Sheila Bair, the former FDIC chairman who heads the Systemic Risk Council, and Ricardo Delfina, a fellow Systemic Risk Council member, met on Sunday with members of several Occupy Wall Street working groups: Occupy Bank, Alternative Banking, and Occupy the SEC. I’ve watched presentations by Bair twice previously: once when she was at the FDIC, another not long after she had left government service. Even though she had been pretty direct in those discussions, she was surprisingly specific in this meeting about some of the impediments she faced during the crisis. Some of the topics:
Citigroup. Bair wanted Citi resolved. However, she was not in a good position to do so, since the OCC was Citi’s primary regulator and it, along with the Treasury and Fed, were adamantly opposed. The FDIC regulated only the depositary, which was about $1 trillion of the then roughly $2 trillion bank. That meant it had data only on that operation, since the Treasury and OCC, which had better data, refused to share it. And she stressed that that the information she had was not very good thanks to Citi’s lousy information systems. She could have forced a resolution through a seldom-used mechanism (used only 6 times in the FDIC’s history) but it would have been extremely aggressive to do so, and she felt she could justify it given her incomplete vantage. She pushed hard for a fallback of firing incumbent management and the board and using a good bank/bad bank structure, which would have had shareholders and bondholders take losses. She said that she never got any analysis from her opponents as to why these measures could not be taken, but instead was met with assertions that Citi was systemically important and that if the authorities took it down, its failure would be blamed on them (an argument Bair didn’t buy either: “This was management’s failure. We didn’t tell them to set up SIVs or buy CDOs.”).
Improving regulation. Bair thinks banking regulation should be a career, like the foreign service, with bank regulators or at a minimum bank examiners barred for life from working for banks either directly or through advisory firms. She also believes in having regulations be simple to avoid bank gaming (former Treasury Secretary Nicholas Brady also took up this theme recently in a Financial Times comment). Thus while she applauded the CFPB for its recent initiatives, she was disappointed in the complexity of their regulations. She clearly took a dim view of the banks’ hoary arguments against effective regulation.
Bair clearly didn’t see Dodd Frank as a magic bullet, but stressed that it did give regulators more powers and they were not using them. She is not happy with the way Romney and a lot of members of the Republican party have taken to demonizing regulators and said that Ronald Reagan would disapprove, quoting him as saying that the role of government was not to protect us from ourselves but from each other.
Specific proposals. Bair thought it was irresponsible not to require money market funds to use a floating NAV, and attributed the failure to get the reform through to aggressive, “vicious” lobbying by incumbents. She discussed how credit default swaps were the derivatives that needed to be reined in, and needed to be regulated like insurance, in particular, that users needed to have an insurable interest. She also argued that banks needed more capital and that using a simple leverage ratio (that is, no risk weighting), noting that Basel III will get them only to 3% when she feels 7% to 8% is what is needed.
Lack of prosecutions. “I don’t understand” why no one has been prosecuted at MF Global, such as Jon Corzine. She thinks it is important to hold individuals accountable.
Effecting change. Bair argued that Occupy and the public more broadly needed to make it clear to Congressmen that they are unhappy with legislators kow-towing to banks. She felt more signs of public outrage were needed. When pressed that public opposition to the TARP hadn’t had any impact, she suggested targeting the most industry-friendly members of the banking oversight committees. She also thought it would be useful to pressure the Administration on its failure to get good regulators in place, such as its long delay in replacing bank stooge (my expression, not hers) John Walsh and its foot-dragging on reappointing Gary Gensler.
———-
While it was gratifying to hear someone who sees herself as a “traditional conservative” on the same page as Occupy, some themes of her discussion were disconcerting. One was her emphasis on the need for pressure from ordinary voters through conventional channels, such as calling or writing your Congressman. While I’ve encouraged readers to do that, since it is low cost and might have some impact, I’m simultaneously concerned that it isn’t all that powerful. By contrast, Ricardo Delfina said after the session that the Occupy the SEC letter on the Volcker Rule had galvinized the SEC. Apparently staffers are often opposed to lobbyist arguments, but unless they have evidence that there is well reasoned opposition, they are at a disadvantage in pressing their case with senior regulators. So focusing more on the public comment process is a potential leverage point.
It’s very hard for most people, and no doubt people who’ve invested much of their career to public service, to acknowledge how quickly our political apparatus has been eaten away from the inside. It remind me of the iconic scene from Alien, where the people seem normal until the creature bursts out. Simon Johnson, who is part of Bair’s Systemic Risk Council, seemed closest to the mark when he said that when oligarch took over, reforms would not be implemented until splits developed in the ruling classes. And it looks like things will have to get worse before that takes place.
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For a look at how bad things really were in DC- how captured many parts of our govt were by Wall Street- and how Goldman alum and Treasury Secy Geithner is virtually a hand-puppet of the too big to fail banks, read “Bailout” by Neil Barofsky.
I’ll probably have to read that book, even though it will likely depress the heck out of me.
… many parts of our govt were by Wall Street-
Fixed this part of your phrase for you:
many parts of our govt ARE by Wall Street-
Even worse, most of the people who run finance in the EU, are also Goldman Sachs alumni.
“Occupy Wall Street working groups: Occupy Bank, Alternative Banking, and Occupy the SEC.”
So you are saying these people are more than barefoot hippies, and have the financial and technocratic knowledge to take on the system, at an argumentative level anyway?
Bert,
http://www.nakedcapitalism.com/2012/02/occupy-the-secs-comment-letter-objects-to-excuses-for-watering-down-volcker-rule-ows.html
OWS isn’t all kids by a long shot. There are professionals with impressive CV’s academics, veterans and their family members, and small businessmen involved in Occupy. OccupytheSEC, with whom I’m familiar, counts among its active members people who work on Wall Street.
Read the comment OccupytheSEC submitted to the agencies involved with drawing up the Volcker Rule:
http://www.occupythesec.org/letter/OSEC%20-%20OCC-2011-14%20-%20Comment%20Letter.pdf
Then read any other comments you like:
http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1157
You will note a qualitative difference between OccupytheSEC and the others. OTS proposes specific measures such as restricting hedging activities to specific loan portfolios owned by the bank and documenting the link. OTS notes several ways banks can conduct prop trading even under the rule, etc.
There are some very sharp people doing very good work at OWS.
Thx. That cheers me up a bit.
As a participant (when I can) in “Occupy Sonora” (CA)…I can tell you that this small group is made up of an ecclectic group, ranging from retired forestry, teachers, trades, retail, world travelers, educators, veterans (many)……
We have many different kinds of signs relating to the issues that are not being discussed by the two “Manchurian” candidates, Obama/Romney…such as universal health care, dismantling the national security state, funding public education, rebuilding national infrastructure and newer environmentaly friendly kinds…..too much to include here.
Even though we don’t meet with “the high and the mighty” we get massive approval from passing traffic in front of the Sonora Courthouse.
This kind of crossection I believe is pretty indicative of the “occupy” movement across the country.
Probably a step up will have to occur for real change to be implemented…..that is a fair amount of “opt-out” or general strikes to bring real change from this awful outdated form of repression of free speech (“kettling” “outright barriers”) to a real progressive government.
Probably not in my lifetime but, hey, you’ve got to start somewhere!
Come and join a local Occupy movement in your area….meet the real Americans!!
Alternative Banking also submitted an amicus brief on behalf of Judge Rakoff in SEC v. Citigroup:
http://www.nakedcapitalism.com/2012/05/occupy-wall-street-alternative-banking-group-files-amicus-brief-on-side-of-judge-rakoff-in-sec-v-citigroup.html
“amicus brief”
So what? I thought it was common knowledge that dirty smelly drugged out hippies were surprisingly good at writing amicus briefs.
P.S. Has anyone actually seen a “hippie” in the last 30 or 40 years? Were they living amongst the passenger pigeons?
They went underground.
You will find many of them living in Santa Cruz and Berkeley!
Occupy was clearly co-opted early on, just as the Tea Party was co-opted. Both of them began with serious intent, but quickly fizzled into a vague desire to “expand the conversation” or some such nonsense.
Until you have a credible candidate and a credible party with money behind it, the “two” “parties” have nothing to fear.
“Occupy was clearly co-opted early on…”
Not clear to me. Co-opted by whom for what reasons? Links?
Thanks.
Clear to anyone who watches Fox News!
This line is the tell:
“Until you have a credible candidate and a credible party with money behind it, the “two” “parties” have nothing to fear.”
Here we have someone who has bought the “marketplace of ideas” myth without realizing that in markets demand can only be expressed by money whereas for it to actually be politics it has to be about real human needs and increasingly those are about specifically the lack of money.
When did Geithner work for Goldman? Despite his many flaws, this one appears to be an oft-repeated urban myth.
Foamy did not, in fact, work for Goldman Sachs. However, other Obama people did, like Larry Summers, Elena Kagan, and Gary Gensler. Jacob Lew worked for CitiGroup and William Daley worked for JP Morgan Chase.
Randy’s statement above specifically cited Geithner. Perhaps I’m in the minority, but I think facts like that should be kept straight in order to be taken seriously regardless of which side of the argument one is on.
Yves said; “It’s very hard for most people, and no doubt people who’ve invested much of their career to public service, to acknowledge how quickly our political apparatus has been eaten away from the inside.’
Yes, it is difficult to make the old fashioned Vanilla Greed for Profit Evilism faction acknowledge the newer more Pernicious Greed for Destruction Xtrevilism faction. Why? Because their crumb supply and their cultural shaping is based in the disease, and so they, like dysfunctional children, are most comfortable with the mutating of this sociopathic disease.
Shiela Bair is one sick puppy, chocking on her Noble Lies — a key symptom of Xtrevilism! That she can say ““I don’t understand” why no one has been prosecuted at MF Global, such as Jon Corzine.” is a bold face lie, no one could be that stupid! It is insulting, at this stage in the game, that she could even say that, and she only serves to make more transparent what a revolting system stooge that she is.
That she urges citizens to piss into the wind by making it “clear to Congressmen that they are unhappy with legislators kow-towing to banks.” is disgusting! The fox urges the chickens to complain to the fox! Gag me with a spoon stooge Shiela Bair! When pressed further, that she then urges citizens to pressure “the Administration on its failure to get good regulators in place” is just more of the same old work within the system pap. C’mon stooge Shiela Bair, get a grip! YOUR self anointed elite sociopathic sickness IS the problem!
Shiela Bair,
Pants on fire!
Transparent stooge!
Transparent liar!
Are we ready for the election boycotts yet?
Deception is the strongest political force on the planet.
Sheila Bair, Burning Woman
What, Sheila would[st] burden “companies'” free speech ?
“That she urges citizens to piss into the wind by making it “clear to [corporate]Congressmen that they are unhappy with legislators kow-towing to banks.” is disgusting! The fox urges the chickens to complain to the fox! ”
“Gag me with a spoon stooge Shiela Bair! ” Quite.
“C’mon stooge Shiela Bair, get a grip! YOUR self anointed elite sociopathic sickness IS the problem! ” Bingo ! “IS”.
Sheila Bair, gender-based backdoor ? Nein, danke.
The ‘burdening’, federal judge spin,
http://www.reuters.com/article/2012/09/05/us-usa-campaign-minnesota-idUSBRE8841AK20120905
Wait…what?
alan, my son, forgive me for “burdening” you with assumed comprehension skills.
I hereby acknowledge your effort to achieve ‘same page’ has succeeded.
lol
As you are probably, at best, some political action functionary aide, rest easy in your boss’s approval that ‘Up the Ante’ will note your comments in the future and that his engines of username reverse-engineering have been fired.
Perhaps one more cup of coffee would have revealed before now that all these elitist politicos being ‘found out’ are in fact of a different order of conspiracy, are in fact embedded transsexuals that do verily seek this very form of ‘finding out’ that the Up the Ante username brings.
If otherwise, more forthcoming. Perhaps not “gender-based”, as they would have it ?
Heh.
lol
“The two parties have nothing to fear”, but fear itself, or a white knight or when the Military have had enough. Probably the last one, for that seems to be who have the brains in the game, fully knowing how this will end.
Too bad a private equity firm can’t swoop in and fix those banks properly. Take out a big fat loan from any number of other bloated banks with no viable business, buy up 51 percent of the shares, fire all the board members and executives, fire 95% of the employees, liquidate the retirement fund, pocket their obscene fees without any further delay and wave goodbye. The FDIC would only have a little sweeping up to do after that.
Ah yes, the MMT-funded private equity firm and its banana republic heroic exploits.
A tear of joy brought to the corner of my eye.
Not yet, unfortunately. As we stand, it’s still taxpayer funded. So anything goes.
Anything goes, very.
Saul Steinberg tried taking over Chase in the late 1960s. That led to an uproar by the Establishment (as it was called then) plus regs that made it pretty much impossible.
Please clarify: It’s been my understanding that a CDS is an insurance policy by another name. The industry wanted to offer insurance policies for financial products they sold. In order to circumvented regulation they give it another name. I’ve had diff and int calculus, but no financial training. I’m puzzled. Is a CDS a type of derivative? Are some CDS’ derivatives and others not depending on how it is
used (eg as a hedge)?
A CDS is a way to “distance” oneself from capital needs and regulation. One may choose to “speed” away from these responsibilities, or “accelerate” away.
CDSs are political derivatives. They are a vehicle that creates capital (“liquidity”) without money or any connection to an underlying asset because they have been given an exchange without any logical or responsible rules to follow. They are purely political instruments. Of mass destruction.
Yes, CDS most closely resemble unregulated insurance contracts. They are NOT a very good hedge or short for a bond (since they cover credit risk only, not interest rate risk, and don’t match maturities or interest payments exactly) despite industry efforts to claim otherwise.
As a former analyst I can say that CDS increase risk that the underlying will indeed default if the firm buying or selling the cds has sufficient fire power in the 5yr corporate bond market. Most CDS purchases are not made by those holding the underlying thus they maximize risk by having the vast majority of holders trying to create a “credit event” that will trigger the pay-off under Basel Rules. Look for a company with low cash flow and rising issuance costs, buy a boatload of their CDS and start cratering their bonds in the opposite direction – viola – credit event in which CDS holders get paid. The notion that these instruments are insurance is, i think, off the mark. That may have been the original intent but these instruments are routinely (majorly) abused by those with no interest in the underlying.
The way you describe them they are basically a poisonous tactic that distorts markets and destroys legitimate trade (the underlying whatever it is).
Why hasn’t the obvious been stated at any level — political, academic, blogosphere — that these devices should be illegal period.
How are they different from acts of vandalism, like torching city blocks, or cars, or houses, in the brick and mortar world?
Wasn’t making them illegal thrown about at one time? And the financial players said they’re would be a foreign market and threatened to take their business overseas?
Or was that a different toxic financial product?
If that is indeed the case, then what also needs to be knocked down, dismantled, deleted is this frame of “well if we can’t do X [socially and economically destructive “product”] we’ll lose out to the overseas competitors.
I’m thinking of a “Cupola” Body that covers the entire “international free markets universe” that pauses the current insanity and then resets the world economy on the basis of a few bright line rules, including no speculation without underlying interest in the “thing”, “service”, whatever. This would take care of the “but if you regulate this “product” out of existence” they (over there across the ocean) will do it and win everything. If nobody can do it, then nobody can whine about being forced to act in the interest of the public good.
But then who would be stupid enough to write CDS knowing that people are trying to trigger a default? Who sells fire insurance to arsonists?
Think it’s fair to say that Wall Street does this routinely; interdealer brokers spread the cds out over a wide group of customers and counterparties are unknown until settlement.
Who would would sell fire insurance to an arsonist; GS JPM MS BAC UBS DB – the list is long and growing.
There are probably lots of insurance companies who would sell fire insurance to an arsonist. Then, after the fire, they’d report the arsonist to the authorities, declare the policy void, and pocket the premium.
Who would sell fire insurance to an arsonist? An agent who gets fees from every sale and bonuses based on volume, that’s who. The personal incentive system drives the beast. No one makes money for refusing a customer. Individual income is glorified in the investment banking sector. It’s like asking, why would an executive make decisions that risk “his” company’s destruction? If he makes off with tens of millions, what does he care? What does Joe Cassano care that AIG went under? What does Richard Fuld care that Lehman went under? He made $400 million in five years. Only prison sentences are going to deter this behavior.
Here’s a very simplified explanation attempted by an ignorant Observer on the sidelines of life.
In that a CDS is a way to offset risk, it’s “insurance.” But you don’t have to own the asset to buy it. It’s really just a bet that the group of loans it references (“derives” from) will end up in default.
If you are an investment bank, it’s cheaper to bet on failure by buying a CDS than it is to set aside capital to cover your own losses (as regulations would and sort of do require, but that’s another discussion). That way, you have more capital available to buy more loans while still being “covered” if the market goes south.
But hey! A CDS isn’t really insurance, it’s just a bet, and that’s what investment banks are good at. So what’s to stop you from selling Credit Default Swaps too, like everybody else? Of course, once everybody’s doing it and the music stops, there won’t be enough capital to cover all the bets. But that’s what taxpayers are for.
CDS is a lot like having a can of gasoline and buying fire insurance on your neighbor’s house.
Hugh’s description of CDS is 100% accurate.
Now you know why Bair thinks CDS should be regulated like insurance, with an “insurable interest” rule (meaning you can only insure your OWN house not your neighbor’s).
Right, in other words, a kind of napalm bomb that for some reason financiers are still being allowed to lob at us.
Why aren’t they being banned by emergency executive order? They are indefensible.
During the financial crisis, Bair supported – but was quashed- stronger bank regualtions, dissolution of “zombie banks” – and was sidelined by Treasury…and White econ advisors. At press conferences she was the least evasive admin rep (except perhaps for Bernanke who came off as a non-lying, professorial type that may understand the import of being truthful) but one got the sense she was out in the cold re the admin. Her counterpart at the OCC is a wall street stooge and should have been ousted long ago, btw.
I too am disappointed in Sheila’s lukewarm “write your congressman” answer because congressmen no longer seem to answer to the public or frankly even know we’re out here.
Hope Bair can find it in her lawyerly, political heart to be more frank about the inside doings at these captured agencies. The lawyer part is risk averse and the political part is overly cautious about stepping on toes that may affect her future in DC. That said, Bair was the best of a bad lot during the housing and financial crisis.
Thankfully, splits are already developing in the ruling classes.
The bank executives are (A) frighteningly incompetent and (B) very damaging to the rest of the 0.1%.
The split is going to come wide open very quickly once the rest of the 0.1% realize just how badly they’ve been screwed. They’re mostly stupid so it will take a while…
Can someone please explain the significance of money market funds using a “floating NAV?” Thank you!
Money market funds promise investors that they will maintain a $1 NAV (net asset value). That means from a practical standpoint that they are pretending to be just like bank deposits, you can always get your money back.
What happens in reality is that a money market funds invest in short term paper (like commercial paper and repos) that can and does fall in value. When one money market fund, Reserve, had invested in Lehman commercial paper, it “broke the buck” (as in it could not give all its investors their money back), which led to a run on other money market funds. That meant funding to banks and securities firms, who rely heavily on repo, dried up. So the government backstopped money market funds for a while.
Bair’s compliant is that here it is, four years after the crisis, and nothing has been done to address one of its fundamental drivers (undue reliance of bank trading operations on hot money from money market funds). A floating NAV (letting investors know they can lose money in a money market fund) would help.
I imagine in that case we will need the rating agencies to rate money market funds?
Why do you refer to money market funds as “hot money”?
They invest very short term and can and do abandon certain types of investment en masse. The collapse of the asset backed commercial paper market (which started in the first acute phase of the crisis, August 2007) was due to money market funds refusing to “roll” it (as in buy new paper from the same issuer when the CP they held matured). Similarly, money market funds are the biggest funders of repo, which on the eve of the crisis funded roughly half of the balance sheets of major trading operations (as in investment banks and the trading ops of big commercial banks). In the crisis, you couldn’t even repo Treasuries, which was simply unthinkable.
So by “hot” you mean something like “volatile”?
Ya. It’s when the funds realize they are buying ABS toxic waste and stop, or toxic repos from Lehman and stop.
It’s like taking the punchbowl away just when the party really gets goin’.
Course right around that time Goldman Sachs raised margin requirements big time on their brokerage accounts, so it’s not just those free wheeling money market funds getting “squirrely” all of a sudden.
Thanks, Yves. That’s exactly what I needed.
Who needs banks?
A universal bailout would provide non-debtors plenty of new cash to honestly lend. So:
Who needs banks?
Credit creation is a business that creates the need for more credit creation. How is that different from a drug pusher?
So why do we have the equivalent of government backed drug pushers?
Her counterpart at the OCC is a wall street stooge and should have been ousted long ago, btw.
Are you talking about Curry or his predecessor John Walsh? You are right about Walsh and that was OCC’s rep for many years. But the recent appointment of Curry has/is making a big difference.
I’m sure he ment Walsh. I thought we’d get Bove as the successor. Then maybe we would get some good stock tips out of the OCC.
marc, you are correct that Walsh is gone but i’m cautious about the new lead as well though his long gov’t service and banking sector ovesight experience (fdic for instance) may hold him in good stead. His acknowledgement that there was “some risk in the sector” after JPM rang as a cya statment to me.
That’s rich. The woman who had the power didn’t do much with it and now visits those without power for what?
A good laugh? I’m not laughing.
I remember watching on CSPAN Senator Dianne Feinstein on the floor of the senate say that she had calls from 80,000 people who asked her not to vote for the big bank bailout, but that she was going to vote for it anyway. Phone calls, letters, petitions, etc. do not work.
Thank you for posting these notes on Sheila Bair’s visit.
The timid behavior of our fearless leaders is more then a little disappointing. A technocrat regulator like Blair shouldn’t have been concerned with appearing “too aggressive” while our banking system was melting down.
Personally, I don’t expect anything out of Congress. It’s been clear that they’ve only concerned themselves with kicking the can in the vain hope that economic growth would pick up. Thus relieving them of the responsibility of actually doing something constructive.
After all, prosperity is right around the corner. With sincere apologies to President Hoover.