Bear with me: this is a long diary, but I think it’s worth the trouble to read it. If you would prefer to avoid all the nitty-gritty details, just skip to my last few paragraphs (below the fold) for my righteous rant, which states my essential point that the Banksters, by corrupting our political system, particularly over the last few years, are the true progenitors of the Occupy Wall Street movement.
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Why now? Haven’t you been wondering why Occupy Wall Street arose now? It’s not like we didn’t know by 2008 that Wall Street, through sheer greed, recklessness,and a sense of entitlement and utter incompetence of monstrous proportions, had managed to send the world’s economy over a cliff? It was a major factor, if not the most significant factor, in the election of Barack Obama.
Well, sometimes it takes a while for people to wake up from a dream. Barack Obama presented his supporters with a dream that changing the system was possible. Sadly, we know realize that this dream was merely a dream. The forces that controlled our political system had profited greatly over the course of the Clinton and Bush years, as more and more government oversight of their activities had been reduced, eliminated or made ineffective. Nowhere was this more apparent than in the financial sector.
Yet, Obama promised change. More than that he gave millions of desperate people hope that change to our system was possible. Now this is not a diary to bash the President and I’m telling you right off the bat that discussions which focus on Obama as the problem or conversely defend him as the best option going forward and a President that achieved much despite the relentless attacks on him personally and the obstruction by the Republicans, the magnification of his mistakes and flaws by the media and the refusal to cover his successes, is not the purpose of this post.
MY purpose is to explain, as best I understand it, the primary reason our economic situation has worsened for everyone but the people at the top, and especially the financial sector we commonly refer to as “Wall Street” and why it took until now for a movement such as Occupy Wall Street to arise. You see, despite the dreams and the hope that Obama inspired in 2008, our political and economic system was already too corrupt, and too dysfunctional for any President to change. Many of us did not realize this fact at the time and the few who did had no platform to make the case that the fix was in no matter who was elected President in 2008.
Let’s begin in 2008.
(cont.)
TARP money (and even more money from the Federal Reserve) had already been handed over carte blanche to the Banksters by the Bush administration. Obama originally attempted to reign in that program and impose oversight to the process appointing Elizabeth warren to head up the investigation into how the TARP funds were dispersed. He also began formulating legislation to reimpose regulation and oversight upon the financial baronies that had literally crashed the economy and had then been bailed out by the Treasury and the Federal reserve. Under President Bush (and this was intentional) no one minded the activities of the Casino Owners on Wall Street (i.e., the Evil Empire), particularly with regard to the bubble they created in the mortgage market from which they profited greatly. Naturally, after contributing millions of dollars in contributions to Obama’s campaign in 2008, the Banksters believed that this policy of not so benign neglect would continue, despite the catastrophe their actions had caused. When they learned that might not be the case, the Evil Empire struck back.
It was at this point the Evil Empire, aided in part by Tim Geithner, Ben Bernanke, the Republican Party and a few select, but high profile Democrats (Chris Dodd, Harry Reid and Chuck Schumer), struck back. The process began with what may seem to some an esoteric and minor issue: how should the Banksters account on their books for the numerous “distressed assets” they owned? Assets such as CDOs (collateralized debt obligations), Credit Default Swaps (CWS) and all the other practically worthless derivatives they held (i.e., the “Big Shit Pile” as Atrios and others so often referred to it) . The banks, fearful of what financial reforms might require them to disclose regarding the true value of their worthless derivatives, pushed hard to have the accounting standards relaxed, so that they could account for these “assets” at a price higher than their actual fair market value.
You see if they would have had to account for this crap under traditional rules regarding “fair value” they would have been exposed as insolvent institutions. This would’ve been bad news for (1) their stock price, (2) their “profits” and (3) –this is the most important– their ability to pay huge bonuses to their senior executives. Understand, that during the height of the “derivatives bubble” the banksters abused “fair value’ accounting (with the willing acquiescence of the rating agencies) to inflate the value of their portfolios by overstating the fair value of the derivatives they held. This led to an increase in their stock price (the Dow Jones Industrial index high surpassed 14,000 during this time in large part due to inflated financial sector stocks, Furthermore, at least one regulator in the UK, blamed the banksters misuse of the accounting rules regarding derivatives to fatten their bottom line and justify large executive bonuses:
Adair Turner, chairman of the Financial Services Authority, told Accountancy Age the pro-cyclical effect of fair value pushed asset prices to artificial highs, which fed into profit estimates and rewarded bankers with inflated bonuses.
“Fair value accounting on the way up can produce a self reinforcing cycle,” he said.
“The price of credit security had gone up – everything was looking more favourable. Banks were making more profits, but they were unrealised fair value profits.”
Now for a little explanation of Fair Value accounting [feel free to skip this part as it can be a bit esoteric and boring to many people]:
Under the accounting rules in place at that time, banks were required under FAS Rule 157 (promulgated by the Financial Accounting Standards Board or FASB, the Professional organization responsible for establishing what constitutes Generally Acceptable Accounting Principles or GAAP
GAAP is a collection of methods used to process, prepare, and present public accounting information. GAAP is overall very general in its methods, as it needs to be somewhat applicable to many different types of industries. GAAP can be principle-based or specific technical requirements. Due to the fact that in many instances it is flexible and general, most industries in the United States are expected to follow GAAP principles.
Although different organizations contribute to GAAP, the Financial Accounting Standards Board (FASB) is the main contributor to GAAP. This is done through one of four categories of methods which differ on method and level of importance.
FASB is an organization that has been granted the authority to establish generally accepted accounting principles (GAAP) by the Securities and Exchange Commission (SEC).
However, with the knowledge that Banks had abused their valuation of derivatives, the FASB in November 2008 modified the definition of “fair value” in FAS 157-d to clarify how derivatives and the risks they posed should be valued. Here is the FASB description of the changes to FAS 157 applicable to derivatives:
The definition of fair value retains the exchange price notion in earlier definitions of fair value. This Statement clarifies that the exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or owes the liability. Therefore, the definition focuses on the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price).
This Statement emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, this Statement establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The notion of unobservable inputs is intended to allow for situations in which there is little, if any, market activity for the asset or liability at the measurement date. In those situations, the reporting entity need not undertake all possible efforts to obtain information about market participant assumptions. However, the reporting entity must not ignore information about market participant assumptions that is reasonably available without undue cost and effort.
This Statement clarifies that market participant assumptions include assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. A fair value measurement should include an adjustment for risk if market participants would include one in pricing the related asset or liability, even if the adjustment is difficult to determine. Therefore, a measurement (for example, a “mark-to-model” measurement) that does not include an adjustment for risk would not represent a fair value measurement if market participants would include one in pricing the related asset or liability.
This Statement clarifies that market participant assumptions also include assumptions about the effect of a restriction on the sale or use of an asset. A fair value measurement for a restricted asset should consider the effect of the restriction if market participants would consider the effect of the restriction in pricing the asset. That guidance applies for stock with restrictions on sale that terminate within one year that is measured at fair value under FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations.
Long story short: FAS 157-d demanded that in determining the “fair value” of an asset, the parties involved were required to take into account the actual market for the property, including securities, as well as an assessment of the risk of assets for which there was little market liquidity such as derivatives.
Under the SEC regulations in place for much of the eighties and nineties, fair value accounting, sometimes known as “mark to market” accounting was required by regulation for brokerage firms. In addition, the Banksters, as previously noted, used FAS 157 to inflate the value of their derivative portfolios. However when the bubble burst, suddenly those same Wall Street executives, who had generated the crisis, realized that continued use of FAS 157 would force them to write off billions (if not trillions) of dollars they had invested in their crap derivatives. They sure as hell didn’t want that, nor did they want to accept the blame for all the risky and ultimately stupid decisions they made creating a a market in CDOs. Thus began their campaign to demonize and blame the accounting rule that they themselves had previously exploited. And who better than the New York Times to turn to fro help in catapulting the propaganda (from July 1, 2008):
A new accounting rule – “an accounting rule!” – partly explains why the American financial system looks so wobbly these days, he says.
Mr. Schwarzman, the co-founder of the private equity giant Blackstone Group, has been espousing this view for weeks … [and] is convinced that the rule – known as FAS 157 – is forcing bookkeepers to overstate the problems at the nation’s largest banks.
“From the C.E.O.’s I talk with,” Mr. Schwarzman said during an interview on Monday morning, “the rule is accentuating and amplifying potential losses. It’s a significant contributing factor.”
Some of his bigwig pals in finance believe that Wall Street is in much better shape than the balance sheets suggest, Mr. Schwarzman said. The president of Blackstone, Hamilton E. James, goes even further. FAS 157, he said, is not just misleading: “It’s dangerous.”
Huh? So the Citigroups and Merrill Lynches of the world are writing off billions of dollars – but they haven’t actually lost the money?
Sort of. If Mr. Schwarzman is to be believed – and there’s some evidence he might be right, at least partly – it all goes back to FAS 157, which went into effect Nov. 15, just as the credit hurricane tore through Wall Street. […]
Pure horsecrap. They were already dead in the water before the FASB passed FAS 157-d (too late I might add) to deal with the valuation issues involved with derivatives that the Banksters had sold as Triple A rated securities even to investors as they shorted them. The accounting change didnltt cause the Banking crisis — the Banksters did that all on their own.
So, when the shinola hit the fan for good in October 2008, and Bush and Congress were forced to bailout the Evil Empire, they passed, as part of that bailout, the Emergency Economic Stabilization Act of 2008. A little known provision of that Act, Sec. 133, required the SEC to study whether FAS 157 should continue to apply with respect to derivatives. Well the SEC completed that study in December 2008 and guess what they concluded?
Among key findings, the report notes that investors generally believe fair value accounting increases financial reporting transparency and facilitates better investment decision-making. The report also observes that fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008. Rather, the report indicated that bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence.
In other words, the SEC wasn’t buying the Banksters’ contention that FAS 157-d was to blame for the 2008 crisis that led to the Great recession. This, coming from the Bush SEC, was not what the Banksters wanted to hear. It made them out to be the bad guys, and as we all know a Wall Street bankster will go to any length to avoid blame for his or her gambling mistakes with other people’s money (even mistakes that destroyed and ruined the lives of literally billions of people across the globe) by any means necessary. So they started to work on our good friend Ben Bernanke, as well as the FASB, to get the “burden” of the FAS 157 fair value standard off their balance sheets. And surprise, surprise, they succeeded!
First up to bat was Benny Bernanke of the Fed, sounding the clarion call that FAS 157 had to go to save our nation’s economic future:
“Further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their pro- cyclical effects,” Bernanke said.
Asked about rules that require companies to value some investments at their current market values, Bernanke said “I strongly endorse the basic proposition of mark-to-market, which is that we should make our financial institutions’ balance sheets as transparent, as clear as possible.” He added that he “would not support any suspension of mark-to-market.”
Still, in periods of financial stress, when some markets don’t exist or are highly illiquid, “the numbers that come out can be misleading or not very informative,” Bernanke said. Regulators could provide “guidance” on reasonable ways to value assets, he said.
Yes, amending accounting standards to find “reasonable ways to value assets” such as the Big Shit Pile of derivatives the Banksters didn’t want to have to write off was so very essential. And, not surprisingly, the FASB got the message from Bernanke (or had their arms twisted) because on April 9, 2009, they issued a clarification of FAS 157 that “eased” the fair value standards when it came to valuing derivatives of any stripe, thus giving a boost to the Banksters’ bottom lines:
U.S. accounting rule makers made it easier for banks to limit losses, but in an unexpected move they bowed to critics and backtracked on one proposal that would have let companies ignore market prices in some cases.
The vote by the Financial Accounting Standards Board followed a debate in which members of Congress pushed for steps to help banks weighed down by troubled assets, while some investor groups warned that the plans would allow executives to cover up losses. The rules change spurred Thursday’s stock-market rally.
Thus, the accounting rules of FAS 157 were essentially suspended in April, 2009 regarding the valuation of derivatives that everyone knew were worthless, allowing the Banks to hide the true value of the distressed assets they own from the public. But the Banksters were far from done. They faced pressure from many sources for the re-imposition of financial reform and additional oversight of their activities, and the creation of a Consumer Financial Protection Bureau (CFPB) to be led by that big meanie, Elizabeth Warren. Here’s where Tim Geithner did yeoman’s work for the Empire’s cause, but since that story is told better here I won’t repeat it.
I will, however, pick a few paragraphs from that same Vanity Fair article, that demonstrates the enormous power Wall Street exercises over our government, even at a time when the mess they made should have weakened them to a point that Congress and the President could achieve effective financial reforms. Well, we all know that he Dodd-Franks bill was watered down to the extent that it is weak tea indeed, has had little effect on our continuing financial and economic crisis and may not last but a few years at best. Here’s one of the reasons why significant financial was never anything but a pipe dream, even when Dems controlled Congress:
According to the Center for Responsive Politics, in 2010 the financial industry flooded Congress with 2,565 lobbyists. They were financed by the likes of the Financial Services Roundtable, which, according to the Center, paid lobbyists $7.5 million, and is on its way to spending as much or more this year. The Chamber of Commerce spent $132 million on lobbying Washington in 2010. The American Bankers Association spent $7.8 million. As for individual banks: JPMorgan Chase, which received $25 billion in TARP funds from taxpayers, spent nearly $14 million on lobbying during the 2009–10 election cycle; Goldman Sachs, which received more than $10 billion from taxpayers, spent $7.4 million; Citigroup, which was teetering on the brink of insolvency and received a $45 billion infusion, has paid more than $14 million to lobbyists since 2009. And none of this money includes the direct campaign donations these organizations, and their surrogates, made to members of Congress.
The banks “do not like to lose,” says Ed Mierzwinski, of the National Association of State Public Interest Research Groups, which was part of the grossly outmatched consumer coalition that managed to scrape together a paltry $2 million to lobby in favor of reform.
That sort of says it all, doesn’t it? First we bail them out, make it easier to cook their books so they look better than they are, improve their stock price, allow their executives to make huge bonuses even as millions of Americans are unemployed thanks to their greed and incompetence, and they take that federal bailout money and buy up more lobbyists than any other industry in the country. In effect, the banks are insolvent today but as long as they “own Congress” that fact will not be made public. Indeed, the US Treasury and the Federal Reserve (and all the bough Senators and House members) will continue to do everything in their power to hide that fact from the general public by propping up the financial institutions, the “Evil Empire” that created the bubble in CDO derivatives that caused the Great Recession and made life miserable for the rest of us.
I short we have the worst of both worlds: The banks are guaranteed a “profit” regardless of their actual financial condition and can pay ludicrously high salaries and bonuses to the “Wizards of Wall Street” because the US government is underwriting the Banksters’ activities. However, that same government is receiving nothing in return for this “gift” to the Evil Empire.” The government’s ability to control these companies is limited. The government is not receiving any equity in these companies (i.e., shares of preferred stock) nor, under the weak enforcement powers and regulatory scheme of the Dodd-Franks financial reform act can the government impose adequate oversight and hold hold accountable the very corporations and private institutions to which public funds have been and are are being extended. Indeed, Attorney General Holder has, for whatever reason, refused to pursue criminal and civil penalties against the Banksters except in a small number of cases.
For all effects and purposes, the Banksters are practicing extortion to maintain their grip on power. They can take a small portion the Trillions of dollars in loans and government guarantees given them (small only in a relative sense) and use that money to buy elected officials and/or intimidate them with the threat of ads that will be used against them in the next election cycle. It is not a sustainable model for our economy, but it is the one the Federal Reserve under Bernanke and the Treasury Department under Geithner have accepted, supported and enabled.
Why do you think Elizabeth Warren was cut off at the knees? She exposed and opposed these policies. She was “too dangerous” to be left to survive in the Obama administration because she opposed the very policies that have continued to allow Wall Street to go about their merry fraudulent ways, raiding our government monies as they would any other treasure trove, while continuing to steal (and I don’t use that word lightly) the funds entrusted to them by their customers and investors, all while avoiding potential consumer protections, oversight, accountability, adequate capitalization rules, etc.
To simplify matters, its best to think of our current financial institutions as Pirates or Brigands or Bandits who have seized control of our country’s government and economy and many of the other major economies around the globe, and are looting and stripping away anything of value, leaving those of us who are being robbed and fleeced helpless and poorer. What is more, this is an ongoing process, as this gang of thieves plots even more ways to steal government funds, defraud investors, and impose greater costs on their depositors and borrowers, insuring that the burden of their plundering of the world’s economy falls upon the rest of us.
For an analogy, imagine the situation of the farmers in the movie Seven Samurai or (if unfamiliar with that film) The Magnificent Seven, who are confronted with bandits who take everything they have leaving them barely enough to survive. Except, unlike the peasants in Seven Samurai and The Magnificent Seven, we have no heroic warriors or gunslingers ready to ride to our rescue because the bandits already bought them off, killed them or scared them away. Do the bandits in those films care if the people they are robbing survive? Have they even thought about the consequences to themselves if those people all die? Of course not. They live in a world where they always believe there is another village they can rob. Like any predator they will simply move on, not even realizing that at some point they will cause the very economies upon which they rely to go extinct.
That my friends, is our current situation in a nutshell. That is why the Occupy Wall Street Movement began this Autumn. It took time to germinate and for people to see past the lies and propaganda pushed on us by our corporate media. Despite years of media coverage that tried to direct the blame for our current economic condition solely on on the President and the democratic Party, people are starting to see the light. After a while, even a blind person can discover the truth that he or she being robbed.
