An Object Lesson in Governmental Failure: Derivatives reform

By Ken Silverstein

If you want to understand why Congress seems completely incapable of checking the power of Wall Street, look back to a hearing on the Hill last October 7, and the subsequent events surrounding it. On that day, the House Financial Services Committee hosted a panel on reform of the market for derivatives, the financial instrument which played such a notable role in the country’s economic meltdown.

Everyone rational knows that there is an enormous need to seriously reform the derivatives market, but the committee, headed by Congressman Barney Frank (D-Wall Street), invited a panel of eight guests who were distinguished by their uniformly pro-industry positions. They included Jon Hixson of Cargill, James Hill of Morgan Stanley (on behalf of the Securities Industry and Financial Markets Association), Stuart Kaswell of the Managed Funds Association (which, through one of its lobbyists, has delivered significant “bundled” donations to Frank) and Christopher Ferreri of the Wholesale Markets Brokers Association.

In response to complaints from Americans for Financial Reform, which represents hundreds of consumer groups and labor unions, the committee issued an invitation—the night before the hearing was held — to Rob Johnson of the Roosevelt Institute. For the committee, the last minute inclusion of Johnson — a former managing director at Bankers Trust Company and former economist at the Senate Banking Committee and Senate Budget Committee — apparently constituted sufficient balance.

Predictably, witnesses at the hearing trotted out positions urging caution in regard to the matter of reform. Derivatives and other exotic financial devices have reaped the finance industry vast profits, but for Hixson of Cargill the common man and woman would be the real losers if Congress were to act too severely. “We offer customized hedges to help bakeries manage price volatility of their flour so that their retail prices for baked goods can be as stable as possible for consumers and grocery stores,” he told the committee’s wagging heads. “We offer customized hedges to help a restaurant chain maintain stable prices on their chicken so that the company can offer consistent prices and value for their retail customers when selling chicken sandwiches.”

Johnson, who came last, offered the only serious critical viewpoint, saying that the American public had been “quite demoralized by…the bailouts that we experienced last fall.” After about five minutes of his testimony, Congresswoman Melissa Bean—another industry-funded committee member who chaired the hearing because Frank was absent—had heard enough. “I’m just going to ask you to wrap up because we’re running out of time,” she told Johnson.

Johnson gamely continued. “When I hear the testimony today that are largely financial institutions and end users, I believe that I represent a third group that comes to the table, which is the taxpayers, the working people of the United States,” he said.

“I do need a final comment,” Bean interjected seconds later.

That put an end to Johnson’s testimony. “I was just called to this hearing last night, so I will provide detailed comments on your bill and a statement for the record that will finish my comments,” he concluded.

About five days later Johnson submitted his full testimony to the committee, to be included on its website along with the statements of the other eight panelists. When it wasn’t posted, Johnson asked Lynn Parramore, editor of the Roosevelt Institute’s blog, to see what was up. Parramore emailed and spoke to staffers at the Financial Services Committee, and received a number of explanations for why Johnson’s testimony had not been posted: first she was told it hadn’t been received, then that it had to be submitted as a PDF, then that the committee was having IT problems. “I couldn’t decide whether it was incompetence or mischief, but I began to suspect the latter,” Parramore told me.

Finally, she was informed that the committee’s general counsel would not allow posting of the testimony because Johnson had not submitted it during the hearing. (Of course, since Johnson had been invited at the last minute it was impossible for him to fulfill this pointless requirement.) So you still can’t read Johnson’s prepared testimony at the committee website, but you can check it out on the Roosevelt Institute’s blog.

Meanwhile, Frank’s committee has put forth its “reform” bill. “Too tepid, too weak, too late,” Johnson says of the legislation. “Very industry influenced. We had a crisis and they are pandering to the perpetrators.”

Must-read on Financial Reform: Robert Johnson’s Testimony on OTC Derivative Market

Harper’s Magazine has written up the lengths to which the authorities will go in censoring views that dissent with what is the unstated official policy: that no demand of the banking industry is too unreasonable not to be catered to.

The object lesson is the gutting of the falsely-branded derivatives reform bill. It arrived with a loophole so large you could drive a truck through it, namely that customized derivatives were not covered. So this bill will do nothing to impede the growth of complex opaque products; in fact, it encourages it, since banks will have no oversight if they tweak a product so that is can be deemed “customized.” It was further weakened by excluding most of the banks in America and by excluding a whole swathe of end users. The final insult was making the derivatives clearing house self-regulating.

The hearings on the bill had testimony scheduled only from what amounted to industry flacks. Someone apparently realized at the 11th hour that that might not go over with the correctly angry public too well. So less than 24 hours prior to the session before the House Financial Services Committee, an invitation was issued to Rob Johnson, a former managing director at Bankers Trust Company and former economist at the Senate Banking Committee and Senate Budget Committee.

So what transpired? As Ken Silverstein recounts:

Johnson, who came last, offered the only serious critical viewpoint… After about five minutes of his testimony, Congresswoman Melissa Bean—another industry-funded committee member who chaired the hearing because Frank was absent—had heard enough. “I’m just going to ask you to wrap up because we’re running out of time,” she told Johnson.

Johnson gamely continued. “When I hear the testimony today that are largely financial institutions and end users, I believe that I represent a third group that comes to the table, which is the taxpayers, the working people of the United States,” he said.

“I do need a final comment,” Bean interjected seconds later.

That put an end to Johnson’s testimony. “I was just called to this hearing last night, so I will provide detailed comments on your bill and a statement for the record that will finish my comments,” he concluded.

So what happens next? >The House Financial Services Committee has refused to publish his testimony, offering “the dog ate my homework” level excuses, first that they hadn’t gotten it, then that it was in the wrong format, then that their IT department was experiencing difficulties (always a good one when real reasons are running thin). The last one was pure Catch-22: that he had gotten his written testimony in too late.

You can read his statement, which is obviously too offensive to powerful interests for it to see the light of day in any officially-sanctioned venue, at the Roosevelt Institute.

Thursday, 10/22/2009 - 9:33 am by Lynn Parramore | 5 Comments

Robert Johnson, Director of the Economic Policy Initiative of the Roosevelt Institute, submitted his full testimony yesterday to the Committee on Financial Services as part of the hearing on reform of the over-the-counter derivatives market. Johnson’s hard-hitting analysis of the potentially catastrophic faults in our financial system runs counter to a troubling trend of failing to address risk that has plagued the Committee’s work so far.

Johnson has grave concerns about loophole-riddled bill currently under review, describing it to me in a recent conversation as “Swiss Cheese.” In his view, regulation of the “reckless” OTC derivatives market is crucial as its impact is so broad, forming “the very fabric of our financial system.”

Increasingly, it appears that bold voices like Johnson’s are being silenced. His original in-person testimony before the Committee was shut down after an outrageous five minutes, despite ample opportunity for industry players to speak. Johnson was forced to submit his full testimony in written form. Click here to read

Is Looting A Thing of the Past?

Nobel prize-winning economist George Akerlof co-wrote a paper in 1993 describing the causes of the S&L crisis and other financial meltdowns. As summarized by the New York Times:

In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer [co-author of the paper, and himself a leading expert on economic growth] said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

The Times does a good job of explaining the looting dynamic:

The paper’s message is that the promise of government bailouts isn’t merely one aspect of the problem. It is the core problem.

Promised bailouts mean that anyone lending money to Wall Street — ranging from small-time savers like you and me to the Chinese government — doesn’t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today’s crisis look tame.

But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters — savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem.

Do you remember the mea culpa that Alan Greesnspan, Mr. Bernanke’s predecessor, delivered on Capitol Hill last fall? He said that he was “in a state of shocked disbelief” that “the self-interest” of Wall Street bankers hadn’t prevented this mess.

He shouldn’t have been. The looting theory explains why his laissez-faire theory didn’t hold up. The bankers were acting in their self-interest, after all...

Think about the so-called liars’ loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains...

What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it “management fees” or “performance bonuses.” Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.

In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it...

Either way, the bottom line is the same: given an incentive to loot, Wall Street did so. “If you think of the financial system as a whole,” Mr. Romer said, “it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury.”

In fact, the big banks and sellers of exotic instruments pretended that the boom would last forever, siphoning off huge profits during the boom with the knowledge that - when the bust ultimately happened - the governments of the world would bail them out.

As Akerlof wrote in his paper:

[Looting is the] common thread [when] countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust...

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society's expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

Indeed, Akerlof predicted in 1993 that the next form the looting dynamic would take was through credit default swaps - then a very-obscure financial instrument (indeed, one interpretation of why CDS have been so deadly is that they were the simply the favored instrument for the current round of looting).

Is Looting A Thing of the Past?

Now that Wall Street has been humbled by this financial crash, and the dangers of CDS are widely known, are we past the bad old days of looting?

Unfortunately, as the Times points out, the answer is no:

At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we don’t get rid of the incentive to loot, the only question is what form the next round of looting will take.

Are We Powerless to Stop Future Looting?

The Times mentions two real solutions to the problem of looting:

The biggest Wall Street paydays should be held in escrow until it’s clear they weren’t based on fictional profits.

Above all, as Mr. Romer says, the federal government needs the power and the will to take over a firm as soon as its potential losses exceed its assets. Anything short of that is an invitation to loot

So there are ways to prevent looting. The only question is whether the government will implement them.

Analysis: Gambling on success - and accepting the fruits or failures of one's decisions - is the essence of capitalism. Every small business owner knows this. But financial giants gambling with other people's money and recklessly speculatiing because they can harvest bumper crops during the good times and know that the government will bail them out during the lean times is something else entirely.

THE HORROR, Bond Traders are White with Terror...

This is an excellent piece written by Stewart Thomson of Graceland Updates (ht Ryan). My warning is that his site focuses heavily on precious metals, but what I like about this article is his focus on CAPITAL FLOWS (bond market versus stock market), and his neutrality in who will win the battle of evermore or what he calls the "thrilla in Manila!"

As you read the following article, please keep in mind the fact that next week’s bond auction will auction a staggering $127 billion in debt ($6.6 TRILLION annualized!)! For a quick review of the bond market’s latest action, I recommend that you review my article, Interest Rate Update…

While I believe that the deflationary forces are going to win in the medium term, the other forces may ultimately win the battle in the long term. You or I will not be “winners” regardless of who wins this battle! You may think you can place a directional bet and become a winner, but I am not so certain – again, a reason I like this article:

THE HORROR, Bond traders are white with terror

Gold Battle
Thrilla in Manila!

I want to talk about the bond market today as it relates to gold. And take you into the very real mind of a very real bond trader. Looking at a bond and gold chart is all very interesting if you like watching ivory tower movies. I do. But movies are not the whole picture. Experiencing the market thru the eyes of a real professional bond trader gives you a sensation of reality, in this case a most horrifying reality, that no chart can give you. I'm going to take you into the mind of a major bond trader who is a very good friend of mine.

What's happening in bond land? The latest US govt bond auction was for $110 billion. Two years ago the average monthly bond auction total was $5 billion, $10 billion, numbers like that. The US govt finances its debt with bonds. A $2 trillion deficit means $2 trillion in new bonds needs to be issued. Approx. $200 billion a month.

I want to take you inside the mind of a primary dealer. These are the approx. 20 dealers that have contracts with the US govt to market their bonds. The way the deal works in the govt's mind is: "You buy our bonds and sell them. You can short t-bonds going into the auction and bag a nice profit for yourself. But if you don't sell the bonds to your clients, guess who owns them? You do! If you don't like it, no more primary dealing for you, got it? And maybe we aren't so keen to hand over anymore bailout money or allow fraud accounting of your OTC derivatives. So play ball, or we take you out."

I spent two hours yesterday meeting in person with a very good friend of mine who is retired as the largest govt bond trader in Canada for one of the primary dealers. He still manages $1.5 billion as a side gig. His minimum trade is $5 million. He looks like a pitbull and uses 4 letter words like Mr. Bernanke uses a greenback photocopier. He carefully detailed to me the horrors that began roaring thru the bond market, horrors that are growing, since the shocking $110 billion US govt bond auction was announced for this week.

The bottom line is: There isn't enough money to soak up all the govt paper screaming down the pipe. The $300 billion in total that Mr. Bernanke committed to buy the bonds over multiple auctions, is a drop in the bucket. It's not enough.

There is a daily competition for money in the world's bond markets. The US govt bond is the King Daddy of those markets. The primary dealers will do WHATEVER IT TAKES to sell those bonds. The primary dealers also carry tremendous power against the govt. Let's have a listen to their response to the Gman's "it's my way or the highway". Listen carefully. "How would you like it, Mr. Gman, if we announced that " sorry, we can't find buyers for your triple A rated toilet paper, we're going to announce to your public that you defaulted. Let's see how you do when we cut your credit cards up. You tell us what to do? Wrong. Go ahead, take away our primary dealerships. We're all standing together on this. We give the orders, not you. Got it?"

What might those orders be? One order could be: "Your $300 billion commitment to buy T-bonds ain't gonna cut it. Try $3 trillion. Now get to your greenback photocopier start button and start pushing it. We'll tell you when to stop."

While that action may be in the pipeline, as of today the ACTIONS taken in the bond market by the players are what is important. And those actions, believe it or not, are to buy bonds. Money is starting to come out of general equities, aka the stock market, and into bonds. Money is not coming out of bonds, it's going in. This is what the chartists don't understand. Money isn't just trickling in, it's pouring in. But it's not enough to meet the govt's skyrocketing demand for money!

The losses in the bond market have pounded bank capital ratios. Balanced funds must now sell stocks and buy bonds to meet their mandated percentages. Losses on corporate bonds bought over the past year are staggering. Many hedge funds leveraged their purchases and are now in dire trouble.

I have warned you all repeatedly about taking delivery of a portion of your stock certificates. Securing your gold. Holding 1 to 12 months expenses cash outside the banking system.

The bond market auction was this week. Again, I want you to FEEL what the bond traders are feeling. They are white with terror. They aren't looking at some chart in internet candyland, they know there isn't enough money to buy all the govt bonds.

Where we appear to be headed is for a test of the Dow lows. You had better pray those lows hold. Because if they don't, your money could become a target of the govt as its demand for money skyrockets, while the supply of money tanks. The ideal situation is a fast crash towards those lows with perhaps either the Dow transports or the industrials breaking, but not both. While that happens, the bond market must rally.

The nightmare situation is the Dow just slowly rolls down, and bonds mount no major rally. If both the Dow transports and the industrials break the lows, the global banking and brokerage system will likely be closed soon after that, the first of many such closes. Short selling would likely be banned. A national sales tax would be simply one of a zillion money grabs.

I do things in moderation. If the Dow industrials and transports break the lows, I would seriously consider moving 5% of your IRA and 401k money out and into physical gold on the next correction in gold. Looking back, you should have bought gold bullion in a pyramid formation instead of opening IRA and 401k accounts. It's too late to turn that clock back. It's a small number, but you may not need that much insurance than 5% given the magnitude of the dangers at hand. Nothing is fixed. Nothing is repaired.

If Ben Bernanke fails to drastically increase the Fed's purchases of bonds, another vortex of asset destruction is a near certainty, as the primary dealers will exert mindblowing pressure on the managers of other assets to move those assets into bonds. Some of the movement is being triggered automatically thru asset allocation algorithms. Let me repeat: money IS not just moving into bonds now, it is POURING in. But... that money is not enough to soak up all the bonds the govt is issuing.

Most money managers are only just this week starting to understand this reality. And what kind of horrific situation this is. If Mr. Bernanke steps forward and announces massive new bond purchases, that could disintegrate the USdollar and send gold to $1200 in weeks or even days. On the other hand, if he doesn't, the primary dealers have no choice but to order a massive liquidation of equity and commodity assets to feed the Gman's maniacal demand for money. Picture a black hole. Everything is being sucked into it. That is the US govt's demand for money. This week's announcement of the $110 billion auction is literally seen by the bond traders as announcing that a real black hole has opened up on a sandy beach. EVERYTHING is slowly being sucked in. Even the sand. And it is accelerating fast in a massive deflationary vortex. As the govt gets the money, it is BURNED. As the sand (and people) pour down the hole, even gold could get sucked in as everything is sold to feed the Gman. Here's the gold chart, the weekly. The chart looks phenomenal. Indicators almost all right in the middle "sweet spot." Perfect to activate the head and shoulders.

Sadly, the massive increases in the commercial short positions of gold and other commodities over the past few weeks suggest it could be the deflationary vortex that emerges the victor of this clash of the titans. Will gold soar or melt? I wouldn't bet 10 cents on one scenario exclusively over the other. I want my subscribers to be 100% prepared for any and all scenarios. Remember the tools Mr. Bernanke has laid out. After the purchase of the t-bonds fails, (and it is badly failing right now) the next step is gold revaluation. If you think the United States govt is going to stand around like a wet noodle while their t-bonds are liquidated and watch all "their" money pour into gold without taking action to prevent that, please report to your new home on Fantasy Island. And don't expect there to be any gold there for you when you arrive. Own gold stocks bought into weakness and take delivery of a portion of your certificates. Own gold jewellery. Secure your gold before the govt secures it for you. Jim "Mr. Big" Sinclair, the world's largest trader of gold in the last bull market, feels gold could begin a skyrocket move to 1200, within 3 weeks! Jim "Mighty Man" Rogers feels gold could fall to 700! The bottom line right now is the bond market will decide the victor. The good news is Mighty Man will be a buyer at 700 if it happens. If he is correct, another massive wave of asset destruction is just around the corner, one that could require in excess of $50 trillion in money printing to cover the announced otc derivatives losses that will probably follow. The IMF may have no choice but to start a massive liquidation of its gold very quickly if the bond market doesn't reverse. They have no money and they may be enlisted to buy US govt debt. This is the clash of the titans and the public, who has just loaded up on stocks in time to be killed, is on the verge of being totally obliterated. Regardless of which way this plays out. Ironically, as money pours out of other assets to buy US govt bonds to feed US Gman Friar Tuck, it could have the effect of a giant short position on the USD being unwound, triggering a massive USD rally. The scenarios for huge price movements in all the major markets in all kinds of directions is arguably stronger right now than ever in financial history!

This is the ultimate nail biter, the Financial Thrilla in Manila! Will it be Jim Sinclair's bull rocket, or Jim Rogers' sledgehammer? I'd like to leave you with an even bigger question for the weekend, and that is:

Are You Prepared?

###

May 29, 2009
Stewart Thomson
Graceland Updates
website: www.gracelandupdates.com
email: s2p3t4@sympatico.ca

Obama Poised to Cede US Sovereignty

medical malpractice system

Why Medical Malpractice Reform is Off Limits
10/4/2009 8:25 AM By Philip K. Howard

(Editor's note: This commentary first appeared in the Wall Street Journal Sept. 29. It is reprinted with Mr. Howard's permission).

Eliminating defensive medicine could save upwards of $200 billion in health-care costs annually, according to estimates by the American Medical Association and others. The cure is a reliable medical malpractice system that patients, doctors and the general public can trust.

But this is the one reform Washington will not seriously consider. That's because the trial lawyers, among the largest contributors to the Democratic Party, thrive on the unreliable justice system we have now.

Almost all the other groups with a stake in health reform-including patient safety experts, physicians, the AARP, the Chamber of Commerce, schools of public health-support pilot projects such as special health courts that would move beyond today's hyper-adversarial malpractice lawsuit system to a court that would quickly and reliably distinguish between good and bad care. The support for some kind of reform reflects a growing awareness among these groups that managing health care sensibly, including containing costs, is almost impossible when doctors go through the day thinking about how to protect themselves from lawsuits.

The American public also favors legal overhaul. A recent Common Good/Committee for Economic Development poll found that 83% of Americans believe that "as part of any health care reform plan, Congress needs to change the medical malpractice system."

Congress now realizes it can't completely stonewall legal reform. But what has unfolded so far is a series of vague pronouncements and token proposals-all of which assiduously avoid any specific ideas that might offend the trial bar. Here are some examples:

On July 31, Rep. Bart Gordon (D., Tenn.), a Blue Dog Democrat, introduced an amendment to the House health-care reform bill (H.R. 3200) to fund pilot projects for liability reform, including pilots for "voluntary alternative dispute resolution."

What happened? According to the online newsletter Inside Health Policy, "While Gordon's amendment originally had seven policies that states could implement in order to receive federal funding, the other five suggestions were crossed out . . . due to the agreement with the trial lawyers."

On Aug. 25, at a town-hall meeting in Reston, Va., Howard Dean, former chair of the Democratic National Committee, was asked why there is nothing in the health-care proposals about liability reform. Mr. Dean replied: "The reason that tort reform is not in the bill is because the people who wrote it did not want to take on the trial lawyers. . . . And that is the plain and simple truth."

On Sept. 9, President Obama made a commitment in a speech before Congress to fix the problem of defensive medicine. On Sept. 17, his secretary of Health and Human Services, Kathleen Sebelius, announced an initiative that will allow states to test a variety of programs to "put patient safety first and let doctors focus on practicing medicine." But in the initiative's statement of goals made no mention of defensive medicine, or of pilot projects such as special health courts. The funding for the initiative is a tiny $25 million. According to Katharine Seelye on the New York Times's Prescriptions blog, "the comparatively small budget seems commensurate with the administration's level of interest in the subject."

The upshot is simple: A few thousand trial lawyers are blocking reform that would benefit 300 million Americans. This is not just your normal special-interest politics. It's a scandal-it is as if international-trade policy was being crafted in order to get fees for customs agents.

Trial lawyers are agents, and their claims are only as valid as those they represent. They argue, of course, that they are champions of malpractice victims. As Anthony Tarricone, president of the trial lawyers association (called the American Association of Justice) put it: "Trial attorneys see first-hand the effects medical errors have on patients and their families. We should keep those injured people in mind as the debate moves forward." But under the current system, 54 cents of the malpractice dollar goes to lawyers and administrative costs, according to a 2006 study in the New England Journal of Medicine. And because the legal process is so expensive, most injured patients without large claims can't even get a lawyer. "It would be hard to design a more inefficient compensation system," says Michelle Mello, a professor of law and public health at Harvard, "or one which skewed incentives more away from candor and good practices."

Trial lawyers also suggest they alone are the bulwark against ineffective care, citing a 1999 study by the Institute of Medicine that "over 98,000 people are killed every year by preventable medical errors." But the same study found that distrust of the justice system contributes to these errors by chilling interaction between doctors and patients. Trials lawyers haven't reduced the errors. They've caused the fear.

An effective justice system must reliably distinguish between good care and bad care. But trial lawyers trade on the unreliability of justice. It doesn't matter much whether the doctor did anything wrong-a lawyer can always come up with a theory of what might have been done differently. What matters most is the extent of the tragedy and that a case holds potential for pulling on a jury's heartstrings.

Former Sen. John Edwards, for example, made a fortune bringing 16 cases against hospitals for babies born with cerebral palsy. Each of those tragic cases was worth millions in settlement. But according to a 2006 study at the National Institutes of Health, in nine out of 10 cases of cerebral palsy nothing done by a doctor could have caused the condition.

Unreliable justice is like pouring acid over the culture of health care. One in 10 obstetricians have stopped delivering babies, unable to pay malpractice premiums on the order of $1,000 per baby, according to the American College of Obstetricians and Gynecologists (ACOG). Some hospitals, including Methodist Hospital and Chestnut Hill Hospital in Philadelphia, have stopped delivering babies altogether; and the number of unnecessary caesarian sections have increased to the detriment of the health of mothers, according to the ACOG.

Trial lawyers scoff at the idea of special health courts. "First you have a court for doctors," a spokesperson for the trial lawyers, Linda Lipsen, recently said, "and then what? A court for plumbers?" But America has a long tradition of special courts for situations where expertise and consistency are important-bankruptcy courts, tax courts, workers compensation tribunals, vaccine liability tribunals, Social Security tribunals, and many more.

Trial lawyers often claim that any alternative to the current medical malpractice justice system, such as specialized health courts, will only make it more difficult for injured patients to seek justice. But that's why you start with a pilot project. If these courts are unfair they will be rejected. But if they succeed-that is, are fairer to patients and doctors-they could provide a solid foundation for rebuilding an effective, less costly health-care system than we have today.

The members of the banking cooperative, The Clearing House Association LLC are:

The FOIA case is Bloomberg LP v. Board of Governors of the Federal Reserve System,
08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

ABN Amro Bank NV
Bank of America Corp.
The Bank of New York Mellon Corp.
Citigroup Inc.
Deutsche Bank AG
HSBC Holdings Plc
JPMorgan Chase & Co.
US Bancorp
Wells Fargo & Co.

The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

The Fed made the loans under terms of 11 programs, eight of them created in the past 15 months, in the midst of the biggest financial crisis since the Great Depression.

“It’s your money; it’s not the Fed’s money,” said billionaire Ted Forstmann, senior partner of Forstmann Little & Co. in New York. “Of course there should be transparency.”

Treasury, Fed, Obama

Federal Reserve spokeswoman Michelle Smith declined to comment on the loans or the Bloomberg lawsuit. Treasury spokeswoman Michele Davis didn’t respond to a phone call and an e-mail seeking comment.

President-elect Barack Obama’s economic adviser, Jason Furman, also didn’t respond to an e-mail and a phone call seeking comment from Obama. In a Sept. 22 campaign speech, Obama promised to “make our government open and transparent so that anyone can ensure that our business is the people’s business.”

The Fed’s lending is significant because the central bank has stepped into a rescue role that was also the purpose of the $700 billion Troubled Asset Relief Program, or TARP, bailout plan — without safeguards put into the TARP legislation by Congress.

Total Fed lending topped $2 trillion for the first time last week and has risen by 140 percent, or $1.172 trillion, in the seven weeks since Fed governors relaxed the collateral standards on Sept. 14. The difference includes a $788 billion increase in loans to banks through the Fed and $474 billion in other lending, mostly through the central bank’s purchase of Fannie Mae and Freddie Mac bonds.

Sept. 14 Decision

Before Sept. 14, the Fed accepted mostly top-rated government and asset-backed securities as collateral. After that date, the central bank widened standards to accept other kinds of securities, some with lower ratings. The Fed collects interest on all its loans.

The plan to purchase distressed securities through TARP called for buying at the “lowest price that the secretary (of the Treasury) determines to be consistent with the purposes of this Act,” according to the Emergency Economic Stabilization Act of 2008, the law that covers TARP.

The legislation didn’t require any specific method for the purchases beyond saying mechanisms such as auctions or reverse auctions should be used “when appropriate.” In a reverse auction, bidders offer to sell securities at successively lower prices, helping to ensure that the Fed would pay less. The measure also included a five-member oversight board that includes Paulson and Bernanke.

At a Sept. 23 Senate Banking Committee hearing in Washington, Paulson called for transparency in the purchase of distressed assets under the TARP program.

`We Need Transparency’

“We need oversight,” Paulson told lawmakers. “We need protection. We need transparency. I want it. We all want it.”

At a joint House-Senate hearing the next day, Bernanke also stressed the importance of openness in the program. “Transparency is a big issue,” he said.

The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.

Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group.

Frank Backs Fed

“You have to balance the need for transparency with protecting the public interest,” Talbott said. “Taxpayers have a right to know where their tax dollars are going, but one piece of information standing alone could undermine public confidence in the system.”

The nation’s biggest banks, Citigroup, Bank of America Corp., JPMorgan Chase, Wells Fargo & Co., Goldman Sachs Group Inc. and Morgan Stanley, declined to comment on whether they have borrowed money from the Fed. They received $120 billion in capital from the TARP, which was signed into law Oct. 3.

In an interview Nov. 6, House Financial Services Committee Chairman Barney Frank said the Fed’s disclosure is sufficient and that the risk the central bank is taking on is appropriate in the current economic climate. Frank said he has discussed the program with Timothy F. Geithner, president and chief executive officer of the Federal Reserve Bank of New York and a possible candidate to succeed Paulson as Treasury secretary.

“I talk to Geithner and he was pretty sure that they’re OK,” said Frank, a Massachusetts Democrat. “If the risk is that the Fed takes a little bit of a haircut, well that’s regrettable.” Such losses would be acceptable, he said, if the program helps revive the economy.

`Unclog the Market’

Frank said the Fed shouldn’t reveal the assets it holds or how it values them because of “delicacy with respect to pricing.” He said such disclosure would “give people clues to what your pricing is and what they might be able to sell us and what your estimates are.” He wouldn’t say why he thought that information would be problematic.

Revealing how the Fed values collateral could help thaw frozen credit markets, said Ron D’Vari, chief executive officer of NewOak Capital LLC in New York and the former head of structured finance at BlackRock Inc.

“I’d love to hear the methodology, how the Fed priced the assets,” D’Vari said. “That would unclog the market very quickly.”

TARP’s $700 billion so far is being used to buy preferred shares in banks to shore up their capital. The program was originally intended to hold banks’ troubled assets while markets were frozen.

AIG Lending

The Bloomberg lawsuit argues that the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”

The Fed has lent at least $81 billion to American International Group Inc., the world’s largest insurer, so that it can pay obligations to banks. AIG today said it received an expanded government rescue package valued at more than $150 billion.

The central bank is also responsible for losses on a $26.8 billion portfolio guaranteed after Bear Stearns Cos. was bought by JPMorgan.

“As a taxpayer, it is absolutely important that we know how they’re lending money and who they’re lending it to,” said Lucy Dalglish, executive director of the Arlington, Virginia- based Reporters Committee for Freedom of the Press.

Ratings Cuts

Ultimately, the Fed will have to remove some securities held as collateral from some programs because the central bank’s rules call for instruments rated below investment grade to be taken back by the borrower and marked down in value. Losses on those assets could then be written off, partly through the capital recently injected into those banks by the Treasury.

Moody’s Investors Service alone has cut its ratings on 926 mortgage-backed securities worth $42 billion to junk from investment grade since Sept. 14, making them ineligible for collateral on some Fed loans.

The Fed’s collateral “absolutely should be made public,” said Mark Cuban, an activist investor, the owner of the Dallas Mavericks professional basketball team and the creator of the Web site BailoutSleuth.com, which focuses on the secrecy shrouding the Fed’s moves.

The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).

Read more: http://www.creditwritedowns.com/2008/11/fed-continues-to-stonewall-in-freedom-of-information-act-suit.html#ixzz0UhL5QVSg

Making money, however, is different from stealing money

There is a sense that if you make money you are going to give. Making money, however, is different from stealing money. If you steal the money, you are not expected to give it to a charity my friends. If you steal the money we will take the money back from you, by way of the government, and put you in jail. The American taxpayer in fact has given trillions of dollars, billions directly to Goldman Sachs so that Goldman can use the taxpayer subsidy to play a parlor game and pay themselves record bonuses.

"Shenanigans" seems to suggest hijinx, such as whoopee cushions and hand-buzzers. What we are talking about here is not horseplay ... this is deadly serious.

Let's call these activities what they are ... fraud, predation, corruption, malfeasance, crony capitalism, financial terrorism, generational theft .... whatever ...
but not "shenanigans".

Excess Profits Tax

Extra federal taxes placed on the earnings of a business. Such taxes may be levied during a time of national emergency, such as in wartime, and are designed to increase national revenue. The excess profits tax differs from the Windfall Profits Tax designed to prevent excessive corporate profits in special circumstances.

The Excess Profits Tax, a predominantly wartime fiscal instrument, was designed primarily to capture wartime profits that exceeded normal peacetime profits. In 1863 the Confederate congress and the state of Georgia experimented with excess profits taxes. The first effective national excess profits tax was enacted in 1917, with rates graduated from 20 to 60 percent on the profits of all businesses in excess of prewar earnings but not less than 7 percent or more than 9 percent of invested capital. In 1918 a national law limited the tax to corporations and increased the rates. Concurrent with this 1918 tax, the federal government imposed, for the year 1918 only, an alternative tax, ranging up to 80 percent, with the taxpayer paying whichever was higher. In 1921 the excess profits tax was repealed despite powerful attempts to make it permanent. In 1933 and 1935 Congress enacted two mild excess profits taxes as supplements to a capital stock tax.

The crisis of World War II led Congress to pass four excess profits statutes between 1940 and 1943. The 1940 rates ranged from 25 to 50 percent and the 1941 ones from 35 to 60 percent. In 1942 a flat rate of 90 percent was adopted, with a postwar refund of 10 percent; in 1943 the rate was increased to 95 percent, with a 10 percent refund. Congress gave corporations two alternative excess profits tax credit choices: either 95 percent of average earnings for 1936–1939 or an invested capital credit, initially 8 percent of capital but later graduated from 5 to 8 percent. In 1945 Congress repealed the tax, effective 1 January 1946. The Korean War induced Congress to reimpose an excess profits tax, effective from 1 July 1950 to 31 December 1953. The tax rate was 30 percent of excess profits, with a 70 percent ceiling for the combined corporation and excess profits taxes. In 1991 some members of Congress sought unsuccessfully to pass an excess profits tax of 40 percent upon the larger oil companies as part of energy policy.

Some social reformers have championed a peacetime use of the excess profits tax, but such proposals face strong opposition from businesses and some economists, who argue that it would create a disincentive to capital investment. George W. Bush, elected president in 2000, had close ties to the energy industry and did not favor such taxes. Whatever the peacetime policy, it remains to be seen whether excess profits taxes will reappear during the "war on terrorism" that the U.S. government launched after the 11 September 2001 attacks on the United States.

Bibliography

Brandes, Stuart D. Warhogs: A History of War Profits in America. Lexington: University Press of Kentucky, 1997.

Lent, George E. "Excess-Profits Taxation in the United States." Journal of Political Economy (1951).

———"The Excess Profits Tax and Business Expenditures." National Tax Journal (1958).

"We Should Impose a 95% Excess Profits Tax—Or Windfall Profits Tax—On Certain Financial Institutions... Enriching Themselves" at Our Expense

http://www.zerohedge.com/article/tavakoli-we-should-impose-95-excess-profits-tax%E2%80%94or-windfall-profits-tax%E2%80%94-certain-financial-i

The following is an advanced copy of an essay by Janet Tavakoli to be released tomorrow. Reprinted with permission of Tavakoli Structured Finance.

Warren Buffett’s Wall Street War

By Janet Tavakoli

October 20, 2009

In a January 2009 interview with NBC’s Tom Brokaw, Warren Buffett criticized leveraging “to the sky,” and creating “phony instruments [RMBSs, CDOs, et al.] that fool other people so you stick money in your pocket.” In 2002, he claimed over-the-counter derivatives are “financial weapons of mass destruction”¹ and participants who account for them have “enormous incentives to cheat.” ²

Warren Buffett, the blogosphere’s “Oracle of Omaha,” often chastises the financial community. If you cost him money, he’s liable to write an expose. He posts annual shareholder letters on a low-tech website and seems to labor under the assumption that rational people eagerly read his blog. Congress and regulators are dismissive of Buffett’s hyperbolic rhetoric; it is fit only for a banana republic.

In 2003, Buffett wrote of the manufactured housing industry’s “business model centered on the ability…to unload terrible loans on naïve lenders…The consequence has been huge numbers of repossessions and pitifully low recoverie[s].” ³ Buffett alleged that the manufactured housing industry’s consumer financing practices were “atrocious,”⁴ and securitizations provided the money to fuel the financing.

Berkshire Hathaway’s investment in the distressed junk debt of Oakwood Homes lost money after the designer and manufacturer of modular homes went bankrupt in 2002. Buffett claimed “Oakwood participated fully in the insanity.” ⁵

Warren Buffett’s diatribe suggested that most of the manufactured housing industry was involved along with several Wall Street firms that underwrote the securitizations. Using money from new investors to pay returns to old investors in unsupportable investments is called a Ponzi scheme.

Oakwood’s loans to purchasers of manufactured homes were made possible by a line of credit from Credit Suisse First Boston (Credit Suisse). The credit line was similar to a credit card except that Oakwood had to put up the home loans as collateral. Credit Suisse earned fees for the loans and further fees when it packaged (securitized) Oakwood’s loans. Credit Suisse (the old investor) bought the securitized loans and then sold them to new so-called sophisticated investors.

Sales of manufactured homes declined. Loan delinquencies (late payments) and repossessions rose. Oakwood Homes had crushing debt and falling income for at least three years before it filed for bankruptcy in November 2002. But securitizations had temporarily inflated the bubble for the collapsing enterprise. A June 2008 court opinion said Oakwood’s aggressive lending practices led to the high number of repossessions and a debt load that Oakwood could not support. Oakwood’s liquidator said the transactions it did with Credit Suisse were “value destroying.”⁶

Someone should have muzzled Warren Buffett back in 2003. The Slumbering Esquires’ Club might have believed Buffett’s preposterous theory that after private securitizations became popular, the “industry’s conduct went from bad to worse.” ⁷ Buffett’s wacky warnings could have jeopardized Wall Street’s subsequent mortgage lending securitization Ponzi scheme.

The SEC might have investigated Lehman Brothers’ questionable shenanigans, especially after it was held liable in 2003 by a California jury for allegedly helping FAMCO cheat borrowers. The SEC might have looked into the unsavory practices at Goldman Sachs Alternative Mortgage Products, Bear Stearns, Merrill Lynch or the entire private securitization industry, and their mortgage lending subsidiaries.

While the SEC slept inside a collapsing debt bubble, the Omahaconspiracy theorist spooked Goldman Sachs into believing it needed his money. In the fall of 2008, Buffett closed a deal for $5 billion in Goldman Sachs’s preferred stock paying a 10% annual dividend. Goldman even gave Buffett warrants to buy $5 billion in common stock at a price of $115 anytime before October 1, 2013. [The Fed let Goldman buy back its warrants for chump change.⁹] Buffett’s warrants are now about $3 billion in-the-money and worth much more—a sweetener for his crispy calamari.

Hank Paulson, Ben Bernanke, and Tim Geithner¹⁰ ignored the historic ravings of the most successful living investor, and fueled some of the bombers piloted by Wall Street before finance’s Pearl Harbor. After they used taxpayer money to save the system and enriched the culpable with no strings attached, Buffett said “it could have turned out a lot differently,” and called each of them a four-letter word. The label was undeserved.

Four-letter words aside, Warren Buffett raised a good point. It could have—and should have—turned out a lot differently. But it’s not too late. Buffett called the crisis an economic Pearl Harbor and said that “Wall Street owes the American people one at this point.”⁸ During World War II, we imposed an excess profits tax. We should impose a 95% excess profits tax—or windfall profits tax—on certain financial institutions (including Goldman Sachs) enriching themselves with ongoing low-cost Fed funding and debt guarantees.

Adapted from Dear Mr. Buffett, What an Investor Learns 1,269 Miles from Wall Street (Wiley 2009) by Janet Tavakoli

Disclosure: Janet Tavakoli is an investor in Berkshire Hathaway Inc.

1 Berkshire Hathaway Inc. 2002 Annual Report, 15.

2 Ibid., 13.

3 Berkshire Hathaway Inc. 2003 Annual Report, 5.

4 Ibid.

5 Ibid.

6 OHC Liquidation Trust, et.al v. Credit Suisse First Boston et al., U.S. Bankruptcy Court, Delaware. Civil Action No. 07-799 JJF (Chapter 11 Case No. 02-13396) Memorandum Opinion June 9, 2008. (Partial Summary Judgment)

7 Ibid. [1]

8 Warren Buffett on ABC’s Good Morning America, July 9, 2009.

9 The Treasury got a paltry 23% return on its $10 billion investment in preferred shares and warrants in Goldman Sachs. The Fed accepted only $1.1 billion for warrants that had more than nine years to run during a quarter when Goldman Sachs was awash in cash and profits and would report record earnings made possible only by taxpayer intervention. The Fed gave up the right to buy 12.2 million shares of Goldman for $122.9 per share. [As of Oct 16, the warrants were in-the-money by around $750 million and would have been worth much more with just over nine years to the original October 26, 2018 expiration date.] This does not include ongoing near zero-cost funding, relaxation of accounting terms, temporary protected status as a bank holding company (guarding against a run on Goldman) before switching its status to a protected financial holding company on August 14, 2009 [The Treasury may designate it a Tier 1 Financial Holding Company], and issuance of $25.15 billion (as of June 2009) unsecured FDIC guaranteed debt [GS is allowed $35 billion outstanding prior to Oct. 31, 2009. Goldman’s first issuance was for $5 billion of 3.35% maturing in 2012 on November 25, 2008; at the time its stand-alone debt traded at 8.25% for a comparable maturity].

10 In the fall of 2008, Henry (“Hank”) Paulson was Treasury Secretary (Paulson was formerly CEO of Goldman Sachs), Ben Bernanke was (and currently is) the Chairman of the Federal Reserve, and current Treasury Secretary Timothy Geithner was the Chairman of the New York Fed. [Geithner was succeeded by Stephen Friedman as Chairman of the NY Fed. Friedman was a former Goldman Sachs co-chairman and owned shares of Goldman Sachs and was a member of Goldman’s board while he held his influential Fed position, a conflict of interest and a violation of Fed policy. Friedman resigned the Fed position in May 2009.]

God Bless America and Goodbye

Congressmen who voted for the TARP bailout just because Hank Paulson scared the bejesus out of them should find a new line of work. People like Pelosi and Frank and McCain and Obama are simply uninformed when it comes to finance and markets. That's why they were easy prey for Paulson and his Wall St buddies. They should be ashamed, but they really believe they did a fine, brave thing back in the fall when they defied their constituents and gave away hundreds of billions of dollars. Pitiful.

The people are waking up to the fact that the "Money men from NY" are the ones that really run this country, via the CFR, Trilateral Commission and other such groups. Politician's votes are often "bought" or otherwise corrupted. Our country is in the toilet as a result. Remember your sworn oath, and "the will of the people", and put the political process back as our founding fathers intended it.

Elizabeth Warren: None of this seems fair

Dear Congressman and Senator,

after many years voting for and supporting you, I am sorry to tell you I will not vote for you in the next election. And I will amalgamate all my friends and family to do the same.

Why? because you and your colleagues continue to support policy that supports lobbyists because they finance your next election.

You do not listen to us common-people Americans who do not have money to give you. You do not care for those who are not wealthy contributors.

- you are failing you average voter-constituents -

When are you going to address banking management operations and bonuses and pay increases reforms? why do you continue taking our taxes and dollar worth away for bank profits and rewards?


Break the banks into three separate part like it was during Glass-Stegall, savings and loan, insurance, and high risk investment companies, before you have lost your middle class support.





http://www.youtube.com/watch?v=ga4hkN1FjEo&feature=related

Sincerely, a previous voter and supporter of yours...

The Banks own Liberal and

Wed, 05/13/2009 - 21:16 — Plenty and Productive (not verified)

The Banks own Liberal and Conservative Congress - BOTH. The suckers who would divide this into a class race with 'wealth transferred from poor to rich' are clueless - I know plenty of very rich people, all of whom are getting gutted by this piracy - those benefiting have most of their assets outside of the US and a couple of extra zeros after their net worth - they aren't 'the rich' - they are the Uber-Rich. We are the sheep to be slaughtered - that means the thousand-airs and the millionaires alike - and by perpetuating the left/right paradigm and by controlling both 'sides' they squeeze every last drop of our wealth while we bicker. Expect every kind of divisive story imaginable, but let's keep our eyes on the ball - The Bill of Rights and the Constitution - that's what we started with - to protect us from the Banks in no small part, incidentally. Do not tolerate any call for 'We have to give up some of our freedoms for the common good' - NONSENSE, we may be broke, but we can still reclaim our freedom, and it is time to stand up for our Constitution, which our Reps swore an oath to defend and need to have their backsides kicked by us because if we don't, they will take their lead from the Bank's Lords. Call your Representative and demand that they support HR 1207 to audit the Federal Reserve Bank.