Occupy Wall Street

[sunrisevt]

Yeah, the big picture on this, as I see it (with help from Nobel Laureate Joseph Stiglitz for laying it out clearly):

"...we've socialized losses and privatized gains..."

The big banks acted like a coked-up Vegas bachelor's party, and got bailed out. None of us little guys have such security. In fact, those money-fat fuckers are looking for all sorts of ways to pad their profits, and they aren't spending any of their money back into the economy--lending is still sluggish, etc.--but they're giving themselves record bonuses all the same.

I'd guess that we're still several steps away from torches, heads on pikes, that sort of thing. But it's not hard to imagine how other societies have gotten there.

[mehead]

There has been inadequate effort to determine if laws were broken.

Correct and there won't be an effort.  Seeing how a lot of those executives for Goldman now have powerful positions elsewhere - the majority in politics and some for Obama.  This protest is waaaaaaaaay too late to have any impact IMO.

[gah]

Also, all 50 states AG's (with the occasional outlier, NY intitally, California recently, etc) are working for a settlement with the banks instead (supported and proposed by the Obama admin)  leaving them no legal resposibility for their actions and security from future lawsuits.

[mehead]

Yup.  Again, the ship has sailed. 

[runawayjimbo]

I am asking this because I don't know.  My understanding is that a big part of the protest is the fact that no one has been indicted for what happened.  What I don't know is what law was broken?  Was there one or was there just a huge gap in regulations?

There was clearly securities fraud as the banks were selling a product on which they had not performed proper due diligence (and, in some cases, were selling loans they didn't even have a legal right of ownership).

The worst part, as RJ said, there has been no effort in bringing justice in these cases. There were literally thousands of bankers jailed after the S&L crisis, yet the worst penalty to date in the credit crisis was Goldman's $550M SEC settlement. Why would bankers be expected to change if they know they can act with impunity?

As for the Stiglitz quote, which I agree with, who's to blame for that? I don't mean to go all "gov't ruins everything" here, but this is obviously all the gov'ts fault. :wink: Once Paulson and Geithner gift-wrapped Bear Steans to JPM, they confirmed what the industry had suspected for a number of years: we can do whatever the fuck we want because we have the explicit guarantee of the federal gov't. The shock from the Lehman failure was the uncertainty created by Paulson's pissing match with Dick Fuld. Then they turn around a couple of weeks later and bail out AIG (which, in effect was a bailout of Goldman), and that's when the markets realized that no one in the US gov't had any fucking clue what they were doing.

They are using the same logic for not prosecuting bankers as they did to justify TARP: we can't afford to destabilize the tenuous financial system because that would be disastrous for everyone. So by my count, in their efforts to "save" us, the federal gov't has:
(1) created the sub-prime housing market which caused the fiasco by mandating Fannie/Freddie increase lending to unqualified borrowers,
(2) bailed out failed institutions, rewarding them for grossly over-leveraged portfolios and encouraging them to continue the "coked-up Vegas bachelor party",
(3) refused to hold anyone involved accountable for the utter failure at every level of management,
(4) allowed the banks to write the law intended to prevent future crises.

They've done enough, IMO. Please stop trying to save us.

[Hicks]

So you are against a reinstatement of Glass–Steagall then RJ2?

[sunrisevt]

jimbo I'm glad to see we agree on something: US government policy--deregulation, mostly--is the primary cause of the inequities OWS is protesting. My only hope is that these protests turn into a sustained movement and pull on the DNC, hard, from the left. I'm pretty sure you'll say the DNC is useless, but in the short term I still think they're the best hope...   :|

[runawayjimbo]

So you are against a reinstatement of Glass–Steagall then RJ2?

Let me ask you, Hicks: if parts of Glass-Steagall had not been repealed in GLB, would the crisis have been averted? The main provision repealed was the separation of investment and commercial banks. But if the merging of these two functions directly caused the crisis (as many on the left contend), why were the main casualties - Bear and Lehman - the only major investment banks who declined to take advantage of this newly granted "windfall"? If anything, the evidence suggests that the banks who had the stability of commercial banking deposits were the ones least likely to need taxpayer support.

I fully support the Volcker Rule, though, which would eliminate prop trading by banks which in my estimation contributed far more to excessive risk taking than did the repeal of GS.

jimbo I'm glad to see we agree on something: US government policy--deregulation, mostly--is the primary cause of the inequities OWS is protesting. My only hope is that these protests turn into a sustained movement and pull on the DNC, hard, from the left. I'm pretty sure you'll say the DNC is useless, but in the short term I still think they're the best hope...   :|

So, are you arguing that OWS should be the counterweight to the Tea Party?

And while I fully agree with you that gov't policy created the disaster, I'm not so sure I'd agree that it is deregulation necessarily. I think housing policy, a lack of conviction re transparency in derivatives markets, and regulatory capital requirements were the primary culprits. That and the moral hazard farm the gov't created when it told the banks they should strive to be "Too big to fail." Failure needs to be an option or else there is no incentive to prevent it.

[Hicks]

My understanding of Bear and Lehman implosions is that they were caused by massive short trades of a highly dubious origin.

As for why that occurred, I believe it is still somewhat of a mystery. 

But to answer your question, no I don't think the merging of investment and commercial banking was the prime cause of the crisis, but it sure didn't help matters and it seems logical to keep the two separate to avoid shady trading behavior of exactly the type that brought down Bear and Lehman. 

[runawayjimbo]

My understanding of Bear and Lehman implosions is that they were caused by massive short trades of a highly dubious origin.

No, their failure was due to massive losses on sub-prime MBS's that they were holding. Lehman, especially, maintained a large position in lower rated bonds since they paid a higher yield. But as the housing market started to turn to shit, there was basically a run on them and they had to sell assets to make margin requirements and share prices got hammered. It became a liquidity death spiral and, especially in Fuld's case, management's hubris got the best of them.

[Hicks]

My understanding of Bear and Lehman implosions is that they were caused by massive short trades of a highly dubious origin.

No, their failure was due to massive losses on sub-prime MBS's that they were holding. Lehman, especially, maintained a large position in lower rated bonds since they paid a higher yield. But as the housing market started to turn to shit, there was basically a run on them and they had to sell assets to make margin requirements and share prices got hammered. It became a liquidity death spiral and, especially in Fuld's case, management's hubris got the best of them.

You don't believe Taibbi on this one?

http://www.rollingstone.com/politics/news/wall-streets-naked-swindle-20100405

[runawayjimbo]

I don't remember that article. I'll give it a full read later on, but based on the intro, if he is suggesting that Bear collapsed because someone bought $1.7M in put options, than no I don't agree with that. And (again based solely on the intro) if he is suggesting that another investment bank had a hand in the trade and actively worked to manipulate the market to make their options pay off, I definitely don't agree with that. Any undergrad can look at the near perfect correlation of banking stocks to realize that if one of them goes down, they all go down. So I can't imagine a scenario where an executive at a rival bank actively sought to push down the share price of a competitor. Finally, decreasing share price only makes it more difficult to raise capital; it has nothing to do with a bank's solvency. Ultimately, it was the losses Bear/Lehman had to take from marking down their CDOs and their management's arrogant refusal to sell them at fire sale prices that did them in.

As I've said, I think Taibbi has been a leading voice (really the only mainstream voice) in exposing the abuses that went on, but I do think he gets a little caught up in populism from time to time. But I'll take a full read later and let you know if I have a change of heart.

[Hicks]

Uh, but they didn't all go down, the result was that they did consolidate their power. . . 

[runawayjimbo]

Uh, but they didn't all go down, the result was that they did consolidate their power. . .

The share price, not the companies.

I think Taibbi is way off base on this one. For sure the practice of naked shorting should be illegal and I agree that it is financial counterfeiting. However, to act like naked shorting was the direct cause of Bear and Lehman's decline is pretty implausible IMO.

The comparison between a small cap, internet retailer like Ovestock.com and 2 of the largest financial companies in history is ridiculous. I get why Byrne is out railing against naked shorting because it could have a very real effect on his company's share price (although anytime someone protests as much as him I get a little suspect. I mean, have you ever used Overstock.com? I haven't). But Bear and Lehman had a market cap 10-20 times that of Overstock, so there's no conceivable way short sellers could destroy those companies. The market is way too liquid for that.

Then he starts throwing out failed to deliver "data" to support his claim that there was obvious naked short selling going on in both cases. Sure in Bear's case the increase from 200k to 14M is obscene, but the number of faileds was only around 7% of total outstanding shares. There is no way that would contribute that heavily to the decline in the share price.

Then we get into when Treasury steps in. He makes a point to say "Thanks to the media-fueled rumors and the mounting anxiety over the company's ability to make its payments, Bear's share price plummeted seven percent on March 13th, to $57" but then notes it climbed back to $62 on news of the short term loan from Treasury. But then he just glances over the most important part: "The rally proved short-lived — Bear ended the day at $30 — but it suggested that all was not lost." It is mathematically impossible that naked short selling could push the price down 50% in a day. He then makes some rather nefarious (and unfounded) implications that Paulson pulled the loan because he was from Goldman and pressured Bear to take Dimon's low ball offer. When a company says "We are accepting a short term loan from the federal gov't" it doesn't exactly instill confidence in that firm. The shares collapsed because the writing was on the wall.

The company failed because it was grossly mismanaged and overleveraged. For a couple of years, they were basically printing money and everyone at the firm prospered because of it. But when the economy started to turn and the housing bubble burst, their leverage caught up with them and their massive sub-prime position made it impossible for them to survive. That's the thing about leveraged portfolios; it's easy to look like a genius when the markets are only going up, but a breakdown in risk management can destroy a company in times of uncertainty and volatility.

I like Taibbi's recent work a lot. I think he does great job exposing some of the more egregious excesses of the financial industry when he focuses more on investigative reporting rather than a narrative based on speculation. This was not his finest effort, IMO.

One other thing, I agree with most of his conclusions toward the end of the article: no one did their job overseeing any of this; Obama inserted the same characters in his administration; no effort to hold anyone accountable. Now, you would probably say that is a sign that more regulation is needed in the financial industry, but it could also be used as an example of how regulation fails. There will never be enough regulation that would prevent the kinds of abuses and excesses the banks exhibited in the lead up to the crisis. There will certainly never be enough people to enforce these regulations. All complex industries are subject to regulatory capture since most of the regulators need to have an intimate knowledge of the industry and because of that, they often come from the industry itself. I'm not arguing there shouldn't be regulation, but the idea that the gov't can stop this kind of behavior just doesn't make sense to me.

In the end, the most effective regulation is the risk that a firm can fail. Without that, regulators will be powerless to prevent future crises from materializing because they are only focused on preventing the past abuses from resurfacing.

[sls.stormyrider]

we're starting to agree. a little.

The Glass Steegall repeal added fuel to the fire. In 08, even conservative (moderates by todays standards) and some financial types were  calling for it's reinstatement.

Poor govt regulations and deregulation were partly to blame. Please, lets not ignore the extremely bad behavior of those in the industry. The people that wrote them were either wall streeters or people payed well by wall street.  And Obama has done little to prevent the Wall streeters from having too much influence; not to the extent of the GOP, but still...

Why were these firms allowed to over leverage themselves? Because they convinced govt to allow them too. The rules changed w/in the past 10 yrs
Whey were they allowed to get so big? Because they convinced govt and the SEC to allow them too.
Why was derivative trading unregulated? same reason.
The bad policies weren't necessarily born in the minds of a politician, they were put there by someone who bought their way in.

One of the reasons there aren't enough regulators is the GOPs efforts (funded by...) to prevent regulators and regulation. If Elizabeth Warren had her choice 2 years ago, do you think running for Senate would be it? She wasn't allowed to be a regulator because she is too "anti Wall St"

Your right, most industries are so complex that members of the industry have to help with regulation. I can't think of another large, regulated industry that has taken advantage of the situation as much as the financial industry. No surprise as to why that might be.

No matter how good the law is, and no matter how many cops are out there, criminals, or in this case unethical, greedy financial types, will always find a way around them. Laws, and fear of enforcement, just make it that much harder. These guys have the power and influence to believe they can get away with anything (and they can).