shadow of its former self

I also hope to see symbiotic relationships form between Progressives and established Statesmen.

And Stateswomen.

But I’m in your hallelujiah chorus on this point.

Volker said that investment banks should not be bailed out; we should stand behind only the commercial banks that take deposits — but it wasn’t clear to me how you make the message of “we won’t support you next time” credible, if they huge amounts of capital they control has so many links to the economy. How is this achieved?

I think there’s a fear of the truths he’s speaking. Obama could choose to push him to the forefront of his economic plans, but Volcker is actually suggesting a very radical (in size, not philosophy, I think it’s quite logical) shake-up of the banking landscape as we know it, and no one things they have the political capital to get away with that, let alone give it credence.

State and private pensions are another shoe to drop. I was at the Pensions and Investing meeting this week and I can tell you there are a lot of coming troubles in the pension space. At 350,000 per month the foreclosure rates remain very high and a lot of pension money is bet on housing and commercial real estate

Max, if you write about this at HuffPo, please put a link at FDL or some Seminal Diary.

When I realized that Elliott Spitzer was ‘outed’ the morning he was headed to Congress to discuss AIG’s impacts on the risks for pensions — and then realized that pension plans were involved in commodities trading in 2008 — I thought,…. well, what I thought is pretty scary.

I’ll leave it at that.
Someone sure as hell didn’t want any kind of focus on the risks to pension plans.
That in itself struck me as hugely suspicous, b/c they must be the biggest pots of $$ around.

Nomi — in your overview of the how we got to the crisis, where did you come out on the question of whether “we had to bail them out or the world financial system collapses”? Do we believe it now? Or is just something we may never know?

exactly. banks have learned, that a merger between an investment bank, commercial bank, and insurance company is not just okay as per the repeal of Glass Steagal in 1999, but was encourage AS THE BAILOUT was underway by Washington, and in particular the FED, who job it is to regulate the big commercial banks. That’s why the only way to teach the lesson for real is to divide the banks into commercial , investment and insurance firms. Let them all do their day job. Then the government would only be on the hook for those that dealt with the public’s everyday financial lives, not bailout the entire system.

If you could replace just one economic adviser to Obama, who would it be, and why? What change would you be trying to accomplish?

Nomi, I spent some time this week reading up on MERS and the effective privatization of public records, coupled with restricting access to them.

All, clearly aimed at easing securitzation, though the real estate/mortgage banking/title industries all had justifications and little goodies for participants.

Took my breath away that so many states and courts capitulated so quickly and easily. All at a cost to the borrowers. Had all of these assignments been a matter of true *public* record, one would think the problem would have been more obvious to third parties.

I’m trying to be a realist. I regularly rail against the fact that Congress is not proportionately representative since females are a very large constituency in the population. Thank you for your supportive language!

I believe that had the Treasury and Fed chosen to do two things at once:

1) put capital or other kinds of guarantees behind individual mortgages. It was these loans that went into foreclosures, hurt people and hurt assets and the entire system. It would have been cheaper and more human to put federal money here.
and 2) begin to divide the banks and insurance companies into direct public dealing companies vs. trading ones.
and 3) let the trading ones fail if they don’t have enough capital left to support their businesses.

they would have forestalled a crisis. The DC rhetoric surrounding the crisis made it about the banks, it became this self-fulfilling prophesy.

Those securitized bonds could be used as further collateral for all kinds of debt globally. Investment banks leveraged on average 30 to 1, and banks 8 to 1.

At some point, I’m sure that I heard the Dir National Intel (Blair) say that the US debt was a national security issue. This seemed to me a rational, fairly obvious statement, but not one that we heard between 2000 – 2008.

What I find just maddening is the inability of DC to get off its duff and realize that failure to fix the entire banking system is a security risk.

Honestly, this seems like a no-brainer.
Are there conversations about how this ties in with security that I’m not hearing? Or is the DC-NY revolving door spinning so fast that they honestly don’t hear it as long as the ka-chinnnnnngggg of the till keeps them calm?

great question. I would get rid of Geithner. The kind of power he has is dangerous, he was part of the NY Fed when decisions were irrevocably, so far, made to bail out the backing system, and his interest is in preserving the image of his choices. Yet, he talks about reform and sounds very complicated and convincing about minor reform tinkerings in front of Congress. This is dangerous.

yes, I think that some of the complexity , if not all, is very tactical.

I think Tim is also constrained by a lack of heft in the market place given his unusual background, education and previous experience

There’s a real inability to admit wrong in Washington, and the banking lobby is pretty happy about this – its constituents are posting record profits and going back to record bonuses this year. By not admitting the policies were wrong, it’s difficult to correct the problems underlying them. It’s maddening.

true, which doesn’t help the situation.

You mean he is a captive of the MOTUs rather than one himself?

I dont know MOTU, I do know he has no educational or career training for the NY Fed gig. He is unusual for the Treasury job. Thus, he needs friends and to limit risk taking. Paulson was a proven markets guy- he could act more boldly

so basically he is a gatekeeper, but during a time when gatekeeping maintains a flawed status quo – this is a very dangerous situation. I’d much rather see someone like Robert Reich step in who wrote a brilliant piece today about how the consumer is still flailing while banks are succeeding..

(MOTU = Master of the Universe, Tom Wolff’s tag for the Wall Street gang leaders in his book, Bonfire of the Vanities.)

Ok, thanks. The problem might be that many are now the masters of a debt necroverse?

Speaking of which, during the whole post MOTU era, when we had Long Term Capital , a mega hedge fund of its day, blow up – the federal government did not bail it out. The $3.6 billion that it took, was raised by a consortium of banker clients. When AIG was about to blow up, its derivatives product group acting very much like a hedge fund, but using capital from people’s insurance policies, not rich investors, the government stepped in and gave its backers, like Goldman, Deutschebank and others help with their losses.

2) begin to divide the banks and insurance companies into direct public dealing companies vs. trading ones.
and 3) let the trading ones fail if they don’t have enough capital left to support their businesses.

they would have forestalled a crisis. The DC rhetoric surrounding the crisis made it about the banks, it became this self-fulfilling prophesy.

Your first book ‘Other People’s Money’ helped me understand the critical importance of the demise of Glass Steagall. Finance isn’t my area (not even remotely), and back in 1999 I don’t even remember reading a paper very often, so it all went right by me.

I think there is a huge public education piece that needs to occur — us ‘normal people’ don’t pay attention to the KINDS of banks, and the fact that once we combined them, that basically Wall Street conduct can leverage our BoA or Wells Fargo checking account balances on their ‘investment’ side AND THEN create an SIV to hide them on the books.

I honestly think that if more people understood this, and then talked intelligently to their legislators and could show a few examples, then the ‘rage factor’ would go down and the ‘productive outcomes’ factor would rise hugely.

It’s not good for people to just get angry.
I think it’s hard for them to follow the critical bits.

Does this make sense on your end? Max? Nomi? Anyone…?

I’d much rather see someone like Robert Reich step in

FOTFLMAO. I’d **love** to see Reich step in!
For starters, I don’t think he suffers fools gladly.
And he also doesn’t seem to be all that impressed by money; he knows it’s just ’stuff’ AND he understands that it represents power, but it ain’t magic.

I think Geithner still seems somehow awed by money.
That always unnerves me.

Great point. There is som much anger and so little grasp. Wall street just steps in and makes money off the yawning gap between what people are paid and the cost of living. Without higher wages and more accountability financial regulation just cuts off one coping mechanism.

That’s a great point. I can see how many people are angry about the notion of bailout out the banks, but also many believe that not doing so would have created a far worse situation. But, the books of a bank include everything the book does. So, if big banks are merging – and in the case of Wells-Whacovia, JPM-Bear-Washington Mutual and Bank of America-Merrill Lynch – such that they have more than 10% each of customer deposits (checking and savings accounts) which goes against FDIC guidelines, but the Fed didn’t seem to care about that when it pushed these mergers, it means these banks can trade on the back of even more consumer deposits. THis was exactly the problem that Glass Steagal was created to avoid.

Frankly, Geithner reminds me of a mid-level investment banker. Politically astute enough to rise above being a junior banker, but not possessing enough personal confidence to go senior.

Or, to put it less politely, they don’t really respect him b/c he hasn’t made his zillions on Wall Street?

Admission and correction of miscalculation or error are irrefutable builders of status when the Public is informed about the benefits to come. This requires incredible courage and lack of selfishness.

I think the Obama administration would be given the opportunity and public support to set the course you suggest should they become clearly focused and decisive on this critical resolution. That support amazes me. Political capital could grow exponentially.

not possessing enough personal confidence to go senior.

Thanks.
That fits with other realms of human activity that I have witnessed.
The most aggressive tend to win in those situations, although they are seldom the smartest or most decent.

I suspect that I’ve seen this movie play out before… not with a good ending.

That matters, but he was also not a star critic ever either? Its not clear he has a base to work off of other than the big players he finds

yeah, it’s a tough problem to have….bonuses on Wall STreet are immense at some firms, but they say a lot more about the mentality of the most powerful leaders of Wall Street, than just that they are greedy. I go through this in my book, but bonus pay is not , if you can imagine, about the money – it’s about what the level of the bonus represents in the pecking order. It’s like a pack of wolves fighting over a kill, the leaders get nourished from their larger take and perpetuate their alpha-ness.

So far, the Obama admin has been mostly big bills and small change. Can they stay popular if that does not change?

it means these banks can trade on the back of even more consumer deposits. THis was exactly the problem that Glass Steagal was created to avoid.

Thank you.
I honestly don’t think that people understand this set of relationships.

If they did, it would change, because they’d be able to speak intelligently to their electeds. I don’t believe people would tolerate this if they understood how this works — let alone the whole ‘off books’ SIV part!

Interesting…
Thanks for that insight.

I’m late,hope Nomi is still around; haven’t read the book but have listened and watched carefully when she has been on DemocracyNow.

Nomi, how can the U.s. leaders even talk about regulation when:

“So, most people don’t even realize that the World Trade Organization has an agreement called the Financial Services Agreement that explicitly applies to over a hundred countries AND MANDATES major deregulation. Just for instance, it has a rule that you cannot have a domestic law, even if it applies equally to foreign and domestic companies, that limits the size of a financial service firm—insurance, banking, securities. So when everyone talks about putting into place rules about “too big to fail,” there’s a WTO dictate that says you can’t do that. A lot of other really extreme deregulation rules. That agreement was never brought to a vote in Congress, so a lot of members of Congress have no idea it’s there.”
P.S. thanks for the link to Amercians for Financial Reform

“Help with their losses” = 100% for the vampire squid, right?

I don’t think so, what’s particularly telling is that the republicans have managed to amass and direct public anger against the banking system (and other more crazy things), and in doing so have quickly used the power of Wall Street against OBama, when he was the one who rode in on a message of changing that. Really putting his foot down on reforming practices and even the too big to fail problem, would help him much more at the polls, than trying to placate Wall Street donors would.

thanks. it seems worthwhile then, to drill on this particular angle.

it’s about what the level of the bonus represents in the pecking order. It’s like a pack of wolves fighting over a kill, the leaders get nourished from their larger take and perpetuate their alpha-ness.

And this description rings sooooo true.

The thing that I find incredibly useful about it is the fact that it kind of cuts them down to size.

It sort of lays aside that BigDeal about HowMuchMoneyTheyMake and puts it in human terms.

Okay, what we got here is your basic wolf pack.
Fighting over alpha rights.

Okey, dokey.
Now its’ cut down to size.

Very, very important.

exactly – and I can never look at a vampire squid quite the same way after Matt Taibbi’s article. I don’t know if you’re located in New York, but he will be participating in a panel with me and others at the Ethical Culture Society this Thursday.

right, and the same fighting over bonuses and who gets dubbed top dog – transcends each firm, to the whole industry – instead of bonus pay, it’s how many other banks can I acquire, packs can I control. My sandbox is bigger than your sandbox in kids speak.

and then one has this kind of action:” A California bank that received $298.7 million in federal bailout money is facing state and federal scrutiny and has fired its two top executives after an internal investigation discovered that massive real estate loan losses were improperly and deliberately hidden from its finance department and outside auditors.

The Securities and Exchange Commission is looking into troubles at United Commercial Bank of San Francisco, which has branches in Sacramento and Citrus Heights, bank officials confirmed. Other state and federal regulators have restricted the bank’s activities after examiners found the bank engaged in “unsafe and unsound banking practices that jeopardize the safety of its deposits,” state and federal records show.”

Honestly, I think that it is extremely important at this moment in American life.

And I’m totally with you on the notion that Obama would be far more powerful if he stood up to Wall Street. But to do that, he’d need Reich at his right hand (rather than Geithner).

Beside fairness and morality, what we have done is not working. Perhaps this is the greatest indictment?

yes, exactly why this is a global problem. I was very disappointed, though entire unsurprised, that the G20 leaders just finished their 3rd summit since the banking crisis began last fall, and yet they are not talking about the real deregulation at the core of the system. We don’t need reform – we need reconstruction – a bringing back of a Global Glass Steagal.

Again, I think in those terms the whole TheyMakeSoMuchMoney so TheyMustAllBeSoFookinAwesomeBecauseTheyMakeMoney kind of goes out the window.

Then, you kind of take a slow, deep breath and go: okay, seen it on the playground, seen it in the workplace, seen it in local politics, seen enough of it.

Then, the whole Wall Street aura is demystified.

No wonder Blankfein never talks to you ;-))))))
You’re exposing these guys as bare-ass naked.

For example, U.S. FDIC Chairman Sheila Bair criticized the Basel II standards during June 2007: “There are strong reasons for believing that banks left to their own devices would maintain less capital — not more — than would be prudent. The fact is, banks do benefit from implicit and explicit government safety nets. Investing in a bank is perceived as a safe bet. Without proper capital regulation, banks can operate in the marketplace with little or no capital. And governments and deposit insurers end up holding the bag, bearing much of the risk and cost of failure. History shows this problem is very real … as we saw with the U.S. banking and S & L crisis in the late 1980s and 1990s. The final bill for inadequate capital regulation can be very heavy. In short, regulators can’t leave capital decisions totally to the banks. We wouldn’t be doing our jobs or serving the public interest if we did.[6] Wiki

Ms. Prins,I was under the impression that the Basel Accords were supposed to be a safeguaerd agaginst specualtion without adequate capital reserves to back it up.

Interesting statement from Bair two years ago,no?

A new standard of measurement is in order. What could it be?

which is shameful, in addition to unethical and illegal. this idea of using consumer deposits or loans as fodder for big securitized deals and massive borrowing is damaging to consumers, to the general economy and the financial system. another shameful thing, is that JPM Chase (one of the banks that had the most help in becoming bigger from our government) is considering lending the FDIC money because its running out of its deposit insurance given that the 95th bank has failed since the crisis began. Can you imagine – the FDIC paying interest to JPM Chase to insure, among other things, JPM Chase deposits? I mean, does you insurance company pay you for using it?

But I think part of it is due to confusion, and part to intimidation.

People get intimidated by very, very large paychecks.
Then they get made about feeling helpless, which is not productive.

If they can laugh about some of this lunacy and then go, “Okay, enough with the alpha dogs and the secrecy and the mumbo-jumbo and the complexification, people!”, then I think we’d have a more functional system.

Is this a talk that will be taped? If so, where and when will it be available?

All true but in a winner take all materialistic setting we will get the same problems and injustices on infinite loop

And what the CMM (corporate mass media)doesn’t inform people about is “And the problem is that the G-20 commitments aren’t binding. It’s a commitment of faith on the countries about what they’re going to do domestically. But the WTO rules are very binding and enforceable by sanctions.

yes, and to answer this question in more detail I refer to Max – she said that, and it’s true, but yet the FDIC didn’t adopt stricter capital requirements at the time, particularly wrt the quality of capital considered against those requirements – there’s a difference say in holding cash or holding quasi toxic assets.

I think it will be taped, I’m not entirely sure who will be doing the taping, but it will probably be available at the Demos website http://www.demos.org, or/and mine: http://www.nomiprins.com

Can you imagine – the FDIC paying interest to JPM Chase to insure, among other things, JPM Chase deposits? I mean, does you insurance company pay you for using it?

What scares me about that the most is the sense that if this occurs, it will be impossible to counteract widespread belief that this was a conspiracy, and this was the objective all along: bank capture even of the Fed.

I don’t even want to think about Glenn Beck having that kind of fodder for his rantings. Yikies!!

True. But, you like to think that if the G20 leaders take the time to discuss financial problems, at least some good solutions will follow, even though you know that these meetings are more about political posturing than achieving real change.

There are two levels to the level one capital debate:
1) how much liquid and therefore no/low yielding capital to hold
2) what is allowed to be used- this brings up the FASB 157 mark to market versus mark to model issues. In other words, what is good, liquid capital

I simply don’t see it as sustainable.
Simply from a ‘numbers don’t add up’ perspective.
Also, I may have seen too many predator-prey graphs back in my youthier days in Environmental Sciences courses.

There are limits, and once you reach them… chaos.
(Not a big fan of chaos myself; I prefer smoothish transitions if you follow my drift.)

@117
Isn’t it odd when you go to a bank for a loan you have to prove you have tangible assetts-but derivatives are based upon little more than smoke rings?

Nomi, thanks so much for this very accessible work. Per others above, love the book title and chapter titles, particularly chapter five: “We already have a bad bank, it’s called the Federal Reserve.”

Also, really appreciate the extremely helpful index and excellent end notes.

Jim Cramer, who I wouldn’t trust with a nickel, suggested incentivizing the SEC to keep a percentage of what fraud they uncovered, bounty hunters of Wall Street. He thought hedge fund managers might like the assignment at some point in their careers, if the numbers were big enough. Just wondered if you had heard of this idea and if you thought it ,or some iteration of it, had some marginal value.

Have you found any support for your work in academia? It seems to me finance and accounting professors would be lining up to use your book in their intro classes?

Thank you again for using your knowledge and skill in the service of the public good.

OT, has your publisher talked about getting you on Charlie Rose? AFAIK, he’s been a huge apologist for Wall Street, but he does on occasion have on some really good guests, Taryn Simon, photographer, An American Index of the Hidden and Unfamiliar

In other words, what is good, liquid capital

Good point.
I don’t think many of us non-financiers, non-economists could be confident responding. I’m not.

Excellent! Thanks much.

I always think of it as follows:
Soft constraint is self or social or political control
Hard cosntraint is ecological disaster political violence unrest insolvency

I was having coffee with a friend last night, who doesn’t have a finance background, and she asked me how credit derivatives could be so out of control. And, I said they’re kind of like facebook friends.

You have your core set of friends – that you actually know, speak with, help, etc
Then, their friends – who you kind of know, but not really.
Then, their friends – who you might have met, like maybe once.
Then, their friends’ friends’, etc. – who you would never recognized if you were the last people on earth.

The relationship that has nothing at stake, can not be counted on.

The conservative answer is short US Treasuries, cash, commercial paper.. a short low yielding list of “safe” stuff

((Boo!))
Man, everyone must be watching those football games today – or watching to see if they can spot the Blue Dog ads! Where is everyone today…?

Reader, this “bank capture even of the Fed.” already exists.

Powerful metaphor.
Very useful.

Hi ROTL, love your comments above.

Thank you for your kind words.

I remember when Cramer said that, to some extent he made sense (and I hate saying that about Cramer) – the amount of money you makes as a Wall Street analyst leaves the money you’d make working for the SEC in the dust. But, then, I like to think not everything is about how much money you make – I say that having left a very lucrative job from a financial standpoint, to work at something I love doing, for FAR less money.

I will ask about Charlie Rose, I am doing Tavis Smiley who I quite like.

I hope there are mnay out there unable to put down the book. I know I felt that way while reading it

Oh, indeed.
But do you see my point that I think simply being able to state that banks are loaning the Fed money makes it so simple that even Beck can spew it out and wreak havoc?

Telling people that — without explaining how to fix it — is just asking for trouble IMVHO.

thank you Max :)

Well, it’s actually the banks loaning the FDIC money, the FDIC being a regulatory body separate from the Fed. But the FDIC also has a credit line with the Treasury; 3 ways for the FDIC to go; higher fees to banks, use the Treasury credit line, or borrow from the banks.

and actually, I think Glenn Beck -as contrasted to Beck the music artist who could spew out a story about this pretty well I think- would find the best story being the one about the WTO trumping any regulation the Congress passes; plays real well into the ‘one world’ diatribe,los of sovereignty, not in charge of our own affairs,etc. Especially when summers and Geithner were so involved in writing the WTO financial deregulation addendum.

I think too, that people should realize that the more powerful certain banks become, the more likely they will find ways to wring money out of customers – i was looking at my statement the other day, and all of a sudden there was an extra fee on it, that amounted to a 5% annual charge – for no reason. So naturally, I wrote to say it seemed egregious that they were charging me 5% without any notice of an increase. They said, we didn’t increase the fee, we increased the balance you need to avoid the fee. Which I pointed out they also neglected to tell me. But, these things add up.

and, just like any insurance company that deals with the rest of us, mere mortals, the FDIC should ask the banks for more money – particularly the biggest ones, like JPM Chase, in whose interest it should be to stay afloat, but who is so propped by the government and its own sheer size relative to most competitors, that it doesn’t care if the rest of the system falls apart taking consumer deposits at other firms, down with it.

Oh, yeah.
Definitely my sense of it.

I think this book needs a lot more readers!
Like Boo, I have a lot of respect for the notes and index (it merits my “Kevin Phillips worthy” nomination; his are always superb as well).

It’s just so unbelievable.
Honestly, it’s weirdly like reading a snarky thriller, where the tale is so bizarre that if it hadn’t happened, you could not believe it possible.

Now that it HAS happened… needs to be fixed.
Don’t know about others, but the concentration of wealth seems to me to be a big driver in the instability.

I’ve known a number of people who made ’significant’ amounts of money the old-old fashioned way: inventors, first-adopters. But they sure as hell didn’t make their money pushing b.s.

But as they made money, they had to ‘invest’ it.
So that drove ‘investments’. And they became like little ecosystems, with lots of dependents.

Looks to me like we’re kind of back in the early Renaissance, with Paulson as a Doge.

But the inequalities are just not sustainable **if** you value, or want to retain, democratic systems. They’re profoundly antidemocratic and drive authoritarian behaviors.

As we come to the end of this lively Book Salon,

Nomi, Thank you for stopping by and spending the afternoon with us and discussing your new book and Wall Street.

Max, Thank you very much for Hosting this great Book Salon.

Everyone, this is a must-read book, if you have not bought one yet, here is a link.

Thanks all.

The fee banking model is huge issue. Banks give less service and charge for the few things they do. This is real shift since the 1990s. More than 30% of bank income is those fees. These fees fall the hardest on the poorest as well. The fees were a $40B+ operation in 2008

I do hope that reading this book, will give people the factual ammunition to support the anger lots feel, and help propel them to annoy the hell out of their political leaders while these discussions about financial reform are going on in Washington for the next couple months.

Thanks Bev, thanks Nomi, and Max.

This book is just terrific!
I’m enthusing about it to the readers that I know.

Thank you everyone so much for being here, and Max for hosting, and Bev as always

Thank you, Nomi and Everyone for a fascinating discussion~

Thank you Nomi, Bev and everyone out there, if you wrote in or not.

Lets make sure this fine work gets read and its ideas get their due!

Just watched CNN’s Wolfie’s interview with Micheal Moore, Micheal sure knows how to straighten out Wolfie on the facts… Micheal Moore’s movie puts all in a nut shell, “you can’t have 1% controlling all the wealth in the economy, Time we had Democracy in the economy”. Seems to me he make a lot of sense

Gracias Nomi; please keep up your efforts and ,again thanks for the link to Americans for Financial Reform

emptywheel is upstairs!
Law & Order v. John Yoo

you’re welcome, and spread the link.

Where were you in the days leading up to the August 2007 infarction?

Did you know it was coming?

If you read her earlier book, “Other People’s Money”, you’ll see that she quit Wall Street because she thought things were way out of whack. However, I wouldn’t presume to speak for her.
But in the earlier book, she was waving all kinds of red flags.

Late in the day, but thanks for a great thread Nomi, Maxx and Bev

the bond-rating industry?

Obviously turning them into whores for creators of new products didn’t work. Maybe they should be fed by an industry-wide fee based on the previous year’s use of the agency work. Then they can do their work independent of a specific pay-off for that work product.

They need some independence or it’s all b.s.

We are watching the gutting of the middle class
1) wages stagnate
2) debt rises
3) housing gets borrowed against and tanks in value
4) pension trouble, dollar drops making us globally poorer
5) Middle class is a shadow of its former self

Wages are stagnant or have dropped significantly because big companies are taking their ball overseas to play and they’re putting as little into their U.S. businesses as they can. It’s like being an absentee landlord who collects the rent and watches the buildings decay. They don’t want to put more into it because they know the profits will be bigger overseas for a very long time to come.

Debt rises because the competition pushes health care and financial services to increase profits and prices continually. Those rise faster than wages, so people gradually drift into greater debt and eventually bankruptcy.

In debt? Borrow against your home equity? It’s a logical continuation of reaching into your bank savings to pay for current bills.

And, it doesn’t help to have Republicans in charge to reshape law to benefit big businesses and to tear down unions.

We have to stabilize that hemorrhaging and begin rebuilding the financial system in a way that let’s people begin building new businesses that pay better and better wages and to let us begin competing with foreign interests more effectively. Energy competition is a big one. Healthcare reform is huge. Financial reforms is huge. Personal savings and stronger unions is part (though a big smaller). It will take quite a while to get everything fixed — probably as long or longer than it has taken Republicans to tear it down.

Obama would be far more powerful if he stood up to Wall Street. But to do that, he’d need Reich at his right hand (rather than Geithner).

Reich would be a great adviser, but Geithner has done well at Treasury. If anything I’d expect Geithner to take a vacation at the end of the year and let Volcker take over Treasury for a while — especially if we start seeing inflation occurring.

I sometimes think the structure of the group of advisers around a president isn’t quite right. Each is assigned certain areas and they become protective. If a president had a group of general purpose advisers, like a group of busy-body bloggers who touch on every topic, then there would be more heads and opinions touching each significant issue.

Data –> Information –> Decision-making ————–> Wisdom

Probably each of these is done better by larger numbers of people except that we have one person to guide the direction of it all, set goals and priorities and break ties and that’s the President.

As things stand we probably have more lawyers and economists and military people directing information gathering and assisting the president. Maybe a general purpose group with a broader range of interests and capabilities would do better. At least the current system has experts in a field to work on issues related to that topic. That’s something.