Relevant and even prescient commentary on news, politics and the economy.

SEC capture…

Yves Smith at NC:

The SEC showed its true colors yet again at a panel at Stanford Law School at the end of March, although not as dramatically as last year. In last spring’s SEC panel at Stanford, the then head of examinations, Andrew Bowden, made such fawning remarks about private equity, including repeatedly saying he’d really like his son to work in the industry, that he resigned three weeks after we publicized the segment. Nevertheless, this conference was another demonstration of depth of regulatory capture at the agency.

As before, the real action came in when the audience members asked questions. They were all fielded by Andrew Ceresney, a former Debevoise & Plympton partner, now head of enforcement. We’re going to look at two questions in succession.


ADDENDUM: Beverly Mann here: This New Yorker article from last month is an absolute must-read.  After I read this post and Yves’ full post yesterday, I tried to find this article and link to it but couldn’t remember where it was published or any of the specific names in it.  But, by chance, I just came across it.

It’s just breathtaking.

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All in one day of reporting…

This is just one days reporting from various sources. I thought I would pass them along. On the face of it perhaps the story line is clearer to even regular folk:

JPMorgan Said to Hire Ex-SEC Enforcement Chief McLucas for Loss Probe
By Joshua Gallu and Dawn Kopecki

JPMorgan Chase & Co., the biggest U.S. bank, has hired former U.S. Securities and Exchange Commission enforcement chief William McLucas to help respond to regulatory probes of the firm’s $2 billion trading loss, according to two people with knowledge of the assignment.

The lender’s May 10 announcement of the “self-inflicted” loss spurred reviews by the SEC, Commodity Futures Trading Commission, Office of the Comptroller of the Currency and Federal Bureau of Investigation. JPMorgan has said the losses may increase. Kristin Lemkau , a company spokeswoman, didn’t have an immediate comment on the hiring. The people requested anonymity because the appointment hasn’t been made public.

Via the Real News comes this headline J.P. Morgan Funds Senate Finance Chair, Even Bigger Problem in the Wings

ome and testify and explain how they lost $2 billion. There’s a problem here. Who is Senator Tim Johnson’s largest campaign contributor? Well, that’s people associated with JPMorgan. So file this under the category as you can’t make this stuff up, as Tom Ferguson said to me…

Bloomberg reports a change in the way the SEC and businesses relate:

+ The U.S. Securities and Exchange Commission, long known for settling enforcement actions without having to prove its case in court, is struggling to cope with a surge in the number of executives and companies willing to go to trial to defend themselves.

+The SEC’s office in Washington is actively litigating about 90 cases, up more than 50 percent in the past year, Matthew Martens, the SEC’s chief litigation counsel, said in an interview. At the same time, Martens’ trial unit staff has stayed relatively flat at about 36. He recently added three more lawyers to his group and is looking to hire more.

+The wave of litigation has two main sources: more complex cases stemming from the 2008 financial crisis and a related increase in lawsuits filed against individual executives.

+Martens said it’s critical that his unit present a credible threat. “At the end of the day, if we can’t win cases, then people don’t settle. That’s the reality,” he said.

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The “JOBS” bill today

Simon Johnson points us to more information on the JOBS bill (see link) and a Senate vote today:

As it currently stands, the “JOBS” bill now before the Senate would gut investor protection in the United States. The title of the bill is a complete misnomer – anything that weakens investor protection makes it more risky to invest in companies and increases the cost of capital to honest entrepreneurs. (For more background on the bill and links, see this piece.) 


Specifically, Senator Reed’s amendment would close or limit a major loophole that will allow large companies to avoid registering with the SEC (and therefore escape much regulation). The Reed Amendment would clarify how to define “shareholders” for the purpose of determining if a business is so widely owned that it must register with the SEC. Under the Amendment, the count should be based on beneficial owners of the shares, i.e., real people. The goal is to prevent evasion of the SEC registration threshold through “nominal” owners holding the shares for large numbers of beneficial owners. Big companies like H.R. 3606 – they will be regulated less and if the cost of capital rises for start-ups, that actually helps them. The Chamber of Commerce, the American Bankers’ Association, and the Independent Community Bankers of America have all weighed in heavily against the Reed Amendment – the idea of escaping SEC scrutiny greatly appeals to them.

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Does A Very Strange Distribution Lead to a Sacrifice in the Hope of a More Interesting Endgame?

Brad DeLong notes an experiment subject (as is the wont of the Obama Administration to date) to regulatory capture:

In a surprising move, the Obama administration will extend special bonus payments meant to reward top-performing Medicare Advantage insurers to those that score only average ratings….The law says bonuses, which start in 2012, would go to insurers that scored at least four out of five “stars” on a set of quality measurements. Instead, a “demonstration project” authorized by Medicare officials will extend bonus payments to plans that score at least three stars. Based on this year’s star ratings, the change means 62 percent of all Medicare Advantage insurers…will qualify for the quality bonuses, compared with only 14 percent of plans under the health law provisions.

If those figures are accurate, then 48% (62-14) of all M.A. insurers are judged to provide “average” (three star) quality.

Perhaps more importantly, 38% (100-62) are judged to be substandard. (The good news is that those M.A. insurers have only 16% of the market. The bad news is that they have 16% of the market.)

In the optimistic version, the new structure facilitates culling the worst of the herd while not damaging that plurality of users who are receiving “average” care.

The pessimistic version is to suspect that those 16% who receive substandard care are in non-competitive markets, and will therefore end up, for the next three years, paying more for the privilege of being ill-served and then receive only marginal benefit from the HIEs.

I’m uncertain whether Dr. DeLong is a pessimist, or is just looking at the additional short-term spending and ignoring that the endgame is to have quality providers in the HIE, and punishing the bulk of the market for the ills of the few this early will make improvements later on less effective.

Then again, I’m uncertain whether I should trust that the Administration knows what it’s doing on its Signature Issue. Which is, as Digby noted in another context, rather more the problem for that Administration.

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And Next Mark Will Ask for A Pony

Slowly moving back into everything, and so catching up with Mark Thoma’s use of Paul Volcker as his latest line of Defense of Giving the Fed More Regulatory Power. (Amusing in itself, given Volcker’s description of the Fed before he was Owned by the Obama Administration.)

I like Thoma (a lot more than he likes me) and his professional work is clean and clear. (Judging by his videos, he’s also the second best college-level Econometrics teacher I’ve ever seen—and it’s no crime to be behind Peter Loeb in that regard.)

But he’s an Incurable Optimist, especially in his blogging. For instance:

If we ask tough questions and insist that the Fed take action in response to the problems that are uncovered, oversight can be improved without moving the authority outside of the Fed.

The English translation of that is: Better the Devil We Know Has Already Failed and that doesn’t have—or appear to want—the Governance Skills to Do the Job Required.

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Geithner’s Baa Humbug to Jobs and Labor

Geithner’s Baa Humbug to Job’s and Labor
(h/t Run75441)

“Ebenezer: Since you ask me what I wish sir, that is my answer. I help to support the establishments I have named; those who are badly off must go there.”

Daniel Gross at Slate interviews Tim Geithner here: “We Will Be Judged on How We Dealt with the Things that were Broken”  Some rather revealing statements by Tim Geithner to Daniel Gross’s questions:

GROSS: There’s a perception that you regard your portfolio narrowly, as primarily focused on the health of Wall Street, with Main Street a distant second.
GEITHNER: “My first and essential responsibility was to fix and reform the financial system. That was necessarily going to be the principal part of what people saw. About half my time from the beginning has been spent on the design of the broader economic strategy. The idea that we did not do much for the broader challenges facing the country is completely unjustified. The Recovery Act itself was not just a sweeping, essential force for growth but included a bunch of targeted investments in education, energy, environment, health care that will have huge long-term benefits.”
(Run here: Geithner misses the point or makes the point that finance is the number one concern over Main Street, even though Main Street is financing the rescue of W$. The constituency doesn’t want charity in targeted investments in education, energy, education, and environment when it can pay for those investments itself if they are working. Main Street wants jobs? Main street is still waiting for that tsunami of job creation which is one of the broader challenges of any administration and no administration has put into play any package to stimuli it or companies to do more. Jobs are left to free market influences which is content with investing profits elsewhere other than job creating infrastructure.)

GROSS: So you don’t think the bailouts were too friendly to Wall Street?
GEITHNER: “The idea that the strategy was unfair and has principally benefited a small number of institutions in New York is a mischaracterization of the design and result of the strategy. I thought people would have understood this after the failure of Lehman Bros. But when you do too little and you leave the system with real fear that everything is going to fall apart, like any financial crisis, it hurts the poorest most. A just and fair strategy, even if it is politically hardest to explain and justify, is to use well-designed but massive force to stabilize the system.“

(Run here: Over at Naked Capitalism, they are debating whether Goldman Sachs drove the collapse of AIG by calling for the mark down of CDO by companies holding too many of them thereby forcing AIG to raise collateral after it was downgraded and eventually paying off on CDO that never were expected to payoff. While AIG is at fault for seeing too many pie in the sky dollars in risk and having too little collateral to cover it, one has to wonder why Goldman Sachs should have received 100% on the dollar on its CDS for its risk with AIG and not knowing how over leveraged AIG was at the time. Goldman Sachs certainly benefited by Geithner’s negotiated settlement of AIG’s liabilities at 100% on the dollar.)

GROSS: The biggest downside surprise?

GEITHNER: “The [high] level of unemployment relative to what was happening in the economy as a whole. I’m not an economist, but almost all forecasters missed that. And that’s hugely consequential, because it’s the prism through which most people view basic economic health.”

(Run here:He is kidding right? During every economic downturn, it has consistently been Main Street that has been shown the street from their jobs or homes.)

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Much to My Amazement

UPDATE: It gets even stranger. The bankrupt-since-October-2008 Lehman Brothers is going to pay $50,000,000 in bonuses for this year. (h/t alea’s Twitter feed)

It appears all of the “gosh, we really made a lot of money from bailing out rich bankers who socked it to their customers” rhetoric is having a small problem in the realization:

The U.S. government abruptly shelved plans to start trimming its 34% stake in Citigroup Inc., after investors demanded a price so low that the Treasury Department would have lost money on the deal….

The huge offering encountered a lukewarm reception on Wall Street, where investors were skeptical of the company’s earnings prospects…

Gosh, golly, gee. Really? I wonder if that’s a recent phenomenon:

(Recession period—still not officially over—shown in cyan.)

Hmmm. Guess not. Ah, well, there’s always next year. Or the year after. Or…

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Hoisted from Comments (thought not here)

UPDATE: D-Squared chimes in, saying in less than 100 words what took me a couple of thousand (though with no quotes):

After the “first hundred days” in the term of a new Democratic President comes the next stage; the almost impreceptible transition among his supporters from saying

“of course, he’s been hampered by all sorts of obstacles to date, but he’s about to start delivering on all those promises he made to his supporters on the left”

to saying

“well, he never really promised anything and it’s terribly naive to think he was ever going to deliver anything to his supporters on the left”

Apparently we’ve reached it.

That’s why he gets the big bucks, folks.

Brad DeLong attempts to attack Matt Taibbi’s facts. Tao Jonesing replies in comments (DeLong starts; Jonesing in bold) :

  1. The financial reform bill that just passed the House is not nearly as strong a bill as the Treasury wanted. The reason is not that Obama and Geithner did not push for a stronger bill, but rather that the members of congress balked at a stronger bill. What financial did Obama and Geithner “push for,” exactly? And don’t point us to speeches. What did they push for, i.e., actually apply the pressure of the bully pulpit? Unless there’s some way to establish that they brought pressure to bear, I think this fact is an opinion.
  2. Citigroup did not receive a $306 billion bailout as the first major act of Obama’s presidency. First, where does the $306 billion number come from? The number I associate with Citigroup is $45 billion of TARP money. Certainly Citigroup would be bust and gone if not for government aid extended to it during George W. Bush’s presidency–aid that Obama endorsed–but it now looks as though Citigroup will pay everything back: that the government will profit from the aid it extended to Citigroup.Clearly, Taibbi is including the backstop in his number, which you realize in 8.*
  3. James P. Rubin is not James S. Rubin.
  4. The James Rubin whom Mike Froman brought in to staff the economic policy search was not Bob Rubin’s son. 3-4. Taibbi admits this error.**
  5. The Obama economic policy inner circle–Tim Geithner, Gene Sperling, Larry Summers, Christie Romer, Peter Orszag–is not “a group of Wall Street bankers.” It is only 5% Wall Street banker–only 1/4 of Larry Summers can possibly count as a Wall Street banker.You misread what Taibbi said, which was that two people in Obama’s economic policy inner circle–Goolsbee and Kornbluh– were replaced with a group of Wall Stret bankers. Taibbi did not say that the all of the inner circle were Wall Street bankers. So, your fifth “fact” is actually a strawman. Perhaps you are focused on the subtitle? I can’t lay the subtitle at his feet because editorial staff make that decision. Note from Ken: Brad is incredibly generous in the case of Geithner, whose dinner plans while at the NY Fed were consistently at the homes of Wall Street bankers, and Summers, whose work since attempting to destroy Harvard’s endowment has been with Goldman, D. E. Shaw, and other paragons of Wall Street. Summers may have worked for years without being on Wall Street, but it has been his primary source of income since his divorce.
  6. Mike Froman staffed the economic policy search. Mike Froman–a very smart and capable man–did not lead the economic policy search. He was not some corrupt Svengali who foisted advisors who would whisper evil in the innocent Obama’s ear. Obama led the economic policy search. Come now, Obama led the search? Really? What did that leadership entail, delegating the day-to-day responsibilities to somebody else? Froman, maybe? Since you seem to know, what did Froman actually do? And Taibbi never said or implied Froman was a corrupt evil Svengali. His point was that Froman was a Citi insider. Overall, this fact seems more like opinion.
  7. Austan Goolsbee’s absence from the transition staff was not notable. Austan Goolsbee does have a senior subcabinet appointment. And Austan Goolsbee is not a voice on the economic left–this is the man who told the Canadians not to take Barack Obama’s claims that he wanted to renegotiate NAFTA seriously. I don’t know the story of Karen Kornbluh.Your opinion of Goolsbee’s departure is an opinion, not a fact. I don’t know whose opinion is correct, although I’d bet on yours.
  8. Ah. Taibbi says: “the government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets.” First of all, $277 + $45 = $322, not $306. But a guarantee is not money at risk and money at risk is not money lost. As I said, it looks like the government is going to make money off of its support of Citi. (Albeit not off its support of AIG.) Clearly, Taibbi is including the backstop in his number, which you realize in 8. Note from Ken: This is, by the way, bullshit, since it’s actually another example of the Rubinesque “contracts are only valid if they favor Wall Street firms.” What is being counted as “profits” are deeply-discounted equity options that have value because of the mass amount of subsidization and drug money that has gone into the banking system without in the least being passed on to the consumer who is footing the bill.
  9. Tim Geithner was not hired as Treasury Secretary by Mike Froman. Tim Geithner was hired as Treasury Secretary by Barack Obama. You are correct that Obama hired Geithner. Nobody else could have, at least in the end. But who proposed Geithner? And what weight did Obama give the opinion of the people who proposed him? Did Obama just rubber stamp the recommendation after meeting Geithner? Who else was on the list? While there’s no doubt that Taibbi was making a lot of assumptions about Froman’s role and level of influence to jump to the obviously false conclusion that Froman hired Geithner, the fact that the conclusion was obviously false does not detract from ugly optics that Taibbi was attempting to magnify.
  10. According to CBO, the ARRA so far is not worth 640,000 extra jobs as of September 2009 but rather 1.1 million plus or minus 500,000–and that number will grow.You got your number from the CBO, but Taibbi says he got his number from the White House. There is a website managed by an executive branch agency that proclaims the 640,329 job number used by Taibbi.

So that scores as 5 (or 6, since I’m inclined to count [2] in the Taibbi column) to 3 (3, 4, and arguably 7) against DeLong, with (8) called a draw (I would give it to Taibbi—the guarantee covers $306B in “assets” without cherry-picking, so potential buyers are seeing “support”-level offers for the entire $306B. But there is a specific issue in using the $306B number, and Dr. DeLong correctly notes that the actual backstopping was greater than Taibbi reports. Whether this makes his interpretation here preferable is left as an exercise.)

Hint for the future: if you’re going to claim you’ve got fifty corrections, lead with your ten best.

*From the comments later, Our Own Rusty lays out the details:

Wall Street Journal 11/24/2008…Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. — will take on any additional losses, though Citigroup could have to share a small portion of additional losses…In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion.

So it didn’t happen during Obama’s presidency, but it did happen post-election, and during the time that the Obama Administration was—by its own declarations—actively holding discussions with the parties.

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I Be Officially Right of Center Now?

As I am arguing on the same side as Henry Kaufman, and against the kind-hearted Mark Thoma, does the phrase “left-of-center” at the top of this blog have as much Memory Meaning as the Suzanne Vega song from Pretty in Pink?


During the Greenspan years (1987-2006), the Fed clearly failed to recognize the significance of the many structural changes in the financial markets—such as the rapid growth of securitization and derivatives—on economic and financial behavior and thus for its monetary policy. The Fed also failed to foresee how the 1999 repeal of the Glass-Steagall Act, which had separated commercial from investment banking since 1933, would sharply accelerate financial concentration through mergers and acquisitions and thus contribute to the “too-big-to-fail” phenomenon.


The hope is that an independent Fed can overcome the temptation to use monetary policy to influence elections, and also overcome the temptation to monetize the debt, and that it will do what’s best for the economy in the long-run rather than adopting the policy that maximizes the chances of politicians being reelected.

On of those people lives in reality. The other, apparently, is a good econometrician.

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