Do The Right Economic Thing

[kent nickell]

A few interesting comments to Simon Johnson's latest blog..... ((2 things the British did right in their bank bailouts compared to us is that they had strings attached to mandate lending and they ousted the former managements))

Paul Volcker praised yesterday Adair Turner, head of the British FSA and also head of the Financial Stability Board, so the game is still on.

I would not be surprised, as Summers is rumoured to be on leave, i.e ousted, that Geithner would be part of the package. The choice of Morgan Stanley as underwriter for Citi seems to me as part of a Trojan horse move, a hot seat is waiting for him, either in the can,or on the board of GS?.Imho, there will be no REAL financial reform as long as this small Secretary is in office..and what a great move from Bam if he wants his party to stand a chance to win the elections


and


Robert Reich makes a great point, if this administration were serious about financial reform it would direct the SEC to prosecute bank executives under Sarbanes-Oxley.

Instead we get blah blah blah blah blah blah blah.

http://robertreich.org/post/485015444/fraud-on-the-street



http://baselinescenario.com/2010/03/31/paul-volcker-do-the-right-economic-thing/



Paul Volcker: Do The Right Economic Thing


with 39 comments

By Simon Johnson

A great deal of the popular anger directed at big banks is completely legitimate, as put nicely by John Cassidy at the end of his interview with Treasury Secretary Tim Geithner, ( http://www.newyorker.com/reporting/2010/03/15/100315fa_fact_cassidy?currentPage=5 )


?The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry.?

Paul Volcker is also angry.

Of course, Paul Volcker expresses himself in the measured language of a distinguished technocrat. But he is very worried about our current financial structure and where it is heading. Speaking today at the Peterson Institute in Washington DC, Mr. Volcker made two broad points (Marketwatch ( http://www.marketwatch.com/story/volcker-commercial-banks-must-be-commercial-banks-2010-03-30-161300 )(coverage) ? both of which we also emphasize in 13 Bankers. ( http://13bankers.com/ )

1. The financial sector does not add anywhere near as much social value as its proponents claim.

?The question that really jumps out for me is, given all that data, whether the enormous gains in the financial sector ? in compensation and profits ? reflect the relative contributions that sector has made to the growth of human welfare? (from NYT story)

2. Too big to fail banks are alive and well ? and this poses a major problem to our future prosperity.

?There is an expectation that very large and complicated financial institutions will not be allowed to fail,? he said. ( http://www.nytimes.com/2010/03/31/business/31regulate.html ) ?Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits.?


The message yesterday and from other statements made by Mr. Volcker ( http://baselinescenario.com/2009/12/17/paul-volcker-picks-up-a-bat/ ) is clear. Our biggest banks are out of control and will not be reined in by the measures currently on the table. We need a much stronger approach to big banks ? an approach that will strip government-backed banks of their ability to take crazy risks and, most likely, an approach that significantly constrains (and hopefully even reduces) their size.

 

[kent nickell]

Re: Do The Right Economic Thing

http://robertreich.org/

Fraud on the Street

Tuesday, March 30, 2010

by Robert Reich


The Securities and Exchange Commission announced Monday it had begun an inquiry into two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers.

Where on earth has the SEC been?

It?s now clear Lehman Brothers? balance sheet was bogus before the bank collapsed in 2008, catapulting the Street and the world into the worst financial crisis since 1929. The Lehman bankruptcy examiner?s recent report details what just about everyone on the Street has known since the firm imploded ? that Lehman defrauded its investors. Even Hank Paulson, in his recent memoir, referred to Lehman?s balance sheet as bogus.

In order to look like it could borrow $30 for every dollar of its own money, Lehman shifted liabilities off its books at the end of each quarter. Its CPA, Ernst and Young, approved of this fraud against the advice of its own whistle blower, whom Ernst and Young fired.

Lehman?s practices couldn?t have been all that different from those of every other big bank on the Street. After all, they were all competing for the same business, and using many of the same techniques. Lehman was just the first to go under, causing a financial run that led George W. to warn ?this sucker could go down? unless the federal government came up with hundreds of billions to bail out the others.

In other words, the TARP covered the other bankers? assets and asses.

We now know, for example, Goldman Sachs helped Greece hide its public debt and then placed financial bets that Greece would default, using credit-default swaps to avoid risking its own capital. It?s the same tactic Goldman used for (and against) American International Group (AIG): Hide the ball, and then bet against the ball and fob off the risk to investors and taxpayers, using derivatives to remove the risky tactics from the balance sheets. Even today no one knows the fair value of the complex derivatives underlying these and related maneuvers, which is exactly the point.

Congress is now struggling to come up with legislation to stop this from happening again. And the Street is struggling to stop Congress. As of now, the Street?s political payoffs seem to be working. Proposed legislation still allows secret derivative trading in foreign-exchange swaps (similar to what Goldman used to help Greece hide its debt) and in transactions between big banks and many of their corporate clients (as with AIG).

But wait. We already have a law designed to stop this sort of fraud. It?s called the Sarbanes-Oxley Act of 2002.

Think back to the corporate looting scandals that came to light almost a decade ago when the balance sheets of Enron, WorldCom, and others were shown to be fake, causing their investors to lose their shirts. Nearly every major investment bank played a part in the fraud ? not only advising the companies but also urging investors to buy their stocks when the banks? own analysts privately described them as junk.

Sarbanes-Oxley ? Sarbox, as it?s come to be known ? was designed to stop this. It requires CEOs and other senior executives to take personal responsibility for the accuracy and completeness of their companies? financial reports and to set up internal controls to assure the accuracy and completeness of the reports. If they don?t, they?re subject to fines and criminal penalties.

Sarbox is directly relevant to the off-the-balance-sheet derivative games the Street played and continues to play. No bank CEO can faithfully attest to the accuracy and completeness of its financial reports when derivatives guarantee that the reports are incomplete and deceptive.

So where has the SEC been?

I was on a panel a few weeks ago with a former chair of the Securities and Exchange Commission who was asked why the commission has so far failed to enforce Sarbox against Wall Street. He had no response except to mumble that legislation is meaningless unless adequately enforced. Exactly.

Bottom line: While financial reform is needed, there?s no reason to wait for it. Sarbox is already there. And even if financial reform is enacted without loopholes, there?s no reason to think it will be enforced if laws already on the books, such as Sarbox, aren?t.

(adapted from my column in The American Prospect)

 

[Laidback Al]

Re: Do The Right Economic Thing

Sarbanes-Oxley Act -

Title III consists of eight sections and mandates that senior executives take individual responsibility for the accuracy and completeness of corporate financial reports. It defines the interaction of external auditors and corporate audit committees, and specifies the responsibility of corporate officers for the accuracy and validity of corporate financial reports. It enumerates specific limits on the behaviors of corporate officers and describes specific forfeitures of benefits and civil penalties for non-compliance. For example, Section 302 requires that the company's "principal officers" (typically the Chief Executive Officer and Chief Financial Officer) certify and approve the integrity of their company financial reports quarterly <sup id="cite_ref-2" class="reference">[3]</sup>

http://en.wikipedia.org/wiki/Sarbanes–Oxley_Act


Applying Sarbanes-Oxley Act to a few individuals can not undo the the financial crisis from the past 2-3 years. But what it would do is put the current financial market on notice that wanton greed and corporate malfeasance will not be tolerated.