Incidentally, I noticed this morning that Carly Fiorina intends to grab a Senate seat in California. Does anybody remember Carly: Lucent, ATT, HWP? There is a lady who can engineer black holes. But, at least if she wins there will be another Senator who understands what a derivative is and how to sell one.

The essence of a bank is that it takes deposits which the Go’mint insures. Why is such an organization empowered to do derivative deals? Because the ISDA trots out its spokesman who talks about the virtues of vanilla interest rate swaps which have not been important (or perhaps even done?) since 1982. Then all the Congressmen nod and Phil Gramm rams through either his wife (1991) or a bill (1999) to prevent anything being done about them. As for AIG, there is some evidence that its credit swaps were nullified by side letters (the old reinsurance scam). The claim is that those banks buying protection were doing it for capital reasons and knew they had no right to collect. Was this the reason Paulson demanded his blank check last September: there was no other way to save Goldman? Had GS outsmarted itself buying protection from guys who didn’t know they were actually selling it? Doesn’t anybody else wonder why AIG was so important given that its insurance subsidiaries were unaffected by its CDS exposure? Why if the world was really on the brink of total meltdown was roughly two trillion enough to save it? Chances are pretty good the entire crisis has been a disaster capitalism scam of the kind normally run in Argentina or Mexico.

The reason we need smaller banks is that we cannot trust larger banks. The reason we need to curb OTC derivatives is that nobody can trust the financial condition of anybody else. Unfortunately, nothing will be done until the next disaster, if then. The banksters got clean away with this one. We still have the same Senators and Congressmen and the same stock market and the same critics saying the same things on deaf ears.

 Investment banks have almost all the cycles of a highly profitable business. IPO’s are hot in the up phase of a business cycle. Trading is profitable in up or down cycles as traders go long or short securities. Financial crisis are periods of opportunity: governments need to sell bonds to cover deficits; toxic assets created by complex securities eventually have to be sold, and who is better equipped to spot undervalued securities than the very same bankers who designed the securities. Mergers thrive from recessions as battered  firms are reorganized or sold. 

Investment bankers believe they are entitled to easy Federal Reserve money, implicit and explicit government guarantees, freedom to produce financial products of “mass destruction” without commensurate capital, leverage , or regulatory restrictions.
With a “straight face“ they will tell you this is good policy.

In fact, the WTO does have rules on financial services, they do require financial deregulation, and specifically, they make it more difficult – not easier – to solve the too big to fail problem.

To wit: the WTO’s General Agreement on Trade in Services Article XVI(2):

“In sectors where market-access commitments are undertaken, the measures which a Member shall not maintain or adopt either on the basis of a regional subdivision or on the basis of its entire territory, unless otherwise specified in its Schedule, are defined as:

(a) limitations on the number of service suppliers whether in the form of numerical quotas, monopolies, exclusive service suppliers or the requirements of an economic needs test;

(b) limitations on the total value of service transactions or assets in the form of numerical quotas or the requirement of an economic needs test;

(c) limitations on the total number of service operations or on the total quantity of service output expressed in terms of designated numerical units in the form of quotas or the requirement of an economic needs test;(9)

(d) limitations on the total number of natural persons that may be employed in a particular service sector or that a service supplier may employ and who are necessary for, and directly related to, the supply of a specific service in the form of numerical quotas or the requirement of an economic needs test;

(e) measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service;…”

Financial services is a sector that countries can commit under the GATS, and over 100 countries did so for this market access obligation – including the US and EU. You can see what deregulators would like this provision:

1. It prohibits even non-discriminatory size caps (i.e. it’s deregulation, not just liberalization);
2. It limits the ability of countries to specify that investment services can’t be provided by a commercial bank, or make other requirements that certain services have to be provided by non-profits;
3. It contemplates five different ways that governments might try to limit size, and prohibits all of them – even at the subfederal level of government.
4. Then, there are other GATS-related rules, like GATS Article VI and the Understanding on Commitments in Financial Services that pose additional deregulation obligations on nondiscriminatory policies.

Even without these specific rules, the WTO dispute settlement system’s 15 year track record of ruling against over 90 percent of challenged public interest laws should give pause to any reformer looking to utilize it to serve the public interest. It’s interest is in maximizing trade flows, not preserving sound regulation.

More here: http://citizen.typepad.com/eyesontrade/2009/11/how-not-to-deal-with-too-big-to-fail.html

http://www.nakedcapitalism.com/2009/11/trouble-ahead-can-the-right-seize-the-banking-reform-issue-in-2010.html

I guess in a judicial-type proceeding we expect the people in charge to keep equal distance from both parties. On the other hand, Mr. Obama’s regulatory policy is shaped by people like Larry Summers who earned millions of dollars on Wall Street. Is it realistic to expect these people to weigh the evidence in an unbiased way?

Why is it, Simon, that, although several of the most renowned economists (including, oddly, Alan Greenspan himself) are in essential agreement with you, and yet, their views don’t seem to be penetrating the ear drums of Congress, the Fed, or Treasury. I agree that public opinion is beginning to turn, and, if it continues in the current trend, this fact could make for a very interesting mid term election next year. The real issue remains: campaign finance reform.

Prior populist movements had a broader scope and realized that there are many forces out there that act against the interest of the people. Government has often been coopted by such forces. A true populist movement would demand good, truly democratic government, but it would also identify forces and trends that work against their interest. Forces like banks that are too big to fail.

‘Populist’ is clearly a pejorative term, a rock to hurl at people who represent an opinion supported by the population at large, when that opinion is antithetical to the goals of the hurler. Occasionally, an idea needs to be defended as desirable in spite of the fact that it has wide support. Such defenses are couched in terms such as ‘I’m no populist, but…’ .

Inherent in the way the term is used is the notion that the population at large is incapable of formulating an appropriate view of the issue at hand. How anti-democratic is that? The fundamental notion of democracy is that common people are capable, and that it is appropriate to vest power in them because they are capable and because it is morally responsible to do so. The pejorative use of ‘populist’ directly contradicts that fundamental notion.

The pejorative use of the term betrays the true attitude of those who use it in that way. Common people are not capable. There are an elite few who are. While the elite may be required at times to humor the masses, the elite are not expected to and should not take into account their views. One form such humoring takes is quadrennial public relations events where corporate sponsored candidates campaign for votes from the masses. Once elected, the masses and their opinions need not be considered, unless their votes are required again in a subsequent public relations event. That the views of the masses are irrelevant is clear, though not often candidly stated. In the fall of 2008 there was an unprecedented outpouring of opposition to the Paulson plan to prop up the financial system after Lehman Brothers collapsed. It passed. Fifty nine percent of respondents in a public opinion poll support single payer health insurance. It is not discussed. A majority of Americans opposed the invasion of Iraq and oppose our continued presence there. We invaded. We remain.

The conduct of the public relations events themselves indicate the level of participation required of the masses and by extension, their perceived level of competence. Substantive issues are rarely discussed, as if doing so would tax the mental capacities of the people. They are instead given information of a kind suitable for deciding which candidate we would prefer to have a beer with.

We can always find fault with the wisdom of the masses. For me, something like the Paulson plan was a necessary evil. Having endured it, we need to reform banking so that we need not repeat it (this is another widely supported idea that is going nowhere fast). So in that specific case, I don’t think the population at large reached the right conclusion. On the other hand, perhaps if we had a true democracy, the reforms of the New Deal would not have been dismantled, and we wouldn’t have had the crisis at all. And it was the all knowing elite who engineered the structured finance products that created the crises.

But, if we are going to use the perceived faults of the opinions of the masses to invalidate the basic premise of democracy, then let’s drop the pretense, stop calling ourselves a democracy and start extolling the virtues of the opposite of ‘populism’. ‘Plutocracy’ and ‘elitism’ anyone?

For the sake of completeness, I’ll paste this link that reports a speech that Ackermann has given at a convention called “Money, Spirit and Magic in Goethe’s Faust II”.

(Goethe is a classic in German literature like Shakespeare is in English literature; 90% of the Germans who think they’re educated claim they’re related to Goethe. “Faust” is his best known work; it’s a well crafted poem and has been shown as a play many times.)

http://www.faz.net/s/RubB8DFB31915A443D98590B0D538FC0BEC/Doc~ECA71AEB8578E4CAB99C6EB1827675D5E~ATpl~Ecommon~Scontent.html

So in the first paragraph it says:

“18 June 2009. The CEO of the Deutsche Bank, Josef Ackermann, warned that the big banks of the world are forming an oligopoly. This not only endangers free market competition, but also creates systemic risks. “After the crisis there will be only few banks which cut up the global cake, which will create the danger of oligopolistic structures.” Those are dangerous if they collapse, says Ackermann.

(…)

Ackermann poses the question about the banking system: “How can one reduce the size of a bank so it can go out of business without endangering the banking system?” (…) ”

I suppose Ackermann’s role model here was Konrad Adenauer, first West German chancellor after World War II from 1949-1963, who said (loosely translated): “What the hell do I care about the bullshit I talked yesterday?” – (“Was geht mich mein Geschwätz von gestern an?”)