Slashdot Mirror
The Secret Goldman Sachs Tapes
An anonymous reader writes: The radio program "This American Life" has published an extraordinary investigative report on how the U.S. government regulators in charge of keeping an eye on the banks actually interact with powerful financial institutions (podcast here). Financial journalist Michael Lewis describes the report thus: "The Fed failed to regulate the banks because it did not encourage its employees to ask questions, to speak their minds or to point out problems. Just the opposite: The Fed encourages its employees to keep their heads down, to obey their managers and to appease the banks. That is, bank regulators failed to do their jobs properly not because they lacked the tools but because they were discouraged from using them. The report quotes Fed employees saying things like, 'until I know what my boss thinks I don't want to tell you,' and 'no one feels individually accountable for financial crisis mistakes because management is through consensus.'"
Yup, just like with the BLM/MMS it's a case of regulatory capture. In fact in the financial sector it was even worse as the banks were basically allowed to make minor changes to their operating and reporting structure to choose which regulatory agency(ies) they reported to so if one agency started to get too strict they'd just make changes and get a new regulator, and once enough banks switched there would be downsizing at the effected regulator so there were strong incentives not to go strong on enforcement.
There are 4 boxes to use in the defense of liberty: soap, ballot, jury, ammo. Use in that order. Starting now.
Carmen Segarra was hired to to clean up the poor oversight of the banks. Instead, she was fired for doing her job. Read the prepublica articles. It's a shame. Contact your senator and tell them to launch an investigation into the retaliation against Carmen!
I happened across this before it got on here and listened to the entire thing. Here's a brief summary:
1. This American Life is a great show. My favorite, you should listen to it often.
2. Managers at the fed seem to be terrified of the banks
3. The lady doing the recordings is aggressive and speaks her mind.
4. There are many "Old Guard" people at the fed that have a cozy, friendly relationship with the banks they work with.
5. The banks actively cultivate this relationship because they realize friendly regulators are less likely to press issues.
6. She uncovered the fact that GS had no formal definition for "Conflict of interest" which is a violation of Fed rules.
7. The fed worked for months gathering evidence and there was consensus that they needed to force GS into creating a policy
8. Suddenly one day her management agreed GS did have a policy just not a good one.
9. She was called in and her boss tried to bully her into changing her report to say they did have a policy.
10. Not too long after she was fired.
11. I believe the suggestion is that GS has control over management and who gets hired/fired at the fed.
A friend of mine worked on Wall Street and said that her firm had a guy at the fed whom they slipped bribes to in exchange for information about the interest rates. Apparently this is widespread.
The Federal Reserve doesn't regulate Wall St. The only thing they regulate are boring transactional stuff like funds transfers (e.g. ACH), and even then often only if the banks voluntarily use the Federal Reserve's electronic services (an opt-in regulatory burden). Their policy making authority is extremely limited. You can thank President Andrew Jackson for that.
Most of the power the reserve banks have is soft power--the bank presidents are at the center of a complex network of relationships between private and public stake holders.
Geitner got promoted because he went out of his way to ensure the financial system didn't collapse. He strong-armed banks like Bank of America to take on huge amounts of debt; not because he had the legal authority to do so (if anything, his threats bordered on blackmail), but through shady, lightning-quick horse trading. He stepped up when many people in his position would have floundered.
His opinions on sub-prime mortgage securitization, or any of that other stuff, are irrelevant. Obviously he's largely an apologist for the status quo. But judged solely by his tenure at the Fed, and in particular the few weeks at the height of the meltdown, the man is in many respects a hero. He displayed bold leadership, which is what you look for when filling top cabinet posts.
"the banks got the money to cover the bad loans (that the government mandated be made)"
The bad loans were not enough to cause the financial crisis. Total mortgage debt was something like $13 trillion, maybe half those were at risk of default. The banks (themselves, not because the government held a gun to their heads) inflated the mortgage debt by a factor of six, into something around $62 trillion. The instruments used to create some $40 trillion were RMBS and their deriviatives such as CDS. When a few defaults happened, as was expected in the high-risk, low tranche RMBSes, market groupthink and emotional overreaction occurred, and even mortgages which had been bundled into high tranche instruments, which hadn't defaulted and were not likely to default, lost value. Banks could no longer use hi tranche RMBS which had not experienced any defaults as collateral to roll over their funding. That's what CDS hedges were for, of course. But the CDS market was brand new and immature. So either banks didn't hedge enough, or the insurers (because they rightly thought there was no risk of default) didn't have enough to pay the insurance.
In conclusion, the "bad loans" were a very small part of the market and could have been absorbed. The banks who made the bad loans had the houses as collateral, right? The bad loans alone did not cause the crash. It was the market mechanisms that inflated house loans into many times their real value through the use of financial insturments, and then market groupthink which saw a few defaults and panicked wildly, spreading the asset price drop to assets that really were still good loans, and then the inabilityt of insurers such as AIG and Bear Stearns to pay on the insurance claims when the RMBSes dropped, that caused the crash.
The Fed should have bailed out individual homeowners instead of the banks.
One of the reasons cited in the SIGTARP Maiden Lane report ("Factors Affecting Efforts to Limit Payments to AIG Counterparties") for intervening in the financial system was: "FRBNY was concerned about the effects of bankruptcy on key sectors of the market, such as retirement accounts and the credit markets." Why doesn't the Fed bail out Detroit then, since retirement accounts are affected there, too?
The biggest selling point they gave me was that if I played nice after 10 years I could leave the Comptroller's office and get a huge paycheck from one of the major banks.
There's also the problem that CDS's are insurance, but because of deliberate technicalities are not regulated as such. The laws and regulations that have been introduced since the 17th century, which keep insurance from being a complete scam or gamble, didn't apply. You could get a CDS on something you didn't even own; you could even get CDS's for several times the value. That's like letting me take out a $1M insurance policy on your $300k home, and then looking the other way when I go to your place and play with matches. It's a setup that's pretty much guaranteed to explode at some time - it doesn't take much to set it off.
See http://en.wikipedia.org/wiki/C...
Comment removed based on user account deletion
This is a common misconception. The financial system is mathematical but nowhere near rocket science. The majors of Wall Street executives clearly indicate this (I knew a fellow who became a senior executive at GS. A hypercompetitive jock with average intelligence). Obfuscation has been the shield behind which Wall Street hid for many years during the 2000s. There are plenty of sharp people who can work as regulators. It is a different mindset from the money-at-any-cost Wall Street executive and they don't understand it. But it's there.
End the revolving door. With it, regulation becomes ineffectual. A farce.
Additionally, regulators need to be firewalled against politicians' retribution. The big donors give big money to politicians. They don't complain to the regulator, they complain to the politicians who defund and reassign departments pursuing the donor.