Thursday, February 25, 2010

Dysfunctional Governance

The subtitle of this post is: Or why Elizabeth Warren should be the first female Secretary of the Treasury Now.

In my prior post, Corporate Socialism vs Regulatory Reform, I made the case that the need for meaningful financial regulatory reform is crucial to the maintenance of democracy.  Capitalism is not the privatization of profit and the socialization of risks and losses further enriching an elite group of profiteers at the expense of the common citizen.  When corporation governance has become so corrupt that corporations are run for the benefit of the managers at the expense of the shareholders, there is something more than fundamentally wrong.

When Brooksley Born sought to have derivatives regulated in 1998, during the Clinton administration, and was crushed by Bob Rubin, Larry Summers, Alan Greenspan, and Arthur Levitt, the current global financial crisis was born and began to grow.  With the financial crisis threatening to bring down banks worldwide and hurl the world into financial oblivion, the opportunity of crisis to provide decisive regulatory reform was decapitated by Tim Geithner, Hank Paulson, and the heads of the very banks and shadow banks which had perpetrated the crisis.

While the regulators and the government should have followed the successful Swedish example from the 1990's and seized the banks and shadow banks, stripped the toxic assets out and placed them in a resolution authority as had been done in the savings and loan crisis, dismissed the management, and then, after proper capital ratio improvements, spun the banks back into the private sector as financially stronger financial institutions, the American Congress was, instead, deceived into appropriating bailout money which was then used not as legislated but rather to fund the very banks and management which had caused the crisis.  As a result the largest US banks have grown from 55% of GDP, pre-crisis, to 63% of GDP.  Their concentration of the financial market has grown to the point where four banks have half the market in mortgages and two-thirds of the market for credit cards.  Five banks control 95% of the derivatives market.  Three US banks have over 40% of the global market for stock underwriting.

The very financial institutions which, by their risky conduct, created this global financial crisis have been allowed to become more powerful and more systemically dangerous, when they should have been broken up with a modern Glass-Steagall division between retail and investment banking, a transparent and regulated derivatives market should have been created, mark-to-market rules enforced, off balance sheet SIVs either prohibited or properly included in balance sheets, management and directors replaced, shareholder ownership reinforced, a consumer protection agency created, bank capital ratios raised, shadow banks formally identified and regulated as systemically dangerous financial institutions without respect to their original business structure,  and systemically dangerous business and investment practices, including disproportionate salaries and bonuses not in the best interests of shareholders, penalized by transaction taxes on the business and the individual (with respect to salaries and bonuses).

As it is, the balance sheets of banks are not financially accurate, because they have been exempted from proper accounting rules.  Citigroup wrote the new credit card "reforms" which became law and raised interest rates to 29.9% prior to its implementation and sent letters to its demand deposit account holders informing them the bank reserved the right to require seven days prior written notice of any withdrawal from a checking, savings, or money market account, while still being majority own by the United States government.

The Federal Reserve has failed to get banks, insurance companies, and hedge funds to agree on what derivatives should be transparently traded through a clearinghouse with proper collateral.  The Administration has failed to decisively create proper regulations and a transparent market.

Purposefully complex and overly complicated mortgage loan, credit card, and other consumer loan agreements have been buried as a cause of the current crisis under the lobbyist's rosy picture of free market buyer beware fairy tales in which the wolves are victims.  The unethical practices of banks, such as Goldman Sachs and J. P. Morgan have been increasingly chronicled and complex financial instruments and practices explained again and again only to have the PR people and lobbyists insist the public is not smart enough to understand finance. While Matt Taibbi has rigorously documented past Goldman Sachs and AIG dubious transactions and activities, some might think his recent article in which he uses the literary metaphor of different criminal con games to describe financial business practices was too factually loose, but the power of literature to transform truth into a universal visualization is not to be derided, as Emile Zola proved.  Is an article any less powerful in its message against the spin of hundreds of lobbyists and the inaction of government just because it is published in Rolling Stone rather than the New Yorker?   When elected officials fail to act and protect the citizenry, should public mockery of the obvious not be expected and escalated?

The recent announcement of a proposed Volcker rules which would limit the size of banks and a proposed ban on proprietary trading was seen as a ray of hope, although it left the banks as is without any reduction or limitations other than proprietary trading.  The issue is really not size, as we have repeatedly said, it is systemically dangerous conduct and activities.  Yet, Geithner has being preaching financial reform this week while recanting on proprietary trading saying it should be limited not banned.  Fixing banks has become a question of power and the banks have been given more power by the very government which should be minimalizing their power through regulation. Protecting the banks has become more important than putting America to work and growing the economy, because the toxic assets were not stripped from the banks and the next financial crisis is peering around the corner at us.

Elizabeth Warren has been one of the few public officials focused and committed to financial regulatory reform and consumer protection.  Canada has had a consumer protection agency for years and banking regulations in place which allowed it to weather this global financial crisis better than the United States and other countries.  Yet, in the United States lobbyists have killed the proposed Consumer Financial Protection Agency and continue to dance on the grave of its aborted fetus with a "just another bloated government bureaucracy" headstone as testament to the power of money to create acceptable lies.  The financial predators do not want anyone protecting the public; it is not profitable.  Elizabeth Warren continues to promote the need of a CFPA as necessary to preserve the middle class which is growing smaller every day as the financial elite become even richer.   She has made it perfectly clear that the battle has come down to the lobbyists versus American families and the lobbyists are winning.

The lobbyists are winning, because people, like Larry Summers and Tim Geithner among others, are helping the financial lobbyists to win.  While Paul Volcker continues to be optimistic about the Volcker Rule while being marginalized again, he still is adamant that the real crisis facing the American people is the present bipartisan dysfunctional governance in which nothing gets done for the people.  What chances of regulatory reform are there if it is completely acceptable for financial institutions to purposefully mislead investors and deceive markets while being paid a great deal of money to mislead people?  What chances do we have that banks will be required to control leverage, improve their capital ratios, and operate with accurate balance sheets if the banks are allowed to be more powerful than the government?  This should be an obvious need in any free society and should not require the financial innovation of more investment products, such as hybrid securities for contingent capital.  All risks should be properly collateralized and proper capital ratios maintained.  The Fed, the SEC, FDIC, OCC, and Treasury Department failed to do their jobs preferring to defer to their financial constituents. 

President Obama was given and took advice to make Larry Summers his chief economic adviser, to make Tim Geithner his Secretary of the Treasury, and to make Rahm Emanuel his chief of staff.  None of these individuals were a part of his campaign nor, by their actions, do they believe in what his campaign said to the American people.  They support the financial interests, with which they have been intimately involved, and nothing is going to change.  If there is going to be corrective action and if President Obama is going to be true to his beliefs, there need to be decisive changes that send a clear message to the the lobbyists and the American people.  The President needs to replace Larry Summers with Christina Romer, Tim Geithner with Elizabeth Warren, and Rahm Emanuel with Evan Bayh.

I must admit that I knew Rahm Emanuel when he was still a college student and working in the Congressional campaign of a high school friend of mind.  I am disappointed, but I wonder if he might be better suited to be the President's lobbyist.

This would be a clear message that shakes the walls of money.  Otherwise, the corporate socialists love dysfunctional governance, not just in the United States, but worldwide in any country.  Will their corporate flags become feudal flags?

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