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“Wall Street’s Threat To The American Middle Class”: Do We Really Need To Be Reminded About What Happened Six Years Ago?

Presidential aspirants in both parties are talking about saving the middle class. But the middle class can’t be saved unless Wall Street is tamed.

The Street’s excesses pose a continuing danger to average Americans. And its ongoing use of confidential corporate information is defrauding millions of middle-class investors.

Yet most presidential aspirants don’t want to talk about taming the Street because Wall Street is one of their largest sources of campaign money.

Do we really need reminding about what happened six years ago? The financial collapse crippled the middle class and poor — consuming the savings of millions of average Americans, and causing 23 million to lose their jobs, 9.3 million to lose their health insurance, and some 1 million to lose their homes.

A repeat performance is not unlikely. Wall Street’s biggest banks are much larger now than they were then. Five of them hold about 45 percent of America’s banking assets. In 2000, they held 25 percent.

And money is cheaper than ever. The Fed continues to hold the prime interest rate near zero.

This has fueled the Street’s eagerness to borrow money at rock-bottom rates and use it to make risky bets that will pay off big if they succeed, but will cause big problems if they go bad.

We learned last week that Goldman Sachs has been on a shopping binge, buying cheap real estate stretching from Utah to Spain, and a variety of companies.

If not technically a violation of the new Dodd-Frank banking law, Goldman’s binge surely violates its spirit.

Meanwhile, the Street’s lobbyists have gotten Congress to repeal a provision of Dodd-Frank curbing excessive speculation by the big banks.

The language was drafted by Citigroup and personally pushed by Jamie Dimon, CEO of JPMorgan Chase.

Not incidentally, Dimon recently complained of being “under assault” by bank regulators.

Last year JPMorgan’s board voted to boost Dimon’s pay to $20 million, despite the bank paying out more than $20 billion to settle various legal problems going back to financial crisis.

The American middle class needs stronger bank regulations, not weaker ones.

Last summer, bank regulators told the big banks their plans for orderly bankruptcies were “unrealistic.” In other words, if the banks collapsed, they’d bring the economy down with them.

Dodd-Frank doesn’t even cover bank bets on foreign exchanges. Yet recent turbulence in the foreign exchange market has caused huge losses at hedge funds and brokerages.

This comes on top of revelations of widespread manipulation by the big banks of the foreign-exchange market.

Wall Street is also awash in inside information unavailable to average investors.

Just weeks ago a three- judge panel of the U.S. court of appeals that oversees Wall Street reversed an insider-trading conviction, saying guilt requires proof a trader knows the tip was leaked in exchange for some “personal benefit” that’s “of some consequence.”

Meaning that if a CEO tells his Wall Street golfing buddy about a pending merger, the buddy and his friends can make a bundle — to the detriment of small, typically middle-class, investors.

That three-judge panel was composed entirely of appointees of Ronald Reagan and George W. Bush.

But both parties have been drinking at the Wall Street trough.

In the 2008 presidential campaign, the financial sector ranked fourth among all industry groups giving to then candidate Barack Obama and the Democratic National Committee. In fact, Obama reaped far more in contributions from the Street than did his Republican opponent.

Wall Street also supplies both administrations with key economic officials. The treasury secretaries under Bill Clinton and George W. Bush – Robert Rubin and Henry Paulson, respectfully, had both chaired Goldman Sachs before coming to Washington.

And before becoming Obama’s treasury secretary, Timothy Geithner had been handpicked by Rubin to become president of Federal Reserve Bank of New York. (Geithner is now back on the Street as president of the private-equity firm Warburg Pincus.)

It’s nice that presidential aspirants are talking about rebuilding America’s middle class.

But to be credible, he (or she) has to take clear aim at the Street.

That means proposing to limit the size of the biggest Wall Street banks;  resurrect the Glass-Steagall Act (which used to separate investment from commercial banking); define insider trading the way most other countries do – using information any reasonable person would know is unavailable to most investors; and close the revolving door between the Street and the U.S. Treasury.

It also means not depending on the Street to finance their campaigns.

 

By: Robert Reich, The Robert Reich Blog, January 26, 2015

February 2, 2015 Posted by | Big Banks, Campaign Financing, Wall Street | , , , , , , , , | Leave a comment

“Crime Does Pay”: A Whining Wall Street Banker Pleads For Pity

J.P. Morgan was recently socked in the wallet by financial regulators who levied yet another multi-billion-dollar fine against the Wall Street baron for massive illegalities.

Well, not a fine against John Pierpont Morgan, the man. This 19th-century robber baron was born to a great banking fortune and, by hook and crook, leveraged it to become the “King of American Finance.” During the Gilded Age, Morgan cornered the U.S. financial markets, gained monopoly ownership of railroads, amassed a vast supply of the nation’s gold and used his investment power to create U.S. Steel and take control of that market.

From his earliest days in high finance, Morgan was a hustler who often traded on the shady side. In the Civil War, for example, his family bought his way out of military duty, but he saw another way to serve. Himself, that is. Morgan bought defective rifles for $3.50 each and sold them to a Union general for $22 each. The rifles blew off soldiers’ thumbs, but Morgan pleaded ignorance, and government investigators graciously absolved the young, wealthy, well-connected financier of any fault.

That seems to have set a pattern for his lifetime of antitrust violations, union busting and other over-the-edge profiteering practices. He drew numerous official charges — but of course, he never did any jail time.

Moving the clock forward, we come to JPMorgan Chase, today’s financial powerhouse bearing J.P.’s name. The bank also inherited his pattern of committing multiple illegalities — and walking away scot-free.

Oh, sure, the bank was hit with big fines, but not a single one of the top bankers who committed gross wrongdoings were charged or even fired — much less sent to jail.

With this long history of crime-does-pay for America’s largest Wall Street empire, you have to wonder why Jamie Dimon, JPMorgan’s CEO, is so P.O.’d. He’s fed up to the tippy-top of his $100 haircut with all of this populist attitude that’s sweeping the country, and he’s not going to take it anymore!

Dimon recently bleated to reporters that “banks are under assault.” Well, he really doesn’t mean or care about most banks — just his bank. Government regulators, snarls Jamie, are pandering to grassroots populist anger at Wall Street excesses by squeezing the life out of the JP Morgan casino.

But wait — didn’t JPMorgan score a $22 billion profit last year, a 20 percent increase over 2013 and the highest in its history? And didn’t those Big Bad Oppressive Government Regulators provide a $25 billion taxpayer bailout in 2008 to save Jamie’s conglomerate from its own reckless excess? And isn’t his Wall Street Highness raking in some $20 million in personal pay to suffer the indignity of this “assault” on his bank. Yes, yes and yes.

Still, Jamie says that regulators and bank industry analysts are piling on JPMorgan Chase: “In the old days,” he whined, “you dealt with one regulator when you had an issue. Now it’s five or six. You should all ask the question about how American that is,” the $20-million-a-year man lectured reporters, “how fair that is.”

Well, golly, one reason Chase has half a dozen regulators on its case is because it doesn’t have “an issue” of illegality, but beaucoup illegalities, including deceiving its own investors, cheating more than two million of its credit card customers, gaming the rules to overcharge electricity users in California and the Midwest, overcharging active-duty military families on their mortgages, illegally foreclosing on troubled homeowners and… well, so much more.

So Jamie, you should ask yourself the question about “how fair” is all of the above. Then you should shut up, count your millions and be grateful you’re not in jail.

From John Pierpont Morgan to Jamie Dimon, the legacy continues. Banks don’t commit crimes. Bankers do. And they won’t ever stop if they don’t have to pay for their crimes.

 

By: Jim Hightower, The National Memo, January 28, 2015

January 31, 2015 Posted by | Big Banks, Jamie Dimon, Wall Street | , , , , , | Leave a comment

“Keeping Regulation At Bay”: One More Step Toward The Next Meltdown

The delaying tactics we told you about nearly two years ago have worked beautifully. The bailout worked (if not for homeowners, at least for the banks). It worked so well that the underlying problems that led to the financial crisis have remained largely ignored.

The regulations that have been written (and continue to languish during their extended comment period) are on their way to being eliminated or weakened yet again by Congress. The House helped out this week by passing a bill (HR 4413) that ensures that if any regulations do get approved, they will be difficult to enforce.

As we reported back in 2012, JPMorgan Chase in London managed to avoid examination and enforcement by the Commodities Futures Trading Commission simply by labeling their massive speculation in credit default swaps as “portfolio hedging.” It was a loophole big enough for a whale to swim through.

Another loophole made enormous by HR 4413 is the cutoff separating “end users” from “swap dealers.” In the CFTC draft regulations written after Dodd-Frank initiated oversight on the swap business, any market player with more than $100 million in swaps per year was considered a dealer, and subject to stricter oversight and capital requirements.

After the industry complained, the CFTC agreed to delay that stronger oversight for two years and put in a temporary $8 billion cap that was due to drop to $100 million later this year. The bill that passed the House makes that $8 billion cap permanent. Now any firm that wants to do $100 billion in business without regulation has the option to create 13 separate companies.

From the point of view of the people who profit from the lack of regulation, streamlining the lack of oversight is financially sound. After all, real estate values in waterfront Greenwich estates, the Hamptons, and even Park Avenue will likely suffer if bankers and hedge fund managers make less money.

For those who trade in opaque markets, profits are maximized when some participants have information that their customers and competitors don’t have. An open market with published prices and capital reserves would limit profits and return on equity. Complying with regulations and keeping records available for supervisory review costs money. It all cuts into profits.

And if profits get squeezed by an overbearing, overregulating government, how can a valuable part of our capital markets survive? It’s not cheap, after all, to employ the people needed to execute this business that virtually no one understands and that the government doesn’t want to regulate.

Remember when AIG Financial Products blew up? Even though there were traders, accountants, clerks, lawyers and others from Lehman who found themselves jobless, the Treasury Department decided to pay more than a million dollars in bonus payments to each of the valuable AIG employees that had bet so big, and so badly.

Thankfully, the lobbyists hired by the industry have figured out how to keep the business profitable, and how to turn the task of complying with new regulations into a potential new profit center. They helped incorporate a brilliant strategy into HR 4413, and got 265 members of the House to vote for it.

The CFTC will be required to create and publish cost-benefit studies prior to adopting new compliance policies, and those studies will be subject to judicial review. That will take some time. After the CFTC rules go into effect, market participants will be free to argue that the cost estimates were inaccurate. Because the studies are subject to judicial review, the companies being regulated can theoretically get the government to pay them for any additional costs they incur when complying. With a little creative accounting, maybe the swap dealers will turn a profit on compliance departments.

While the delaying tactics written into the bill keep regulation at bay, trading in credit default swaps will continue as it has, with the risks it has, here and abroad. Over half of the hundreds of trillions of dollars in swaps on the books of our banks belong to foreign subsidiaries. A condition of the new bill requires the CFTC and the SEC to certify that derivatives regulations are not already in place in those foreign jurisdictions before they become subject to the new “regulations.” All a bank or hedge fund needs to do is dispute the nature of existing derivatives regulations in their legal places of business overseas, and any oversight can come to a grinding halt while they all work it out. In the meantime, they can enter into lots of credit default swap contracts.

Perhaps the most brilliant part of HR 4413 is hidden in the budget. The congressionally mandated increased workload has no accompanying increase in the commission’s budget. It won’t be easy to run thousands of legal and economic analyses without the people to do it or the money to hire them.

Speaking of people, the bill passed in the House also peculiarly reinvents the org chart. Key regulatory and enforcement personnel currently report directly to the commissioner of the CFTC, but under the new law, those people would instead report to five different members of the commission. Hiring, firing, and departmental budgeting will be decided by all five members together.

Have you ever reported to five bosses at the same time? I did, for about a year, and it’s nearly impossible to get anything done.

By the way, in case you thought our government didn’t have a sense of humor, Congress tells us we can call HR 4413 the “Customer Protection and End User Relief Act.”

Correction: The “hundreds of trillions of dollars” figure cited in the 12th paragraph refers to all swaps, not just credit default swaps as this post originally stated.

 

By: Howard Hill, Former Investment Banker, The National Memo, June 27, 2014

June 30, 2014 Posted by | Big Banks, Financial Crisis, Financial Institutions | , , , , , , | Leave a comment

“A Picture Of Massive Corruption And Cowardice”: The Decline Of The American Justice System

Jed Rakoff, a former prosecutor, has an interesting piece in the NYRB about why there have been no prosecutions of financial industry employees over the systemic fraud surrounding the financial crisis. The whole piece is worth a read, but here are the main points boiled down:

1) The FBI is consumed with terrorism, apparently cutting their financial fraud investigation force from over a thousand agents before 2001 to about 120 by 2007. Whether that’s justifiable or not, it does remind me of a line from one of the finest action movies of all time: “Jesus man, wake up! National security’s not the only thing going on in this country.”

2) Regulators and law enforcement, especially at the SEC, have been focused on insider trading cases and Ponzi schemes like the Madoff affair, which are easier to investigate and to prosecute. Mortgage and securities fraud, by contrast, are far more complex and difficult.

3) Government complicity. This isn’t a bad point, but Rakoff directs too much blame at subsidies for the poor. As I’ve written in the past, the whole government housing policy regime, most definitely including subsidies for the rich like the home mortgage interest deduction, are to blame as well.

4) A new trend in prosecuting companies instead of individuals. This seems unambiguously true, and it’s a reminder of how new trends in legal theories always seem to move in the direction of increased subsidies and decreased accountability for wealthy elites.

Those points are all fair enough. But taken together, I don’t think they go nearly far enough. As an instrumental account of the details of why these prosecutions aren’t happening, it makes a lot of sense. Though, for the record, they might not even be instrumentally true: according to a new David Kay Johnston report, the Justice Department has been running interference for JPMorgan Chase against Treasury investigators.

But in any case, make no mistake: added up, this is a picture of massive corruption and cowardice at the top levels of our law enforcement agencies. Because regardless of whatever structural trends are happening, no prosecutor with a single fair bone in her body could possible tolerate, oh I don’t know, a minor slap on the wrist for laundering money for drug traffickers and terrorists.

 

By: Ryan Cooper, Washington Monthly Political Animal, December 27, 2013

December 29, 2013 Posted by | Financial Institutions | , , , , , , , | Leave a comment

“The Corruption Is Complete”: Where’s The Cop On The Wall Street Beat?

Bankers gone wild! Let’s tally some of their crimes:

JPMorgan Chase engaged in massive, systematic fraud to foreclose without cause or due process on innocent homeowners, tossing thousands of families into the streets.

Goldman Sachs profited by marketing an investment package that was designed to fail, collecting fat fees on each sale to unsuspecting investors who lost millions, while the bank also collected millions more from a side bet it made that, sure enough, its package would be a loser.

For years, HSBC has been butt-deep in a swamp of despicable, illegal money-laundering schemes, willingly processing billions of dirty dollars for vicious drug cartels and peddlers of arms to terrorist forces at war with America.

Many more examples abound. These are not poor saps desperately robbing a bank branch for a few hundred dollars, but criminal enterprises run by multimillionaire Wall Streeters who run in the finest social circles, are celebrated by the media and hobnob with the nation’s political elite.

Their corruption is complete; their crimes are documented. Yet, unlike sad-sack bank robbers, none of these Robbing Bankers have even been prosecuted, much less jailed. In fact, as revealed on PBS’s Frontline program earlier this year, frustrated prosecutors who served in the Justice Department’s criminal division two years ago report that “when it came to Wall Street, there were no investigations going on. There were no subpoenas, no document reviews, no wiretaps.”

Why is that? Where are the cops on the Wall Street beat?

Up in the suites, coddling the culprits, whom they know on a first-name basis. That’s because Attorney General Eric Holder and the chief of his criminal division, Lanny Breuer, have previously enjoyed lucrative careers as lawyers defending the very barons they’re now supposed to be prosecuting. Holder and Breuer both hail from the same Washington law firm, Covington & Burling, that specializes in representing corporate clients with legal issues at the Justice Department.

The moral here is clear: When engaged in high crimes, it literally pays to have friends in the highest places.

To transport them there, a secret cosmic door connects the parallel universes of Washington and Wall Street. It’s not the proverbial revolving door, but a wide-open passageway for easy flow back and forth — reserved for those in the know.

Lanny Breuer is one definitely in the know, passing with impunity from the job of defending Wall Street wrongdoers in cases before the Justice Department to being the department’s chief prosecutor of Wall Street wrongdoing.

Four years ago, he left Covington & Burling, where he represented Wall Street clients, to head the criminal division of Justice. Dismissing criticism that his long service to Wall Street banksters created an inherent conflict of interest with his new duty to the public, Breuer insisted that he’d be a better prosecutor “because of my deep experience in the private sector.”

That claim would’ve proven more convincing had he brought even a single case against the Wall Street executives who’ve been publicly exposed as self-enriching perpetrators of widespread fraud and other destructive financial crimes. But, no, not one.

Why? Call me cynical, but perhaps because he was using his four years at Justice to pad his résumé and enhance his value to Wall Street. Protecting bankers from prosecution could be a good career move.

No surprise, then, that Breuer headed back through that cosmic door, rejoining Covington in a specially created position to expand its role in defending corporate clients charged with foreign bribery, money laundering, securities fraud and such. “I’m a zealous advocate,” said the guy who studiously refrained from being a zealous prosecutor. “I look forward to being a zealous advocate for our clients again,” he added.

Sheesh, couldn’t he at least pretend to have some ethics? Instead, Lanny was relieved to be back on Wall Street’s side: “It’s my professional home,” he confessed.” Oh, did I mention that his starting salary at Covington will be $4 million a year?

 

By: Jim Hightower, The National Memo, April 10, 2013

April 11, 2013 Posted by | Big Banks, Wall Street | , , , , , , | Leave a comment

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