brainiac conspiracy

No Money for [Insert Name of Useful Social Program Here]

Because the price of freedom is eternal targeted slaughter:

“NSA threw the kitchen sink at the FATA,” said a former U.S. intelligence official with experience in Afghanistan and Pakistan, referring to the Federally Administered Tribal Areas, the region in northwest Pakistan where al-Qaeda’s leadership is based.

NSA employees rarely ventured beyond the security gates of the U.S. Embassy in Islamabad, officials said. Surveillance operations that required placing a device or sensor near an al-Qaeda compound were handled by the CIA’s Information Operations Center, which specializes in high-tech devices and “close-in” surveillance work.

“But if you wanted huge coverage of the FATA, NSA had 10 times the manpower, 20 times the budget and 100 times the brainpower,” the former intelligence official said, comparing the surveillance resources of the NSA to the smaller capabilities of the agency's IOC. The two agencies are the largest in the U.S. intelligence community, with budgets last year of $14.7 billion for the CIA and $10.8 billion for the NSA. “We provided the map,” the former official said, “and they just filled in the pieces.”

As opposed to, oh I dunno, throwing the kitchen sink at poverty in America instead. Okay, assuming that this isn't self-serving bullshit, and that some of these people actually do know how to perform their jobs, you would think that sooner or later, our elected leaders would question the utility/desirability of a computerized killing regime that only creates more enemies for the computerized killing regime to target for killing so it can create more enemies to keep killing. Not to minimize whatever threats we face, but there are so many other things we could spending the money on!

---Baron V

Innocent Mistakes

We all make them because, you know, nobody's perfect:

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon sought to hide escalating trading losses that surpassed $6.2 billion, misled investors and dodged regulators as the bank’s position deteriorated last year, a Senate probe found.

The largest U.S. bank “mischaracterized high-risk trading as hedging,” and withheld key information from its primary regulator, sometimes at Dimon’s behest, according to a report today by the Senate Permanent Subcommittee on Investigations. The 301-page document also shows how managers manipulated internal risk models and pressured traders to overvalue their positions in an effort to hide growing losses in a “monstrous” credit derivatives portfolio in London.

“We found a trading operation that piled on risk, ignored limits on risk taking, hid losses, dodged oversight and misinformed the public,” Chairman Carl Levin, a Michigan Democrat, told reporters today after his investigators spent nine months combing through 90,000 documents and interviewing current and former executives.

No need to call out the Feds on this. Anyone could have slipped up here---these transactions are incredibly complex! So we'd only need to inform the Justice Department if any serious crimes had been committed.

Meanwhile, serious crimes. Priorities!

---Baron V

Keeping It in The Family

As a rule, it's probably the preferred way to settle domestic disputes since it's not too dignified to be seen washing one's dirty laundry in public. When the public is covering the dry-cleaning bills, however, different rules of etiquette just might apply:

"In the old days, the regulators made it a point to embarrass everyone, to call attention to their role in bank failures," said former bank examiner Richard Newsom, who specialized in insider-abuse cases for the FDIC in the aftermath of the S&L debacle. The goal was simple: "to make other bankers scared."

Newsom said he couldn't understand the shift, unless the agency doesn't "want people to know how little they are settling for."

It certainly seems to be of piece with the role that our financial regulatory regime has assigned to itself for policing troublesome job creators: Less of a watchdog, and more of a protection racket. But it really does not have to be that way.

---Baron V

Still Taking Care of Their Own

Time for our leaders to consider making some substantial revisions to the Federal Reserve Act:

Late last Wednesday, the New York Fed said in a court filing that in July it had released Bank of America from all legal claims arising from losses in some mortgage-backed securities the Fed received when the government bailed out the American International Group in 2008. One surprise in the filing, which was part of a case brought by A.I.G., was that the New York Fed let Bank of America off the hook even as A.I.G. was seeking to recover $7 billion in losses on those very mortgage securities.

It gets better.

What did the New York Fed get from Bank of America in this settlement? Some $43 million, it seems, from a small dispute the New York Fed had with the bank on two of the mortgage securities. At the same time, and for no compensation, it released Bank of America from all other legal claims.

Granted, the prospect of putting Congress in charge of monetary policy isn't likely to inspire much confidence in any quarter, but on the other hand, you'd think a sensible central-banking law would forbid the institution from making unilateral decisions like this involving taxpayer money without some sort of third-party oversight. And since Congress is the branch of government that's most directly accountable to the taxpayers, seems to me they'd be doing themselves---and their constituents---a big favor by empowering themselves to put a stop to this shit. It's one thing for the Fed to sell Treasuries to the banks in exchange for taking mortgage-backed securities off their balance sheets; it's at least the approximation of a fair transaction. But just blowing off billions of dollars in claims that taxpayers are entitled to recover, in exchange for virtually nothing? If this is how business is done these days, why not just retire the New York Fed and put Bank of America in charge of monetary policy instead? Sure, it'd be an open invitation to a string of disastrous and self-serving policy decisions, but at least we'd know for certain who was really running the show.

---Baron V

Market Uncertainty

It's a bogus talking point, of course, made by people with ulterior motives and with their own self-interest at heart. That's because a certain degree of uncertainty always exists in every kind of open market. Even if you can accurately forecast consumer spending habits, interest rate fluctuations, new housing starts, changes in tax policy and every other indicator that can affect economic activity, there will always be things like earthquakes and floods and political turmoil that can disrupt supply chains at any given time but which cannot be accurately predicted in advance. This is why big corporations have risk management departments----to price every potential investment strategy an enterprise could adopt to determine which is likely to be the safest, and which may be the most fraught with peril.

In fact, the only kinds of markets where there is no uncertainty whatsoever, i.e., where outcomes are wholly predictable 100 percent of the time, are markets like, well, this one. And that's how you know that people who complain about "uncertainty" in the marketplace aren't nearly as interested in driving positive economic activity as they in picking other people's pockets.

---Baron V

Saving America's Jobs Creators

You can stop reading after the sixth paragraph:

A new paper from Patrick Sims of Hamilton Place Strategies, a policy and communications firm led by Bush administration White House and Treasury official Tony Fratto, amounts to a case for the big banks. (Hamilton Place counts major banks and their trade associations among its clients).

Layman's translation: Don't break up our clients because it'll be bad for our consulting business.

Now granted, I'm no economist, but it seems to me that a pretty good rule of thumb would be: If any single financial institution---or any single corporate entity, for that matter---has grown so enormous that its failure would implode the entire global economy, that would suggest that a breakup is in order. Unless we want to max out systemic risk across the banking system, which means that yes, in flush times the banks will yield generous returns for their investors---and in bad times, either taxpayers will come rushing in with trillions more in bailout relief, or it's the financial equivalent of nuclear winter for the rest of us. I really do believe that there's a better way.

---Baron V

Don't See Why It's Either/Or

Granted, I don't have a Economics degree, so yeah, I'm an ignorant rube, but still:

[W]hat if the DOJ had prosecuted Bank of America or Citigroup into nonviability in 2009? Who was going to buy them? Nobody! That was the whole point of TARP and all the rest.

Had you secured criminal convictions against these megabanks, you'd have had to nationalize them and assume their liabilities or else face an economic catastrophe. But if the Obama administration wanted to nationalize the banks, it could have secured that outcome without the bother of criminal prosecution [...]

But either way, implementing a non-nationalization approach to bank recapitalization and then prosecuting the banks into a renewed state of insolvency and then nationalizing them would have been nuts. If saving the banks was a mistake, then the error had nothing in particular to do with prosecutions, and if saving the banks was the right thing to do, then curtailing prosecutions was the only way to execute the strategy.

First, we already are assuming the banks' liabilities. What else is quantitative easing all about?

Second, why would prosecuting criminal bank executives trigger de facto bank defaults? Seems to me that's buying into the bogus argument that the Masters of The Universe who run these institutions are so uniquely irreplaceable that the banking system couldn't function properly in their absence. Notwithstanding the fact that they already ran the banking system into the ground.

Nationalization, restructuring and prosecutions of individual executives, roughly in that order, were/are the best way to go if the administration's policy goal was to restore "investor confidence" in the integrity of the financial system. By tolerating/sanctioning so much moral hazard, though, and by continuing to feed it with discounted paper, they've only rewarded the system's most corrupt and parasitic elements, and discouraged the most honest investors from plowing their money back into markets that they see, quite rightly, as rigged. But even if you don't agree with that, there's no reason why prosecuting the heads of the most crooked banks would necessarily have resulted in some sort of financial panic. Mafia crime families have lines of succession to ensure their businesses keep running smoothly if one of their high-ranking capi gets nabbed by the police or gunned down by a rival. Why wouldn't it be the same for the megabanks? Am I missing something here?

---Baron V

Lives of The Party

Some people got no sensayuma:

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members' suggestions: "Subprime Meltdown," "Hitman," "Nuclear Holocaust," "Mike Tyson's Punchout," and the simple-yet-direct: "Shitbag."

Ha ha. Those hilarious investment bankers.

Then they gave it its real name and sold it to a Chinese bank [...]

In February 2006, Morgan Stanley began putting together the Stack C.D.O. According to an internal presentation, Stack "represents attractive business for Morgan Stanley."

Why? In addition to fees, another bullet point listed: "Ability to short up to $325MM of credits into the C.D.O." In other words, Morgan Stanley could---and did---sell assets to the Stack C.D.O., intending to profit if the securities backed by those assets declined. The bank put on a $170 million bet against Stack, even as it was selling it.

In the end, of the $500 million of assets backing the deal, $415 million ended up worthless.

And they actually lost money on the transaction. Genius.

Future historians will surely wonder how our political leadership could have been so feckless, so inept, and so ethically compromised to have allowed this sort of behavior to escape any reasonable accounting. While the members of Team Democrat may have good reason to celebrate the second inaugural of the Man Who Saved The Markets, they would be well advised to ask themselves if those markets deserved to be saved at all.

---Baron V

Why They Walk

The reasons given by our leaders for their dereliction of duty have been numerous, but the ones we've heard most often over the past few years are (1) financial fraud is very hard to prove, (2) that the various derivatives/swaps that were at the heart of the housing-market crisis are too opaquely difficult to explain to a grand jury, and most recently, (3) that prosecuting major bank executives and/or shutting down their operations would rattle investor confidence, which would trigger runs on deposits, massive sell-offs of financial stocks, and the eventual cratering and collapse of Western corporate capitalism. If that sounds to you like a lot of phony fear-mongering, perhaps that's because, well, it probably is:

The world’s largest banks need to shrink or be broken up in order to regain investors’ confidence after four years of scandals, high-profile trading losses and financial crises, according to a Bloomberg poll.

Almost 60 percent of respondents said they were not confident or “just somewhat confident” that banks are taking prudent risks and conforming to the law, and getting smaller was seen as the top fix in the Bloomberg Global Poll, with 29 percent choosing that remedy.

---Baron V

With a Little Help From Their Friends

Shocked, shocked I tell you, to hear that market-rigging is going on here:

During the Fed's August 16, 2007, conference call, Geithner said that banks had started to ask about borrowing from the Fed earlier in the month after the central bank had released a statement saying it stood ready to provide liquidity to credit markets.

Geithner said banks "obviously don't have any idea that we're contemplating a change in policy"---a statement that Lacker then questioned.

"Did you say that they are unaware of what we're considering or what we might be doing with the discount rate?" Lacker asked, according to the transcript.

Geithner said yes, and Lacker followed up: "I spoke with Ken Lewis, president and CEO of Bank of America, this afternoon, and he said that he appreciated what Tim Geithner was arranging by way of changes in the discount facility. So my information is different from that."

Geithner responded, "I cannot speak for Ken Lewis, but I think they have sought to see whether they could understand a little more clearly the scope of their rights and our current policy with respect to the (discount lending) window."

"The only thing I've done is to try to help them understand ... what the scope of that is," he said.

Don't really know which is worse if this is true: That he was leaking insider information that could have given them a competitive edge over other banks that weren't tipped off, or the way he talks about them is if they're a business partner of the central bank. Okay, in a way they are business partners, but the whole idea is not to selectively leak useful info that can be monetized to them because it will move the financial markets in a way that is, well, rigged.

---Baron V

Seamless Transition

Looks like we'll never notice any changing of the guard. Because there isn't going to be one?

Lew declared at the 2010 Senate hearing that he didn't think financial deregulation led to the financial crisis, saying the real problem was banks taking too many risks with bizarre derivatives.

"I don't believe that deregulation was the proximate cause," he said, adding, "I would defer to others who are more expert about the industry to try and parse it better than that."

And maybe the reason why they were taking too many risks with bizarre derivatives was because . . . nobody was regulating the trades or the instruments? I mean, if children playing with matches set your house on fire, you take away the matches, and if the Masters of The Universe are trading exotic pieces of paper that have already set the economy on fire and which they still have no idea how to value, you might want to consider, well, taking away their play money. Crazy thought, I know, when what they really need is a tax cut.

---Baron V

Protection Racket

They're not even trying to pretend they care about the public interest anymore:

US authorities defended their decision not to prosecute HSBC for accepting the tainted money of rogue states and drug lords on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the "collateral consequences" of taking the bank to court.

Announcing the record fine at a press conference in New York, assistant attorney general Lanny Breuer said that despite HSBC"s "blatant failure" to implement anti-money laundering controls and its wilful flouting of US sanctions, the consequences of a criminal prosecution would have been dire.

Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking licence in the US, the future of the institution would have been under threat and the entire banking system would have been destabilised.

At this point, none of these outcomes seems terribly undesirable, considering that this very same banking system has already destabilized the lives, and stolen the fortunes, of tens of millions of people in this country and millions more overseas, and it continues to require massive balance-sheet expansions from the world's central banks to simply stay operational: in other words, as currently constituted, an enormous net drag on the global economy. Just a crazy thought here, but perhaps if one of these criminal enterprises lost its license to conduct commerce, had its assets broken up and its executives sentenced to lengthy prison terms, it might serve as an example to the other criminal enterprises to, you know, clean up their act before prosecutors decide to do their jobs, which last I heard was to prosecute people, not make up excuses for dereliction of duty by trying to scare people.

Personally, I'd be willing to bet that if they actually allowed a bank like HSBC to fail, most people in this country would stand up and cheer, even if it cost them some money from their portfolios. I know I would.

Cyrus Vance, the Manhattan district attorney, said: "New York is the centre of international finance, and those who use our banks as a vehicle for international crime will not be tolerated."

But they are being tolerated because they are being allowed to remain in business on our fair shores in exchange for money they can make up in half a fiscal quarter. Don't insult our intelligence with this "Crime doesn't pay" crap, because absent prosecution and imprisonment, it quite clearly does:

Despite the size of the fine, HSBC's shares on the London stock exchange rose by 2.8p to 644p. Last month HSBC announced third-quarter pre-tax profits to $3.5bn (£2.2bn).

---Baron V

Elections Don't Matter

Don't like to think this, since I do take pride in never having missed one, but it's kinda hard to reach any other conclusion at this stage in our history when you realize that the people who are actually formulating policy and writing our laws aren't people who anyone voted for:

Both Romney and Obama are widely viewed in corporate America as likely to support a deal roughly along the lines of the Bowles-Simpson commission recommendations that will include trims to Social Security and Medicare and new revenues beyond just increased taxes for the wealthy. Corporate America would also like to see such a deal include a lower overall corporate rate and changes to the taxation of overseas profits. But those things are not viewed as prerequisites for widespread corporate support of a deficit reduction deal. The executives also want a mechanism put in place in the lame-duck session to extend current tax policy and delay the $1 trillion in sequester spending cuts scheduled to go into effect in January while forcing action on a sweeping plan next year.

“Based on conversations with both campaigns I’m very reassured they are both committed to getting a deal done and want to lead on making it happen,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. MacGuineas is leading an effort to corral CEOs to support the Fix the Debt campaign, which has so far raised $30 million to support a “grand bargain” deal on taxes and spending and hopes to raise $100 million. “You can’t implement any kind of agenda without getting this done first.”

---Vitelius

QE Free

Wrote about this the other day, but besides being a supply-side policy fix that doesn't/can't/won't address the overall weakness in aggregate demand, you have to wonder---just a little bit---about the wisdom of extending what amounts to an open credit line to people who are either hopelessly corrupt or simply bad at their jobs. Because it's not as though there aren't more effective tools available to inject liquidity into the economy. But I guess we should be grateful for whatever relief we can get since things could be even worse next year than they are right now. Cheery thought!

---Vitelius

With Friends Like These

Who needs counterparties?

The U.S. Justice Department said it will not pursue criminal charges against Goldman Sachs Group Inc or its employees related to accusations that the firm bet against the same subprime mortgage securities it was selling to clients.

The decision not to prosecute Goldman, a firm held up by critics as a symbol of Wall Street greed during the 2007-2009 financial crisis, highlights the difficulty in prosecuting crisis-related cases.

Few expected the bank to face criminal charges, but in April 2011, U.S. Senator Carl Levin asked for a criminal investigation after the subcommittee he leads spent more than a year looking into Goldman.

The accusations were aired in a heated 2010 Congressional hearing in which Levin grilled Goldman Chief Executive Lloyd Blankfein for hours about whether it was morally correct for the firm to sell its clients products described internally as "crap".

"The department and investigative agencies ultimately concluded that the burden of proof to bring a criminal case could not be met based on the law and facts as they exist at this time," the Justice Department said in a statement late on Thursday.

The DOJ does not typically make public statements when it concludes an investigation.

Neil Barofsky, a former watchdog for the U.S. government's financial system bailout in 2008, said the announcement was a stark reminder that no individual or institution had been held meaningfully accountable for their role in the financial crisis.

"Without such accountability, the unending parade of megabanks scandals will inevitably continue," said Barofsky, who has been an outspoken critic of the government's response to the financial crisis.

In a brief statement emailed to Reuters, a Goldman Sachs spokesman said: "We are pleased that this matter is behind us."

Taking the Justice Department at its word, the fact that these blatantly fraudulent financial transactions are so complex and opaque in nature that criminal charges can't be brought against them sure seems like a really strong motivation to, oh I dunno, maybe rewrite the regulations that govern such transactions---or even ban them altogether? Yes I know, we can't even consider doing that because Stalinism, but otherwise we are giving these people a license to steal from their customers in perpetuity. Which might not be so horrible in and of itself---caveat emptor and all that---but as we've already seen, wholesale looting of the clientele is the financial equivalent of a gateway drug that eventually leads to the wholesale looting of taxpayers.

---Vitelius

Check's in The Mail

Another day, another out-of-court settlement:

Capital One has agreed to pay $12 million to resolve allegations the bank violated special consumer protections in federal law for members of the military, the Justice Department announced Thursday.

The government says Capital One wrongfully foreclosed on some homes and improperly repossessed some cars. In addition, the government says the bank obtained wrongful court judgments against some service members and improperly denied interest rate relief on some credit card and car loans.

In a settlement under the Servicemembers Civil Relief Act, Capital One will pay $7 million in damages, including at least $125,000 to each service member whose home was unlawfully foreclosed upon and at least $10,000 to each service member whose vehicle was unlawfully repossessed.

Better than nothing, I suppose, but how about forcing them to give back the houses and cars that they stole from the troops instead? If that isn't possible, i.e., the properties have been resold and are occupied by new owners, how about finding other houses or cars for the foreclosed soldiers, and applying the settlement money towards their principal payment? Would sorta be a case of the punishment fitting the crime, but forcing our job creators to actually lose money for their offenses is, apparently, never an option. That's why they broke the law in the first place, and that's why they'll keep on breaking it.

---Vitelius

America's Job Creators

They used to make their money investing in the brick-and-mortar economy the rest of us live in. Now they make money by flimflamming it, and us:

By some estimates, 90 percent of quotes on the major exchanges are canceled before execution. Many of them were never meant to be executed; they are there to test the market, to confuse or subvert competing algorithms, or to slow trading in a stock by clogging the system—a practice known as quote stuffing. It may even be a different stock, but one whose trades are handled on the same server. On the Internet, this is called a denial-of-service attack, and it’s a crime. Among quants, it’s considered at most bad manners.

I first began to notice this trend in the late 1980s, but by now it should be obvious to everyone that our capital markets have become completely uncoupled from the greater economy into which they're supposed to be allocating wealth most efficiently. Dodd-Frank isn't going to make a whole lot of difference in regulating this outlaw industry because, well, their outlaw business practices are still perfectly legal.

Meanwhile, bring on the next casino crap-out.

---Vitelius

Prison-Default Swaps

It's the hip new derivative that all the cool kids will be trading next year.

At least I can see a business case for Goldman making this kind of investment. Seems to me that one of the best ways to ensure that your executives never get marched off to prison is to, well, own the prison. If this isn't an example of industry best practices, I don't know what the heck is.

---Vitelius

Warning: Contains Irony-Like Substance

Someone's kinda touchy:

“A lot of people thought, and wrote, in publications of record that I spent my life at Goldman Sachs, rather than as a public servant, which is what I’ve done with my life. A lot of people thought the Federal Reserve Bank of New York was a bank, a private bank, rather than the fire station of the financial system,” Geithner said. “I’m deeply offended by that."

Yep. He ran the fire station while half the neighborhood burned to the ground. Glad we cleared that up!

---Vitelius

Pretty Much Sums up The Last Four Years

If it seems like things haven't gotten much better, it's because basically, they haven't:

It is clear that the criminal-justice system has proved ill-equipped to address the financial crisis. For that, we needed effective regulatory reform. Instead, we got the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

---Vitelius