Janet Tavakoli: Show Bernanke and Geithner the Door
Submitted By Janet Tavakoli
Both the United States and the United Kingdom have had a coordinated non-response to financial reform. If a drunk driver killed your neighbors and crashed the car into your house, you wouldn't expect a police officer to hand the offender a bottle of whiskey and the keys to a bigger, faster, and more powerful car. You would be outraged if the officer said he would only impose a fine, and then made you lend the drunk the money to pay the fine. Yet this is the modus operandi of our financial system, and now financial drunk drivers refuse blood tests and huff that their seat belts were fastened.
Both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Timothy Geithner missed the critical warning signs of our recent financial crisis. In April of 2009, Steve Forbes called Geithner "the most formidable impediment to an economic recovery." Ben Bernanke repeats past mistakes and hands out cheap money with insufficient conditions or regulation. Both economists have been economical with the truth. There were alternatives to their actions during the crisis that are based on sound financial principles and do not violate the spirit of democracy.
President Obama has proposed a baby step towards financial reform. He proposes to limit ill-defined proprietary trading, limit banks' borrowings, and prevent banks from investing in hedge funds and private equity funds. Banks' lobbyists and PR spin-doctors are already working overtime to thwart him.
Mainstream financial media got it badly wrong when it said that the proposal was based on populist anger. It may have motivated President Obama to (only partly take) Paul Volcker's advice, but sound financial principles back that advice.
Some bank stocks fell in price after the President's remarks yesterday. That was because savvy investors knew that speculators might no longer be able to report high risk-based earnings subsidized with taxpayer dollars. In this case, a fall in stock prices for banks driving down Wall Street should be viewed as a healthy sign. A few bank stocks rose, because they rely on traditional banking backed by sound financial principles.
Goldman Sachs's stock went down a few percentage points. It became a newly created "bank," to get on the taxpayer give-away gravy train. JPMorgan Chase claims only 1% of its revenue comes from proprietary trading, yet even before its merger with Bear Stearns, JPMorgan's market share of credit derivatives was greater than 50% for U.S. banks. That meant you could combine the credit derivatives of all other domestic banks, and JPMorgan's positions were greater. Those are just two examples. Banks' "non-proprietary" trading desks are often invisible hedge funds.
Taxpayers currently subsidize banks with cheap money supplied by the Federal Reserve. Even banks that nearly crashed our economy borrow at nearly zero interest rates, while some consumers pay nearly 30% on credit card debt.
Banks enjoy a Term Asset-Backed Securities Loan Facility (TASLF) that allows them to borrow against problem assets. New banks have each issued tens of billions in FDIC guaranteed debt through the Temporary Liquidity Guarantee Program (TLGP). Banks get interest payments on the excess reserves they keep with the Fed. Accounting rules were changed in March 2009, so banks make up their own prices for assets and more easily hide losses. These are only a few of many newly-created hidden subsidies.
Taxpayers are paid only peanuts in fees for these massive subsidies while being squeezed with high interest rates and mortgage foreclosures--after our economy was devastated chiefly by several banks' malicious mischief.
What has the financial crisis taught us? Among other things, we should show Bernanke and Geithner, enablers from the previous administration, the door. Paul Volcker is right to ask for a return to Glass-Steagall. It worked until it was eroded over several decades by bank lobbying. Banking and speculative trading activities--even when done for "customers"--don't mix.
"Financial innovation" must be limited, since much of it in recent years was the financial equivalent of card cheating. Banks should not be allowed to sponsor hedge funds and private equity funds, and furthermore, they should not be allowed to lend to them through prime brokerage units or other means. Financial institutions must be allowed to fail. Hedge funds require regulation. Malfeasance should be investigated and prosecuted. Credit derivatives should be traded and cleared through exchanges and made transparent. Compensation and financial incentives at banks must change. Bank employees cannot continue to reap huge rewards at no personal risk while shoving risk into the global financial system.
President Obama promised us change, and he should seize this opportunity to demand sweeping financial reform.
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UPDATE: Bernanke Confirmation Now In Doubt >>
Geithner Not on Board With Obama Plan >>
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Video: Max Keiser with Janet Tavakoli -- January 19, 2010 -- Burying the Financial Bodies
Janet's segment begins at the 12:30 mark.
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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).
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Jan 22, 2010 at 10:30 PM
Reader Comments (10)
Janet says...Credit derivatives should be traded and cleared through exchanges and made transparent.
Gobias responds...Another great article by Janet. I love you Janet but I do not agree. I wish I understood why we need credit default swaps at all. From my understanding, yes limited, they were invented by JP Morgan in 1997. A woman named Blythe Masters was part of that small group that created derivatives. I think they should be a thing of the past. If one game in the casinos bankrupts Vegas, you don't rebuild Vegas with more pit bosses watching that same game. You remove that game from the floor. Yes, I know that the casino house is the big banks and the Goldman Sachs these days. That may be the bigger problem.
http://www.pbs.org/wgbh/pages/frontline/warning/themes/derivatives.html
http://www.bloomberg.com/apps/news?pid=20601086&sid=aXRBOxU5KT5M
As you can see from the second article above, this chick Blythe Masters is now getting even more creative in Lewinskying every hard earned dollar from our Main Streets into the greedy sweaty hands of those on Wall Street. What was that line in Black Rain…I usually get kissed before I get fucked (now we have to add AGAIN to the end of that quote).
It is time that we wise up and end derivatives. What did Buffett call them, a fool’s game/financial weapons of mass destruction. Well Warren, speak up old man or did you are you now one of those fools waiting for another mushroom cloud leading to more national debt putting us in more peril. Oh right, Warren will still be richer than God and Obama will still vacation in Hawaii. Pelosi will get another facelift and John Kerry will stay a gigolo and windsurf in Hyannis port.
The crooks on Wall Street (the Blythe Masters of the world) will move their derivatives games to any pool of money out there and suck up the nickels without any shame or decency.
Well, they just laughed at and mocked Joe the Plumber and Sarah from Alaska. They just laughed at and mocked Scott with the pickup truck and the Tea Party Patriots. Well, he who laughs last, laughs the loudest.
This is our most desperate hour. Help me, Janet Tavakoli; you're my only hope.
But real change will come when Geithner and Paulson are sent to prison.
As Mish observed:
" Anyone short S&P puts is asking to have their heads handed to them on a platter."
http://globaleconomicanalysis.blogspot.com/2008/05/buffett-loses-12-billion-shorting-put.html
So it's no suprise the Oracle is out there campaigning for Bernanke....
The Personal Credit Crisis and Coming Credit Revolt
By Thomas Louis
We have been in a real financial crisis in this country since March of 2008 when Bears Stern fell. In order to avoid another depression the government pumped up many of the nations larger and more important institutions. While we may have avoided depression this has created some very unique elements to this deep recession that we the consumer will be feeling for some time to come.
In order to get healthy (fat) again many if not most of the institutions that give us our most common form of credit; credit cards, have been cutting credit lines so that they can decrease their exposure and at the same time raising rates. Here is the part of the problem no one seems to be talking about. Our credit ratings; that mystical number that determines our economic fate in so many ways is in part determined by:
1) How much credit we owe versus how much we have available,
2) How long we have had our credit lines/cards
3) Debt payments versus income
So here are the problems on the horizon:
1) If credit card companies cut your limits you then immediately have a much worse owed vs. available credit ratio. This in turn drops your credit rating.
2) If credit card companies raise your interest rate your monthly income vs. debt payment ratios making it more difficult to get credit and some credit card companies will raise your rates and decrease your lines based on your lower scores.
3) If you apply for new credit to balance out the change in your debt owed vs. available ratios then your credit rating goes down making it harder to get credit and some credit card companies will raise your rates and decrease your lines based on your lower scores.
In short millions of Americans who have done nothing other than pay their bills just as they did before Wall Street and these banksters gambled away our economy, are now far less credit worthy. Not because of anything they did. Not because they failed to pay a bill. Only because the banksters who set the rates, set the standards, decided they will do whatever it takes to get fat again regardless of the effect it has on millions of their good paying clients.
Eventually many people will be left with little choice but to stop paying. When you have taken away someone's credit worthiness even though they pay you every month, you have taken away their ability to borrow money from you anymore, why would they continue to repay them.
The banks have shortsightedly created a scenario where the math says to stop paying the banks. Perhaps they are counting on the good will and faithful nature of the American people to keep paying. This has worked in the past and I may agree it would work again if it were not for the fact that we see them paying themselves billions of dollars in bonuses, see that they are paying 1% to borrow the money and charging us up to 29% for the same money ( I know of guys that have done jail time and made smaller spreads), we know that it was us the tax payers that bailed out the gambling banksters and we put out trillions of dollars that could be doing a lot of good for this country if it weren't sitting in their vaults.
Is there a full scale revolt in the making, perhaps. As this continues to unfold we will see if the government makes another attempt at keeping these banksters in line or if they continue down this path that is bad for the people and for business. If the banks continue rewarding themselves for bad behavior and punishing us for good behavior I do not think that the American people will continue feel obligated to pay the banksters.
Tom Louis http://www.creditrevolt.2thoms.com/
Excellent comment Ken! And YES, "they" sure are.
If there's something that I'VE learned about the American people is that -despite the ease with which we can be herded into supporting almost ANY disastrous political policy- we're despite of that deep down inside a very NAIVE and SWEET-HEARTED people. We REALLY DO believe in the ultimate triumph of Good, Justice and Equality. We still believe in the value of hard work. In "picking ourselves up by our own bootstraps" when adversity strikes. We also have always believed in PAYING OUR OWN WAY and in HONORING OUR PERSONAL DEBTS.
40 years of watching The Rifleman & John Wayne movies will do that to anyone, you know?
But at some point along the way corprorate bigwigs like GOLDMAN SACHS decided to CASH IN on our national tendency towards HONESTY and they figured they could actually PROFIT from it as if it were some form of STUPIDITY or even a MENTAL PROBLEM.