October 22, 2009

Nothing new under the financial sun

This week "Frontline" did an interesting report on Brooksley Born (left photo), probably someone you haven't heard of because her tenure in government was abruptly truncated when she failed to act like one of the boys. She was Clinton's original choice as head of the Commodities Future Trading Commission. A Stanford law graduate, a very seasoned securities litigator with Arnold & Porter in Washington, D.C., she took her rather obscure job seriously and immediately became concerned about the immense volume of unregulated derivatives traded over the counter with no federal oversight at all. So she proposed regulations to force this off-site gambling into the open, where it would be subject to normal capital requirements, disclosure and reporting.

She was aggressively opposed by Clinton's Three-Headed Monster of Deregulation: the misogynistic Larry Summers, the arrogant Robert Rubin (Sec. of Treasury) and the Ayn-addled Alan Greenspan, Chairman of the Fed. They didn't want any regulation at all, being market "fundamentalists." Greenspan went so far as to dispute the necessity of regulating securities fraud, arguing that the "market" (which had a kind of holy, talismanic meaning for him) would take care of it. They blocked Brooksley at every turn, showing up at Congressional hearings with her and kneecapping her ideas. Clinton, in the thrall of the go-go tech IPO craze and the booming market on Wall Street, sided with the Boyz, of course, since his weaselly cowardice where women were concerned (think Lani Guinier) made his decision easy. Clinton became a champion of financial deregulation (he signed the repeal of the Glass-Steagall Act, which is why you see securities dealers inside your local Bank of America), globalization and offshoring of American jobs. In a lot of ways, George W. Bush simply executed Clinton's plan for the destruction of the American middle class and ruination of the American economy. The hard work of making America vulnerable to grifters and banksters was well underway when Bush took charge in the Oval Office. With the financialization of the economy a done deal, Bush could concentrate on his true passion, war.

Anyway, after Born quit in frustration, the derivative business (credit default swaps, etc.) exploded into a business with a notional value greater than the combined GDP's of the nations of the world. It was a situation completely out of control. Various geniuses, such as those at Long-Term Capital Management, based their opaque investment schemes on the unregulated derivatives market, and made a killing in ways which they claimed were immune from failure. Then the Russian economy collapsed and LTCM, for reasons no one could completely understand (since no one really understood their business) went into free-fall, losing hundreds of millions of dollars every day. LTCM was so interconnected with the banks on Wall Street that the failure of the hedge fund threatened to bring the American economy down with it, which may sound familiar. So Robert Rubin organized a cartel of big banks to bail LTCM out and the crisis passed. Rubin's role as savior of Wall Street is remembered; his seminal role in thwarting regulation of the business that sank LTCM, less so.

The derivatives business went totally nuts under the malignant neglect of Bush&Cheney, reaching, by some estimates, a notional value of one quadrillion dollars. The collapse of AIG was directly attributable to its land office business in credit default swaps, side bets on the success or failure of securities such as mortgage-backed bonds. And, of course, there was no real oversight of the mortgage-backed security business itself, another multi-trillion dollar business in which all the big commercial and investment banks were deeply involved. When Bear Stearns failed in 2007, it started a domino collapse of the entire financial industry. This time the banks themselves could not save the system (so they said, since they were the ones who needed saving), so it was left to the federal government and the Federal Reserve, the lender of last resort, to bail everyone out.

It must be a little strange for President Obama to meet with his economic advisors, see Larry Summers sitting on the other side of the desk in the Oval Office, and realize this somewhat porcine and definitely self-satisfied guy is one of the principal architects of the problem we're in now. And yet he leans heavily on his advice; after all, Summers is really, really "smart." Obama tends to marginalize Paul Volcker, an occasional ex officio advisor, because Volcker has lately taken to calling for the nationalization of banks such as Citigroup, Bank of America and Wells Fargo, on the grounds that they're "zombie banks." (If for no other reason, I am grateful to the financial crisis for this colorful usage, lifted from the Afro-Caribbean voodoo tradition.) They're being propped up by bailouts and zero percent loans, and by the government's acquiescence in allowing them to count the hundreds of billions in cruddy loans on their books as if they had real value. Volcker thinks this is pointless, especially since they're not really lending, just hoarding. As Max Keiser has said, America needs a banking system, but it doesn't follow that we need exactly these banks run by these specific, well-connected individuals.

Well, despite such thinking, I do believe this is another instance where Obama is loath to fail in a unique and original way, and if all the Goldman Sachs alums and Goldman Sachs cronies around him tell him that we must save The Banks in the Club (the ones left after Goldman helped the government get rid of competitors like Merrill Lynch and Lehman Brothers), so be it. If the economy goes down for the count (if America becomes a failed state), he wants to make certain that he is following the corrupt consensus in Washington, D.C., and the de-regulating, Wall Street-pandering, bribe-accepting cadres supposedly representing us remain definitely in the ascendant in D.C. As a recent example, Obama raised $2 million for the Democrats on Wall Street just this past Tuesday night - how tough do you want to be with your Sugar Daddies?

Oil is now $82/barrel despite slumping demand and massive overstock. Makes a lot of sense, huh? It does when you see a Euro costs a buck fifty now. Bernanke is reaching the end of his capacity to stoke Treasury purchases by "quantitative easing." If we don't buy our own debt, who will? That will become a very interesting question, and one where the answer, I'm afraid, is going to be delivered during Barack's first term. He's going to be dealing with crises, seriatim, that will make LTCM seem like someone's overdraft at the local credit union.

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