APRIL-MAY2008

 


the federal reserve shaping up to run the world !

Long Fight Ahead for Treasury Blueprint

Consumer Groups, Agencies Criticize Regulatory Overhaul

By David Cho, Neil Irwin and Carrie Johnson Washington Post Staff Writers
Sunday, March 30, 2008; Page A01

Lawmakers and regulators said yesterday that an ambitious plan by the Treasury Department to revamp the nation's decades-old financial regulatory structure could require congressional action stretching over several years and would not help the economy out of its current credit crisis.

Battle lines are already forming over Treasury's major proposals even though top officials have just begun to digest the 200-page regulatory blueprint, which was released to them late Friday night.

Some Democrats and consumer groups criticized the plan for serving the needs of financial markets but not consumers. Former and current regulators hinted at a likely fight over proposals to strip authority from agencies such as the Securities and Exchange Commission, and the head of another imperiled body, the Office of Thrift Supervision, was dismissive of the Treasury blueprint in an e-mail Friday to his employees. Other officials worried whether the effort to streamline financial oversight would lead to a massive disruption and elimination of positions across the federal government.

Though recent upheaval on Wall Street has put Treasury's efforts in the spotlight, work on the blueprint began a year ago before the downturn in credit markets, and the plan was never envisioned to be an emergency cure for the ills now threatening the economy. The proposed changes to the regulatory system were instead meant to prevent financial crises like today's from recurring.

The plan, which is scheduled to be officially unveiled tomorrow by Treasury Secretary Henry M. Paulson Jr., got a mixed reception on Capitol Hill with differences of opinion emerging within the ranks of Democrats and Republicans.

Some Democrats in Congress praised the blueprint, saying it charts a clear course for broader regulation of the nation's financial markets. While some elements don't go as far as many Democrats would like, they said the proposal changes the terms of the discussion over whether to increase government oversight on Wall Street.

"The debate now is: We have this wholly new financial system, we need much better regulation, how do we do it?" said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. "I mean, you've got the secretary of the Treasury, the former head of Goldman Sachs, acknowledging that regulation is good for financial markets and it's not going to kill them. That's very significant."

But Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, declined to give the administration credit for the proposals, saying its earlier inaction was responsible for the financial problems. "Regrettably, the Administration's blueprint, while deserving of careful consideration, would do little if anything to alleviate the current crisis -- which was brought on by a failure of will," Dodd said in a statement.

Some key Republicans cheered the plan. "I commend the administration and Secretary Paulson for regulatory restructuring and reform that is very comprehensive in its potential impact," said Rep. Spencer Bachus (Ala.), who is the ranking Republican on the Financial Services Committee. He called for swift congressional action to implement several reforms. But it was unclear whether Republicans would approve proposals recommending that agencies, such as the Federal Reserve, gain sweeping powers over Wall Street. Several influential Republicans, including Sen. Richard C. Shelby (Ala.), ranking member of the Senate Banking Committee, declined to comment on the initiatives.

Treasury officials hope Congress will this year pass at least one proposal, the creation of a Mortgage Origination Commission. But even if this effort succeeds at establishing tough, uniform standards for mortgage brokers and lenders, it would do little to help people who were exploited by unsavory or incompetent mortgage brokers during 2005 or 2006.

"This is not primarily a plan to deal with the current credit crisis, and it shows," said Barbara Roper, director of investor protection at the Consumer Federation of America. "The real focus here is on structural issues that have nothing to offer the millions of Americans currently facing foreclosure or nervously eyeing the effects of the market's recent roller-coaster performance on their retirement accounts."

Treasury's plan calls for a complete reworking of how Washington watches Wall Street. It sweeps away the patchwork of regulation that oversees financial firms and instead proposes the creation of three new regulators. One would regulate banks, which now answer to five agencies. This body would get rid of overlapping regulators, such as the Office of Thrift Supervision. A second regulator would oversee consumer protection and business practices. The Fed would have broad but somewhat undefined powers to regulate any aspect of the financial markets to ensure financial market stability.

A significant loser in the blueprint appears to be the SEC, which would be combined with the Commodity Futures Trading Commission. It would be asked to give financial markets greater freedom to police themselves and streamline the process for approving financial products such as complex futures contracts. Right now, many financial firms and hedge funds get such products approved by other market regulators or trade them on foreign markets because of the bureaucracy of the SEC, Treasury officials have said.

SEC Chairman Christopher Cox said the regulatory system needs to be streamlined.

"Recent events have provided further evidence, if more were needed, that financial services regulation in the United States needs to be better integrated among fewer agencies, with clearer lines of responsibility," Cox said in a statement yesterday. "The proposed consolidation of responsibility for investor protection and the regulation of financial products deserves serious consideration as a way to better address the realities of today's markets."

Former SEC chairman Harvey L. Pitt, a Republican who resigned in 2002, said the blueprint offered a common-sense approach.

"The SEC's style of regulation -- mostly after-the-fact enforcement action -- no longer makes sense, if it ever did," Pitt said. "The existence of separate agencies to monitor different entities that all perform the same functions is no longer workable."

The SEC's inspections team could be stripped of much of its power if it ends up ceding its examinations to the Fed. The unit, known as the Office of Compliance Inspections and Examinations, has been targeted in recent months by industry and has been the focus of criticism from Republican commissioners.

While the SEC would lose some of its authority, the Fed would gain almost unprecedented power.

Yesterday, the Fed indicated openness to the Treasury Department's plan, without endorsing its specifics. A spokeswoman for the central bank called it a "timely and thoughtful analysis" and an "important first step in the complex task of modernizing our financial and regulatory architecture."

John M. Reich, director of the Office of Thrift Supervision, discounted the importance of the blueprint, which calls for his agency to be merged with the Office of the Comptroller of the Currency to streamline the regulation of similar types of financial firms. In an e-mail to his employees, which was obtained by The Washington Post, Reich wrote that "you might be wondering whether financial services restructuring is an idea whose time has finally come. I don't think so."

Reich suggested that the current arrangement, of multiple banking regulators, offers important checks and balances. "When the Treasury Department issues its recommendations, expect to see news stories and renewed questions about what the future will hold," Reich wrote. "Take note of the fanfare, then look back to [past failed efforts to restructure financial regulation] and resume the important work that you continue to do so well."

Staff writer Lori Montgomery contributed to this report.

As Big Banks Fall: The Bear Has Fallen and the Bull is Gone Why the Financial Crisis Is Not Just About Finances
By Danny Schechter
http://www.zmag.org/sustainers/content/2008-03/20schechter.cfm
ZNet Commentary March 20, 2008

New York: If you walk through London's High Gate cemetery and wander over to the grave of the late Karl Marx and then listen closely with your ear to the ground, you might hear a repetitive murmur of the phrase "I told you so" in a distinctly German inflected accent.

You might also see the earth moving ever so slightly as what's left of the bones below turn over in the realization that capitalists, not the proletariat, are the ones bringing down the system.

Fellow blogger Ian Williams, a former disciple of the bearded prophet, is now chanting, "Shareholders of the world unite" in recognition of the way the world is changing.  The fall of Bear Sterns and the collapse of confidence in our financial system is a profound turning point.

When you turn this rock over -and not just England's Northern Rock bank that failed earlier--- you see a seamy swamp of delusion, and deception, with `Wall Street worms slithering off to their condos in Colorado or their hangouts in the Hamptons.

This could be the end of an era of legalized greed, aided and enabled by the deregulation policies of the Busheviks with the active complicity of so many bi-partisan worshippers at the temple of the Free Market.  Alas, it is not just Republicans who were implicated or who rely on funding from Hedge Fund and FIREcrats: the Finance, Insurance  and Real Estate industries.

If you were a fellow banker on The Street this past Sunday, you realized that your master of the universe days may be over.  "Layoff Fear in Stox Shocks" was the headline in the New York Post. Prosperity has been displaced by panic.

8000 jobs had been lost before "the Bear," the nation's number #5 broker, was sold at a ridiculous discount, bought with $30 billion pumped through JP Morgan who picked up what was left of the firm at $2 a share. (It had been trading a day earlier at $170).

Many more and other dominos are expected to fall. 

Some experts believe that JP Morgan overpaid because the shares they bought actually had no value.  The money was used to monetize junk sub-prime holdings not yet written off-so much for the doctrine of moral hazard" that holds speculators should not be rewarded.  In fact, there is evidence not only of unethical practices but Enronesque illegal ones.

A week earlier, Bear Stern's former CEO bought a Manhattan condo for $28 million, no mortgage needed.  In December, compromised Wall Streeters walked off with $31 billion in bonuses, just a billion below the record set a year earlier.

The resumes are flying now with fears of mass layoffs spreading. The people who will be hurt initially are the lower paid back office workers.

The pain will not remain there.

How you understand these fast moving developments depends on where you sit in our highly stratified culture and how much you know about why a Wall Street crash can ripple into all of our lives.

If your name is Hank Paulson or Ben Bernanke, you have been huddling in alarm with the White House's "Plunge Protection" team coming -up with inventive new rationalizations for printing new money and bailing out bankers.  With the President directed to sound upbeat, the ex-Banker and former Professor are contradicting all their earlier assurances that the market would correct itself. 

If your name is Max Wolff, a New School professor and brilliant young economist, you were on a panel at the Left Forum in New York about "the Coming Depression" explaining how the derivative game had been repackaging fraudulent mortgages and then, slicing, dicing and "Securitizing" them off quickly with 72 hours to buyers all over the world.

Those buyers were mesmerized by the high returns but then found there were no assets behind these "asset-based securities."  Once turned on by Wall Street, they are now turning on it. The law suits blaming our Suits are coming. Foreigners have lost their confidence in how assets are valued.

If your name is Nicklaus Skaggs of Vacaville California, you are one of tens of thousands of homeowners who are walking away from your homes and their mortgage burdens. 

Reported the San Francisco Chronicle

"As their home values tumble and their mortgages rise, these "walk away" homeowners" decide to cede their houses to their lenders.   "It's throwing good money away after bad" to pay an escalating mortgage on a home that's plunging in value, said Army Sgt. 1st Class Nicklaus Skaggs.. He and his wife, Tishara, stopped paying their mortgage in February. They signed up with a new company called You Walk Away to help guide them through the multi-month foreclosure process."

Other homeowners are so angry that they trashing or burning their own homes. Still others are moving into tent cities springing up near Los Angeles. It took a British media outlet, the BBC, to report on that.

Has our media prepared us for this disaster? Yes, there are headlines now since these developments can't be ignored. But where were the TV networks and the press when all these practices which we now hear denounced were first taking place and building steam?

Where were the warnings and the outcry against the engineered dropping of the dollar and the likelihood that the interest rate cuts would drive up prices and lead to the stagflation we are now experiencing. Unfortunately this was not a celebrity sex scandal. Those worries  were buried.

The business press told us about the ups and downs of the market, not how the underlying debt burden and all the subcrime game playing could destroy our economy. Concludes Dean Starkman in the Columbia Journalism Review, "Today, as the credit crisis unravels, the business press can be fairly blamed for inattentiveness to the growing strains on middle-income borrowers. Maybe that's why so many middle-income people don't read it."

If they had, they would have seen the chorus of complementary coverage of Alan Greenspan who was lionized as a genius. Now critics point to how his policies created the housing bubble. Today, he says the economy is at its "worst points since WW2." One blogger dismisses him as "Mr. Obvious."

I met him-and have less amusing words to describe him with.

But what are we seeing in the rest of the press and TV media? More and more ads selling us deceptive mortgages and credit cards. The media is always more about selling (and buying) than telling the truth. Their failure as watchdogs helped bring about this economic failure not to mention the Iraq War now marking its fifth year. And they make money on the misery.

Even today, it's hard to get a critical narrative out on these issues. Some months ago, the Independent Film Channel told me they would broadcast In Debt We Trust (Indebtwetrust.com), the documentary I made warning of the crisis. Late last week, they killed it. No real reason given. On the same day, John Conyers, chairman of the House Judiciary Committed had staffers meet with me to schedule a screening on the Hill. He thinks members of Congress should see it urgently.

This is part of the media-reality disconnect we have to confront. You can't trust the financiers or the media that gave them a pass. We have to arm ourselves with information and prepare for the possible catastrophe to come.

News Dissector Danny Schechter edits Mediachannel.org. He is looking for a publisher for WE ARE SCREWED, a new book he's written about the crisis. Comments to dissector@mediachannel.org
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Wall Street Bailout Could Forever alter Role of Central Bank

By Neil Irwin Washington Post Staff Writer
Friday, March 28, 2008; Page A01

In the past two weeks, the Federal Reserve, long the guardian of the nation's banks, has redefined its role to also become protector and overseer of Wall Street.

With its March 14 decision to make a special loan to Bear Stearns and a decision two days later to become an emergency lender to all of the major investment firms, the central bank abandoned 75 years of precedent under which it offered direct backing only to traditional banks.

Inside the Fed and out, there is a realization that those moves amounted to crossing the Rubicon, setting the stage for deeper involvement in the little-regulated markets for capital that have come to dominate the financial world.

Leaders of the central bank had no master plan when they took those actions, no long-term strategy for taking on a more assertive role regulating Wall Street. They were focused on the immediate crisis in world financial markets. But they now recognize that a broader role may be the result of the unprecedented intervention and are being forced to consider whether it makes sense to expand the scope of their formal powers over the investment industry.

"This will redefine the Fed's role," said Charles Geisst, a Manhattan College finance professor who wrote a history of Wall Street. "We have to realize that central banking now takes into its orbit everything in the financial system in one way or another. Whether we like it or not, they've recreated the financial universe."

The Fed has made a special lending facility -- essentially a bottomless pit of cash -- available to large investment banks for at least the next six months. Even if that program is allowed to expire this fall, the Fed's actions will have lasting impact, economists and Wall Street veterans said.

As they made a series of decisions over St. Patrick's Day weekend, Fed leaders knew that they were setting a precedent that would indelibly affect perceptions of how the central bank would act in a crisis. Now that the central bank has intervened in the workings of Wall Street banks, all sorts of players in the financial markets will assume that it could do so again.

Major investment banks might be willing to take on more risk, assuming that the Fed will be there to bail them out if the bets go wrong. But Fed leaders, during those crucial meetings two weeks ago, concluded that because the rescue caused huge losses for Bear Stearns shareholders, other banks would not want to risk that outcome.

More worrisome, in the view of top Fed officials: The parties that do business with investment banks might be less careful about monitoring whether the bank will be able to honor obscure financial contracts if they assume the Fed will back up those contracts. That would eliminate a key form of self-regulation for investment banks.

Fed leaders concluded that it was worth taking that chance if their action prevented an all-out, run-for-the-doors financial panic.

Those decisions were made in a series of conference calls, some in the middle of the night, against hard deadlines of financial markets' opening bells. Fed insiders are just beginning to collect their thoughts on what might make sense for the longer term.

"It has wrought changes far more significant than they were probably thinking about at the time," said Vincent Reinhart, a resident fellow at the American Enterprise Institute who was until last year a senior Fed staffer. Whether there is a formal, legal change in the Fed's power over Wall Street or not, the recent measures, which were taken under a 1930s law that can only be exploited in "unusual and exigent circumstances," represent a massive departure from past practice.

The central bank was created in 1913 to prevent the banking crises that were commonplace in the 19th century. The idea was that the Fed would be a backstop, offering a limitless source of cash if people got the bright idea to pull all their money at once out of an otherwise sound bank.

In exchange for putting up with regulation from the Fed and requirements over how much capital they can hold, banks have access to the "discount window," at which they can borrow emergency cash in exchange for sound collateral. A bank might take deposits from individuals and make loans to people buying a house. Hedge funds do something similar: borrow money in the asset-backed commercial paper market and use it to buy mortgage-backed securities. But the bank has lots of regulation and access to the discount window; the hedge fund does not.

In recent decades, more of the borrowing and lending that was the sole province of banks has come to be done in more lightly regulated markets.

A decade ago, the nation's commercial banks had $4 trillion in credit-market assets, and a whole range of other entities -- mutual funds, investment banks, pensions, and insurance companies -- had about twice that much. Now, those other entities have about three times as many assets, based on Fed data.

Still, the Fed has resisted broadening its authority. On March 4, Fed Vice Chairman Donald L. Kohn told the Senate Banking Committee that he "would be very cautious" about lending Fed money to institutions other than banks or, as he put it, "opening that window more generally." The Fed did exactly that 12 days later.

The New York Fed said yesterday that investment firms have borrowed an average of $33 billion through that program in the past week.

The Fed has intervened in the doings of Wall Street in the past, but in limited ways. Most notably, in 1998, the New York Fed brought in heads of the major investment banks to cajole them into a coordinated purchase of the assets of the hedge fund Long-Term Capital Management, to prevent a disorderly sell-off that could have sent ripples through the financial world.

"Long-Term Capital was the dress rehearsal for what happened with Bear Stearns," said David Shulman, a 20-year veteran of Wall Street who is now an economist at the UCLA Anderson Forecast.

Treasury Secretary Henry M. Paulson Jr. said that if investment banks are given permanent access to the Fed's emergency funds, they should have the same kind of supervision that the Fed requires for conventional banks. "This latest episode has highlighted that the world has changed, as has the role of other non-bank financial institutions, and the interconnectedness among all financial institutions," he said in a speech Wednesday.

If Congress and the administration do broaden the formal powers of the Fed, it would be the latest in a long history of financial policy made out of a crisis. The Great Depression fueled an array of stock exchange regulation. The 1987 stock market crash led to curbs on stock trades. The 2002 corporate scandals led to the Sarbanes-Oxley Act.

And after the panic of 1907, a National Monetary Commission was formed to figure out how to prevent such things from happening again. Its crowning achievement: The creation of the Federal Reserve.

Societe Generale on trial in French-Israel scam

Feb 3, 2008

PARIS (AFP) — Embattled French bank Societe Generale faces fresh troubles Monday when a trial opens in Paris involving a vast money laundering scam between France and Israel.Four banks, including Societe Generale, and 138 people, including the bank's chairman Daniel Bouton, are on trial over the multi-million dollar scam that allegedly began in the late 1990s.The other banks include Societe Marseillaise de Credit, Barclays France and the National Bank of Pakistan.

Allegations of a money laundering network stretching between France and Israel initially surfaced during an investigation into a separate fraud involving companies in the Sentier garment-making district of Paris. Cheques trafficked from France were allegedly cleared in money exchange offices or banks in Israel, where a third party can clear a cheque by paying a cash sum, making it difficult to trace the origin of the funds. The sums were then repatriated to French banks. Among those charged in the France-Israel scam include six rabbis, a former French prosecutor and 57-year-old Bouton, along with other banking managers.

In the case of Societe Generale, investigators cite one example in which the bank received seven million euros (10.4 million dollars) in stolen cheques from the Israel Discount Bank between 1997 to 2001, "knowing these influxes had a criminal origin." All four banks are charged with contributing to money laundering and profiting from the deals. All deny the charges.