What actually happened in Cyprus?

What happened?   It's hard to say.  One big bank saved, one on its way to dissolution.  The smaller banks, it seems, will be left to their own devices.  Did the Teutons get their way?  Partly.  Are the Cypriots actually saved?  Not likely.  Greek style depression looks inevitable

Here's the good stuff: the insured deposits remain insured.  Those with up to €100,000 will not suffer losses, but those with larger (some very much larger) accounts will take a hit.  The Russians, needless to say, are not happy.  Amusingly enough, they are talking about starting their own bank, someplace in Asia, where they can avoid paying (presumably Russian) taxes.

What we never hear, though, are what (if any) consequences accrue to the bankers who created the mess, and the bureaucrats who facilitated their activities.  Is it cynical of me to think they might have kept their own wealth someplace other than Cyprus — someplace where the banks were not gambling on long shots like Greek bonds?

Eric Holder seems to believe that American bankers are "too big to jail," and hasn't pursued any prosecutions for malfeasance — but somehow, someplace in the world, I'd like to see some bankers behind bars.

Financial regulation

On health care, the Obama administration sat back and waited for Congress to come up with something — anything. On financial regulation, the bill came straight from the administration, and it sailed right through the House.

Obama, as I've noted in the past, picked the wrong Bob — Rubin, rather than Reich. That left us with Geithner and Summers, zombie slaves of the financial industry. I'd feel a lot happier about the package from the White House if it had been written by people less ideologically committed to Wall Street. When a bill starts out weak, it only can end up as an even weaker law.

Oddly enough, I find myself in agreement with the likes of Richard Shelby and John Cornyn on at least one point: it is time to revisit the 1995 repeal of Glass-Steagall, one of the most unfortunate legacies of Robert Rubin's time in the Clinton administration. Commercial banks and investment banks should, once again, be separate — if for no other reason than to reduce the overall size of the largest institutions. Even if that were done, though, there are some institutions which would need further whittling down to ensure that there no longer are any that are "too big to fail."

At this time, the biggest banks have an unfair competitive advantage over smaller banks, in that they can borrow money at lower rates. They get those lower rates because it is assumed that government will not allow them to fail, no matter what pledges come out of Congress and the White House — and they use their surplus profits not to invest in productive businesses, but to place bets in the high-stakes casino Wall Street has become over the past fifteen years.

I can see absolutely no reason for synthetic CDOs to exist. They are nothing but side bets on real economic activity, but bets large enough to disrupt the financial system and create crises. Credit default swaps on synthetic CDOs were a large part of what brought down AIG, and made its government bailout necessary. If the very rich want to make bets on whether bonds they don't own will or will not default, let them open their own betting parlor and gamble with their own money — not with our pension funds.

Other derivatives must be openly traded, on an exchange like the one provided for in the bill now before the Senate Agriculture Committee, but with no exceptions for companies that are particularly large or well-connected. Markets cannot operate properly when they operate in secret.

Naturally, I don't expect much of the current effort to improve financial regulation, but hope it might be a step in the right direction. Yes, my fingers are crossed — but I'm not holding my breath.

Jobless "recovery"

Now that the senatorial election in Massachusetts has tossed Obama's lame-ass health care bill into the toilet, nothing will help the Democrats but some aggressive action against the bankers. How can that be done, considering that Wall Street is a major funder of candidates of both parties?

Beats me. Frankly, I see the plutocracy remaining firmly in control. As you may have noticed, I tend to be bearish on America.

Shit.

Here's why the recovery is jobless:

1. Productivity — When employers figure out that they can get more work out of decreasing numbers of desperate workers, that's exactly what they do. In case you haven't noticed, that's exactly what they're doing now. Why hire more?
   
2. Low Interest Rates — The low rates now being maintained by the Fed are supposedly going to make it easier for businesses to borrow, expand, and hire more workers. Nope, not quite. Low interest rates make it easier for businesses to afford the machines that replace workers. Why spend money on some smelly, angry guy who wants health insurance when you can have a machine that demands nothing?
3. That Whole Globalization Thing — Maybe you can train an out-of-work factory worker to be a telephone customer service representative, but cost-benefit analysis still will send the business to Mumbai or Calcutta. The whole argument that better education will improve the American economy is crap, because, whatever it is, we can't do it for less then they can.

So where do the jobs come from in this "recovery?" Beats me — and if the jobs are scarce and pay minimum wage, who has money to buy the services (we can pretty much forget about goods, except for export) the alleged recovery will produce? The Chinese? Maybe we could retrain unemployed Midwest factory workers to speak Chinese, so they can work the telephones for Chinese collection agencies.

Nah. The Indians will get those jobs.

So what is a cafe au lait president who promised change and so far has delivered just more and more of the same to do?

Me, I'd start by firing Larry Summers, Tim Geithner, and anybody else who ever was attached to Robert Rubin's teats. I'd replace Summers with Joseph Stiglitz. As for Treasury, Paul O'Neill would be a pretty amusing choice, and could help Our President continue his idiotic pretense of seeking bipartisanship.

Frankly, I don't think the Democrats have the guts to enact health care reform via reconciliation, so unless one of those oddball Republican women from Maine crosses over to the "dark" side, health care reform is as good as dead. All that's left to rescue Democratic candidates in 2011 is a really hard, stinging slap at Big Finance — accompanied by a lot of rhetoric about Republicans sucking Wall Street's balls. Since the Republicans will be sucking Wall Street's balls, the only obstruction to using this approach will be the difficulty Democrats will have disentangling Wall Street's balls from their own tonsils.

If you're looking for work — good luck. If you need health care and don't have insurance — good luck. What the hell — if you're living in contemporary America, good luck! You'll need it.

Regarding the Bank Tax

I wish I could figure out what the Obama administration has in mind regarding that idea for a tax on the big banks. Whose idea was it? Did it come from Summers and Geithner? (Maybe, but I don't think so.) How about Rahm and the political team? (A lot more likely.) Somebody else? (I hope so!)

You see, it's actually a pretty good idea — provided it's done right. There is that little problem that it would have to be enacted by Congress, which means that getting it done right is very unlikely. Nevertheless, unable to rid myself of a residual twinge of optimism left over from my youth, I can't help thinking of how it might be done right.

Here's how it might happen: noticing how unhappy most of America is with the giant banks, their bailout by government, their vast, government subsidized profits for the past year, and the huge bonuses they are paying to their inept executives, members of Congress who are not total prostitutes to Wall Street will decide it might be a good idea to go a bit populist. They will go along with the Obama administration's efforts to assuage teabaggers and fellow travelers who think a balanced budget will restrain their taxes.

Community banks certainly cannot afford additional taxes — enough of them already are failing because they financed all those half-empty strip malls. Community banks will be excluded from the new taxes. The targets will be the big banks — the ones that are too big to fail.

If you slap a big tax on the biggest banks, it's a dead cinch that those big banks will break themselves into manageable pieces — pieces that are small enough to fail (and not pay those taxes.) Congress won't do it, but an appropriate tax will encourage the banks to do it to themselves.

Will it happen?

I'm not too optimistic, but, what the fuck, there's a chance.

Still, I'm not holding my breath.

Recovery?

The stock market is doing great, especially the financials. GDP was up last quarter. The recession is over — right?

Technically. Maybe.

The stock market is doing well because corporate earnings are up — but not because of increased sales, because of decreased costs. When you fire half your workers and force those who remain to work twice as hard, costs are way down, and suddenly you're profitable again. With the Fed holding interest rates at rock bottom levels (should you happen to be a large corporation and not an individual consumer), it is much cheaper to replace labor with new capital.

So far, though, all we've seen is the supply side. The demand side doesn't look nearly so rosy.

Henry Ford is remembered for his decision to pay his workers well enough so that they could afford to buy his company's cars. Somewhere along the line, that idea was forgotten. As unemployment continues to rise and wages continue to be depressed, demand for everything but luxury goods has to decline. The Wall Street execs may continue to buy their $15 million condos and $18 thousand wristwatches, but who's going to be buying the Fords?

In the meanwhile, regulatory reform looks like it's going nowhere. Flush with taxpayer subsidized profits, the banks have successfully lobbied the teeth out of proposed legislation that still might not pass. It looks pretty certain that derivatives will remain largely unregulated, and that capital requirements won't be increased enough to significantly reduce risk. Chris Dodd's plan to consolidate regulation into a single agency (that is not the Fed) is dead in the water, because no Congressional committee supervising the current assortment of agencies will be willing to give up its power. I suspect a good deal of his populist stand is an attempt to get us to kind of forget about the extra-favorable treatment he got from Countrywide Finance.

As for Obama, Emmanuel, and company — I don't think they're too anxious to give up the vast contributions coming in from those generous folks at Goldman-Sachs and the like. Don't look for leadership from the White House.

Regulatory reform?

I've been reading as much as I can about the Obama plan for regulatory reform. I'm not happy.

As usual with this administration, there is a good deal less on the table than one might hope to find. The initial approach, which was to bring all the relevant lobbyists together and let them slug it out, seemed like it might have been a good idea. There were many competing interests, and reason to hope they might neutralize one another. The administration could claim it had "listened," and then go on to do what really was needed.

Ooops, pardon me! For a second there, I forgot it was the Obama administration, which works from the first principle, "It is a far, far better thing to look like you're doing something than actually to do something. Getting things done just gets people pissed off."

Making the Fed regulator in chief is Obamanomics 101:

• The Fed is an "independent" agency. Hence, if it screws up, the administration can duck all blame -- especially while Bush appointee Ben Bernanke is in charge.
• The Fed is a creature of Wall Street, so no matter how much the financial industry may whine about oppressive regulation, you can bet they're not especially upset.
• Larry Summers would love to be the next Fed chairman, and he'd love it even more if the job included additional autocratic powers.
  

For populist pandering, there will be the new Consumer Financial Protection Agency, charged with protecting us little guys from predatory bankers and their ilk. The predators, of course, are playing their role by pretending to be upset -- but the likelihood of the new agency having the power, the funds, or the political support to do anything significant is minimal.

Meanwhile, in Switzerland...

According to Carter Dougherty, in the New York Times, "Swiss financial regulators said Thursday that they were considering assuming new emergency powers that would allow them to break up large banks to wind down troubled business units that are not essential to the economy." After their UBS and Credit Suisse problems, the Swiss have decided that they've had enough of banks that are 'too big to fail.'"

They'll start by "working with" the banks -- but it sounds like, in the absence of real cooperation, they'll just go ahead and do it. Yay, Switzerland!

Regulation and the Free Market

Just in case you haven't noticed yet, Friedman and Greenspan were wrong. Free markets are extremely fragile. Left untended and unregulated, they can't survive -- they succumb to what economists call "market failure." The only institutions powerful enough to prevent market failure are governments, and the only way they have to do that is through economic regulation.

The chief component of the market failure that created our current economic crisis was lack of information. For markets to operate properly, buyers and sellers must be aware of the real value of what they buy and sell. In the case of derivatives, as we now know, that information just wasn't available. Not only were buyers misled by the ratings agencies -- who were paid by the sellers -- but derivative sales were private. Buyers had no means of knowing what other buyers were paying for very similar instruments. The derivatives market was totally obscure, and totally unregulated.

"Then, let there be regulation," intones Obama. "Right on it, boss," cries His Boy In Treasury, Timmy G. And there shall be regulation. Effective regulation? Um, well...

Some Democrats in Congress, like Senator Tom Harkin (whom I recall supporting in a presidential primary a great many years ago), want all derivatives to be traded in an open exchange -- like stocks or commodities. That would provide full transparency, and make a repeat performance of the current mess just about impossible.

Timmy G. has another idea, though -- derivatives would be traded through privately managed "clearinghouses," which would make the trades, well, sort of semi-transparent. More complicated, "customized" securities, however -- like the credit default swaps that brought down AIG -- would remain outside the system, and totally opaque.

You get one guess: which plan does the industry prefer? Here's a hint: if buyers get to know what the securities really are worth, they won't pay as much for them.

Maybe Obama will surprise me, and get behind the idea of an open exchange. Somehow, though, I doubt it. Bill Clinton signed the December 2000 bill exempting most derivatives from regulatory oversight, and so can claim a fat share of the responsibility for our current problems. Barack Obama, who took even more in campaign contributions from the financial industry than Clinton did, is not likely to be a major improvement.

As Dick Durbin pointed out recently, "the banks ... are still the most powerful lobby on Capitol Hill. And they frankly own the place." I'm afraid that probably is true of the White House as well.

Well, so much for free markets. How can markets be free when the government that's supposed to protect them is bought and paid for?

Must Reading

Anybody seriously following the bank bailouts cannot afford to miss this article in today's New York Times, an extensive review of Tim Geithner's relationships with Wall Street firms and executives, as well as his policy recommendations both as chair of the New York Fed and Secretary of the Treasury.

This article is not "commentary" or "news analysis," but a review of Geithner's history. We are left to draw our own conclusions. For me, it reinforces my ongoing belief that the "change" promised by the Obama administration, at least as far as the financial industry goes, continues to be mostly smoke and mirrors.

Stress positions

I can hardly wait. Two more weeks, and Treasury will be releasing the results of its stress tests of the banking industry. Maybe. Sort of.

I can hear it now: "We have completed exhaustive testing of the nineteen largest banks, and we are pleased to report they all passed. No details are available right now, but maybe in a month or two..."

In the meanwhile, the banks are doing their best to impress us with their "better than expected" "profits."

Yes, I had to do two sets of quotes in a row. Neither turn of phrase is what it seems, and judging by today's action on financial stocks, investors haven't been fooled.

When the "results" of the stress tests are "released," it will not be the credibility of the banks that will be evaluated, but the credibility of Tim Geithner and the Obama Treasury Department.

Glimmers of Hope?

The President has seen "glimmers of hope." I'm trying to figure out where.

Maybe it has something to do with Wells-Fargo's record quarterly profits, or the determination of Goldman-Sachs to repay its TARP funds. Financial stocks seem to be staging a bit of a recovery, which is not especially surprising with the FDIC guaranteeing billions upon billions of dollars of the loans they are making -- essentially taking on all the risk in exchange for a negligible fee.

Goldman-Sachs posted a profit -- made possible, as it happens, by payment at 100% of face value on a credit default swap issued by AIG. Does a profit really count if it depends on free money provided by the taxpayers? Yes, apparently, it does count. If you can get the suckers to hand over their money, it's yours, right?

The only "glimmer of hope" I could believe in right now would be an effort to remove from government anybody and everybody with a history at Goldman-Sachs. Two administrations' worth of Goldmanistas already have eliminated virtually all of the company's competition. Isn't that enough?

More questions than answers

I listened to Geithner's speech four times, and took notes. He made some of the right noises, but the devil always is in the details -- and the details were conspicuously absent.

He said that "gradualism" won't do -- except, I suppose, for announcing the specifics of the new administration's approach -- and warned against making the mistake of "applying the brakes too early." He made a lot of noise about transparency. Okay. Swell.

He spoke of a "comprehensive stress test" for banks, with government agencies assessing bank balance sheets. Does that mean government will take on the task of valuing all those frozen assets? No, I guess not, because he gets to that later, in a different context. Anyway, the banks get to draw on a "Financial Stability Trust" as a "bridge" to private capital. Do banks have to pass the "stress test" -- demonstrate that they still have some net worth -- before they get to draw capital from the FST?

Valuing the frozen assets, apparently, will be done by defrosting them. Geithner spoke of a trillion dollar "public/private investment fund" that would use government capital to "leverage" private capital, and start the unsalable securities selling again. What role will government play, and what will be necessary to get the hedge fund managers and other investors interested in buying? Nobody seems to know, but the term "bad bank" keeps coming up in the news analysis.

One thing I do know is that every time I hear the phrase "public-private," my blood runs cold. Typically, "public-private" means the public absorbs any losses while the private sector absorbs any profits -- more corporate socialism.

Another trillion, from the Treasury, the Fed, and the FDIC, will go to "support" consumer and business lending. This sounds a bit like my "good bank" idea, but I have a bad feeling that some way will be found to further enrich a bunch of private bankers in its application. As for foreclosure relief and regulatory reform -- well, maybe we'll hear something about that next month (!)

In the meanwhile, I haven't heard anybody in the administration openly criticizing the Senate's 50% cut in the amount of aid to states that will be in the upcoming stimulus package. Of course, it makes absolutely no sense for the federal government to try to stimulate the economy and create jobs while state governments are forced to decimate spending programs and throw vast numbers of state workers out of work -- unless, of course, you're a Republican.

Obama should take the time to listen to Rush Limbaugh once in a while, and he might wake up to what the Republicans really are trying to do. Rush openly states that he wants Obama to fail. Guess what, Barack? So does almost every Republican in Congress. They don't care at all if the country sinks into Great Depression 2.0 provided they can get back into power. You're still singing Kumbaya, Barack, but nobody's singing along.

The next bank bailout

It's Saturday. Geithner won't give his speech until Monday, and who knows how much he'll be willing to lay on the table even then? I figure it is incumbent upon me to speculate a bit, so that, as events develop, my forecasting ability may be evaluated. (By the way, I never go back to edit earlier postings -- except for obvious typos.)

And, so, it looks like what will be announced Monday could be a fairly clever compromise. Instead of "sin eating" Wall Street's toxic assets, government will invite private investors to buy them -- but with reduced risk because of government insurance. In essence, the Treasury would be issuing credit default swaps.

If done right, it could work. The only way to get a fix on what all those "troubled assets" are worth is to get people buying and selling them again -- but will it be done right? That remains to be seen.

To my mind, doing it right involves a few basic rules. First, no asset should be insured for more than half of what the investor pays for it. Insuring assets for full "face value" is the same as buying them outright, except without the opportunity to sell them if their value increases.

Second, pre-existing credit default swaps should not be re-insured. Since the lion's share of those were sold to buyers who did not even own the securities they supposedly insured, covering them is tantamount to insuring gambling losses.

Third, government should charge a fee for the insurance it issues. Investors were willing to pay for credit default swaps in the past, and they still should be willing to do so -- especially since the insurance is being issued by government, an institution which will not default.

Fourth, participating banks should be required to write down the alleged value of all derivatives that do not find buyers in a reasonable period of time. Only in that way can we discover which banks are essentially healthy and which are among the walking dead.

And now the banks...

...again. Or, more to the point, still.

Yes, it's nice to see the ass end of Henry Paulson exiting the Department of the Treasury, but it's also a little disconcerting to see Tim Geithner on his way in. As President of the New York Fed, he was pretty much Alan Greenspan's right-hand man -- anyway, I can't remember him voting against any significant Greenspaniana. Should we assume that Greenspan's mea culpa applies to Geithner as well? I'd be a lot happier if I were sure Obama didn't select Geithner based solely on a recommendation by Robert Rubin.

(Hmmm... What have we heard about Rubin lately?)

So according to all the usual sources, Obama's choices for dealing with the banking crisis come down to these:

• Infuse even more taxpayer money into the major banks, perhaps with requirement that they actually lend it out this time.
  
• Have the Treasury create one glorious, taxpayer financed "bad bank," which would buy all those "toxic assets" from the private banks. This is, essentially, Paulson's original plan.
• "Fence off" the toxic assets by guaranteeing their value, so that banks can go back to doing business as usual without worrying about further write-downs.
• Figure out which banks are "zombies" -- failed banks that will struggle on only with continued large infusions of taxpayer money -- and nationalize them.
  

The "bad bank" idea has been gaining in popularity because it embodies the traditional American approach of socializing all losses while privatizing profits. It rewards the greed and stupidity of those who created the mess, at taxpayer expense, since the only way it could truly save zombie banks is by paying them substantially more than their toxic assets are worth.

Also a contender is "fencing off" toxic assets by guaranteeing their value -- in essence, writing insurance policies on sinking ships. Proponents of this approach don't like to mention it, but there is a less folksy name for that kind of insurance -- credit default swaps, the same kinds of financial instruments that helped get us into this mess. Haven't the taxpayers already eaten enough of those when we bailed out AIG?

Nationalization, of course, is a dirty word. It's the kind of thing those, those Europeans do, after all, and hence completely unAmerican. The fact that it worked very nicely back in the 1990s, when the Resolution Trust Corporation was formed to resolve the Savings and Loan crisis, is being studiously ignored.

Geithner, at least, says that this time we won't be leaping in head first without taking the trouble to see whether or not there's water in the pool. Free market über alles ideology has taken a beating recently, and Barney Frank's leadership of the Financial Services Committee is some cause for comfort. We'll see what happens.

Thank you notes

Yesterday's market gains were quite dramatic, and at least as of this writing, we don't seem to be giving them back today. So who gets the thank you notes?

First, we should thank Barney Frank and anyone else in Congress who helped him slip that provision into the bailout bill which allows Treasury to directly infuse cash into the banks by buying equity shares. Henry Paulson didn't ask for it, and didn't want it, but Congress gave it to him anyway.

Clearly, the former Goldman-Sachs CEO would have preferred to limit his actions to buying those nasty toxic assets from his old pals in finance. Having the power, clearly, was not enough to get him to use it -- and so thanks go out to France, Spain, Italy, and especially the UK for semi-nationalizing their own banks and thereby forcing his hand. (I think a nod is also due to Ireland, which started the ball rolling last week when it guaranteed all deposits in Irish banks. That meant the rest of Europe had to act fast to keep depositors from moving all their money to Ireland.)

So now $250 billion of our taxpayer $700 billion will be buying shares of preferred stock instead of shares of unwanted subprime derivatives. Let's hope the other $450 billion also is diverted from Paulson's original purpose. I suspect there is a good chance that can happen, because it is likely to take more time than the Bush Administration has left in office to chase down the relevant crap and approximate how much it may be worth.

* * *

I'd also like to extend personal thanks to the Nobel Committee that awarded this year's prize in Economics to Paul Krugman. To me, Krugman winning the prize is a kind of personal validation, since my perspective on economic policies coincides with his about 95% per cent of the time.

Did those wily Swedes pick Krugman this year to extend one parting middle finger to George W. Bush? That probably helped them decide to give Krugman the award this year -- but if it hadn't been this year, it still would have happened eventully. Krugman has a marvelous talent for seeing things that are right in front of our eyes, but which other academic economists miss because they are blinded by orthodoxy or ideology. His contributions to the field are very real, and very significant -- and I offer him my sincere congratulations