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The Banking Hustle

The Fed just let Morgan Stanley and Goldman Sachs off the hook after both failed the required stress tests under Dodd-Frank. The stress test is supposed to predict whether banks and so-called banks like Morgan Stanley and Goldman Sachs can weather a financial crisis.

This is not an instance of if you remember in 2008, who could forget? Few TBTF had set aside the necessary reserves to back the tranched MBS and the more risky CDS/naked CDS. These were the heady days of financial engineering and gambling on Wall Street. The models could not fail as they were statistically proven. Some investment firms such as Goldman Sachs (before it was made a bank by the Fed to save it’s hiney) made the call (CDS) on other nonbank firms such as AIG leaving AIG in dire straits as the money, the reserves were already paid out in dividends and bonuses. Greenspan did little to curb the appetite of investment firms and TBTF. The clearing board to track derivatives had not been installed by Wall Street. We were safe in the scheme of people pursuing what was best in the economy will only do what was right.

When it all hit the fan, the Fed had to make the investment firms (GS, Morgan Stanley, etc.) as well as others (American Express, GMAC [now Ally], etc.) banks in order to lend them money under the provisions of TARP and other save – the – banks plans (Barkley recommended a book; “The Alchemists: Three Central Bankers and a World on Fire” about what went on behind the scenes during the troubled times and a near economic collapse. I found it to be an interesting read during my long flights). The banks and newly designated banks and Wall Street survived (grumbling all the way about the inequities imposed upon them and lack of bonuses). Main Street paid the price in a crashing economy to which Labor as measured by Participation Rate has still not recovered from its numeric pre-2008. Republicans were all to willing to end lengthy unemployment and job training benefits for the less moneyed.

Back-step a little in time, just a few months ago Congress in all of its wisdom passed a revision to Dodd-Frank which raised the limit of banks from $50 billion to $250 billion in assets-cash-capital to avoid the Dodd-Frank stress tests. This was done under the guise of being called, (cough-cough, clearing my throat) community banks or The Community (Bank) Hustle as the Intercept would label it. You would expect this type of push to occur from Republicans; but, Democrats also joined in the give-away to the banking industry. 17 Democrats who were mostly (10) up for elections. Senators such as Michigan’s Debbie Stabenow (Stabenow also joined Biden in passing the 2005 Bankruptcy Act which included a provision disallowing bankruptcy for student loans) voted for this revision of Dodd-Frank. When there is a backbone needed, Democrats are largely silent and fade into the group hoping they are not noticed. “S.2155 The 2018 Economic Growth, Regulatory Relief, and Consumer Protection Act” has a nice ring to it the same as the Bankruptcy Abuse Prevention and Consumer Protection Act which disposed of bankruptcy for Student Loans. Consumer Protection?

Volcker felt $75 billion was enough leeway for banks and former Congressional Rep and sponsor Barney Frank felt $100 billion was enough (it may be reversed; but each is less than $250 billion). The $250 billion limit allows some of the riff-raff such as Deutsche Bank and Holding Company to escape the surveillance it should have through stress testing. With the $250 billion limit, “25 of the 38 largest banks in the United States would no longer be subject to stronger capital and liquidity rules, enhanced risk management standards, living-will requirements, and stress testing requirements. They collectively hold $3.5 trillion in assets or an approximate one-sixth of the assets in the entire banking sector. Scandal-plagued Deutsche Bank and other foreign banks such as BNP Paribas, UBS, and Credit Suisse should still be more heavily monitored rather than deregulated.

In May, Congress lessened the burden of maintaining adequate reserves for community banks which included 25 of the largest banks in the US plus the scandal-ridden banks (Deutsche, BNP Paribas, UBS, and Credit Suisse). The same act allows mortgages to be created with little or no confirmation of whether the borrower has the ability to pay back the loans and allows loans made outside of escrow requirements in which borrowers may be confronted with costly tax liens or force-placed insurance and loans being made with indirect kickbacks. And this is called Consumer Protection, the same as eliminating the bankruptcy protection on student loans without limiting what commercial banks could do to make those loans.

In June, “the Federal Reserve gave the giant investment banks Morgan Stanley and Goldman Sachs a pass for ‘stress tests’ even though they had failed it. In the review of their financial conditions, it was determined that the banks did not have enough assets to allow them to weather a financial crisis. Despite failing the stress tests, the Fed agreed to allow the banks to pay $billions in profits to investors which, under normal application of the rules, the banks should have kept. This is just the latest example of leniency that the Fed, governed now by Trump appointees, is showing the financial industry. Other examples include the dismantling of the Consumer Financial Protection Bureau, the rolling back of the Dodd-Frank post-2008 financial regulations for medium-sized banks, and the reduction of compliance penalties under the Community Reinvestment Act.”

Bill Black: “the US is in the eighth straight year of economic expansion. The country is close to full employment (I would disagree on that point). Business failures are at a minimum and would not be defaulting on their loans. Banks should easily pass these stress tests. The San Francisco Fed recently published results that showed in the last 60 years, inverted yield curves have predicted recessions. with the exception of one, an inverted yield curve was followed by a recession and followed by a substantial reduction in growth. The yield curve looks like it’s about to invert again (longer-term interest rates are lower than shorter-term interest rates).”

Maybe now is not the right time to loosen regulations on major banks.

run75441 @ Angry Bear Blog

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Adding to Steve’s quest to define “money”. A couple short films.

Via Digby comes a couple short films talking about what is money.   They are part of an effort by a group/site called We The Economy that has 20 short films aimed:

 to drive awareness and establish a better understanding of the U.S. economy. Told through animation, comedy, musical, non-fiction, and scripted films, WE THE ECONOMY seeks to demystify a complicated topic while empowering the public to take control of their own economic futures.

I have to say I am a bit biased toward these two films as they promote the idea that I have presented here in various ways: trust.  It all comes down to trust.  All our wealth, power, security, prosperity and future.  Trust is the money.   And we have been doing our damnedest to destroy it in the quest for ever greater growth (financial or otherwise) via some concept referred to as freedom or more relatedly “free market”.

They are kind of humorous in parts too.

That Film about Money, part 1

The second part of That Film about Money

I’m going to go watch the rest of the films now.

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It is in the interests of bankers and landlords to masquerade as capitalists

An comment worth noting on an  interesting post Where Are You in the Economic Strata? by Barry Ritholtz is the following (hat tip Mike K.):

In my opinion, aspirational voting is the consequence of a rational
dedication to ethics based upon false assumptions of what is ethical.
As I see it, there are two forms of income. The first type of income
is generated through productive achievement that benefits others and
grows the economic pie – this is the symbiotic relationship between
labor and capital. The second type of income is generated through
rent-seeking behavior that simply alters the flow of money, but does
not grow the economic pie – examples of this include
fractional-reserve banking and the land increment of rent. It is in
the interests of bankers and landlords to masquerade as capitalists,
but they are not capitalists (since they don’t grow the capital stock)
– they are rent-seekers.

Republicans are people who correctly see the benefits of capitalism
(the expansion of the capital stock that adds value to labor), but
they are fooled into thinking bankers and landlords are capitalists.
Democrats are people who correctly see the evils of wealthy
rent-seeking individuals, but they incorrectly attribute rent-seeking
to capitalism. In my opinion, Democrats would be wise to change their
target from “the 1%”, which may include capitalists that help others
(Apple is not the problem), and focus their attention specifically on
the rent-seekers (banking is the problem). By using this strategy,
Democrats can align themselves with Republican voters who support
productive capitalist activities, while at the same time exposing the
rent-seekers who masquerade as capitalists. In my experience,
Republicans are increasingly skeptical of banking. They are starting
to get that banking is different from other capitalist activities.
There is a real opportunity for Democrats, but they’ve got to be sure
they select the correct bogeyman.

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