bank run blog

The failure of the Obama administration to engage any of the serious, respected economists who have proposed directly confronting the insolvency of the nation’s four largest banks, instead endlessly of coddling them along with their faceless bondholders, ensures that the narrow views that predominate within the White House economic policy team will remain unopposed.

It might be too much to hope for consultations with Nouriel Roubini, Joseph Stiglitz, or James Galbraith, even though all of them are basically centrists with eminently appropriate resumes, but now it seems that Summers and his minion, Geithner, have succeeded in totally marginalizing veteran economic policy advisor Paul Volcker. The Wall Street Journal reports :

“As an early supporter of Barack Obama, Paul Volcker gave the young presidential candidate gravitas and advice. He frequently sat by Mr. Obama’s side at key economic events, and started carrying a cellphone for the first time, just to be able to brainstorm with the candidate from the campaign trail.

In the Obama White House, the role of the 81-year-old former chairman of the Federal Reserve has been more limited.

The one-time central banker has been put in charge of a presidential advisory board that hasn’t yet had a formal meeting. It has been nearly a month since he has seen Mr. Obama. Mr. Volcker hasn’t been a main player in key decisions handling the global financial crisis.

Treasury Secretary Timothy Geithner unveiled the administration’s plans for handling troubled financial institutions and the housing crisis without seeking input from Mr. Volcker, associates say. ‘Paul was surprised’ at the failure to consult him, particularly on issues of financial rescue after his dominant role in resolving financial crises in the 1980s, says one person who has spoken to Mr. Volcker recently.”

The deliberate isolation of Volcker has been underway since before the inauguration. Bloomberg covered the petty feud in this February 5 story Volcker Chafes at Panel Delay, Clashes With Summers :

Wall Street Journal : Volcker Assumes Smaller-Than-Expected Role With Obama

Bloomberg News : Volcker Chafes at Panel Delay, Clashes With Summers

originally published June 26, 2005

The Bush Administration’s nominee to chair the Securities and Exchange Commission is a veteran advocate of business interests and an outspoken critic of regulation and taxation.

Orange County, California Representative Christopher Cox, “a champion of free enterprise,” has been chosen to “vigorously enforce the rules and laws that guarantee honesty and transparency in our markets and corporate boardrooms,” the President said at a press conference announcing the nomination, which is subject to Senate confirmation.

A former lawyer in the financial sector, Cox has been in Congress since 1988. In 1995 Cox sponsored legislation which protected corporate officers and agents from litigation, limiting the scope for legal action in corporate fraud cases. After his own California constituency fell victim to a $10 billion corporatefraud involving the now defunct Enron Corp., Cox urged Congress not to “rethink deregulation.” He opposes the capital gains tax, taxation on dividends, and the estate tax.

Cox would succeed William Donaldson, who resigned in early June. The President chose Donaldson, a Bush family friend , to oversee the Securities and Exchange Commission in 2002, at the height of several high profile corporate scandals, notably the Enron bankruptcy and the subsequent downfall of accountants Arthur Andersen.

Donaldson worked to restore public confidence in corporate transactions and market integrity. But his regulatory “activism” led to complaints from business leaders, and opposition from a growing number of Republican members of Congress.

cross posted at

redstateupdate.net

Members of the New York credit rating cartel that allowed themselves to become part of the securities frauds on Wall Street and in Europe will do what they can to try and remain relevant, but like the municipal bond insurers, their credibility is fatally compromised by their actions during the AAA years.

Today, the masters of the obvious at S&P downgraded a whole bushel of insolvent aaapples. According to Reuters :

“Standard & Poor’s downgraded the credit ratings of 11 top global banks on Friday including Citibank, Deutsche Bank and JP Morgan, citing increased industry risk and a deepening economic slowdown.

The agency cut its ratings on Citibank, Morgan Stanley and Goldman Sachs Group each by two notches.

It cut Bank of America, JP Morgan Chase and Wells Fargo by one notch.

In Europe, S&P shaved one notch off the ratings of Barclays, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and UBS. It kept the rating of HSBC Bank, part of HSBC Holdings Plc, at AA but downgraded its outlook to negative from stable.

‘The downgrades and revised outlooks reflect our view of the significant pressure on large complex financial institutions’ future performance due to increasing bank industry risk and the deepening global economic slowdown,’ S&P said in a note.”

With deflation taking hold, banks are certain to see more writedowns on securitized portfolios for the next several quarters. Bloomberg reports :

“Banks worldwide have reported more than $745 billion of writedowns and losses since the credit crisis began, according to data compiled by Bloomberg. S&P expects banks to face more uncertainty in funding markets and a higher level of stress than in a ‘typical business-cycle trough.’

‘The macro outlook in the U.K. and U.S. banking sector has worsened materially,’ said Sandy Chen, a London-based banking analyst at Panmure Gordon & Co. ‘They’re looking at the risk of what the combination of deleveraging and deflation could do to banks’ earnings.’”

Reuters : S&P downgrades 11 top global bank credit ratings

Bloomberg : Goldman, UBS, Deutsche, Morgan Stanley Lowered by S&P

For Americans following the depression through the filter of the mainstream media, the problem seems to have started in residential real estate, and then spread to the banks, the insurance companies, and now apparently the auto manufacturers. In reality, the problem begins and ends in the financial sector with widespread securities fraud, and those frauds are continuing to unwind. The decimation of the real economy is just collateral damage.

In the coming months a wave of bankruptcies among small retailers will be followed by defaults of national chains, epidemic vacancies in malls and shopping centers, and finally bank failures, as the commercial real estate market collapses. Commercial loans are as highly leveraged, or as they say, “securitized”, as any loan product from the last decade. An article in the New York Times is the tip of the iceberg :

“For many months now, the commercial real estate industry has been grim about its future, but it has been hard to quantify just how bad things are. The default rate for loans packaged into securities and sold on Wall Street has remained well under 1 percent, yet today that low figure is considered highly misleading.

Now a New York research company, Real Capital Analytics, has compiled data showing that at least $107 billion worth of income-producing property — including hotels, offices, apartment complexes and warehouses — is already in distress or is headed in that direction.

The distress is occurring all across the country, but New York tops the list because of the number of costly high-profile transactions that occurred during the boom years. Real Capital Analytics’ list includes a total of 268 properties in the New York area, with a value of $12 billion, as already or potentially in trouble.

‘The trouble that’s emerged is bigger than most of us expected,’ Robert M. White Jr., the president of Real Capital Analytics, said in an interview in his Manhattan office, ‘and the size of the problem that is potentially out there is much greater than we thought we would be able to quantify at this point.’ Many of these difficulties have surfaced just since mid-September, when the financial world suffered a series of jolts, including the collapse of Lehman Brothers, he said.”

In a predictable development that is part of every social backlash against financial excess, regulators are now tripping over themselves in an effort to prosecute a few of the more odious villains of the decade of securities fraud. The Associated Press reports :

“Congress will investigate the alleged $50 billion Ponzi scheme run by Wall Street money manager Bernard L. Madoff, a leading House lawmaker said Wednesday. Separately, the U.S. attorney general took himself out of any involvement because his son is representing an officer at Madoff’s investment firm.”

The political atmosphere in Washington is demanding a show of retribution, as the auto executives discovered to their surprise. Yesterday SEC lightweight Chris Cox threw his chief subordinates under the bus :

“The planned congressional inquiry follows a stunning rebuke that SEC Chairman Christopher Cox leveled against his agency’s career regulators, blaming them for a decade-long failure to investigate Madoff and for failing to detect one of the largest Ponzi schemes ever.

At the Justice Department, a spokesman said that Attorney General Michael Mukasey had recused himself from the investigation into Madoff. Mukasey’s son, Marc Mukasey, is representing Frank DiPascali, a top financial officer at Madoff’s investment firm.”

full story

An article in today’s New York Times mentions another area of possible conflict for Mukasey :

“In another potential point of conflict, the attorney general and his wife also have close ties to an Orthodox school in Manhattan, the Ramaz school, where she has served on the board. The school was among a growing list of institutions that lost significant investments it had with Mr. Madoff’s firm.

Mr. Carr at the Justice Department said the role of Mr. Mukasey’s son alone was ‘an obvious reason’’ for the attorney general to recuse himself from the case.”

full story