Is The “Volcker Rule” More Than A Marketing Slogan?

At the broadest level, Thursday’s announcement from the White House was encouraging – for the first time, the president endorsed potential new constraints on the scale and scope of our largest banks, and said he was ready for “a fight”.  After a long tough argument, Paul Volcker appeared to have finally persuaded President Obama that the unconditional bailouts of 2008-2009 planted the seeds for another major economic crisis.

But how deep does this conversion go?  On the “deep” side is the signal implicit in the fact that Volcker stood behind the president while Tim Geithner was further from the podium than any Treasury Secretary in living memory.  Where you stand at major White House announcements is never an accident.

Increasingly, however, there are very real indications that the conversion is either superficial (on the economic side of the White House) or entirely a marketing ploy (on the political side).  Here are the five top reasons to worry.

  1. Secretary Geithner’s spin on the Volcker Rule, Thursday night on the Lehrer NewsHour, is in direct contradiction to what the president said.  At first, it seemed that Geithner was just off-message.  Now it is more likely that he is (still) the message.
  2. The White House background briefing on Thursday morning gave listeners the strong impression that these new proposals would freeze the size of our largest banks “as is”.  Again, this is strongly at odds with what the president said and seemed – at the time – to indicate insufficient preparation and message drift.  But who is really drifting now, the aides or the president?
  3. At the heart of the substance of the “Volcker Rule,” if the idea is literally to freeze the banks at or close to their current size, this makes no sense at all.  Why would anyone regard twenty years of reckless expansion, a massive global crisis, and the most generous bailout in recorded history as the recipe for creating “right” sized banks?   There is absolutely no evidence, for example, that the increase in bank scale since the mid-1990s has brought anything other than huge social costs – in terms of direct financial rescues, the fiscal stimulus needed to prevent another Great Depression, and millions of lost jobs.  On reflection, perhaps the president really still doesn’t get this.
  4. Since Thursday, the White House has gone all out for the reconfirmation of Ben Bernanke, whereas gently backing away from him – or at least not being so enthusiastic – would have sent a clearer signal that the president is truly prepared to be tough on big banks and their supporters.  Unless Bernanke unexpectedly changes his stripes, his reappointment at this time gives up a major hostage to fortune – and to those Democrats and Republicans opposing serious financial reform.
  5. As the White House begins to campaign for the November midterms, how will they answer the question: What exactly did they “change” relative to what any other potential administration would have done in the face of a financial crisis?  How will they counter anyone who claims, citing Rahm Emanuel, that: “The crisis is over, and we wasted it.”  No answer is yet in sight.

The Geithner strategy of being overly nice to the mega-banks was not good economics and has proven impossible to sell politically – the popular hostility to his approach is just common sense prevailing over technical mumbo jumbo.

But selling incoherent mush with a mixed message and cross-eyed messengers could be even worse.

By Simon Johnson

101 thoughts on “Is The “Volcker Rule” More Than A Marketing Slogan?

  1. I always wonder if we’ve become so cynical nowadays because society and humans are more evil than say in FDR’s era, or because of books, public education, and the internet we’re just less naive and therefor we see the evils that have been in society all along. My father is in his eighties, born before the beginning of the depression. I imagine he would say a little of both.

    Still it’s sad either way when you can’t take a man by his word. And sadder still when more times than not it proves that you can’t.

    I remember when I was in China I thought it was SO SAD how even family members don’t trust each other over there after the cultural revolution and they would even turn over their own family members to communist officials if they went against party doctrine. That mistrust lasts even today in China 2010, and probably into the foreseeable future. Now I’m back in the good ol’ USA and wonder when will we be able to trust the members of Congress who sell out our country for their own individual benefit, even as the country slowly spins down the toilet. I imagine that will be decades IF EVER AGAIN.

    Well if you’re reading this Mr. Congressman or Mr. Senator, I hope you enjoy every single penny of graft you take to cheat American’s trust—every SINGLE penny—because you will eventually burn in Hell for it.

  2. Just as with the debates in Congress around the time that Paulson went down on his knee to Speaker Pelosi, all politicians have one eye on the polls and especially the Massachusetts result, but they can’t take their other eye away from watching the trajectory the Dow Jones Industrials.

    Trouble is the latter eye is the myopic one!

  3. How could anyone support Bernanke for FED Chairman when he doesn’t know that any and all contracts can and sometimes should be renegotiated. He claims that the 100% pay out to the holders of CDS in the AIG failure was not a matter of choice but rather a matter of contact. Through the backdoor he and Geithner funneled money to foreign banks and the likes of Goldman Sachs for the sole purpose of saving these corporations.

    None of the CDS holders would have received 100% if AIG had failed. Starting with that premise, the FED and Paulson’s treasury could have easily negotiated less than 100% pay out, by simply explaining that the taxpayer was not going to provide funding for a 100% bailout.

    The CDS’s did not include a clause that required the FED and Treasury to pay nor were they a party to the CDS. Thus, there was no legal obligation for the Treasury and the FED to pay the CDS’.

    In the real world of business, as Paulson knew all to well the contracting parties often renegotiate in order to receive some part of the “benefit of the bargain” particularly when the entire contract is in peril of default. All contracts are in peril when one party can not perform, particularly when there is no money to pay the contract.

    But Bernanke hides and claims that his hands were tied. How amazing is that? Not amazing at all when the fix is in.

    What was going on at the NY FED under Geithner, did he not understand his role as regulator? From our limited knowledge of the AIG bailout it appears as though he thought that his role was “Big Boy” facilitator. Was he merely facilitating a taxpayer bailout for the benefit of the “Big Boys” at the determent of the taxpayer? Absent full disclosure we will never know.

    Neither, Bernanke nor Geithner are competent to hold their positions. Both should be fired.

  4. On reflection, perhaps the president really still doesn’t get this.

    The President’s announcement last Thursday called for a change of Administration’s objectives of the financial reform driven by the recent crisis.
    Two points stand out:
    – The change, as articulated by the President, was very substantial and very much at odds with the previously pursued strategy.
    – The change was very sudden; there had been no indications that there were serious debates within the Administration, whose official views on the financial reform remained consistent over the past year.

    I can only think of three possible explanations to that sudden major change of course:

    1. The President had been too absorbed with the health care reform and foreign policy issues. He never really focused on the financial reform and completely delegated that task to Geithner, Summers, and Bernanke. Once Volcker got President’s ear, Obama quickly understood Volcker’s argument and got behind it.
    Such a scenario would imply that Obama did not understand the seriousness of the financial aspects of the crisis and was very detached from what was going in America’s economy.
    Obama is too smart for this scenario to be true.

    2. There were internal debates about the financial reform, but they were held behind firmly closed doors. Even if some people from outside the Administration were invited to these debates, they were under very strict instructions not to divulge even a hint of what was going on.
    In this scenario the Obama Administration is even more secretive than the Cheney Administration, which did have leaks, and is both able and willing to keep major policy debates completely closed from the public.
    Call me naive, but I want to believe this scenario is not true either.

    3. The Thursday announcement is a knee-jerk political reaction to the Massachusetts election. The President finally got proof that the policy of protecting economic interest of mega banks does not lead to improvement of the real economy and leaves the electorate deeply resentful. The President then decided to go with a message provided by Volcker, which he expected to resonate much better with the voters. That message had been ready and waiting for months, so picking it up was quick and easy.
    In this scenario, the President’s decision is purely political. It is not a result of his sudden enlightenment about the causes and lessons of the crisis. It is not that the President “finally got it” – he just sided with it because political facts on the ground changed. (And what do you do when facts change? :-) )
    Therefore, the key question is to whom the President will delegate working out operational details of his new position (it can still very well be given to Summers and Geithner).
    Furthermore, this aspect financial reform will remain political in nature. We just have to hope that polls will be showing the Volcker rule is gaining popularity in states that will matter for the November elections.

  5. The administration seems to be focusing more on how to label financial institutions (“in the spirit of Glass-Steagall”) than size and interconnectedness as such.

    And Treasury is already reportedly working on an exit strategy for Goldman:

    Making banks shed their prop trading is not going to make them small enough to fail. Giving Goldman the label of investment bank as opposed to bank holding company does not make it any less of a hazard.

    I do not think it is cynical to expect something more than a rally cry (“getting our money back” – what does he think that means?) from our leaders. Something like an actual plan to make all major financial institutions small enough to fail. But that’s not the kind of thing you can produce overnight in response to an election.

  6. Spot on.

    I believe part of the cynicism we see today in the general population is the result of the elites having their way for too long at the general populations expense.

    The devaluation of our currency continues unabated, cheered on by the same social elites who felt it an admirable goal to allow those who should not even qualify for a credit card to qualify for a home mortgage.

    As wages for those who still work stagnate and government tax revenue plummets we are treated to endless reams of literature from academia (social elites) on the need for more credit (debt and impoverishment) which is of course the PROBLEM not the solution.

    These palette cleansers are, in turn, picked up and with pinky fingers extended, tasted by the other social elites (the political class and media) and a muffled call to action is heard between bites.

    The latest, a bipartisan commission to reduce the federal budget, is but the latest tired old “tactic” of presenting the illusion of the elite politicians actually caring to do something.

    Run for your lives…hide your silverware…LOL.

    So, their admission is simply this, we, the Congress Critters YOU have elected to tax and spend cannot control ourselves…we just cannot leave any small morsel at the buffet table. YOU probably should have just elected an 18 member “bipartisan” commission to run the financial affairs of the nation.

    To which I reply…your fired…AND I want clawback from your pension and benefits for everything you have stolen from me, my children and their children.

    And this has been going on forever as Mencken observed;

    “The government I live under has been my enemy all my active life. When it has not been engaged in silencing me it has been engaged in robbing me. So far as I can recall I have never had any contact with it that was not an outrage on my dignity and an attack on my security.”
    HL Mencken

  7. Maybe it is not about financial reform at all, but just making things not be about health care reform. He needs to change the topic.

    I kind of think that if he actually had a coherent plan, he would have brought it with him to the podium. That is what a leader would have done to prevent uncertainty from riling the markets. But Obama never really escaped his campaign.

  8. Welcome to the real world Mr Johnson. Yes, Volcker was just a prop. There was never any doubt in my mind about that.

    First of all, there is no honor in Washington DC so you might just as well get that out of your mind.

    I never doubted Bernakes reconfirmation. And I never took Obama’s latest speechifying about “fighting for the little guy” and taking on the banksters as anything more than the propagandist tripe it is.

    The simple truth is Bernake and his peer group, and that would include ALL of the people who will decide whether Bernake has a job or not, but all of Bernake’s peer group made a ton of money on the way up and then they made even more money on the way down. All at the expense of the American middle class.

    This is working for them Mr Johnson. They will change NOTHING. Because this is working so very well for them.

    Privatize the Profits, Socialize the Losses.

  9. Very nicely done… The question remains: ‘How much of the toxic assets were actual real estate, and how much was just deriviative b.s.?

  10. We will never be able to prevent the government from trying to bail out Goldman or JP Morgan or even Citi.

    What we need is a law that would specify the process for how government support to financial institutions must be approved, something that cannot be solved by a dramatic posture (think of Hank Paulson falling on his knees before Nancy Pelosi) and something that will use the inescapable slowness of our legislative process.

    For example, a law could require that in order for the government to commit any money to a financial institution not taken over by a regulatory agency, the following decisions must be made:
    – First, the House Financial Services Committee has to approve such motion
    – Then the House has to vote for it
    – Then the Senate Banking Committee has to approve it
    – Then the Senate has to vote it
    All sequential steps, not simultaneous.
    Only then we won’t be held hostage by Wall Stree again.

  11. About 13 minutes ago….

    CNBC Poll: Tell Us What You Think
    Should Ben Bernanke be reappointed?

    * 21654 responses

    Yes – 53%
    No – 42%
    Not Sure – 4.5%
    Not a Scientific Survey.
    Results may not total 100% due to rounding.

  12. Exactly! It is not a question of Left versus Right, it is a question of top versus everyone else. The 1%ers are not ready to throw in the towel that easily.

  13. Ella,

    Here are a couple of other facts about CDS that will really get you steamed. First, the 100% payoff Goldman and the others received was not a return of their investment. CDS are a highly leveraged bet, so they probably paid about 2.5%-3.5% of what they were ultimately paid. They would have had massive profits even if they’d been paid 25 cents on the dollar! The 100% payout was incomprehensibly obscene. Geithner was either ignorant of how CDS work, or he’s the biggest crook to ever hold a public office.

    Geithner’s next screw-up is that he didn’t insist that AIG claim the assets that were being covered by the insurance, which they had every right to do. For example, if you were to wreck your car and it was totaled, your insurance company has the right to the car once they’ve paid you off. They can then sell it for salvage value to mitigate their loss. The same holds true with CDS. The taxpayers’ bill probably could have been cut in half, at least, if AIG had simply forced the counterparties to deliver the insured mortgage-backed securities in exchange for the payoff on the CDS. Indeed, because the counterparties never actually owned what they were insuring in the first place, they would have had to have gone into the market to buy the insured assets, and that in and of itself would have increased the value of the assets. AIG could have then sold the assets in the market and recouped a lot of the loss.

    I differ with you on where the blame for this belongs, however. The CDS debacle was Geithner’s baby.

  14. Gee, a CNBC poll saying they still want Bernanke. Shocking…(How many times did Cramer vote?)

    I’ve got your non-scientific right here: What percentage of non-CNBC viewers think Bernanke should be behind prison bars? Um, think that’s running about 90 percent.(The other 10 percent are excused due to benefiting from his policies, or dead drunk.)

  15. As Obama tries to give some direction to the junk drawer called the Democratic party he has only one effective tool to keep the lesser Dem megalomaniacs in line: his own popularity. And does he have anything other than a populist attack on the bankers in his toolbox? If he doesn’t start barnstorming with a tent meeting road show that whips the bankers mercilessly than I see little reason for hope.

  16. mr. johnson, mcmia is right. & either u know more about whats going on than us or u are part of the lie. these people operate above the rest of society & they think we are lower forms of life that are war fodder. this is not democracy.

  17. Pat,

    I think you point out the underlying problem in CDS’. It begs the question… Should anyone be allowed to insure something they do not own? This is particularly the case with a CDS when you can then short the company you have protection on, drive the company under and reap big rewards.

    I think that your point about Geithner being to blame is well taken, but I add … Does not Bernanke as Chairman approve such actions or does the NY FED act on it own? The buck stops with Bernanke.

    The recent Bankruptcy Reform Act included some goodies for derivatives holders (CDS) which give them some preferences over other creditors. These changes written by the industry need to be changed by Congress to prevent further harm.

  18. Thank you.

    In the case of AIG, I think that it was all about the CDS’. But when in comes to the banks, who knows?

  19. Bottom line appears to be that the Administration and Congress have sided with Wall Street over Main Street. While that is not unusual, what is unusual is that more and more of the people on Main Street have figured it out.

    When the median family income in around $50,000 +, and the cost of living has outstripped your ability to pay for it, you are looking for better pay and a lower cost of living. As far as you can see into the future, neither is on the horizon.

    Many on Main Street see trillions in FED support not to mention billions in Treasury support all going towards the obscene pay out of $145 Billion in bonuses. Meanwhile, Main Street knows they will be liable for the tax bill.

    Finally, some are calling for a special committee to review deficit reduction. But the committee is aimed at eliminating middle class benefits like Social Security and Medicare. Not trillions in wars and Bush tax cuts, and not trillions in Wall Street subsidies. Amazing

  20. We will know soon enough – if Obama means it, he will already have a team of advisors working out the details and meeting almost continuously with the Congressional staff of the persons in Congress most likely to be sponsors or strong backers of legislation. There will also soon be supporting statements by members of the Obama administration talking up early proposals.
    If not – pffffft.

  21. Spot on. Well said.

    To Simon’s point: Timmy! is going to do everything he can to protect the banks, as will Larry. The hope is the President’s remarks serve as some sort of palliative that will mollify public anger. That’ll be a serious mis-read.

    Paul Volcker is a giant. Sadly, he may be the exemplar of a generation that truly loved this country. The generation coming up behind him now serving our Republic is significant only for its headlong pursuit of wealth and status. The Geithner-Summers axis has neither the dedication to the United States, as the embodiment of humanity’s deepest longings, nor the sense of obligation expected of stewards sworn to uphold the Constitution. They fail on so many levels. President Obama is ill served by these people.

  22. Amen, Amen, Amen.

    The time might be coming when those of us who truly love our country have to go get it back.

  23. Adding a bit to Pat Fleck’s comments. Gregory Zuckerman’s book , The Greatest Trade Ever , presents a lot of evidence that some banks created and sold very poor CDO’s in order to sell insurance on the CDO’s to John Paulson and others. Zuckerman accuses Deutsche Bank, in particular, of this practice and DB certainly was hit hard with losses. That would have been double up of losses. Write off the CDO and pay out the insurance. DB started to layoff the insurance though according to Zuckerman. Had the ” re-insurer’s” failed DB would still owe the settlement. They were that convinced that their models foreclosed risk until late in the game.

    The other argument is that this was done to boost current earnings and thus back up bonus payouts. The assumptiom most of the time by people doing long term irrational things for short term rationality is that they will have cashed out and be gone by the time the boomerang returns. Others simply believed that they had created riskless products. The greatest skill in a grift is knowing the blow off.
    What would you do in the mindset of a big bank that had the foresight to buy this insurance other than fight to be paid off? If I had not been paid off, given that I would have had huge profits from retention of the deposits, I would have gone for involuntary petitions in bankruptcy of AIG and screamed the fact that I had all the required petitioners to do so. First , of course, I would have made sure I had incontestable right and title to the deposits and that the deposit squeeze could choke no more money out of AIG. That is what the people owed CDS protection did in real world terms anyway. The FED academics caved before more drastic measures were required. Greatest poker play ever.

    Being really one sided about it all, playing up to Paulson’s ideology about Lehman would have been an excellent way to force payouts on AIG. A very workable strategy if all you care about is collecting your receivable. That was the legal duty of people like Blankfein. Academics seem very easy to lean on.

  24. Third that. Great comment.

    It is truly shocking to me Obama buys the “sell” of Timmy-the-tax-cheat and Bernanke – or – alternatively, Obama is consciously complicit in the banksters’ scam.

  25. ” I hope you enjoy every single penny of graft you take to cheat American’s trust—every SINGLE penny—because you will eventually burn in Hell for it.”

    Do you have any proof that there’s a ‘hell”, or any kind of an afterlife in which people are punished or rewarded for anything?

    This is an earthly problem, not ammenable to supernaturalism, stemming from what it costs to run political campaigns and the fine art of legalized payoffs to politicans.

    Look on the bright side of it. Historians have long pondered the hows and whys for the fall of the [western] Roman Empire.
    Now we’re getting real life insights into how it played out.

  26. As I speculated earlier, it is all ’empty’. I do not believe this Admin will bring any serious changes. Axelrod is ‘fooling’ Americans when he wants to give the ‘spin’ that Washington DC loves ‘canning of officials’. That is not the case, it is holding people ‘accountable’ and Obama Admin is refusing that.

    Rumsfled’s resignation was talked for years in Washington DC and Democrats also demanded that. Bush continued with him for years even after knowing that it was political liability. Looking back, Washington DC was not wrong, Bush should have fired him long back.

    Point is – Obama Admin is wrong supporting folks like Bernanke, Geithner and Summers. Until they come clean on this, nothing is going to happen. Everything is all ‘show’ only.

    When Simon says ‘Unless Bernanke unexpectedly changes his stripes…’; one should read what James Fallows says about Chief Justice John Roberts:

    “The head of the nation’s judicial branch was purposefully deceptive during his “umpire” testimony. Or he had no idea what his words meant. Or he has had a complete change of philosophy and temperament while in his mid-50s. Those are the logical possibilities. None of them is too encouraging about the basic soundness of our governing institutions.”

    This is what is likely to happen with Bernanke. He is already fighting Ron Paul Fed Audit. So when time comes, these guys will be not allow any meaningful financial reforms.

    In short – Obama is incapable of rooting out ‘corruption’ of American System. Question is will Tea Party folks join Netroots/Left to oppose Bernanke. For example, John McCain is ambivalent about Bernanke.

  27. I think this is likely just a populist kabuki thing in reaction to the Mass. results and polling.

    If that’s true, the real question that should be examined, instead of wasting energy on carping about things, is this:

    Is there some actual, tangible, realistic political / economic reality that is apparent to Obama and his people, that is detering them from real banking reform?

    Could there actually be something out there that they realize that most of us don’t? Do the banks and the other looters *actually* have power enough to blast the Dem party out of the water if their survival is threatened?

    If there is, what would that be, what would it look like, how would it be played out?

    We’re all assuming mundane reasons for inaction, but is it possible there’s an understandable tangible reason for inaction and kabuki politics?

  28. The problem has ALWAYS been Party A is voted out and Party B takes their place…rinse repeat ad nauseum.

    There’s not a dimes worth of difference between most of them…some inside try…but are either blocked or absorbed…they (A or B) have never shown any inclination toward fiscal restraint long term probably because of the escalation of promises required to get elected…which will all be broken at some point anyways due to our inability to live within our means…whether it’s Pills for Seniors or Shovel Ready Government Debt Bombs no one seems to see the folly of it.

    At times one feels like Diogenes.

    Regards and stay thirsty my friend…LOL,

  29. I think Obama reflects the internal Democratic Party coalition on banking: liberal talk, conservative action. I have no idea what he will do when conservative action fails for a second time, but so far this is only liberal talk.

  30. 1Kings: “…. Um, think that’s running about 90 percent.”

    Another poll showed 52% not knowing who that Times man of the year was. If it really would be running at 90% the reform process would already be underway.

    Look, some 5000 protesters at the annual bankers meeting in Chicago, a few busloads along the Mcmansions of the bonus banksters, hardly count.

    The fin. crisis story is really too complicated for most people to study and follow. What we need is a presidents with a good narrative who can eloquently discuss a difficult topic. Luckily, we elected such a person (remember that speech about complicated race relations? It’s being used a.o. in Japan for students to learn English). ….. (silence)…….What is going on?…..I do not hear this ‘tragically charismatic’ former presidential candidate speak eloquently about the crisis, its root causes and the transformative changes necessary.

  31. Obviously “My hands were tied. I need to uphold the contracts in full.” from the government is BS. If the government truly believed such principles, the unionized auto works would receive 100% of their contracted pensions after the auto industry bailout.

  32. RA, We already know the rationale: If we aren’t nice to bankers, the banks will stop lending, and that will collapse our economy, making us all poor. Ergo, we must allow Lloyd Blankfein and Jamie Dimon earn as much as they want for themselves and their friends, distasteful as that is, because by doing that we are helping ourselves.

    In reality:

    1. We are spending a big chunk of our GDP on FIRE (maybe 8%), which is devoted to efficiently allocating the approximately 15% of our GDP devoted to investment. This is clearly horribly inefficient, and FIRE needs to shrink quite significantly.

    2. Leaders in FIRE and politics have joined into s single community that takes care of each other. It’s not just check-book corruption, it’s a revolving door and cultural ties.

    3. Large numbers of our voting population gained significant wealth through an unsustainable inflation of asset prices well in excess of GDP growth over the last quarter century or more. This group includes the now politically dominant baby boomers, and they are accustomed to using the political process to accommodate their goals.

  33. kabuki — right. and behind the show, a reassuring wink to the bankers. that’s how i see it. as for causing some stock market dips, those guys can make money from that too, and some poor fools who take the show seriously will lose on the rebound.

  34. John Paulson understands that the world financial system will not withstand the end of big bank holding company shares and especially debt.

    Here is what Gregory Zuckerman writes on the penultimate page of his book ” The Greatest Trade Ever”.

    By early 2009. ” Paulson ordered his traders to begin purchasing the debt of troubled companies,securities backed by home and commercial mortgages, shares of banks and other investments…. It was a slow accumulation and well below the radar screen, but by August he owned a huge cache of anbout $ 20 billion of these investments.”

    Paulson understands if he is killed everyone is killed. I wonder what the face value of all the debt he bought is. Might it be $80 billion? What is the cash flow if he simply runs the debt out to maturity and drops seized collateral in special entities to generate rents for the most part?
    He could be looking at better than $ 4 billion in run off cash flow every year. All told more than that with collateral proceeds. Oh to see his books.

    The point is that the big banks no matter what is done to them still must survive or else. Obama knows this as well as any person understanding basic facxts of life. What you do has consequences. What you inherit has consequences. Gnashing of the teeth by seekers of their brand of personal good must live within those parameters. This is a fact Americans do not seem to understand very well.

  35. Perhaps to reform its healthcare system America must first redefine its relationship with the oligarchs in the financial system. The pushback is coming from political activism and freedom of expression in the blogosphere.

  36. these many responses to an ordinary mail… human mind is strange… strangely strange. or this is the only site u people visit… i find a lot better articles all around…

    so the point is … that in the end it doesn’t even matter… or does it? i don’t know!!!

  37. Indubitably.

    In spite of everything else, it seems like after Mass. the voters are still in control of who calls the shots. The question is who controls the voters? Especially after decision by pro-fat-cat corporate members of the SC. Can voters in effect override that decision? Does it all boil down to who controls TV? How can TV be controlled without fat cat corporate money?

    Thinking out loud.

  38. Any anti banking/finance moves are political home runs. At least until the probable downside hits. To think the administration could have castrated GOP populism over the last year and is going to embrace it now is to suppose they are fools. Yes politics can turn quickly but to give up so much ground is sort of nuts.

    One has to assume they did it because they believe the reestablishment of the banking and financial sectors is the best and perhaps only way to avoid disaster.

    Who among us doesn’t foresee disaster if the financial markets collapse again. They do and we do. We perhaps have faith that the nation will be far better off if there is a sense of fairness and justice and shared pain and sacrifice as we change course. Still it is in the back of my mind and in many minds is the threat that in worse times authoritarians may acend. I am sure such is in the back of some minds in the West Wing. Another reason to keep up with extend and pretend.

  39. Careful with the Kool-Aid.
    The House has been working away at a financial reform bill for months, as has the Senate. Both chambers are close to completing their task. Then all of a sudden a brand new proposal leaps out of the Executive Branch. Where has Obama been for the last several months? Why didn’t he make some substantive contribution to the process during the discussions in the respective Committees? One answer — Senator-elect Brown. Obama really should try to control this urge to shoot from the hip. His aim is way off and he merely muddles the process and destabilizes the market

  40. This notion that keeping the stock market high is necessary for the health of the economy is unfounded. We are probably at least 30% over-banked, and removing the 30% of the banking system with the worst moral hazard would be very beneficial for us in the long run.

  41. What do Obama, Geithner, Bernanke & Summers all have in common?

    They’re all sophist. The question is what are the long term consequences? More Massachusetts?

  42. A year ago, the Treasury could have become dominant shareholder in the problem banks, and could have directed bank reform from the inside and outside, and could have been in control (temporarily) of banking activities.

    That would have eliminated the fear of the banks not lending, which they haven’t been doing much of, anyway.

    Obama shied away from that. Timidity and the routine explanantions may well be what’s at work.
    My question is, could there be something else less obvious.

  43. Lambert: “… Kleptocracy is quite a simple concept to understand.”

    Why do most people not know who Time’s man of the year Bernanke is? Why do most people not know about the powers of the FED? Why do most people not realize that the *investment* space for their long term pension funds has been taken over by microsecond computer traders and gamblers and speculators and ‘innovative’ products? Why do so many people still their savings at the big bonus banksters? Why were there only 5000 people protesting in Chicago? And on and on?

    Lambert: “What we need are elected officials who aren’t owned by the kleptocrats, as both legacy parties are,..”

    Do you see that happen in the near future? And now last week’s supreme court ruling (unlimited campaign funding from corporations as ‘free speech’).
    Another 3rd party run?
    Why wait for honest elected officials? (sorry for the many questions)

  44. Ted, well said. Trust is 100% absent in politics and commerce…Congress, courts are bought and sold by the corporate interests and their lobbyists. As we say in Canada, the Bay Street interests (our Wall Street) have no allegiance to any country but their own.

  45. Come on, this is based on people responding. There is nothing scientific about this. All it (usually) takes is PR agencies for the financial sector organizing a little call-in. This could mean that banks are getting nervous about B’s confirmation.

  46. Ella,

    Actually, Bernanke has been acting on his own with respect to the easy availability of funds from the Fed window, which has resulted in a windfall arbitrage opportunity for the banks, but the payoff of the CDS out of TARP was Geithner all the way.

    Re your other comment about buying CDS without having an insurable interest — what would be called having a naked position — I believe someone should be able to do that, BUT, as you must do when shorting a stock, they should also have to borrow the shorted security so it can be ultimately be delivered. This ensures that you can never have a larger short position out there than the total amount of the shorted security. This is where things really went off the rails with CDS. There was vastly more insurance (CDS) sold on the underlying securities than the securities themselves, which created an enormous liability for the CDS sellers, like AIG. This was obviously a recipe for disaster.

  47. DNK,

    I posted this on my blog back in March. What a tragedy that we still have to be talking about all of this 10 months later!

    Riddle me this: why is it that for years and years businesspeople used to say that “contracts were made to be broken,” but as soon as the government steps in to financially back a company, they’re all of a sudden saying that we have to “protect the sanctity of contracts?” I guess we can all afford to take the high road when we don’t have to pay the bill.

    When companies don’t have unlimited funds at their disposal, it’s amazing how creative and cooperative they can be with each other in renegotiating their obligations. If AIG had told its counterparties that they could either have their insurance premiums back or get nothing in a bankruptcy, wouldn’t those counterparties have been willing to work something out? Instead, the government raced in with billions of dollars and made good on 40-to-one bets. Goodbye $170 billion of taxpayer money. How smart was that?

    Businesses restructure deals and renegotiate contracts with employees, vendors, customers, and business partners all the time. The likes of Goldman Sachs are probably laughing their asses off at how naïve the government was for making good on their bets. If the government can’t learn how to do business the way businesses do, then maybe it shouldn’t be rushing into the corporate sector with billions of dollars in taxpayer money.

  48. Perhaps the White House realizes that freezing is about all they can do, absent new legislation that is not terribly likely.

  49. Your article and the related comments by readers proves once again why this is the best blog on economic issues, period.

  50. Karl Denninger over at has 3 excellent posts today – I suggest you take a look.

    Weekend Roundup 1/23
    A Message To Our Senate: Defeat Bernanke
    Financial Terrorism? You Decide

    From my perspective the Geithner-Bernanke gang and their deputies are engaged in financial terrorism. “Do what we say or we will crash the markets” – which Bernanke can certainly do. These two should be put in prison as traitors.

  51. More thinking –

    Where were the majority of voters in Mass. getting their information? Were they watching the MSM?

    I don’t think so. I think the majority were reading the blogs.

    On the Question of who controls the voters, or more correctly where do voters get their information, sounds like the blogs are winning. Could this mean the greedy fat cats are going to try and shut down the blogs? I’d keep my eyes open to this possibility.

  52. “Could this mean the greedy fat cats are going to try and shut down the blogs? I’d keep my eyes open to this possibility.”

    Clearly this calls for an Internet Czar…oh yeah it’s already under discussion…never mind ;-)

  53. I was seriously browsing through The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance by Ron Chernow and could not believe how much it repeats the scenario of today. The beauty of Chernow’s work is that it has no axe to grind since it was completed in 1990. It can’t be accused of slanting any position to favor some political or economic bias 20 years later. The same predisposition and the same arrogance plays out decade after decade as the next generation fails to see the confidence game being orchestrated.

    It occurs to me that concentrating on banking and financial institutions of sanctioned priviledge, we miss the entire showboat of what is being financed. Davidoff has come out with a compelling revies of Private Equity and the big “Deal” involving both Governmment and Finance in during the past 35 or so years. With all the blocked up focus upon the size and shape of the banksters, how is it that we never look critically at the foundation of the Hustler economy itself? Private Equity has had a great deal to do with the financials and the aggressive LBOs have scavenged the economy hand in hand with the derivative temples of worship and unaccountable excess. It seems we are locked in a political penny archade on a merry go round with the monkey and a ring when we should be explaining to the public what they should be yelling at Obama to do. Or maybe we will all just sit tight and let it all play out…AGAIN like the Morgan Dynasty.

  54. Hear hear. I’d rather see men take action than hope takes action. Acts of man are far more palpable and targeted than acts of invisible friends.

  55. Words mean nothing. Actions and deeds define the mettle of an individual, a leadership, and a nation. If Obama is serious then sometime soon, some committee or commission will dig into the sewage and toxic waste that is the entire derivatives market.

    Either we abide and honor our own laws, and codes, and that thing we call the Constitution, or we don’t. Produce origination papers on the bundled bundles of subprime mortgages, determine who actually owns what, and account for those assets accordingly. When that process is undertaken – the entire house of cards the that is the derivative, innovated products markets collapses, exposed as very complex PONZI SCHEMES!!! The captured government provides extraordinary largess, and turns a blind eye to wanton abuses and catastrophic failure.

    Sadly – Amerika has shapeshifted into a kleptocracy, and a select few predatorclass oligarchs and olympians own and control 60% of the wealth and resources and all of the government. The people have no voice, and absolutely zero representation. The predatorclass and predatorclass oligarchs own and control the government. They do not care about us. Call Wall Streets bluff. Raise it. Don’t imagine you can brute the fiction that this “den of vipers and thieves” is somehow or in someway exceptional or brilliant. I beg to differ, – and don’t tell me there are not better more hardworking, diligent, honest, and brilliant candidates capable of managing smaller, tightly regulated, much more restricted financial institutions. Crimes were and are being committed; – fraud, taxevasion, insidertrading, predatory or discriminatory lending, PONZI SCHEMES, and worse…

    Finance is critical and necessary. Noone argues that. But a crime is a crime, and either we live in a nation of laws, and crimes are prosecuted, – or we don’t. If we don’t then in practical application – the are no laws, and in a nation where there are no laws, – there are no laws for anyone predatorclass biiaaatches!!

  56. Whenever the Wonk-in-Charge, Geithner, speaks to anyone about anything, my eyes glaze over. First, I think that he either doesn’t get, or, more likely, doesn’t agree with (or like) Volcker. Volker is antithetical to his and Bernanke’s (and, needless to say, Summers’) views on appropriate economic curative measures. One gets the serious feeling that once again, the President is acting politically to try to earn points with the populace completely and unequivocally disenchanted with big finance, but, as is his habit on all matters of actual policy, he is turning matters of financial reform to Congress and his own economic team, and seems to be unable to be direct and certain in his public statements or the potential guidance they might provide. The upcoming speech Wednesday evening should be interesting, because we know that he must address these matters. If his rhetoric on Wednesday is all political polemic, we can almost be guaranteed that he is once again wont to steer a clear course and provide the necessary leadership to do what must be done. The fact of his endorsement of Bernanke really is scary, since it would virtually guarantee a continuation of the negative reform momentum on Capitol Hill, and mean that essentially nothing will be done, but only talked about in order to improve the President’s polling numbers presently in the toilet.

    I am highly skeptical that he will go anywhere near the toughness necessary to drive reform where it must go.

  57. Oops, one last thing I forgot to mention. On This Week, I believe that it was Matthew Dowd (Republican hard liner) who cited the stock market drop at the end of last week as being indicative of the danger of the President’s plan to tame big finance. He thought that the message was clear, tha such moves would chill the markets and halt recovery. Needless to say, there is no recovery, the markets as of now are very highly manipulated, and the drop strongly indicates that the President’s proposals are spon on. That’s the message. They’ll have to find something else to manipulate, but then with the SCOTUS decision last week, that should be easier than ever. I am certain that lobbyists are preparing their threats as I write. Either you go along with the finance industry (oligarchs), or we will kill your upcoming campaign.

  58. The solution proposed by MrM and others would be a disaster- For example, a law could require that in order for the government to commit any money to a financial institution not taken over by a regulatory agency, the following decisions must be made:
    – First, the House Financial Services Committee has to approve such motion
    – Then the House has to vote for it
    – Then the Senate Banking Committee has to approve it
    – Then the Senate has to vote it
    All sequential steps, not simultaneous.
    Only then we won’t be held hostage by Wall Stree again.

    Markets unwind with ferocious rapidity and as seen with great detsructive power. This is akin to wataching a burning house and then consulting the entire neighbourhood what their recollection was, who was in the area etc. rather than putting it out.
    Ironically I suspect if Hank Paulson had managed to get the TARP through speedily and cricially extract a major quid pro quo from the banks much of the subsequent damage could have been mitigated. Instead Congressional hearings stalled the proces in full view of the markets. OK you could have closed them but no one did.It has taken a major shot across the bows from Volcker to bring off the blinkers and self-delusion that passes for policy. The Europeans incidenatlly will continue to make an elaborate meal of regulation at the G20. Leadership was urgently required- provided by the astute Dr.Volcker and now needs acute and determined follow up, not self serving brick-bats from the banks and toadying financial press ( with a few notable exceptions)

  59. “Paul Volcker appeared to have finally persuaded President Obama that the unconditional bailouts of 2008-2009 planted the seeds for another major economic crisis.”
    So all want “conditional bail-out” instead?
    Has anyone considered that NO BAIL-OUTS would have worked miracles AND AUTOMATICALLY reduced those banks to exactly the “right size”??? And all for free!

  60. Carol,
    The tea-baggers, the liberals, the ‘independents’, traditional conservatives, my mom, your dad, the neighbor down the street,know utter corruption when they see it. They can give us the ‘we know better than you smile,’the politician finger point’, the ‘searching for the best lie pose'(Timmy and Bernanke), etc. but all of us know it’s B.S.

    Obama has proven his empty suit’ness. If he would have let Volcker make the speech, maybe he could convince me.

  61. “Produce origination papers on the bundled bundles of subprime mortgages, determine who actually owns what, and account for those assets accordingly.”

    Exactly. Commodity futures serve a purpose, but financial derivitves? We know what “purpose” they’ve served.
    Producing proof of ownership of the underlying mortgage has been used in some court cases and shows what a sham this whole thing is. Tie these looting scumbags in knots and let decent people keep their houses.

  62. Every decision made by every politician is purely political. Having someone do the right thing, even for the wrong reasons, is better that what we’ve been getting for the last year, so I’ll take it.

  63. The Tischman/ Blackrock abandonment of Stuytown on the Lower East Side today illustrates interconnectedness that might only be cured by time and would not be particularly helped by breaking up the bank holding companies.

    Tishman and Blackrock put up $250 million out of equity financing of various stripes totaling $1.9 bn
    The rest of the purchase price of $5.4 bn was one way or another securitized and sold all over the world with apparently Fannie and Freddie being the big holders.

    Problems like Stuytown will become more urgent in 2010 than breaking up TBTF’s.

    Tishman/ Blackrock handed off their holding , undoubtedly nonrecourse and held by a tightly worked special entity .

    This one will be Fannie and Freddie’ job. They will need to force the creditors into a viable venture. In short, all the creditors will now own Stuytown as an equity interest. It will take a forced hand as in the GM reorganization.

    Events move on in a credit collapse and do not wait on endless discussions about solutions.

    Wachovia took the first mortgage interest for $3 bn and securitized it. So this problem is off their balance sheet and I would hope non recourse too. That would probably be double non recourse. Equity interest nonrecourse at Stuytown and nonrecourse to Wachovia NA.

    This deal might well be the poster child to illustrate the insanity of securitization and the pyramiding of debt layers.

    In the meantime, Stuytown must operate seamlessly for the 25,000 people that live there.

  64. I think it indicates an undisciplined White House and that the message was relatively hasty and that not all the cabinet is on board. And since details where not articulated, which is the modus operandi of this administration, some (Treasury) will fill the void.

    Notwithstanding: “Given that the tax credit appears to account for a good deal of the improvement in the housing market,” Paul Dales, domestic economist for Capital Economics Ltd., wrote in a research note, “we’re becoming increasingly concerned that the housing recovery will falter once it is removed.”

    From reading here, I thought the tax credit was ineffective for stabilizing the housing market?

  65. Pat,

    The counterparties DID deliver the underlying cdos in exchange for cancelling the CDS.

    The 100c meme is confusing on that point.

    For example SOC gen owned CDOS insured by CDS from AIG.
    As the CDOS lost value the CDS went in the money and AIG needed to post collateral.
    In a perfect world SOC Gen was flat.

    If the Fed paid 100c on the AIG CDS, SOC gen would be ahead of the game, since Soc Gen would have been gifted the CDOs had they recived 100c on the CDS.

    The objective of the plan , I think, was to keep SOC Gen flat. To accomplish this SOC Gen sold the CDOs to Maiden Lane at market in exchange for terminating the CDS and keeping the collateral posted to date.

    The result is that technically SOc gen posted a loss on the CDO and recognised on gain on the now terminated CDS. Net result to SOc Gen=0.

    The loss on the AIG CDS remains at AIG.
    Maiden Lane assumes the risk on the CDOS it purchased at market on settlement date.

    Was this the right thing to do? I haven’t decided yet, but I think the details of the transaction are widely misunderstood and no one at Treas/Fed or AIG has made any effort to clarify and rebut the 100c charge.

    Since the losses on the CDS are booked at AIG and since AIG is effectively owned by the govt, it seems that the govt has absorbed the losses on the CDS. This is the consensus view.

    In the event the govt loses on the ultimate disposition of AIG, then the govt will have de facto paid off the CDS counterparties.

    Until then, the way the transaction was structured , AIG has technically absorbed the losses. In the event AIG is sold with no loss the govt, then AIG shareholders paid for the CDS losses.

  66. When your president’s a deserter you dress him up in a flight suit. When your president’s a corporate puppet you pose him with Paul Volcker.

  67. Why all the accolades for Volcker? He engineered the 1971 dollar devaluation while Treasury Undersecretary. Is Obama reaching the point that finally requires further devaluation? Is there any other choice?

  68. Volcker also began the “save the financial system” paradigm for socializing corporate gambling losses with bailouts of big S&Ls in the 80’s. Greenspan and Bernanke learned everything they know about bailouts at the Master’s knee.

  69. Ella brings up a point that I’ve been wondering about.

    If I insure my car and then purposefully wreck it I don’t get my insurance money. If I burn my insured house down I don’t get bonuses, I get jail time.

    How is it legit to drive a company under that you have a CDS for?

  70. true enough about the Roman Empire.

    While I completely agree that this is strictly a human problem, I would rather see people invoking eternal burning than provoking stake burning.

  71. I need a life, judging by the volume of links i’m posting today…

  72. For over a century, the USA have lived on the rest of the world , spent the money they did not have, used credit, borrowing the other’s money that they could not pay back , wasted money and the world’s minerals on useless gadgets . Meanwhile, the inhabitants of the emerging countries were starving, worked like slaves for a few cents and were deprived of their mineral resources .

    History wants things to be balanced in the long run : established empires train armies to murder abroad all the foreign peoples whose mineral resources they coveit . But empires always collapse when they get too big and new empires, their former slaves, grow and replace them and collapse too when they get too big in their turn.
    China used to be an empire a few millenaries ago , then China collapsed . So did the Roman empire and nowadays it is the turn of the American empire to collapse while China is emerging again to be the new empire for a few decades or centuries before collapsing again . It is a cycle .

  73. All these attempts such as “Volcker’s rules” are like redecorating the concert hall in the Titanic . The USA -Titanic is sinking . Like the governing crew of too big a boat, the last three or four American presidents were too self-confident and did not move until it was too late . It is too late .

    For the USA and all the western “developed ” countries, the best things our governments should do for us are to organize collective swimming lessons and teach us how to survive in caverns .
    It is the ordinary historical cycle for empires

  74. Yep. I like your broad perspective, Canto.

    Add to the historical cycle a new element: our developing global consciousness, with posters of Planet Earth on our walls, and internet communion, and environmental awareness. When we see a peasant family attacked by a killer drone, viscerally we identify with those people on the ground. It is a biological issue and runs deeper than any political alignment. How will this change the shape of things?

  75. These guys just used the banks and AIG as conduits to funnel public money to themselves and their cronys.

  76. “Where has Obama been for the last several months? ”

    Acting the part of “president”, his dream role.

  77. Do you have any proof that there’s a ‘hell”, or any kind of an afterlife in which people are punished or rewarded for anything?

    RA, what proof would you personally require?

  78. Should anyone be allowed to insure something they do not own?

    Ella, I may be well out of date, but I thought an ‘insurable interest’ was an essential component of an insurance contract? This because it is your possible loss of your asset that is being insured? Otherwise you are insuring someone else’s insurable interest? You may be able to set me straight?

  79. I don’t have any hard evidence of heaven or hell, this is a matter of faith.

    At the same time, we can find many instructive examples to show that if there is anything like “karma,” it sure doesn’t play out in this lifetime.

  80. Larry Summers spoke about the topic on Charlie Rose from Davos, Friday 1/29 (re-air on Bloomberg TV, Monday 8pm/10pm).

    Here are some of Charlie’s questions to Summers (starting at 10:18 on the webcast video):
    – All the talk is about the Volcker Rule. Is the president, is Larry Summers, is Tim Geithner, is Paul Volcker on the same page? And what is that page? Help us understand exactly what to expect.
    – And where is Too Big To Fail?
    – Why did it take this administration so long to come to the point of agreeing with Paul Volcker?
    – Are you satisfied with what the banking industry has done in Washington with respect to financial reform? Or are they spending a lot of money lobbying that puts financial reform in jeopardy?
    – You have said, “We were there for the banks. They need to be there for us and for the country.” What did you mean? What do they need to do?
    – There is also the administration’s decision, that the president has talked about, to try to get some of the TARP money back. How much do you think you can get back?
    – Are we likely to see in the public discourse and the politics of 2010, with midterm elections, a kind of populist attack against Wall Street and financial institutions?
    – What is the biggest misperception about the president and his attitude about the economy and the way it works?
    – Tell us how you think this new global order is shaping up, especially since emerging countries are leading the recovery.

Comments are closed.