FDL Book Salon Welcomes Gretchen Morgenson and Joshua Rosner, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

Welcome Gretchen Morgenson, Joshua Rosner, and Host Yves Smith.

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

Host, Yves Smith:

Reckless Endangerment describes the players that helped create the housing bubble and bust that were at the heart of the financial crisis. Gretchen Morgenson and Josh Rosner focus on how regulators and other officials were complicit by promoting liberalized housing finance as a way to increase homeownership. Their account chronicles how a naïve vision of the American Dream, that of homeownership as the foundation of upward mobility and stable communities, turned into a nightmare in the hands of a growth driven and increasingly predatory mortgage complex.

Jim Johnson, who was a Mondale operative, one-time Bill Clinton, political consultant, and CEO of Fannie Mae from 1991 to 1998, was a major architect of a powerful alliance that sought and obtained more and more government support for housing. His immediate focus was to deepen Fannie’s relationship with the government to protect its implied state backing. Johnson bought support of his aggressive growth plans by sponsoring large-scale programs to target low income borrowers. These initiatives, while they sounded benign, often amounted to radical experiments that over time gutted many of the traditional guidelines for sound lending. And the need for these changes was often exaggerated. Some of the seminal studies that found that blacks and minorities were incorrectly denied mortgage finance were nowhere near as clear cut as Fannie and its allies suggested.

Johnson also used Fannie’s huge profits to hire virtually every independent housing analyst so as to limit criticism, and went savagely after anyone who questioned the GSE’s efforts. Fannie also formed the Fannie Mae Foundation, which siphoned funds to associations linked to favored politicians, in effect using government supported profits to protect and extent its franchise. The only party able to stand up to its onslaught was the Congressional Budget Office, which had the temerity to produce an analysis that showed that a full 1/3 of the huge value of Fannie’s government subsidy was going to executive pay and shareholders, rather than its professed goal of making housing more affordable.

An unduly accommodative regulatory climate helped supercharge overly aggressive lending.  [cont’d.] (more…)

FDL Book Salon Welcomes Gretchen Morgenson and Joshua Rosner, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

Welcome Gretchen Morgenson, Joshua Rosner, and Host Yves Smith.

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

Host, Yves Smith:

Reckless Endangerment describes the players that helped create the housing bubble and bust that were at the heart of the financial crisis. Gretchen Morgenson and Josh Rosner focus on how regulators and other officials were complicit by promoting liberalized housing finance as a way to increase homeownership. Their account chronicles how a naïve vision of the American Dream, that of homeownership as the foundation of upward mobility and stable communities, turned into a nightmare in the hands of a growth driven and increasingly predatory mortgage complex.

Jim Johnson, who was a Mondale operative, one-time Bill Clinton, political consultant, and CEO of Fannie Mae from 1991 to 1998, was a major architect of a powerful alliance that sought and obtained more and more government support for housing. His immediate focus was to deepen Fannie’s relationship with the government to protect its implied state backing. Johnson bought support of his aggressive growth plans by sponsoring large-scale programs to target low income borrowers. These initiatives, while they sounded benign, often amounted to radical experiments that over time gutted many of the traditional guidelines for sound lending. And the need for these changes was often exaggerated. Some of the seminal studies that found that blacks and minorities were incorrectly denied mortgage finance were nowhere near as clear cut as Fannie and its allies suggested. (more…)

On Fauxgressive Rationalizations of Selling Out to Powerful, Moneyed Backers

For sale to Pete Peterson?

I’m surprised that my post, “Bribes Work: How Peterson, the Enemy of Social Security, Bought the Roosevelt Name” has created a bit of a firestorm within what passes for the left wing political blogosphere. It has elicited responses from Andy Rich of the Roosevelt InstituteRoosevelt Institute fellow Mike Konczal, as well as two groups only mentioned in passing in the piece, the Economic Policy Institute and the Center on Budget and Policy Priorities.

They all illustrate the famed Upton Sinclair quote, “It is difficult to get a man to understand something when his job depends on not understanding it.” And so it is not surprising that all of them engaged in straw man attacks and failed to engage the simple point of the post: if you have a clear purpose and vision, you do not engage in activities that represent the polar opposite of what you stand for.

These “the lady doth protest too much” reactions reveal how naked careerism has eroded what little remains of the liberal cause in the US. Despite the fact that the left, as does the right, has a moral stance underlying its political positions, operatives on the left have been willing to sell out, not just to make the occasional compromise, but on bedrock principles. Here the fish has rotted from the head; this posture reflects the corporatist-in-sheep’s-clothing stance of Obama filtering through the Democratic party infrastructure.

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How the Roosevelt Institute Sold FDR’s Legacy to Pete Peterson

 

FDR Memorial, Washington DC

Bribes work. AT&T gave money to GLAAD, and now the gay rights organization is supporting the AT&T-T-Mobile merger. La Raza is mouthing the talking points of the Mortgage Bankers Association on down payments. The NAACP is fighting on debit card rules. The Center for Budget and Policy Priorities and the Economic Policy Institute supported the extension of the Bush tax cuts back in December.

While it seems counter-intuitive that a left-leaning organization would support illiberal extensions of corporate power, in fact, that is the role of the DC pet liberal. This dynamic of rent-a-reputation is greased with corporate cash and/or political access. As the entitlement fight comes to a head, it’s worth looking under the hood of the DC think tank scene to see how the Obama administration and the GOP are working to lock down their cuts to social programs.

And so it is that the arch-enemy of Social Security, Pete Peterson, rented out the good name of Franklin Delano Roosevelt, the reputation of the Center for American Progress, and EPI. All three groups submitted budget proposals to close the deficit and had their teams share the stage with Republican con artist du jour Paul Ryan. The goal of Peterson’s conference was to legitimize the fiscal crisis narrative, and to make sure that “all sides” were represented.

Now this tidy fact is not obvious if you check the Peterson Foundation publicity for its “Fiscal Summit:”

On Wednesday, May 25, 2011, senior Administration officials, policy experts and Democratic and Republican elected leaders will come together in Washington to discuss solutions to the nation’s fiscal challenges at the 2011 Fiscal Summit: Solutions for America’s Future, convened by the Peter G. Peterson Foundation…..The American Enterprise Institute, Bipartisan Policy Center, Center for American Progress, Economic Policy Institute, Heritage Foundation and Roosevelt Institute Campus Network will present and discuss their own proposed packages of solutions for achieving long-term fiscal sustainability at the Summit. These leading policy organizations, representing diverse perspectives, received grants from the Peter G. Peterson Foundation to develop comprehensive plans to address the nation’s projected long-term debt and deficits.

Why, after spending considerable resources, such as a website called New Deal 2.0, with virtually daily posts by Roosevelt fellows debunking deficit terrorism, and more formal work, such as a well-researched and argued paper by Tom Ferguson and Rob Johnson debunking deficit cutting in general and assaults on entitlements in particular, has the Roosevelt Institute cast its lot with a sworn enemy? Make no mistake, not only did the Institute undermine its raison d’etre by attaching its name to the Peterson anti-entitlements campaign, but as we’ll discuss later, the end product, as would be expected, bolstered particular initiatives that are contrary to FDR’s legacy, the Institute’s more general “progressive” objectives, and sound economics.

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FDL Book Salon Welcomes Nicholas Shaxson, Treasure Islands: Tax Havens and the Men who Stole the World

Welcome Nicholas Shaxson, and Host Yves Smith.

[As a courtesy to our guests, please keep comments to the book. Please take other conversations to a previous thread. – bev]

Treasure Islands: Tax Havens and the Men who Stole the World

Yves Smith, Host:

Treasure Islands tells us that tax havens are much larger and much more destructive than most might realize, yet at the same time enjoy much more unofficial and formal support from governments in advanced economies than many of us want to believe.

Nicholas Shaxson defines a tax haven (or “offshore”) as having these qualities: secrecy, low or zero taxes, very large financial service sectors compared to the domestic economy, and political stability by virtue of being captured by banking interests.

Even though Shaxon’s account includes a rogue’s gallery that would be at home in a Graham Greene novel, such as a Mr. Autogue, who has access to everyone important in Gabon, and virtually the entire government of the Isle of Jersey, the broader ramifications are far more chilling.

It’s bad enough that money launderers, arms dealers, and dictators are major beneficiaries of the presence of banks that profess to operate at first world standards without pesky first world oversight. “Offshore” also allows for governments to be denied legitimate tax revenues for activities within their borders. Thus, as implausible as it seems, Africa is a net capital exporter, losing far more in taxes than it gets back in foreign aid. And as Shaxson accounts, many of the devices used by major corporations to chop their tax bills have nothing to do with the actual flow of goods.

Treasure Islands describes how this system evolved. The UK’s Vestey Brothers, early in the 20th century, went to considerable lengths to be “technically abroad” so as to shield their income from beef imports from Argentina from taxes. Switzerland became the modern template for a tax haven during World War II. The Bank of England’s decision not to regulate the Eurodollar market, which developed in the 1960s, set the stage for the development of a much larger unfettered banking system. It expanded during the 1980s as a new cluster of tax havens in parts of what was once the British Empire, became “intimately linked to the City of London.” And the City of London, or more accurately, the Corporation of London, is a state-within-a-state, existing from “time immemorial,” with the world’s longest-standing official lobbyist, the Remembrancer. Nominally democratic, with corporate voters far outnumbering the real inhabitants, it like the various tax havens in its web, has quite deliberately been allowed to exist outside the normal rules of transparency and accountability due to the status and power of its bank residents. Even major scandals like BCCI have left this system unperturbed.

And this network also increases systemic risk. The IMF warned in 1999 that the growth of OTC markets, particularly derivative trading, likely involves offshore banks, which are typically highly leveraged. And when they get in trouble, they lack ready access to a big balance sheet central bank to bail them out. The shadow banking system is heavily anchored in offshore banking, with many hedge funds domiciled in the Caymans or Luxembourg, and special purpose like SIVs typically located in Ireland, Luxembourg, Jersey, or the UK. The point here is that their offshore status means that they finesse key aspects of regulation and oversight.  [cont’d.] (more…)

FDL Book Salon Welcomes Nicholas Shaxson, Treasure Islands: Tax Havens and the Men who Stole the World

Welcome Nicholas Shaxson, and Host Yves Smith.

[As a courtesy to our guests, please keep comments to the book.  Please take other conversations to a previous thread. – bev]

Treasure Islands: Tax Havens and the Men who Stole the World

Yves Smith, Host:

Treasure Islands tells us that tax havens are much larger and much more destructive than most might realize, yet at the same time enjoy much more unofficial and formal support from governments in advanced economies than many of us want to believe.

Nicholas Shaxson defines a tax haven (or “offshore”) as having these qualities: secrecy, low or zero taxes, very large financial service sectors compared to the domestic economy, and political stability by virtue of being captured by banking interests.

Even though Shaxon’s account includes a rogue’s gallery that would be at home in a Graham Greene novel, such as a Mr. Autogue, who has access to everyone important in Gabon, and virtually the entire government of the Isle of Jersey, the broader ramifications are far more chilling. (more…)

NY Fed Under Geithner Implicated in Lehman Accounting Fraud Allegation

(photo: epicharmus)

Quite a few observers, including this blogger, have been stunned and frustrated at the refusal to investigate what was almost certain accounting fraud at Lehman. Despite the bankruptcy administrator’s effort to blame the gaping hole in Lehman’s balance sheet on its disorderly collapse, the idea that the firm, which was by its own accounts solvent, would suddenly spring a roughly $130+ billion hole in its $660 billion balance sheet, is simply implausible on its face. Indeed, it was such common knowledge in the Lehman flailing about period that Lehman’s accounts were such that Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal.

Well, it is folks, as a [pdf] newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.

I am reading the report, and will provide an update later, but here are the key bits (hat tip reader John M). As much as Karl Denninger has done some terrific initial reporting, he does not go far enough as far as the wider implications are concerned.

The key revelation is that Lehman as of late 2007 was routinely using repo transactions at the end of the quarter to mask how levered it truly was:
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Spitzer, Partnoy, Black Call for AIG Open Source Investigation (and Goldman Implications)

by twolf1
by twolf1

An op-ed in the Sunday New York Times by former investigators and prosecutors Eliot Spitzer, Frank Parnoy, and William Black calls for AIG to put non-privileged e-mails, accounting documents, and financial models on line to allow for an “open source” investigation. The questions they want to examine include:

As fraud investigators, we would like to examine the trading patterns of A.I.G.’s financial products division, and its communications with Goldman Sachs and other bank counterparties who benefited from the bailout. We would like to understand whether the leaders of A.I.G. understood that they were approaching a financial Armageddon, and whether they alerted their counterparties, regulators and shareholders to the impending calamity.

We would like to see how A.I.G. was able to pay huge bonuses to its officers based on the short-term income they received from counterparties for selling guarantees that, lacking adequate loss reserves, the companies would never be able to honor. We would also like to know what regulators knew, and what they did with the information they had obtained.

This idea no doubt will strike most readers as quixotic. But the authors point out that three individuals have the power to force this to take place: (more…)

Bernanke Tries to Defend the Fed

Photo by rin3y
Photo by rin3y

In a sign that the Federal Reserve is circling the wagons, chairman Ben Bernanke has an op-ed in the Washington Post that attempts to defend the central bank’s role. What is interesting is how much the tables have turned. The Obama effort to make the Fed into the uber bank regulator has become a rout, with decent odds that the Fed will have its powers reduced, and an increasing possibility that Bernanke might not be reconfirmed (which is frankly the right outcome, no CEO who presided over a similar disaster would still be in charge).

This piece has so many artful finesses that I must limit myself to the most salient points. From Bernanke:

As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

Yves here. He’s only one paragraph into the article and he is already discrediting himself. If he is looking only to last two years for lessons, he is looking in the wrong place. This crisis was at a minimum a decade in the making, and I’d say more like 30 years. Where are the post-mortems? There is absolutely no evidence that the Fed sees its own policies, namely the Greenspan and then Bernanke puts, and the extreme laissez-faire attitude towards bank regulation, as major culprits.

For instance, the Fed was the architect of the “let a thousand flowers bloom” policy towards derivatives, and made inadequate (one might say no) effort to understand new financial technology. (more…)