Friday, June 26, 2009

Bloomberg: Volcker Marginalized - Major Push Back on Curbing Excess. Our Life of Financial Oligarchy Does not Change

Let me preface this piece by saying (a) it's long but hopefully educational and (b) I am not picking political sides; both major parties are complete poison to the US and really not very different at all once you strip them down to the base. With that....

Some say we romanticize Paul Volcker - the last Federal Reserve Chief who apparently has an idea that money does not grow on trees - and he is not "all that". I don't know - everything I've seen from him the past year, and much of my reading of him in the past comes from a place of common sense, yet in a very capitalistic sense. He cannot be accused of being "one of those Europeans!" (codeword for socialist) yet believes in a firm regulatory stance that is based on common sense. Back in April 2008 in [Apr 9, 2008: Paul Volcker Speaks]

In a speech on Tuesday, Paul A. Volcker, the imposing former Fed chief who felled the runaway inflation of the 1980s, chided the current chairman, Ben S. Bernanke, for toeing “the very edge” of the bank’s legal authority in orchestrating last month’s bailout of the beleaguered investment bank Bear Stearns.

“Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank,” Mr. Volcker told members of the Economic Club of New York.

His remarks came on the same day that Alan Greenspan, Mr. Bernanke’s immediate predecessor as chairman, deflected criticism of his tenure in an interview with The Wall Street Journal, dismissing as “unfair” claims that his policies stoked an untenable housing bubble.

That was ironic timing indeed! Volcker continued

Indeed, Mr. Volcker also implicitly questioned Mr. Greenspan’s cheerleading of the “bright new financial system,” that “for all its talented participants, for all its rich rewards, has failed the test of the marketplace.”

Mr. Volcker also argued Tuesday that the Fed's strenuous efforts on behalf of the housing market risked looking "biased to favor particular institutions or politically sensitive constituencies," in this case the housing industry.

But the Fed has a particular duty to defend the integrity of the "fiat currency" in its charge. And exchanging dollars for "mortgage-backed securities of questionable pedigree" both raises the specter of moral hazard and potentially undermines the world's faith in the integrity of the Fed's balance sheet.

Straight talk. Something I admire... keep in mind all that was said after Bear Stearns but before all the rest of the interventions and government/Fed handouts. I really had high hopes when Volcker was included in Obama's team. Unfortunately we quickly discovered Volcker is more like the 25th man on a baseball team. Eye candy really.

We quickly found out Summers was freezing out Volcker - heck Volcker was already lost at sea by March!

Summers isn’t regularly inviting Volcker to White House meetings and hasn’t shown interest in collaborating on policy or sharing potential solutions to the economic crisis, they said.

We weren't the only ones to notice [Mar 6, 2009: Where is Paul Volcker?] By April we found out Volcker had not even met once with Obama in the past month [Apr 11, 2009: Paul Volcker Assumes Smaller than Expected Role with Obama]


The real powerhouse in this administration is Larry Summers - after his stint in the Clinton White House, off he went to Harvard where "foot in mouth" disease caused an early exit, and then off to hedge fund DE Shaw [Apr 9, 2009: Larry Summers - No Conflict of Interest; He Pinkie Swears] to learn how the markets really work from the computerized, dark pool side of things. It's almost like working at Goldman Sachs but without the very obvious connection. Oh, did I mention that for a Democrat he once sounded "GOPish!" when it came to regulation - in fact he was one of the primary cheerleaders for the deregulation of the financial industry in the 90s, including the now obvious in retrospect disaster that was the harpooning of the Glass Steagall Act (which at its heart was a bill that separated plain vanilla commercial banking from "innovative" investment banking). Along with Robert Rubin our Secretary Treasury in the mid 90s (where from? 26 years at Goldman Sachs). Rubin of course went on to preside at the Board of Citigroup (C) - collecting in excess of $100M. Whatever happened to Citi?

Point is folks - this is all connected, and the same bad actors are here. Like roaches they never really can be eradicated - its now embedded in the system; the financial oligarch system. Do you know who opposed any repeal of any part of Glass Steagall? Paul Volcker. Want to know who along with Rubin & Summers was for the harpooning of this "slowing down our financial innovation" law? Alan Greenspan. Rubin was so anxious to help out his friends back in investment banking he was pushing for the repeal not 2 months into his term as Secretary of Treasury.
  • (Feb 1995) The Clinton Administration plans to call this week for legislation that would allow commercial banks, securities firms and insurance companies to merge, forming giant financial services companies that would offer everything from checking accounts to mutual funds and life insurance, Federal officials say.
  • In a speech prepared for delivery in New York on Monday and in Congressional testimony scheduled for Wednesday, Treasury Secretary Robert E. Rubin will urge Congress to repeal the Depression-era Glass-Steagall Act, the officials said. For more than 60 years, the law has forced financial concerns to choose between owning commercial banks or owning securities companies like brokerage firms and investment banks, but not both.
  • Mr. Rubin also plans to call for broad changes in the Bank Holding Company Act of 1956, which has effectively barred most financial concerns from owning both commercial banks and insurance companies, said the Federal officials, who spoke on condition of anonymity. Mr. Rubin's speech will represent the first time that the Administration has taken a position on eliminating the legal and regulatory barriers among financial industries.
This initial push in the mid 90s failed, but Citigroup (C) was allowed to merge with Travelers (TRV) [insurance] in 1998. How was that possible? Oh, they got a waiver - heck its against the rules, but we're good - go ahead and merge. The waiver was for 2 years and they were supposed to expunge part of their business. Instead? Citigroup alone spent $100M in lobbying in 1 year (1998) to get the most important portions of Glass Steagel REALLY repealed. (if you fail at first, lobby lobby again!) Forget that divestiture stuff!! And so it was in 1999 - when Phil Gramm, Rubin, Summers, Greenspan, Goldman Sachs, Citigroup and the financial oligarch cabal got their victory. Setting us up for the biggest financial disaster in America within a decade.

If you want the dirty details the "repeal" bill passed in the House May 6, 1999. In the Senate July 1, 1999.

Robert Rubin's work was done. He resigned. July 2, 1999. (1 day after the Senate passed the bill) He went off to work for Citigroup, collecting well over $100M in compensation in the coming decade. Yes the same Robert Rubin lauded as one of our best Secretary Treasuries and a great steward for Citigroup. He's got Goldman blood in him! Must be brilliant!

And you know who was the named the next US Treasury Secretary: Larry Summers.


So yes, I'm going to be a fanboy to Volcker, the one prominent guy who vocally was against this repeal - which can be counted as one of the few root causes of our disaster today - along with espousing straight talk and common sense in many other spots. The problem is, like many things now, it doesn't matter. Political and financial power dominates and what is right is tossed on the backburner. You can believe everything above and since is all "happenstance" or "blind chance" and some firms win and some win, "randomly" - but really, if you do - I have some bridges in Florida up for sale.

Let me give credit to a handful of Senators who voted against this repeal as well: Byron Dorgan, Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin, Russ Feingold and Richard Bryan. A fascinating short interview with Senator Dorgan a decade later for "calling it" back in the late 90s - almost exactly.

Meanwhile, back to Larry. He is a brilliant mind from all accounts - but very ambitious. He wants the ultimate job - the one I've called the 2nd most powerful in the world after US President. The one with almost no oversight and the power to create money from thin air - Federal Reserve Chief. Only one problem - that job is occupied. But lo and behold, you can almost hear Larry smacking his hands together in glee as Mr. Bernanke roasts on an open fire.

Oh yes ... let's not forget.... the "Administration" is pushing for more power for the Fed - even though their laissez faire policies (isn't the antithesis of a regulator laissez faire?) helped get us here. So isn't it convenient than the push to give more power to the Fed from "inside the Administration" comes with only a few quarters to go before the Fed head position comes open. Now who would be so persistent in pushing for these new powers to be given to the Fed... and with what motive? (connect the dots)

But we had one hope in this mess; even if a small one. That was Paul Volcker. But it appears for poor Paul... and by definition us... he is turning from the 25th man to the 26th man on that baseball roster. Effectively sent down to AAA.

Bloomberg: Volcker Gets Less than He Wants in Curbing Excess

This is a very long piece by Bloomberg so I'll save most of it for those who care to read about what is going on in the country in the great power grab. But I'll throw a few snippets here below.
  • Volcker, who eventually made his way to the dinner table the evening of April 27, earned a reputation for standing up to Wall Street in the 1980s when, as Fed chairman, he brought inflation down to 1 percent from 15 percent by pushing the fed funds rate up to 20 percent.
  • Now, he’s urging radical regulatory reforms that would limit how big banks can get, separate deposit taking from trading at financial institutions and force all derivatives trading onto public exchanges. His proposals go beyond what Geithner, Summers and other members of the Obama administration have advocated.
  • After the inauguration and Geithner’s confirmation, Volcker was elbowed aside, White House insiders say. His economic recovery board took weeks to get off the ground -- a delay people close to Volcker say he blames on Summers. And Volcker’s access to the president was limited.
  • If Volcker is at one end of the spectrum arguing for tougher financial rules, Summers and Geithner are at the other.
  • Summers pushed for deregulation while Treasury secretary under President Bill Clinton, advocating the repeal of the Glass- Steagall Act, which had separated investment and commercial banking for more than 60 years. Geithner was president of the Federal Reserve Bank of New York during a period when banks ratcheted up their leverage. Both men are proteges of Robert Rubin, a former Clinton Treasury secretary who served on Citigroup Inc.’s board from 1999 until this year and has been criticized for allowing the bank to pile up $544 billion of derivatives and securities before it became the recipient of more government assistance than any other bank.
  • The reform proposals presented by the Obama administration, crafted largely by Summers and Geithner, fall short of what Volcker wants.
  • Geithner, 47, and Summers, 54, have also put forward a mechanism for dismantling large banks that fail. It doesn’t include rules for preventing them from getting too big, as Volcker urged.
  • The Geithner plan allows (derivative) contracts that can’t be standardized to be traded outside the central clearinghouse. Volcker wants to discourage that by imposing capital requirements on trading parties, people familiar with his thinking say. He also wants derivatives to be traded on exchanges, where investors can see prices for themselves, which would bring down profits for the dealers who act as intermediaries.
  • “While Summers and Geithner worry about not antagonizing the banks, Volcker is the only one who can say loudly what needs to be done,” says Timur Gok, who teaches finance at Northern Illinois University in DeKalb, Illinois. “The Summers-Geithner stamp is clear in this framework because it’s not very radical. We’ll see whether Volcker’s views are heeded more in Congress.”
  • The biggest obstacle to Volcker’s reform agenda is Summers, Volcker’s friends say. While the president’s top economic adviser has softened his anti-regulatory stance from his days as Clinton’s Treasury secretary, it will be difficult for him to accept some of Volcker’s proposals, they say.
Other good calls
  • The former Fed chairman started worrying about derivatives and structured debt such as mortgage-backed bonds in the early 2000s, his grandson says. In a 2000 interview with the New York Times, Volcker said he couldn’t make sense of the financial innovation going on. “You obviously have a kind of speculative fever,” he told the paper. “It’s a kind of casino. It’s all the rage, trading certificates that have no intrinsic value.”
  • In 2005, Volcker was worried about the housing bubble, the U.S.’s growing trade deficit and banks’ increased risk taking. “Under the placid surface, there are disturbing trends,” Volcker wrote in the Washington Post. “Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”
  • The Obama administration initially wanted to give the Fed a larger role, people close to the discussions say. Volcker was opposed, arguing that too much weight on the institution could threaten its independence in setting monetary policy.

Finally, a great quote from the piece

“He did a lot of things, in all his different roles serving the public, knowing that he’d be criticized. He has never flinched. He doesn’t flinch because he’s a man of utter conviction and absolute integrity.”

These are the type of people the country sorely lacks at the top in all areas - the term 'representative' no longer has the original meaning. Looking out for the greater good is something to write on Christmas cards... boiler plate language versus actions taken behind the scenes.

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