No this is not a post to bash President Obama. This is a blog post which raises an honest question about the financial reform bill.
That legislation will do nothing to prevent another financial derivatives bubble like the one that cratered our economy in 2008 unless tough measures are taken to eliminate speculative derivatives trading by Wall Street. At a minimum we should pass a bill in which Senator Lincoln’s provisions dealing with derivatives are retained in the final bill. Yet I am reading reports that your administration is working to strip that language out of the final bill?
Please, Mr. President. Tell me it ain’t so.
A Senate proposal to force banks to shed their lucrative yet risk-laden derivatives units — which is vehemently opposed by Wall Street — is gaining steam, picking up the support of some regional Federal Reserve chiefs with more on the way.
Yet President Barack Obama’s Treasury Department, led by Timothy Geithner, continues to oppose the measure, Senate aides say, who add that Treasury is supporting Wall Street over Main Street by opposing the measure considered of “utmost importance” to financial stability.
“It shows the access of the major Wall Street banks in the Treasury Department in spades,” one Senate aide said on the condition of anonymity. Assistant Treasury Secretary for Financial Institutions Michael S. Barr is said to be leading Treasury’s efforts.
In short, President Obama, why do you and/or your Secretary of Treasury disagree with three members of the Federal Reserve Board who have stated in no uncertain terms that Big Banks should be forced to spin off their business units that deal in derivatives in order to prevent future “too big to fail” bailouts of financial firms at the expense of ordinary workers.
The president of the Federal Reserve Bank of St. Louis supports a Senate plan that would force Wall Street megabanks to spin off their derivatives units and raise significantly more capital to cover their bets, becoming the third Fed official outside Washington and New York to support a hotly contested measure that’s turning into a Wall Street versus Main Street issue.
James Bullard, the St. Louis Fed chief, joins Dallas Fed President Richard Fisher and Thomas Hoenig, who heads the Kansas City Fed, as the three Fed officials who publicly support the provision, authored by Senate Agriculture Committee Chairman Blanche Lincoln (D-Ark.), according to one of his spokesmen. The Obama administration and the Fed’s Washington-based Board of Governors oppose the measure and are working to kill it.
Is it because Tim Geithner doesn’t want to cross his “pals” and “buddies” on Wall Street, the same folks who are making money hand over fist while millions of Americans are unemployed, underemployed, can’t sell their homes (or have no equity in them anymore)? In brief, is it to protect the interests of these mega-financial conglomerates at the expense of the “little people?”
Bullard’s support is key to a measure vehemently opposed by Wall Street. The plan would force financial behemoths that run their swaps-dealing operations out of their banks to reorganize those desks into separately-capitalized affiliates, compelling them to collectively raise tens of billions of dollars in capital to back up potential losses.
JPMorgan Chase, Goldman Sachs, Bank of America and Citibank are the biggest dealers in over-the-counter swaps in the country, according to the most recent figures from the Office of the Comptroller of the Currency. Swaps are a type of derivative contract. […][
Of the nearly 8,000 banks in the U.S., less than 25 would be seriously affected.
“It’s really a Wall Street bank issue, not a community bank issue,” the Senate aide said.
After all this is a measure that has a lot of support from people outside the Geithner/Bernake/Wall Street circle:
[S]upporters include the longest-serving policy maker in the Fed, Federal Reserve Bank of Kansas City President Thomas Hoenig, Federal Reserve Bank of Dallas President Richard Fisher, Nobel Prize-winning economist Joseph Stiglitz and House Speaker Nancy Pelosi.
The measure is supported by financial reform groups and academics who wish to purge the riskiest of risky activities from the U.S. banking system. Since banks enjoy taxpayer-financed protection via federal deposit insurance and access to cheap funds from the Federal Reserve, they shouldn’t use that taxpayer support to subsidize risky bets on derivatives, say proponents of the measure. […]
“Banks that have been acting as banks will be able to continue doing business as they always have,” Lincoln said May 5 on the Senate floor. “Community banks using swaps to hedge their interest rate risk on their loan portfolio will continue to be able to do so. Most important, we want them to do so.”
In addition to Fisher and Hoenig, Lincoln cites support from the Independent Community Bankers of America, the Consumer Federation of America, AARP, labor unions and leading economists.
“I think this shows that the [Fed’s] Board of Governors and Treasury are out of touch with how a lot of other people are thinking about this stuff,” said the Senate aide. “We’re at the end of the game here, and people are standing up and saying, ‘You’re not addressing the underlying problem the way you ought to be.’ It’s tragic.”
I’m no expert on financial matters, but I’ve done enough research to know that risky derivatives trading fueled by Wall Street’s creation of an essentially unregulated and overheated market for Collateralized Debt Obligations from residential and commercial mortgages tanked our economy.
And even after that collapse Goldman Sachs made a very nice profit when the bailout overseen by Bush’s Treasury s Secretary Hank Paulson (with help from –surprise — Tim Geithner) ensured that Goldman Sachs and friends would be paid 100% of the derivatives it held from AIG as part of the TARP program.
Because of laws that emasculated regulatory oversight, Goldman’s trading positions in credit derivatives with AIG had escaped the scrutiny of the Fed until September 11 or 12, 2008, when AIG told the New York Fed that it would soon run out of cash. The CDOs did not trigger a liquidity crisis at AIG, at least, not directly. Rather, it was the imminent cash drain from anticipated downgrades, from AA- to A-, which would trigger $30 billion in new collateral postings on AIGFP’s trading positions. In addition, someone at the company had screwed up. They had invested billions in cash collateral, intended for someone else, in highly rated mortgage securities, for which there was suddenly no liquid market. So AIG needed to come up with the cash right away. […]
On September 15, 2008, the same morning that Lehman’s bankruptcy sent shockwaves, Geithner had convened a meeting with JPMorgan Chase and Goldman to work on an emergency bridge financing for AIG. Why include Goldman? Traditionally, the bank with the largest credit exposure to distressed borrower helps arrange the debt restructuring. Geithner opened the meeting, and left soon thereafter, leaving Paulson’s deputy, Dan Jester, in charge. Jester was a former Goldman banker whom Paulson had plucked in July 2008 to work on matters that concerned Paulson. […]
September 16, 2008: Paulson installs a CEO at AIG who will favor Goldman.
And a few minutes after Goldman, JPMorgan Chase and the government tried to figure out what was next, at 9:40 a.m., September 16, Goldman CEO Lloyd Blankfein placed a call to Hank Paulson, which Paulson took, even though such communication was illegal. […]
As it happened, a few minutes after Paulson got done speaking with Blankfein, Geithner briefed Paulson about a tentative proposal for the government to extend AIG an $85 billion facility. The conversation with Geithner ended at 10:30 a.m. […]
October 7, 2008: Paulson’s appointee unnecessarily pays out $18.7 billion to the CDO counterparties in exchange for nothing.
Actions speak louder than words, and AIG’s new CEO acted in a way that removed any doubt that he would make decisions in favor of Goldman. Remember, there was no need to hand over anything to the CDO counterparties, because there was no agreed-upon market value for the CDOs, which were all still highly rated. On October 7, 2008, AIG paid out $18.7 in cash in exchange for nothing. Before that October 7, only 26% of the CDOs’ face value had been paid out as cash collateral. Immediately afterward, counterparties hold cash for 56% of the CDOs’ face value of $62.1 billion. All of a sudden, the banks, not AIG, had the upper hand.
The end result? Goldman Sachs and the other Big Bank counter-parties were made whole with “tens of billions of dollars” of tax-payer money, and also got access to essentially free money from the Federal Reserve as a “bonus” (which naturally was used to pay “bonuses to Wall Street executives).
So, again, my question Mr. President is are you and/or Tim Geithner attempting to strip out the provisions in the financial reform bill that would eliminate some of the risk to the taxpayers Wall Street Banks continuing to make and sell risky bets on derivatives?
If yes, I have to ask why you would do that? I think I already know why Tim Geithner would, but why would you do Goldman Sach’s bidding for them? What purpose does it serve to enable these corporate bandits and plutocrats who would slice and dice up their mothers, bundle them together in bloody pieces and sell them as derivatives to whoever they could con to buy those pounds of flesh? I mean other than enrich people who consistently support the Republican Party over your party with their campaign donations (especially when Republicans control at least one house of Congress).
If anything, in light of the universal disdain of and anger at Wall Street’s Too Big To Fail Monster Banks that most Americans feel, wouldn’t it be the smart political move (in addition to being the one thing we could do to protect future TARP-like bailouts) to pass the toughest financial reform bill possible? Certainly, if I were a Democratic candidate for national office, I would think that would be a winning political strategy come this Fall. I would hate to run as a candidate of a party which failed to get tough with Wall Street after that party made promises in 2008 that it would.
The better plan? Make the GOP the party of Wall Street, Mr. President. Don’t let Wall Street insiders like Tim Geithner mislead you. In short, please, please, do the right thing. Pass the legislation with the toughest restrictions on speculative derivative trading by the “Banksters” that you can. We are counting on you.