Posts tagged Dodd-Frank
Banks’ Lobbyists “Help” in Drafting Financial Bills
Who writes the laws? The lobbyists.This isn’t completely true, but it is true to a very large extent as this article explains.
The thicker the law, the more opaque the legislation, the more opportunities there are to make money. There’s a reason Obamacare is a stack of papers taller than a man, same for Dodd-Frank. Both laws deal with impossibly complex areas of the economy best left to market mechanisms. To a very large extent the problems which both Obamacare and Dodd-Frank seek to address, access to healthcare and a corrupt banking system respectively, are problems created by prior government involvement in the marketplace.
But Americans always seem to forget this. Sadly a significant portion of the population continues to have a near religious faith that someday the virtuous will finally take the reins of power and government will finally work for the people darn it!
This is a fairy tail.
Despite what we have been taught all our lives about the power of government to do good, and it does on occasion do some good, for the most part government makes things better for the rich and connected and marginalizes the average person. Sure government will throw some bones to folks just to keep them in their place, but for the vast majority of Americans government is not their buddy. It may be necessary, but it is not a benevolent force (unless one has membership in the club.)
Marx was wrong. FDR was wrong. Nixon was wrong. Obama is wrong. Thomas Jefferson was right. The government which governs best, governs least.
How about instead of creating a law (Dodd-Frank) which is sold to the American public as a regulatory scheme to deal with “too big to fail” but which actually institutionalizes TBTF and now provides a huge taxpayer subsidy to the big banks, we just let the market sort it out. How about we let the big banks go bankrupt?
But who would pay all the bank lobbyists who write all the bank “legislation” then?
(From The New York Times)
“The bill restores the public subsidy to exotic Wall Street activities,” said Marcus Stanley, the policy director of Americans for Financial Reform, a nonprofit group.
But most of the Democrats on the committee, along with 31 Republicans, came to the industry’s defense, including the seven freshmen Democrats — most of whom have started to receive donations this year from political action committees of Goldman Sachs, Wells Fargo and other financial institutions, records show.
Six days after the vote, several freshmen Democrats were in New York to meet with bank executives, a tour organized by Representative Joe Crowley, who helps lead the House Democrats’ fund-raising committee. The trip was planned before the votes, and was not a fund-raiser, but it gave the lawmakers a chance to meet with Wall Street’s elite.
In addition to a tour of Goldman’s Lower Manhattan headquarters, and a meeting with Lloyd C. Blankfein, the bank’s chief executive, the lawmakers went to JPMorgan’s Park Avenue office. There, they chatted with Jamie Dimon, the bank’s chief, about Dodd-Frank and immigration reform.
Bloomberg has reported that the US Consumer Financial Protection Bureau is considering taking a role in managing the $19.4 Trillion in American’s retirement US Consumer Financial Protection Bureau. Yes, you read that correctly, the government agency created in 2010 as part of Dodd-Frank is weighing ‘helping’ Americans manage their retirement funds…naturally by protecting them with the safety and security of Treasury bonds.
As we have been warning readers for nearly 2 years here at SD, the coming risk of confiscation is not in your gold and silver investments (the American public has nothing to confiscate), but in your pension, 401k, and IRA retirement funds through forced allocations of US Treasury paper.
Those who are unwilling to take the tax hit and get out of Dodge in time will likely soon find themselves directly funding the US ponzi scheme through their retirement funds.
Breakingviews: Gupta fear factor?
June 18 – Jeffrey Goldfarb and Reynolds Holding discuss whether the guilty verdicts against former McKinsey boss and Goldman director Rajat Gupta will deter other would-be insider traders.
By Steve Forbes, Forbes Staff
Arse Backwards: The Federal Reserve’s Approach to the Housing Market
This article originally appeared in the Mar. 26, 2012 issue of Forbes magazine.
In reaffirming its near 0% interest rate policy for another three years the Federal Reserve averred that this was necessary to revive the housing market, which, in turn, was necessary for the economy to revive. House building and the buying and selling of existing homes are meaningful parts of the economy. More important, from the Fed’s perspective a house is the biggest asset for millions of people; therefore, higher values mean owners will be more likely to spend.
This reasoning is arse backwards.
A strong economy—and minimal government interference—would rapidly revive the housing market. People who want to buy houses, which includes most of us, buy them when we can afford to do so. Only during the Fed-created bubble were millions of people with insufficient incomes purchasing homes with mortgages that were far beyond their capacity to service.
Let’s hammer this point home: Government and Federal Reserve “stimulus” for housing won’t put our economy on a vigorous and sustainable growth trajectory. Other things—sound money, low tax rates, less spending, repealing ObamaCare and Dodd-Frank—will.
The Fed’s reverse reasoning is not the first instance of this confusion of cause and effect. The first big occurrence came in the autumn of 1929, when the stock market crashed as the trade-destroying Smoot-Hawley Tariff began making its way through the congressional legislative mill. President Herbert Hoover thought that by propping up wages the U.S. could avoid an economic contraction. He called major business leaders to the White House and got these moguls to agree to keep wages at current levels and not engage in layoffs. Like Bernanke with housing, Hoover didn’t grasp the fact that wage levels reflect market conditions. Keeping them artificially high doesn’t create prosperity. Astonishingly, these CEOs kept their word. Nevertheless, the economy went into a tailspin. Only in 1931, with a river of red ink staring them in the face, did these executives abandon their promise.
Have You Heard About The 16 Trillion Dollar Bailout The Federal Reserve Handed To The Too Big To Fail Banks?
What you are about to read should absolutely astound you. During the last financial crisis, the Federal Reserve secretly conducted the biggest bailout in the history of the world, and the Fed fought in court for several years to keep it a secret. Do you remember the TARP bailout? The American people were absolutely outraged that the federal government spent 700 billion dollars bailing out the “too big to fail” banks. Well, that bailout was pocket change compared to what the Federal Reserve did. As you will see documented below, the Federal Reserve actually handed more than 16 trillion dollars in nearly interest-free money to the “too big to fail” banks between 2007 and 2010. So have you heard about this on the nightly news? Probably not. Lately Bloomberg has been reporting on some of this, but even they are not giving people the whole picture. The American people need to be told about this 16 trillion dollar bailout, because it is a perfect example of why the Federal Reserve needs to be shut down. The Federal Reserve has been actively picking “winners” and “losers” in the financial system, and it turns out that the “friends” of the Fed always get bailed out and always end up among the “winners”. This is not how a free market system is supposed to work.
According to the limited GAO audit of the Federal Reserve that was mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the grand total of all the secret bailouts conducted by the Federal Reserve during the last financial crisis comes to a whopping $16.1 trillion.
That is an astonishing amount of money.
Keep in mind that the GDP of the United States for the entire year of 2010 was only 14.58 trillion dollars.
The total U.S. national debt is only a bit above 15 trillion dollars right now.
So 16 trillion dollars is an almost inconceivable amount of money.
But some other dollar figures have been thrown around lately regarding these secret Federal Reserve bailouts. Let’s take a look at them and see what they mean.
A recent Bloomberg article made the following statement….
The $1.2 trillion peak on Dec. 5, 2008 — the combined outstanding balance under the seven programs tallied by Bloomberg — was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg.
The $1.2 trillion figure represents the peak outstanding balance on these loans, not the total amount of all the loans. On December 5, 2008 the “too big to fail” banks owed this much money to the Federal Reserve. Many of them could not pay these short-term loans back right away and had to keep rolling them over time after time. Each time a short-term loan got rolled over that represented a new loan.
Thomas E. Woods, Jr., is the New York Times bestselling author of 11 books. A senior fellow of the Ludwig von Mises Institute, Woods holds a bachelor’s degree in history from Harvard and his master’s, M.Phil., and Ph.D. from Columbia University.
This is simply unbelievable.
For a long time, a very wealthy friend of mine who is an extremely good money manager had been sharing his IRA portfolio, and every buy or sell action he took, with anyone who asked to be added to his email list. He is the kind of guy the EMH (efficient markets hypothesis) assures us cannot exist, who pretty consistently and very impressively beat the market. His lifetime return on the account is in excess of 40% annually, and that includes the years of the recent financial crisis.
So if you wanted to invest exactly the same way he was, you could easily do so.
Not anymore. Now the government has chosen to protect us from people like him. From his email to friends:
This list began many years ago and grew out of my desire to help others who are friends but are not professional investors. The list started as a small group of friends and family but over time I added names as people asked for assistance. My thought process was that I would be doing a good deed. I figured from a “karma” point of view that I would be rewarded for sharing my best thinking. I did not guarantee success, but I guaranteed honesty in what I am doing . That is, I would report every single trade. Then each person could make their own decision whether to follow me or not. Those who have read Clausen’s The Richest Man In Babylon know that the simple key to growing wealth is to save 10% of what you make and invest it the way rich people invest. I never contributed more than $40,000 per year to the account and it is now over $6.0 million. My compound annual return from inception in 2003 is 42.76% and my return for the last five years (including 2011 down) is 52.96%. So it has performed well.
I never imagined that sending out this list hurt anybody, or in any way conflicted with my role as a the manager of an investment fund. I was not charging for advice and I was not selling anything. To use an analogy, it was as if I knew how to cook and I was sending out good recipes to friends. I made no implied or other commitment. I often advised people to seek their own counsel. Everyone who was on the list was an adult. In fact, many of the people on the list had expressed an interest in investing in our fund but they did not qualify under the oppressive government rules which prevent average savers from investing $10,000 or $30,000 with me. By law (a law that the big brokers and mutual funds love by the way) you can only invest in my fund if you are a “qualified investor” meaning you have assets of $1.5 million or earn $200,000 or both. Theoretically this is to protect small investors, but in reality what it does is restrict them from doing what they want and forces them to either invest on their own (think sheep sitting down with wolves to discuss dinner) or to hand their money over to the mutual fund industry (think sheep giving themselves to wolves). The LAW will not let you invest your money as you see fit. All for your protection of course. Personally, I think this is wrong. You should have the freedom to make your own choices.
So, since people expressed an interest in investing with me but could not, I added them to my IRA list. I tell you what I am doing, you make your own decisions, and no harm, no foul. I have always been very careful to only disclose my trades after [our] Fund had taken its own positions. In other words I have a fiduciary responsibility to put my investors first and I have always done so. This has been clearly disclosed to the IRA list several times. Unfortunately, with the passage of the Dodd Frank Bill and with the increasing size and success of [our firm] it now looks nearly certain that we are going to be subject to much stricter government regulation from the State of Massachusetts and the US Federal Government. Ironically, these organizations could not catch Bernie Madoff when they had a concerned citizen (Markopolous) pointing out the fraud. They have refused to prosecute the people at MF Global who stole customer money. Yet, they find it important that they monitor all of my emails and instant messages to make sure I am not doing anything illegal. The level of filings and registrations that we will have to go through are extremely burdensome. Frankly, I find it outrageous and disgusting that I cannot tell my friends what stocks I buy. I would think it would be protected under freedom of speech, yet in the securities industry nothing is so simple. I have been informed by my partner and multiple lawyers that I can no longer disclose what stocks I am buying and run an investment fund. Personally, I would like to fight this in court, but I have a responsibility to my partner and to my investors to focus on investing well. Therefore, I have to stop disclosing what we are doing. For that I apologize.
By Timothy Noah
Jon Corzine’s testimony before the House agriculture committee may mark the definitive end to the Democratic party’s love affair with Wall Street.
Once upon a time, Wall Street bankers were Republicans. Not terribly ideological, they preferred whenever possible a minimum of taxation, regulation, and government in general, but they didn’t make a fetish of it. As the GOP moved right starting in the mid-1960s the east coast Republican establishment began to crumble, and by the late 1980s it was mostly gone. These silk stocking conservatives had been driven out of the Republican party by a social agenda that frightened them, a budget deficit that threatened their livelihoods, and a base that increasingly viewed moderates as RINOs (“Republicans In Name Only”).
By the early 1990s Wall Street was ready to go Democratic. In his new book, Back To Work, former President Bill Clinton writes,
“For every person on Wall Street who resembles the character Michael Douglas played in the Wall Street movies, there are many others who give lots of money every year to increase educational and economic opportunities for poor kids and inner-city entrepreneurs.
“Most of these people are grateful for their success and know that because of current economic circumstances, they’re in the best position to contribute to solving our long-term debt problem and to making the investments necessary to restore our economic vitality. Many of them supported me when I raised their taxes in 1993, because I didn’t attack them for their success. I simply asked them, as the primary beneficiaries of the 1980s growth and tax cuts, to help us balance our budget and invest in our future by creating more jobs and higher incomes for other people.”
In crafting his first budget bill, Clinton was mindful of the bond market to such a degree that James Carville famously complained, “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 basball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
The Wall Street-Democratic Party love affair came out of the shadows and into the sunlight when Robert Rubin, former co-chairman of Goldman Sachs, became Treasury secretary. The economy was booming, the budget deficit was disappearing, and all was right with the world. The romance deepened through most of the aughts, so much so that in 2010 Rich Lowry of National Review complained, “the Democratic majority was bought and paid for by Wall Street and corporate money.” In 2008 the finance sector actually gave more to the Democrats than to the Republicans, something that hadn’t happened since 1990.
It all started to come apart in the late aughts as Democrats realized that Rubin’s distaste for financial regulation (and that of his deputy and successor, Larry Summers, which was more pronounced) had contributed to the 2008 financial meltdown, in part because Rubin and Summers had outmaneuvered Brooksley Born, chairman of the Commodity Futures Trading Commission, when she wanted to regulate derivatives. Summers (who wasn’t from Wall Street but was a Rubin acolyte) became director of the National Economic Council during President Barack Obama’s first two years in office and the economy floundered. That deepened the alienation between Democrats and Wall Street.
Passage of the Dodd-Frank financial reform law drove the lovebirds further apart as Wall Street enlisted Republican goons first to weaken the bill (and succeeded in many instances) and then to neuter it by pressuring federal agencies to write regulations that created as little accountability as possible.
By Rep. Ron Paul-The Washington Times
I firmly believe the American people are serious about cutting spending and fixing our debt crisis now. Those struggling to make ends meet and provide for their families while also trying to save for the future know we must change course immediately.
I’m not running for president merely to trim a little here and there from our bloated federal budget. Instead, I have offered the boldest, most specific and most comprehensive solutions in the history of American politics to restore our economy and once again make America the most innovative, competitive and prosperous nation in the world.
We face no problem that cannot be solved by reaffirming our trust in the fundamental principles of freedom, limited constitutional government and individual responsibility.
As a candidate, I pledge that not only will my first 100 days as president be dedicated to reinstituting these core values from the moment I take my oath but that my entire time in office will be devoted to protecting our liberties and removing the burden of an out-of-control government from the people’s backs.
Starting on Day One, I will begin implementing my Plan to Restore America, which cuts $1 trillion in spending during my presidency’s first year alone and delivers a fully balanced budget by Year 3.
This plan is about priorities. Politicians play a game in which they give lip service to the voters’ concerns only to sacrifice a strong national defense, the needs of our veterans and the promises made to our seniors at the altar of attaining more power once in office.
I will lead a national discussion on how we might tweak cuts, and I will work with coalitions to make them in the fairest way possible and to plan the necessary transitions.
A Paul presidency will deny the politically connected the spot they have carved out at the American people’s expense. By immediately repealing such regulatory nightmares as Obamacare, Dodd-Frank and Sarbanes-Oxley, we will start to break the corporatism that places special interests over the average American.
My administration will fight for requirements styled after the REINS Act (Regulations From the Executive in Need of Scrutiny) to ensure all new bureaucratic regulations are thoroughly reviewed and approved by Congress before taking effect. I also will cancel all onerous regulations previously issued by executive order.
I will move to abolish all corporate subsidies and end all bailouts.
As we work to cut $1 trillion in the first year, my budget will eliminate the Departments of Energy, Education, Commerce, Interior, and Housing and Urban Development. Functions that cannot be abolished immediately will be transferred to other departments.
I plan to answer the call of the vast majority of Americans for a full audit of the Federal Reserve, and I will work with Congress to pass competing currency legislation to strengthen the dollar and stabilize inflation.
I will lead the way toward restoring a sensible and constitutionally conservative foreign policy by ending all foreign aid, nation-building and participation in organizations that threaten our national sovereignty, while honoring our commitment to our veterans, who deserve what they have sacrificed to earn.
The looming entitlement crisis can be addressed without breaking our nation’s promises to our seniors. Younger workers will be allowed to opt out of Social Security so they can properly invest for their futures, while money saved from reining in our government will be used to sustain those currently depending on Social Security funds.
The expanding cost of Medicaid and other welfare programs will be tackled without harming those relying on such programs by giving states block grants to give them the flexibility and ingenuity they need to solve their own unique problems individually.
HOLY BAILOUT – Federal Reserve Now Backstopping $75 Trillion Of Bank Of America’s Derivatives Trades1
UPDATE – Chcek out regulator William Black’s blistering reaction to this story HERE.
This story from Bloomberg just hit the wires this morning. Bank of America is shifting derivatives in its Merrill investment banking unit to its depository arm, which has access to the Fed discount window and is protected by the FDIC.
This means that the investment bank’s European derivatives exposure is now backstopped by U.S. taxpayers. Bank of America didn’t get regulatory approval to do this, they just did it at the request of frightened counterparties. Now the Fed and the FDIC are fighting as to whether this was sound. The Fed wants to “give relief” to the bank holding company, which is under heavy pressure.
This is a direct transfer of risk to the taxpayer done by the bank without approval by regulators and without public input. You will also read below that JP Morgan is apparently doing the same thing with $79 trillion of notional derivatives guaranteed by the FDIC and Federal Reserve.
What this means for you is that when Europe finally implodes and banks fail, U.S. taxpayers will hold the bag for trillions in CDS insurance contracts sold by Bank of America and JP Morgan. Even worse, the total exposure is unknown because Wall Street successfully lobbied during Dodd-Frank passage so that no central exchange would exist keeping track of net derivative exposure.
This is a recipe for Armageddon. Bernanke is absolutely insane. No wonder Geithner has been hopping all over Europe begging and cajoling leaders to put together a massive bailout of troubled banks. His worst nightmare is Eurozone bank defaults leading to the collapse of the large U.S. banks who have been happily selling default insurance on European banks since the crisis began.
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.
The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.
Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.
“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”
The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which has a higher credit rating, according to people familiar with the transactions. Transferring derivatives also can help the parent company minimize the collateral it must post on contracts and the potential costs to terminate trades after Moody’s decision, said a person familiar with the matter.
Keeping such deals separate from FDIC-insured savings has been a cornerstone of U.S. regulation for decades, including last year’s Dodd-Frank overhaul of Wall Street regulation.
Bank of America benefited from two injections of U.S. bailout funds during the financial crisis. The first, in 2008, included $15 billion for the bank and $10 billion for Merrill, which the bank had agreed to buy. The second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the bank’s stability if the takeover proceeded. The U.S. also offered to guarantee $118 billion of assets held by the combined company, mostly at Merrill.
Bank of America’s holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
Moving derivatives contracts between units of a bank holding company is limited under Section 23A of the Federal Reserve Act, which is designed to prevent a lender’s affiliates from benefiting from its federal subsidy and to protect the bank from excessive risk originating at the non-bank affiliate, said Saule T. Omarova, a law professor at the University of North Carolina at Chapel Hill School of Law.
“Congress doesn’t want a bank’s FDIC insurance and access to the Fed discount window to somehow benefit an affiliate, so they created a firewall,” Omarova said. The discount window has been open to banks as the lender of last resort since 1914.
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