A Short Question For Senior Officials Of The New York Fed

At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve.  It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.

Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC).  US banks or bank holding companies would not generally be allowed to undertake such transactions – in fact, it is annoyed bankers who have asked me to take this up.

Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion?  If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks?  Or will all bank holding companies be allowed to expand on the same basis.  (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance.  Should Goldman Sachs now be placed in this category?

Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.

In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China.  Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?

By Simon Johnson

90 thoughts on “A Short Question For Senior Officials Of The New York Fed

  1. From Fox News 8/20: Goldman Sachs (GS: 179.6, 0.78, 0.44%) received Federal Reserve approval last week to become a financial holding company, the company said Thursday.

    The status allows Goldman to continue to be under the direct supervision of the Fed, but can continue to participate in activities that a regular bank normally wouldn’t, including private equity among other businesses. The status was posted on the Fed’s list of Financial Holding Companies and announced to Goldman employees via an e-mail from Goldman’s Chief Financial Officer David Viniar.

    Goldman spokesman Lucas Van Praag said that Goldman’s switch was widely understood by the market after the firm applied for bank holding status last year at the height of the financial crisis. Goldman has received a temporary waver to continue in these activities when it originally applied,

    “It’s not a material change to our business,” Van Praag said.

    Morgan Stanley (MS: 29.46, -0.36, -1.21%) also became a financial holding company after applying for bank-holding status at the same time as Goldman, but Morgan was approved sooner. Other firms that are FHCs are JPMorgan Chase & Co. (JPM: 41.84, 0.44, 1.06%), Citigroup (C: 4.52, -0.03, -0.66%) among dozens of others.

    FHC status was created in 1999 by the Gramm-Leach-Bliley Act, which is the law primarily known for repealing Glass-Steagall Act of 1933, which separated deposit-holding commercial banks from investment banks.

    After repaying its loans from the Troubled Asset Relief Program and the Treasury Department warrants, there was talk that Goldman might shed its holding company status to return an investment bank model. Instead, it looks like Goldman can continue to do the activities it has been doing, but still under the supervision of the Fed.

  2. What is REALLY happening here folks???

    As Mr. Michael Thomas was so kind to point out, the Glass-Steagall Act of 1933 separated commercial banks from investment banks. Why?? Because Investment banks take the money that is given to them, and mainly speculate with it. Investment banks speculate with it because that is exactly what their “depositors” ask them to do with it, and those depositors usually have to show they can pay for all the losses before the investment bank will speculate with it. Commercial banks traditionally invested in safer things, because that was what their depositors asked for and expected, because that was a SAVINGS account, their “life’s blood”, what they needed for NECESSITIES, not for speculation. Separating these 2 functions, savings versus speculation was very useful, especially if you were a saver.

    Now we have Gramm-Leach-Bliley Act of 1999, where banks can combine these 2 functions and take depositors’ savings and speculate on instruments that even the creators (of the derivatives) themselves don’t fully understand.

    So what happens when you take depositors’/savers’ money and invest it in credit default swaps and other risky instruments??? What happens when you gamble with money that ISN’T REALLY YOURS to increase profit margins??? And I haven’t even started with the $700 billion plus they received from the taxpayer, so they didn’t go insolvent, because the morons we call bankers now don’t even know what qualifies as an asset on a balance sheet. Milton Friedman explains it very well how large bank executives might feel about it now.

  3. This is insane.

    Clearly the Government is in collusion with Wall St. to keep the gambling parlor doors open.

    It is sickening. And it appears that not one Representative or Senator, nor the President, gives a damn.

    What is it going to take to bring the corruption to an end?

  4. Since Goldman Sachs owns the U.S. Government, the Fed, and everyone else, it can do what it damn well pleases. Regulations are for other entities.

  5. As Michael Thomas correctly notes, Goldman has become a financial holding company, not just a bank holding company (as, too, has Morgan Stanley). This status embraces a far wider range of activities and, for those that extend beyond even the Gramm-Leach Bliley Act’s provisions (which created the financial holding company entity when the Fed, Congress and the President rolled over and died in the face of the Travelers-Citicorp merger in 1998) many are grandfathered by that legislation and some might only have to be divested over a fairly lengthy period of time, if at all. Goldman itself has announced that by consolidating its domestic and global banking assets it now owns one of the ten largest banks in the United States. It certainly falls on the list of too-big-to-fail institutions, and it probably has done so for some time.

  6. I should have added that GS’s foreign activities are largely covered anyway by the provisions Simon Johnson cites in his blog as well, specifically 12 USC § 1843(k)(4)(G).

  7. Time to read Ellen Brown’s piece: “The Rise of the SDRs – IMF Catapults From Shunned Agency to Global Central Bank”

    final paragraph….

    “The IMF is back in business, but it’s the old unseemly business of serving as the collection agency for the international banking industry. As long as third world debtors can service their loans by paying the interest on them, the banks can count the loans as “assets” on their books, allowing them to keep their pyramid scheme going by inflating the global money supply with yet more loans. It’s all for the greater good of the banks and their affiliated multinational corporations, funded with $500 billion from the taxpayers of the G20 nations.”

    ~ http://www.webofdebt.com/articles/imf.php

  8. If we knew the extent and depth of the penetration into Congress and Fed by “too big to fail” banksters to capture and own government, just maybe if Joe Plumber realized tweedly dee and tweedly dum are one and the same then you have the potential to raise your consciousness of the really objective conditions of the citizens servitude to Corporate Banking America.

  9. Simon says “annoyed bankers who have asked me to take this up”? And what is Baseline now? An outpost for financial vigilantes?

    Simon says “cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China.” Come on, who is really funding who?

    Should we have to assume now that Goldman Sachs does not know what it is doing? To me it looks at least like an operation that will require 8 percent capital and which is quite an improvement over the meagre 1.6 percent we have lately seen too often.

  10. Come on people, stop whining! What’s good for GS is good for America. It will trickle down, I promise. NYC cab drivers can expect biiiig tips.

  11. Please, please, a little sympathy for the devil, OK? These boys have a serious problem: the whole damn thing is teetering. Can’t we just allow them to take a little creative license here and there between the endless public bouts of pandering and cheerleading?

  12. Musing here. A possible scenario is China develops a middle class consumer society and reduces its trade surplus. Canada does fine because there is a vast market for commodities in the emerging Chinese economy The financial elites in America are enriched further. But the standard of living in the United States will drop unless the country can recreate an economy outside the financial sector.

    But the stock exchanges in Hong Kong and Shanghai sound totally wild.

  13. I suppose that I should be surprised by this special treatment. I am sure the NY Fed can’t answer, except to say that they were told to do this to save large problems (by someone, maybe Bernanke). At any rate, they all get all the passes needed to do whatever they want without limits. The rules will be changed so that exceptions can be granted as convenient. Isn’t that what every good plutocracy does??!!

  14. You know, Barack Obama is looking more like one Class A BS’er. Says one thing, does quite another…..

    Same with almost everyone in the W.H. I listened to Bernanke testify last week. What nonsense. He relentlessly answers every question with the tough line, -hate the banks, hate the abuse, hate the bailouts posture. Have you noticed?,…. it is all BS. Says one thing in public, but this is a total facade. Apparently he gets that from his boss. At least Bush told you where he stands, always,…. the stiff arm approach to Presidential management. You may not like him, in fact most don’t, but he was not a lying little weasel mouth. Obama? …. basically a cowardly worm.

  15. Well done btraven! I would add the following paragraph from the same article so that there be no doubt what is going on here:

    “The Fed (Federal Reserve), which is owned by a consortium of banks and was set up to serve their interests, is tasked with seeing that the banks ARE paid back; and the only way to do that is to inflate the money supply to create the dollars to cover the missing interest. But that means diluting the value of the dollar, which imposes a stealth tax on the citizenry; and the money supply is inflated by making more LOANS, which adds to the debt and interest burden that the inflated money supply was supposed to relieve. The banking system is basically a pyramid scheme, which can be kept going only by continutally creating more debt.”

  16. Again what is it that we most want? That real bank lending, that which requires ex-ante risk-taking that which for instance requires 8 percent capital spending takes off.

    And here you are complaining about an operation of that sort (though in China) while we have not heard an iota from the owners of the blog complaining about the fact that if this same “horrible” bank lend to the government the capital requirement is zero. Do you really believe that lending to government should have a zero capital requirement because that carries no risk? No risk of what?

    Capital is a known coward. Is this spot being financed by a Carlos Molotov Pavlov to seed self doubts in the “land of the brave”? http://bit.ly/gNemy

  17. I thought Matt Taibbi did a pretty good job of explaining this:

    From Matt Taibbi’s “The Great American Bubble Machine” in Rolling Stone Issue 1082-83.

    The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

    rest of the article at: http://www.rollingstone.com/politics/story/28816321/inside_the_great_american_bubble_machine

  18. Yeah, it makes me nostalgic for ol’ W, who always spoke the truth.
    You know, about the WMDs, torture, the housing bubble, jobs, the
    greenhouse effect, and anything else you could think of.
    I believe he said once: “When I was a boy, I cut down a cherry tree,
    and my father said ‘George, did you cut down this tree?’ ‘Yes Dad,’
    I said, ‘I cannot tell a lie. I hate trees and someday I’ll pave
    over this place and put a parking lot here.'”
    That’s how he got the nickname “Honest George W.”

  19. The next iteration is “The Holding Company of Holding Companies Act of 2010”
    In this Act, Holding Companies subject to certain onerous regulations such as
    having to report certain information to certain people, having to accept losses when some of their holding companies realize them,
    having to pay taxes, having to keep accounts, having to lobby congress for certain perqs, and having
    to obey certain laws that have not already been repealed for financial holding companies, will become completely
    exempt from all laws, regulations, taxes, duties, investigations, criminal prosecutions, civil liability, and realized losses, and instead
    the taxpayer will inject unlimited amounts of their own money into helping these crucial corporations thrive in a depressionary environment.
    The Act will appear as two long lines published at 3:00 a.m. in the Federal Register buried in An Omnibus Tax, Highway, Scrimshaw Artist, and Military reconciliation Act on p. 11,235 of the Act, in 8pt type in the middle of another paragraph. It will pass without debate.

  20. I should also have added that in the “Holding Company of Holding Companies Act of 2010”
    Holding Companies of Holding Companies will receive a stronger version of Immunity than
    Soverign Immunity, just to be sure that nothing bad can happen to them. Also, the U.S.
    military will enforce their contracts.

  21. That does sound like the mother of all vendettas… the battle of titans. You helped to force a speculative bubble on me… well here is a speculative bubble for you!

  22. Matt Taibbi is the typical person carving out a profitable niche for himself in the hate-and-blame-someone-else community. He puts together a couple of inflammatory phrases that are more based on the combustion value of the words than on some real research and then he hits the road making certain that the stops are in friendly places.

    To read the Basel regulations and try to understand them? Forget, it too boring, and there is too little promo value there” So you see, the extremes are all so alike.

    Sincerely would you like to place the future of the US and coming generations in the hands of regulators with a mindset like Matt Taibbi?

    Yes I admit having my own conspiratorial take on the crisis, but that, as you can easily see, is strictly for pedagogical reasons. http://bit.ly/gNemy

  23. Oh, I think I’m getting him confused with another President.

    You know, the one when asked “Did you have relations with an
    intern in the White House?” responded, “That depends on the
    definition of the word “an” and “the.”

  24. If speculative bubbles occur every decade, or so, and are increasingly damaging where will the cash come from to bailout the world if there is a “China bubble” and it bursts?

    The prognostication is grim. Unless China engages in a genuine post mortem of the 2008 financial meltdown and takes action to protect itself.

  25. Goldman is a hedge fund with unlimited access to the Fed’s discount window and the American Taxpayer via various alphabet soup bailout programs for essentially FREE capital to play with. The biggest SCAM in history.

    100% of Goldman’s BONUS POOL should be allocated to the US Treasury for at least 5 YEARS starting in 2009 as payback to the AMERICAN TAXPAYER who’s money has been HIJACKED by them and used as a perpetual nearly infinite ZERO COST LIMITED PARTNER CAPITAL CALL.

    WE THE PEOPLE have saved Goldman from insolvency, we have empowered them to leverage their near MONOPOLY powers to manipulate and profit from the global financial markets in a time of GREAT DURESS, and WE SHOULD REAP THE REWARDS as their largest Limited Partner — At a minimum we deserve the usual 80/20 private equity allocation of profits (80 us, 20 them, no management fee).

  26. In China? From the renminbi printing machine. And over there, because of the nature of their government, they also have a rule that states that the banks, when lending to the government, do not need to have any capital requirements… ooops!

  27. “WE THE PEOPLE have saved Goldman from insolvency”

    Forget it you have just signed some IOUs. For the time being you are even getting cash for clunkers. If and when those IOUs are paid by your children and grandchildren in taxes then you would be allowed to correctly state it as “THEY the children and the grandchildren of the People”… meanwhile no one has been saved we have all just have had our sentence suspended.

  28. Per, this is nuts. China has a few trillion invested in the “safe harbour” of US treasury notes. So the US lends this at effectively 0% to Goldman Sachs which then lends it back to China at __% and GS is not required to hold a capital reserve because it is lending to a government? I must be confused. Not an economist nor a banker. Utterly out of my water here.

  29. No typpygolden. Last time I looked China was A+ and so if GS was lending to China as a sovereign it would need a capital of 1.6 percent (as it would seem A sovereign A+ is sort of a risk equivalent to a Corporate AAA)

    But since GS is not involved here with a sovereign but with a local outfit that I doubt is AAA I am quite sure that GS needs to post 8 percent equity against this. Now yes, GS will make money on it… hopefully I assume?

  30. Bravo! Mainstream media can’t possibly tell these truths.

    But to me, the burning question is in what possible way can we do anything to stop it? How will it end?

    “Organized greed beats disorganized Democracy”

    doesn’t these mean the only solution is organized Democracy? Otherwise, I can only see organized violence and chaos to prevent such abuses in the future. French Revolution comes to mind. Off with their heads.

  31. I do not know what Simon has in mind when he says that “too big to regulate” is “an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance.”

    I can’t think of a a single example, and certainly not one in at least the last 20 years.

  32. Sad but true, Per. When payment time does come — and it will — it is not going to be pretty.

  33. And who will organize the democracy? Can you think of a single person in either major party, or an independent who might form a third party who has enough public recognition and money to take this on and also has credibility to speak to these issues?

    We need a new Teddy Roosevelt. Or a new FDR. But is anybody like that anywhere in sight?

  34. Re the issue of “organized democracy” as an antidote to the corporate takeover, i.e., “organized greed” which now defines this republic, I just now came from M. Moore’s “Capitalism, A Love Story” in which he makes the same argument. I’m no big fan of Moore’s cinematic efforts but I do tend to agree with him politically and philosophically. Essentially, the point can be made that given the system as currently operating doesn’t benefit a huge majority of the populace, if only their consciousness could be raised to a level of that understanding, and they would vote their interests backing a candidate so situated, we could wrest control of our government back from the corporations. He posits democracy as the antidote to capitalism. Simplistic and pie in the sky, but at least he is helping to raise issues for many who haven’t really given it much thought. More to the point did Obama “punk” us with this “change” mantra, or is the collusion to the point where the only change you will see in this country will be in your paycheck (if you have a job) as in the chump change that will be your earnings?

  35. Well, Mr. O’Chewbacca did save the world from global fincncial meltdown.. bwahahaha! Or at least he saved Goldman, Citi and BOA. Tell me Yackiss, do you know who Chewbacca is? Do you see the resemblance?

    What I would like you to do for me, in your infinite sarcastic wisdom, is list O’Chewbacca real accomplishments in his 9 months in office, other than generally polarizing the country beyond any time since the Civil War.

    He does give great speech though.


  36. Goldman, “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

  37. My anger at this is under the topic of “democratic egalitarianism”–all those issues of economics and democratic sustainability that are worthy of our consideration as we struggle to sustain our democracy in the face of a corporatist agenda (i.e., an agenda that privatizes and deregulates; that grants control over much of what matters to us in our daily lives to multinational corporations with no loyalty to our country or our people or the public good; that makes greed good, redistribution upwards meritorious, and redistribution to care for public needs and those who need a safety net to protect them somehow morally questionable).

  38. Paul, visiting your blog I got the feeling you and I are on different sides of the political aisle. But I think we could share some cold beer and agree on many things.

    I think people can argue all day about systems and political parties. But what if society in of itself has no religion, no norms of behavior? And the rule of law is who is bigger, who can tell the better lie, who screws who first, can any society function well under ANY system or ANY political party with that mindset? Where there is no investigative reporting and we hear of scandals 5-10 years after the fact. I mean when you look at it Madoff turned himself in to save his sons. It wasn’t the New York Times that caught him. The same with the child molester in California. 2 crimes dragged out over decades where both men basically (only a slight exaggeration) walked into the police station with their hands extended for cuffs.

    Well maybe you like Milton Friedman and another likes John Maynard Keynes, but you can both agree it’s a big big shame for America. Even some thieves have codes right?? It used to be the majority of this country stood for a Judeo-Christian God. American soldiers liberated the Joos from the concentration camps in Europe. Now our country’s bank system is unreliable. Our bank system now holds out its hand for welfare checks from the U.S. government at the SAME TIME banks’ executives take billions in bonuses. Meanwhile all the news asks “What will happen to the famous Polish director??”

    All you can do is try to live your life clean, live your life smart, and work hard.

    Proverbs 1:18–19
    But they lie in wait for their own blood, They lurk secretly for their own lives. So are the ways of everyone who is greedy for gain; It takes away the life of its owners.

  39. oh stop all this complaining. its been going on since the 1930’s.

    unless prolls want to manage their own pensions and savings the cash and the power will always find it way to the pockets of the white-collar criminal classes.

    regulation is a competitive advantage not a shield for the customer. so stop hoping for some new all encompassing law that lets you sleep easy.

    now please take the position while banksters around the world enjoy themselves at your expense.

    champagne and pink slips all round

  40. Wow, to think I’ve wasted my infinite sarcastic wisdom
    on a guy who thinks “O’Chewbaca” is clever.

  41. The BHC to FHC transition was expected when GS applied for BHC status. From the Fed’s Order approving the GS BHCs:

    Goldman engages in a wide range of nonbanking activities that have been determined to be financial in nature, incidental to a financial activity, or complementary to a financial activity pursuant to section 4(k) of the BHC Act. …
    Goldman expects promptly to file an election to become a financial holding company pursuant to sections 4(k) and (l) of the BHC Act and section 225.82 of the Board’s Regulation Y. Section 4 of the BHC Act by its terms provides any company that becomes a bank holding company two years to conform its nonbanking investments and activities to the requirements of section 4 of the BHC Act, with the possibility of three one-year extensions.13 Goldman must conform to the BHC Act any impermissible nonfinancial activities it may conduct within the time requirements of the Act.

    Those GSers really know how to skeedaddle.

  42. I’m fine with whatever it takes, I just want transparency and honesty. I don’t believe in, “You can’t handle the truth.”

  43. Yackiss, that was a test of American cultural history, trying to detect if you are in fact, the Indian or UAE type zillionaire luxury brat you appear to be. Anwser discovered. Thanks.

  44. Our leaders in the whitehouse, the cabinet, the economic advisors, and congress all the have the power to change the situation if they wanted to. Obviously they all have much too gain from the current situation or else it would be otherwise.

  45. 1.6% capital ratio mean $16 million in reserve to hedge against possible default of 1,000 million dollars in AAA-rated loans.

    Is this an indication of the competency of the central bankers in Basel?

  46. Michael M Thomas: “I believe GS, a month or so ago, departed bank holding company status and became something else, a strange mutant entity neither fish nor fowl”

    They morphed into Dick Cheney?

  47. Democratic organization includes credible taxation to keep the social wheels running smoothly. So what are some of the choices: (1) Reduced taxation to stimulate the economy? Does this work? (2) Progressive taxation for social goods and solidarity?

  48. I’m sorry but “carving out a profitable niche for himself” is just a little too cynical for me. You can say he’s a hack if you want to, but Tabbi strikes me as nothing if not sincere.

    Personally his journalism doesn’t seem that bad either, though yes, I do think sometimes he let’s his baser instincts take over in his comments.

    Still, I think you can count him a power for good and sometimes saying it like it feels has a lot of value. After all, most of the liberals and the press have been cowering in corners and it’s good to see anyone trying to face it head on (like this blog as well).

  49. No tippygolden. $16 million bank equity to back up a $1000 exposure does not really imply that those in Basel taking the decisions are incompetent. In fact they might be brilliant… but not sufficiently brilliant to understand that there is a risk with brilliance, if allowed to work on its own in an enclosed environment. Intellectual incest is what most comes to my mind.

    Also these regulators assumed that the purpose of their regulations was what they thought they should regulate for. And so they set up their own mission plan and listened to no other opinion…and so s..t happens.

    But hold it there, worse than the only 1.6 percent capital requirement, is the fact that other operations required 8 percent… you see it is more the differences in capital requirements that drove the misallocation… and this is the part that those geniuses in Basel can´t understand.

    In my country there is a quite vulgar but quite precise saying that is used to explain circumstances like this…”not enough bordello”

  50. Well if it is only a case of “his basic instincts take over” I guess I would owe him an apology, though in that case I would also ask him to keep his “basic instincts” better in check. But should I give him the benefit of the doubt when he so tries to play his role as well? I have seen sincere people in both extremes… but their leaders are usually not them (but then again I am just your ordinary radical of the middle)

  51. Spoken like a true neocon, change the subject and put in a good dose of blame with it. The suject was Goldman and how they are taking advantage of there new status. There are better blogs to voice your rantings on Obama. What apply here “the more things change the more they stay the same”.

  52. …because only Americans have seen Star Wars…
    Naturally, if I am not an American my opinions don’t count.

  53. @sb: 100% of Goldman’s BONUS POOL should be allocated to the US Treasury

    Actually not 100% but US Treasury got some money. Remember Paulson was/is a large shareholder of GS.

  54. Bill Woolsey – a libertarian monetarist – argues that the repeal of Glass Steagall wasn’t the linchpin, because it did not prevent the purchase of the problem-causing securities (AAA CDOs, which had low capital requirements, high yields, and a good enough risk rating to attract/allow institutional investment) In other words, the financial innovators beat Glass Steagall (and used the ratings agencies to do it).

    Though a monetarist libertarian, Woolsey argues that the new regulation needs to GO BEYOND glass steagall 2.0, and regulate actual lines of business (again, remember Taunter’s Boring/Safe).

    It’s worth a read…


  55. “It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.” ~ Henry Ford

  56. Dollars to donuts they didn’t skeedaddle. They knew exactly what they were doing. The letter was probably postmarked two days before the public announcement. Whole thing was a contingency plan they had ready.

  57. I realize murder, or rape, or slavery, and fraud are entirely different crimes that must be remedied by entirely different judgements and punishements. But Goldman is apparently breaking the law. Are there no reprecussions for lawlessness? The problem with these kinds of policies is that it informs us meaningless plebes, that we are held to one kind of standards and laws, and PONZI scheme operators and patholigical liars at Goldman Sachs are held to entirely different, in fact captured set of standards and laws. This dynamic renders the very concepts of standards and laws as impotent and moot, and so in practical effect, – there are no laws. If you don’t have to play by the rules, – neither do we. In a world where there are no laws, – there are no laws for anyone biiiiiiaaaatches!!!

  58. Per, Basel the regulator may itself be a hostage of regulatory capture. Maybe Basel is merely greasing the wheels for its masters. There are trillions of dollars worth of AAA-rated bonds out there that are essentially “junk bonds”. They cannot be valued, have no market and may have lost 60-80% [?] of their value.

  59. There’s gold in them thar’ sacks! It looks like GS has been given free rein to pump and churn the magic money machine with impunity. I thought the near collapse of the global financial system was supposed to put the fear-of-God in our regulatory authorities–what happened? Looks like we’re back to business as usual–and so soon! Crime and Hubris triumph again ….

  60. 200,000,000+ workers finally getting pissed off enough to realize that ‘peaceful protest’ and ‘letter writing’ isn’t doing any good, and start taking up tanks…. arms.. pitchforks.. and reclaim their country!

  61. I’m not sure about this. A key theme of this blog is regulatory capture by the oligarchs. Basel is a convocation of central bankers. And we all know what company many central bankers build their careers, prior to and after, heading up a central bank. So Basel II may be a symptom and not the cause. Although, I have learned a great deal from your postings on Basel II so by all means continue.

  62. tippygolden. Below a description of the Basel Committee and which you say that according to the owners of this blog could have been captured by bank oligarchs. Indeed there was a lot of influence from the banks but if we have to think in terms of a planned job or a conspiracy, then I find the alternative of an “internal job” explanation and which I have offered in jest, to be even more plausible. http://bit.ly/gNemy

    Having followed their discussion and work for a long time, I am sincerely convinced that the Basel Committee captured itself, in the trap of incestuous thinking processes.

    “The Basel Committee was established by the central-bank Governors of the Group of Ten countries at the end of 1974. The Committee’s members come from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. Countries are represented by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank.

    The Committee does not possess any formal supranational supervisory authority, and its conclusions do not, and were never intended to, have legal force. Rather, it formulates broad supervisory standards and guidelines and recommends statements of best practice in the expectation that individual authorities will take steps to implement them through detailed arrangements – statutory or otherwise – which are best suited to their own national systems. In this way, the Committee encourages convergence towards common approaches and common standards without attempting detailed harmonization of member countries’ supervisory techniques.

    The Committee reports to the central bank Governors and Heads of Supervision of its member countries. It seeks their endorsement for its major initiatives. These decisions cover a very wide range of financial issues. One important objective of the Committee’s work has been to close gaps in international supervisory coverage in pursuit of two basic principles: that no foreign banking establishment should escape supervision; and that supervision should be adequate. To achieve this, the Committee has issued a long series of documents since 1975.

    In 1988, the Committee decided to introduce a capital measurement system commonly referred to as the Basel Capital Accord. This system provided for the implementation of a credit risk measurement framework with a minimum capital standard of 8% by end-1992. Since 1988, this framework has been progressively introduced not only in member countries but also in virtually all other countries with internationally active banks.

    In June 1999, the Committee issued a proposal for a revised Capital Adequacy Framework. The proposed capital framework consists of three pillars: minimum capital requirements, which seek to refine the standardized rules set forth in the 1988 Accord; supervisory review of an institution’s internal assessment process and capital adequacy; and effective use of disclosure to strengthen market discipline as a complement to supervisory efforts. Following extensive interaction with banks, industry groups and supervisory authorities that are not members of the Committee, the revised framework was issued on 26 June 2004. This text serves as a basis for national rule-making and for banks to complete their preparations for the new framework’s implementation.”

  63. Umm, that was Matt Taibbi’s choice of words. Scroll down for a fuller discussion.

    So far, Roger contribution has been to compare Obama to a wookie who helps save the good guys from the evil death star. Oh yes, and to assert that the Stars Wars franchise is unknown outside of the U.S. despite billions in foreign sales and the widespread availability of movie theaters and DVD players.

  64. Per, perhaps Basel II is both a product of intellectual incest among central bankers, as well as a symptom of regulatory capture by financial elites.

  65. The very high degree of leverage was a result of the regulators wanting to believe that the credit rating agencies were not to make the mistakes they did. It was so extraordinarily naïve.

  66. Unfortunately there are some who need it to be “on purpose, with malice and in order to make a couple of million dollars”. But, as I saw things unfolding before my eyes, I would swear to that it mostly resulted from a very incestuous debate among some very like-thinking regulators, who had only one thing on their mind, namely that of avoiding bank-defaults at whatever costs for the rest of the world. And these regulators, so blinded, were extremely naive, gullible or innocent, whichever you like.

    I would love to be able to support the criminal intent version, because then it would be so much easier to find the solutions. Unfortunately that is not the case which is exactly why we are not making a lot of progress within the regulatory reform process… you see they are still captured by their own paradigms.

    And by the way, if we really suspect any criminal intent action, then of course we would also have to include among the criminals those who kept silence about it all, and which of course does even include, as far as I know, one of the owners of this blog.

    But of course the above does not mean for a second there was not a lot of undue lobbying going on… why should the financial sector be the exception?

    If we are not careful in understanding what happened we will only dig us even deeper in the hole we’re in.


  67. I fully agree that regulatory capture does not have to equate to criminal intent. And I did not say there was a criminal intent, and in fact, from what I said earlier I do not believe there was one present. But regulatory capture could indeed have a criminal intent, and if that is suspected, then clearly a quite different procedure is required.

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