Tag Archives: financial regulation reform

H.R. 1135 and the Baize Door: Republicans Revisit CEO Pay Disclosure

Monopoly Character bankerWe can’t really say that the 113th is a Do Nothing Congress, they are doing something.  However, what the Congress is doing is not getting much press.  The Village Media, hot to inspect the implications of the latest Drudge headline, or to masticate endlessly over the ramifications of immigration reform or health insurance reform politics, is singularly inept at economic reporting.  The problem is that there’s nothing particularly sexy about the implementation of the 2002 Sarbanes Oxley Act or the Dodd-Frank Act, and this may be exacerbated by the evident lack of economic knowledge of some who carry the label journalist.

Our problem is that as everyday, ordinary, reasonably well educated Americans we are getting a heavy dose of information slanted toward the professional investors — “business news” designed by and delivered to professional investors.   Today’s post concerns a topic once rendered dramatic enough to attract the attention of the news networks — when a sufficient number of 99% Protestors raised a ruckus — but now has sunk back beneath the ocean’s  Mesopelagic Zone: Corporate CEO Pay.

There’s A Plan Here

The Dodd-Frank Act, section 953 (b) was never popular with corporate leadership.  The section dealing with the disclosure of CEO compensation was initially ignored, never really enforced, and now the Republican controlled House of Representatives would like to repeal it wholesale.  [NVRDC]

Corporations are currently required to follow the rules pertaining to section 953 (b) which are, in detail:

(1) IN GENERAL.—The Commission shall amend section 229.402 of title 17, Code of Federal Regulations, to require each issuer to disclose in any filing of the issuer described in section 229.10(a) of title 17, Code of Federal Regulations (or any successor thereto)—  (A) the median of the annual total compensation of all employees of the issuer, except the chief executive officer (or any equivalent position) of the issuer;  (B) the annual total compensation of the chief executive officer (or any equivalent position) of the issuer; and (C) the ratio of the amount described in subparagraph (A) to the amount described in subparagraph (B). (2) TOTAL COMPENSATION.—For purposes of this subsection, the total compensation of an employee of an issuer shall be determined in accordance with section 229.402(c)(2)(x) of title 17, Code of Federal Regulations, as in effect on the day before the date of enactment of this Act. [DoddFrank]

Translation:  Corporations are now required to report the ratio of pay between their CEO’s and their “median” or most typical workers.  The plan devised by the CEO’s and their Congressional allies is to avoid telling the investors and the public anything about CEO pay…ever.

The Bill to Implement the Plan

The bill introduced into Congress to put this simple plan into effect is H.R. 1135, Representative Bill Huizenga’s (MI-4) “Burdensome Data Collection Relief Act.”  It is summarized by the Congressional Research Service as follows:

“Burdensome Data Collection Relief Act – Amends the Dodd-Frank Wall Street Reform and Consumer Protection Act to repeal the requirement that the Securities and Exchange Commission (SEC) amend certain federal regulations about executive compensation to require each issuer of securities to disclose in any filing: (1) the median of the annual total compensation of all the issuer’s employees, except the chief executive officer; (2) the annual total compensation of the chief executive officer; and (3) the ratio of the first amount to the second.”

In short — corporations will no longer be “burdened” by having to disclose the total compensation of their chief executive officers, or to disclose the ratio of CEO pay to that of their median workers.  And, those of us in the general public will no longer be “burdened” by having such information available.   At this point, the CEO’s would be pleased to have information about their compensation packages drift and drop down into the Abyssopelagic Zone on its way to the Hadalpelagic…

One criticism of the requirements of section 953 (b) is that executive pay is a package of components consisting of base pay, bonuses, stock grants and other long term compensation, accumulated benefits in pension plans, and the value of accumulated benefits in more specific executive pension plans.   Some of the benefits are much higher than the base pay.  [BlmLaw]  In short the argument is that computing the CTAC (total annual compensation) is “difficult.”   It’s tempting to offer the rejoinder that perhaps someone would like to sell the corporation a computer for its actuaries and auditors to use in this calculation.   The computation is probably too much for the average abacus, and perhaps even for a nice old fashioned pocket calculator, but … I thought this was why we had computers?

Why the introduction of H.R 1135?

The essential question boils down to: Is it worth the effort to calculate and compile statistics on corporate CEO compensation?

Representative Huizenga says no.

“Huizenga told BNA that “Section 953(b) of Dodd-Frank creates an enormous burden for publicly traded companies while offering no corresponding benefit. By forcing publicly traded companies to report median total compensation, the federal government is requiring companies to provide data that is potentially misleading to investors due to the differing geographic locations of the business. A salary in Detroit is going to be different than a salary in San Francisco, which is going to be different than a salary in London.” [Huizenga]

With all due (lack of) respect, I think individuals can figure out that a company based in the U.S. with most of its employees in Bangladesh is going to have a slightly skewed ratio of CTAC to MTAC.  (median total annual compensation)  Likewise, its not hard to figure that the ratio will be different for companies with domestic manufacturing or service provision activities.   The point remains — whether the ultimate calculation can be slanted is assumed, it’s the out of control full on flash flood of executive compensation which remains unaddressed by corporate boards and problematic for their employees.

Think just for a moment or two about the great push to disclose the salaries and benefits of public employees; as if kindergarten teachers, local firefighters, DOT personnel, and retired police officers are a “Great Drain On The American Way of Free Enterprise” and we should all know exactly what they are collecting.  However, the base pay, benefits, general and specific pension plans, and bonuses of corporate executives is just “tooooo difficult to calculate,” and the great unwashed might be “ill informed” by the release of such data.  It appears as though requiring the corporation to reveal the compensation of top ranking employees is enough to drive them all so frantic as to require fainting couches trailered from their golf carts.

Now, where might Representative Huizenga have gotten the notion that section 953 (b) was the cause of so much pearl-clutching?  There’s a hint in a January 19, 2012 letter from the Financial Services Roundtable to SEC Commissioner Mary Shapiro. (pdf)  The letter is a summation of the common talking points. The section is “too difficult,” some of the results might be “misleading,” and their are problems for multinational corporations.

It shouldn’t surprise any one that the signatories to this epistle include such very special interests as the American Petroleum Institute, the American Insurance Association, the National Association of Manufacturers, the Financial Services Roundtable, the Securities Industry and Financial Markets Association, and the U.S. Chamber of Commerce.  (*full list provided below)  We’d probably not see another such  collection of pro-corporate/financial interests beyond the manicured greens of Augusta, Merion, Pebble Beach, and Oakmont.

Breaching the Green Baize Door

Once upon a time, in the days of Downton Abbey, when  the domains of the served and the servants were rigidly prescribed, the green baize door separated the two realms into precisely delineated classes.  To trespass into the the “other’s” territory was all but an assault on foreign territory.  Thus, the dis-inclination to divulge such information as CEO compensation to those below stairs.  The compensation packages are “too complex for the average person to understand,” and the recipients might be mislead by the statistical requisites necessary to calculate the ratios with any precision.

Further, the computations are an annoyance for the corporate management, confusing for the multi-national corporate structure, and of only moderate utility to the domestics.

What the Residents beyond the green baize door have decided, if we are to believe their January 2012 missive, is that the inconvenience to the Residents outweighs the value of the information to the Domestics.   Thus, on June 19, 2013 members of the House Financial Services Committee voted to protect the Residents on a 36-21 vote to repeal section 953 (b) and send H.R. 1135 to the floor of the house. [HFSC pdf]

If the Residents have their way, no more information about CEO compensation will flow down through the green baize door, and the amount of compensation received by the Executive Class will be consigned to the Hadalpelagic Zone as far beneath the waves as possible.  What could possibly go wrong?

*Signatories to the January 19, 2012 letter to Commissioner Shapiro: American Benefits Council, American Insurance Association, American Petroleum Institute, Business Roundtable, Center On Executive Compensation, Competitive Enterprise Institute, The Financial Services Roundtable, HR Policy Association, National Association of Manufacturers, National Association of Real Estate Investment Trusts,  National Association of Wholesaler-Distributors, National Investor Relations Institute, National Restaurant Association, National Retail Federation, Property Casualty Insurers Association of America, The ERISA Industry Committee,  The Real Estate Roundtable, Retail Industry Leaders Association Securities Industry and Financial Markets Association, Society of Corporate Secretaries & Governance Professionals, Society for Human Resource Management,  U.S. Chamber of Commerce,WorldatWork

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Filed under Economy, financial regulation, Politics

Amodei, Heck Join Big Bank Boys Club: H.R. 1062 Protects Wall Street

Occupy Wall Street bankersAlmost lost in the hyperbolic distractions so beloved by the D.C. press, was the House passage of H.R. 1062 on May 17, 2003, a bill to gut the capacity of the Security and Exchange Commissions rule making to protect American investors.   And, Nevada Representatives Amodei (R-NV2) and Heck (R-NV3) voted in favor of it.  Representatives Titus (D-NV1) and Horsford (D-NV4) voted against H.R. 1062.

What did they support?

“SEC Regulatory Accountability Act – Amends the Securities Exchange Act of 1934 to direct the Securities and Exchange Commission (SEC), before issuing a regulation under the securities laws, to: (1) identify the nature and source of the problem that the proposed regulation is designed to address in order to assess whether any new regulation is warranted; (2) use the SEC Chief Economist to assess the costs and benefits of the intended regulation and adopt it only upon a reasoned determination that its benefits justify the costs; (3) identify and assess available alternatives that were considered; and (4) ensure that any regulation is accessible, consistent, written in plain language, and easy to understand.”  [Thomas CRS Summary] (emphasis added)

Oh, how the Wall Street Wizards will love this one! The Little Wizards in the investment banking sector have long wanted all regulators to use the “cost/benefit” standard for restraining the excesses of investment enthusiasm.   H.R. 1062 seeks to gut the Dodd-Frank financial reform statute enacted in the wake of the Mortgage Meltdown and attendant financial machinations, and unleash the Wall Street Wizards from all regulation “past, present, and future.”  [HuffPo] We already have “cost/benefit analysis”  built into the system — so why another bit of legislation?

Here’s the little kicker in the bill:  “This bill was transparently designed to allow each regulation to be challenged in court by industry, but not by consumer advocates.”  [HuffPo] Got it?

Evidently, Representatives Heck and Amodei believe this to be a good idea — that the financial sector battalion of legal expertise may challenge each and every regulation proposed by the Securities and Exchange Commission — but the rules may NOT be challenged by consumer advocates.

As Representative Gwen Moore (D-WI4) explains:

“The ink would not be dry on a SEC rule before the race to the courthouse door to challenge the regulations would begin. Presumably, the most powerful industry participants would challenge the rules in the way that achieves their narrow interest, which may be to the detriment of investors or other less-affluent market participants. In this way, the most powerful industry interests would be able to not only use the courts to undo consumer protections, but to also seek competitive advantage over competitors.”

The big get bigger, the fat get fatter, and the rest of us sit waiting to find out how best to serve the Big Bankers on Wall Street.

But wait! It gets better — if you happen to be a Big Banker on The Street:

Requires the SEC to: (1) consider whether the rulemaking will promote efficiency, competition, and capital formation; (2) consider the impact of the regulation upon investor choice, market liquidity, and small business; (3) explain in its final rule the nature of comments received concerning the proposed rule or rule change; and (4) respond to those comments, explaining any changes made in response and the reasons that it did not incorporate industry group concerns regarding potential costs or benefits. [Thomas CRS Summary] (emphasis added)

Any rule has to promote “capital formation?”  Translation: No SEC rule may prevent any investment banking operation from accumulating capital (money) just about any way it wants to, and even further — if the rule does prevent some Wall Street investment house or Monster Bank from accumulating all the coin of the realm it wants then the SEC has to explain (presumably to Wall Street’s satisfaction) why “industry group concerns” weren’t incorporated into the rules.  Another translation might be in order:  The SEC can’t propose and adopt any rule Wall Street doesn’t like.

Wall Street would like to modify some existing rules (like those pertaining to the Dodd-Frank Act) and H.R. 1062 offers them a way to do that:

Requires the SEC to: (1) review its existing regulations periodically to determine if they are outmoded, ineffective, insufficient, or excessively burdensome; and (2) modify, streamline, expand, or repeal them.  [Thomas CRS Summary] (emphasis added)

How nice.  Now, just what does “excessively burdensome” actually mean?  The standard Wall Street dictionary applies the term to any regulation they don’t like.   Is it “excessively burdensome” to require a Wall Street firm to report what it’s doing with derivatives? Is it “excessively burdensome” to make Wall Street stop playing casino games with people’s mortgages?   If the rule isn’t “excessively burdensome,” then how about making rule proposals almost impossible?  The bill had a little something for that prospect too:

“Requires the SEC, whenever it adopts or amends a major rule, to state in its adopting release: (1) the purposes and intended consequences of the regulation, (2) the post-implementation quantitative and qualitative metrics to measure the economic impact of the regulation and the extent to which it has accomplished the stated purposes, (3) the assessment plan that will be used under the supervision of the Chief Economist to assess whether the regulation has achieved those purposes, and (4) any foreseeable unintended or negative consequences. Requires the assessment plan to: (1) consider the costs, benefits, and intended and unintended consequences of the regulation; and (2) specify the data to be collected, the methods for its collection and analysis, and an assessment completion date.”  [Thomas CRS Summary]

Got all that?  How is an “unintended consequence” foreseeable?  That’s why they’re called “unintended” in the first place.   So, the SEC cannot enforce any rule which might at any point in the future have an “unintended consequence” because that would violate the provision calling for a full assessment of the development of the rule.

After this bit of legislative legerdemain on behalf of the Big Banks and their cohorts on Wall Street, Representatives Amodei and Heck have not a quarter of an inch of room to talk about protecting small businesses — who are all too often at the mercy of the Big Banks, nor do they have any leeway to discuss protecting investors and their retirement accounts.  Nevada homeowners facing all manner of difficulties with mortgages that were sold off in packages and then bet on more enthusiastically than the Kentucky Derby might want to inquire precisely how Representatives Amodei and Heck are protecting their interests?

Representatives Heck and Amodei have joined the Big Bank Boys Club in this vote; a connection avoided by Representatives Horsford and Titus.

If you are not a resident of Nevada and would like to see how your Representative voted on this egregious bit of pandering to Wall Street and Big Bank interests click here.

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Filed under Economy, financial regulation

Sunday Roundup of Recommended Reading

Cattle Roundup Nevada Legislative News:    For an analysis of the tax reform battle currently on view in the Nevada Legislature, see “Mining for Clarity,” from the Nevada Progressive.  You’ll find some context in “Let’s Talk Tax Reform and Mean It” from a February edition of the Nevada Public Employees Focus, and a bit more from The Nevada View.  For more information see: “Nevada Funds Mining’s Big Mistakes,” in CityLife.  And, there’s more from the mining corporations in “Mining Rep: Republican Effort to Tax Us in Punitive,” Las Vegas Sun.

The economy:  The battle over the provisions of the Dodd-Frank Act have moved into the caliginous rule making phase.  The efforts were the subject of an MSNBC piece (video), which (finally) picks up on a review from The Hill, in which it was reported that more than half of the Dodd-Frank Act rules are still “in the works” from January 28, 2013.   There’s more from the Angry Bear economics blog,  in which we find the fraudsters now seeking to use the Sequester to cut funding for rule making and implementation.  The following does not bode well for assisting the various Federal agencies tasked with keeping up with the “creative” machinations of the Wall Street Wizards:

“Aside from federal civil and voting rights programs, investment law enforcement agencies and commissions on the chopping block include the Securities and Exchange Commission (a possible $115 million reduction), Commodity Futures Trading Commission ($17 million), federal courts ($384 million at risk), Public Accounting Oversight Board ($18 million) and the Securities Investor Protection Corporation ($23 million). In sum, $557 million could be cut from investor protection programs, barring Congressional intervention.”  [Angry Bear]

Naked Capitalism has an excellent piece on the prevarications of banking regulators who are supposed to be keeping an eye on the welfare of Americans who have money in the banks, not just the bankers who are raking in more American money, they call it “safety and security” — they mean “profitability.”  In a more general vein, there’s a MUST read post from Henry Blodget, “In Case You Needed More Proof That It’s Stupid To Cut Government Spending In A Weak Economy…” in Business Insider.    And, if you have not already read Michael Hiltzik’s piece for the Los Angeles Times, “The five biggest lies about entitlement programs,” please click over and read his summarization.  Here’s a taste:

“As efforts to cut Social Security and Medicare gather steam in the budget wrangling in Washington, you’ll hear these mega-trillions being thrown around more and more. Beware. They’re numbers designed to terrify, not edify.  The assertion comes from something called the “infinite horizon” projection. It’s a calculation of funding gaps projected out to the limitless future and then converted to present value — meaning what the cost would be if we had to pay it all today. For Social Security, the figure was $20.5 trillion, as reported in the program trustees’ latest report. For Medicare, the number comes to about $42.7 trillion. Even professional actuaries say this calculation is bogus.”

Media and Politics Finally! Someone calls out the Village Press Corps for continuing to bleat that the “President should reach out more…,” another Must Read is Dee Evan’s blast of sanity “More Selective Memory…” in the Huffington Post.

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Filed under Economy, financial regulation, media, nevada education, Nevada legislature, Nevada politics

A Shot In the Sequester Battle: GAO Report on BRAC Implementation and Implications for Civilian Cost Cutting

DoD CobraSomething for the Nevada Congressional delegation to consider while pounding away on the Sequester question is a report today from the GAO concerning the Cost of Base Realignment Actions (COBRA) by the U.S. Department of Defense.  If the intention is that our military operations become more fiscally rational, and our military system more structurally efficient — we have a way to go.

Our first clue is that when a report shifts from a complimentary tone concerning Department of Defense efforts at fiscal responsibility to the next sentence beginning with the word “however,” something is amiss.  For example, after commending the DoD’s projections about costs of base realignments, here comes the punch line:

“However, DOD’s process for providing the BRAC Commission with cost and savings estimates was hindered in many cases by underestimating recommendation specific requirements that were entered into the COBRA model. For example, military construction costs for BRAC 2005 increased from $13.2 billion estimated by the BRAC Commission in 2005 to $24.5 billion after implementation ended in 2011.”

We’re all familiar with cost overruns in construction projects, and with under-estimations of expenditures, but a +93.18% level is much more difficult to explain.   There’s (a) something wrong with the model? (b) something wrong with the estimates? or (c) something wrong with both of these inputs?  The GAO Report explains:

“GAO found that other cost estimates increased because requirements were initially understated or not identified as inputs into COBRA. DOD also did not fully anticipate information technology requirements for many recommendations. For example, the initial information technology cost estimate for one recommendation was nearly $31 million, but implementation costs increased to over $190 million once those requirements were better defined.”

In short, the difference between the idea and the implementation proved to be far more expensive than initially estimated.   Moreover, the methods used to guide its projections didn’t fill the bill:

“DOD was unable to always document the methodology used to estimate savings from reducing military personnel positions. Therefore, to increase the fidelity of the initial cost estimates that DOD submits with its recommendations to the BRAC Commission for a future BRAC round, GAO is recommending that the Office of the Secretary of Defense (OSD) improve the process for identifying and estimating the cost of requirements for military construction and information technology and update the guidance on documenting how it identifies military personnel position-elimination savings.”

Or, not to put too fine a point to it, the U.S. military (a) didn’t do a very good job of estimating the costs associated with construction and IT demands, and (b) needs to figure out a way to substantiate its estimates of the results of eliminating redundant or unnecessary positions.   The GAO provides a helpful example:

“By implementing BRAC 2005, DOD closed 24 major bases, realigned 24 major bases, eliminated about 12,000 civilian positions, and achieved estimated net annual recurring savings of $3.8 billion; however, the department cannot provide documentation to show to what extent it reduced plant replacement value or vacated leased space as it reported in May 2005 that it intended to do.” (emphasis added)

And, when the documentation is faulty it is difficult, if not nearly impossible to determine if the actions taken are producing any real savings to U.S. taxpayers.   Part of the problem associated with generating cost savings in the Department of Defense may well be related to the priority given to the implementation of the BRAC recommendations themselves.

“Although reductions in excess infrastructure to generate cost savings remained an important goal for DOD, the extent and timing of potential costs and savings, including the number of years it would take for the savings to exceed costs, was included as “other” or secondary criteria. As a result, many BRAC recommendations were not expected to produce 20-year net savings. Also, the BRAC Commission added contingency clauses to some recommendations, which allowed some outcomes to be defined by events or decisions that could occur after Congress could have prevented the BRAC recommendations from becoming binding, if it so chose. Hence, Congress had limited visibility into the potential cost of those recommendations.”

If the Department is realigning for strategic purposes then it might be logical to conclude that savings aren’t the main priority.  However, if the Department is called upon to further reduce costs as the result of sequestration, a Grand Bargain, or other Congressional maneuvers, then Congress definitely needs more “visibility” into the process.

One of the more helpful components of GAO reports is that they don’t merely criticize, but also offer recommendations for improvement.  In this case there are three:

“GAO is suggesting several matters for Congress to consider for amending the BRAC statute if it decides to authorize future BRAC rounds. First, if cost savings are to be a goal of any future BRAC round, Congress could elevate the priority DOD and the BRAC Commission give to potential costs and savings as a selection criterion for making BRAC recommendations. Second, Congress could consider requiring OSD to formally establish targets that the department expects to achieve from a future BRAC process and require OSD to propose selection criteria as necessary to help achieve those targets. Finally, Congress could consider whether to limit or prohibit the BRAC Commission from adding a contingent element to any BRAC recommendation and, if it is to be permitted, under what conditions.”

The first makes perfect sense.  If, in fact, cost savings and not strategic considerations are the priority then Congress should say so.  Secondly, more thought should be given to forming implementation targets and setting BRAC priorities.  Finally, if “contingent elements” are to be added we need more oversight into what will be allowable, and under what conditions it would be permitted.

All of this argues against the Meat Axe Approach to the reduction of federal spending.   There may very well be a message here which could be applicable to other government agencies.

There are at least two reasons why agencies, military or civilian, might adjust their operations: Strategic (providing better or more efficient service), and Monetary (getting by with less expenditures of public funds.)

The first asks the question how can we better and more efficiently implement our core mission to serve the people of the United States, while the second simply asks what can we cut in order to save money.  If we extrapolate the military situation into civilian terms then we can more readily see the implications of cost cutting for its own sake.

At this point it would be well to consider the nature of budget cutting and the rationales offered therefore.   Budgets can be cut to save money, but not so much that the agency cannot perform its central mission, or budgets can be axed to prevent an agency from conducting its basic business.   In this context, the House Republicans will be re-introducing the Ryan Budget 2.0 (or whatever version count we’ve now achieved).

“The plan by the GOP vice-presidential nominee is expected to lock in cuts to agency budgets, and curb the future growth of benefit programs like food stamps and Medicaid and contain a controversial proposal to turn Medicare into a voucher-like program for seniors younger than 55. Ryan said it’ll take relatively small additional spending cuts beyond those proposed last year to demonstrate balance.” [USAToday]

What if we were to apply the GAO recommendations on BRAC implementation to the civilian side of the budget proposed by the House Republicans (or, for that matter, to the budget amendments being compiled on the Senate side)?

The Medicare Question

Are the House Republicans proposing to voucher-ize the Medicare program into a coupon-care operation because they want to save money, or because they want to revert to a privatized system of health insurance acquisition for the elderly?  In GAO/BRAC terms — is the proposal strategic or savings oriented?  The Tea Party/GOP response could well be “both.”  Adopting their ideology assumes that privatizing the system would in theory save money and secure the basic provision of health care for elderly Americans in a “free market.”   This is an essentially locular position.

The main cavity is that health care markets in the United States aren’t working like commodity markets, never have and never can.  “Health” is not a commodity.  People don’t make economic choices about the purchase of health care services.    A “strategic” view would incorporate this concept.  As there is no logical way to argue that U.S. military presence in Korea is “unessential” at the moment — there is no way to validly argue that the access to health care service can be fobbed off into a market which commodifies the un-commodifyable.

The Oversight Question

As the GAO recommended more Congressional visibility in the issues raised by BRAC policies, we might want more transparency in the strategies asserted by Congress in others, civilian, functions.  One example might be the CFPB. The Consumer Financial Protection Bureau has never been popular with Republicans, who seek to replace it with a “committee” structure beholden to bankers and Wall Street investment houses.   Again, we come to the question of whether the proposed cuts are “strategic” or “cost saving” in nature.

Initial estimate projected  it would cost about $143 million to get the agency up and running, and Republicans immediately revised this downward in 2011 to $80 million. [HuffPo]  Budgeting for an agency in “creation mode” offers a point of comparison with Defense Department efforts to “re-create” some of its functions and their implementation.   The CFPB needs to hire employees (as the DoD needs to recruit personnel compatible with its mission) and to “build out core supervision and enforcement capability.” [BIB CFPB pdf] The FY 2013 Administration Budget calls for $261,119,000 for enforcement and supervision (up 22% from FY 2012) and $126,025,000 for consumer engagement and responses to consumer concerns about financial products being marketed to them. (Up 49% from FY 2012)

A suggested reduction in the FY 2013 budget for the practical elements (supervision of financial services and engagement of consumers in understanding financial products and services) means that someone is making a “strategic” decision about how resources are to be allocated for these basic functions.  Do we, for example, put “bases” in all major U.S. cities, or do we attempt to function with a single centralized base of operations in Washington, D.C? Do we appropriate funds for minimal staffing in all “bases,” or do we strive for moderate staffing levels in some, minimal in others?

The Final Question

Removing for the moment those ideological radicals who really want no government and no regulation of major economic or environmental factors (physical or social) in our lives (save for the defense contractors in their Congressional districts?) it’s reasonable to assert that when we say “smaller government” we say we want more efficient government.  If this is truly the object then why not consider applying the GAO recommendations to the budget conversation?

We want the best cost projection models possible. Further, we want to know if the estimations are predicated on cost savings or strategic considerations.  We deserve to know the Congressional priorities in budget allocations, and finally we should be told — in terms as clear as possible — if changes are to be made who made them and why.

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Filed under Appropriations, Defense Department, financial regulation, Medicare

Late Night Recommended Reading Roundup

Newspapers glassesThe Nevada Progressive connects the dots in “The Secretive Climate Denial Campaign in Our Backyard.”  The AFP connected to the NPRI, the NPRI connected to the Tea Party, the Tea Party connected to the Republicans, now hear the Words of the Koch Brothers!  Highly recommended reading.

Stay tuned to the Sin City Siren for information about the upcoming Las Vegas, NV hate crime event.  Calendar marking information for those in the area here.

Talk about a business tax is waning in the Nevada Legislature; In case you missed it,  The Nevada View has a good summary, complete with a must see chart on taxation in the Silver State.  Buzzlzarownd discusses tax topics in the current session of the Assembled Wisdom.

L’Affaire Brooks  is covered in the Nevada State Employee Focus blog, and there’s more from Steve Sebelius at Slash/Politics.

Yes, there’s a big difference between deficit and indebtedness, and the Nevada Rural Democratic Caucus blog makes this clear while providing some ammunition with which to push back against the Republican’s Tocsin in regard to the Great Big Horrible Debt Which Will Consume Us Faster Than An A Speeding Meteor… or something.

Speaking of Things Financial:  Begin with the post on Crooks and Liars  about the depredations of HSBC; then proceed to “Call the Waaambulance!” for C&L’s observations on the bankers’ pearl clutching fainting couch landing after being assaulted, I say Assaulted, by Massachusetts Senior Senator Warren.  The Huffington Post describes the whining from Wall Street. Now, read the New York Times article concerning the $35 million settlement agreed to by a mortgage firm that was involved in a six year scheme to prepare and file perhaps a million (or more?) fraudulently signed documents.   Unsettling huh?  If you aren’t sufficiently annoyed by the corporate cavorting over the U.S. tax system — read “The Loophole Lobby.”

What is it that scares Republicans even more than the thought of increasing the minimum wage?  Politicususa has the answer.   And, then there’s the Tennessee Congressional Representative, who during a nostalgic tale of How I Grew Up Self Sufficient Making The Minimum Wage inadvertently made the President’s point for him.  Oh, and by the way, back in the days of the Bush Administration there were 65 Republicans pushing for an increase in the minimum wage. Who’da thunk it.

Then they went on vacation — The Congress is on vacation — again — meanwhile the Violence Against Women Act re-authorization sits awaiting action in the House.  Meanwhile, a prosecutor in Detroit is spearheading efforts to tackle the huge backlog of untested rape kits in police storage.

No, radical gun enthusiasts — Chicago is NOT proof that reasonable controls on guns don’t work.  Look at the Chart.

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Filed under Politics

Advice from The Strip to Wall Street

Nevadans understand gambling.  We bend over backwards to be hospitable to those who want to push buttons on our machines and enjoy the games on our tables.  We advertise it, we oversee it, and we are pleased to be one of the entertainment centers of the world.  We have large fancy casino resorts, and we have small pub-like local bars with enticing machines.  We support many of our public services from the revenue gaming produces.  However, enjoy it as we do we also know it from living with gaming 24/7/365.   There are two general rules we should share with you.

What happens in Vegas doesn’t necessarily stay in Vegas. No, we won’t advertise what you did — but that doesn’t mean your friends and associates won’t.  If you aren’t certain about this concept please contact Prince Harry’s public relations staff.  So, Wall Street, when your presidential candidate of choice makes disparaging comments about 47% of the country’s population at a donors’ dinner please don’t be surprised when the pictures and sound show up on the Internet.

Don’t gamble what you can’t afford to lose.   Nevada has an entire chapter (458A) in its statutes concerning problem gambling,  additionally we define issues involving people with serious trouble following the simple maxim:  “Problem gambling” means persistent and recurrent maladaptive behavior relating to gambling that causes disruptions in any major area of life, including, without limitation, the psychological, social or vocational areas of life.

Most problem gambling finds it origins in the Gamblers’ Fallacy:  “The Gambler’s Fallacy is committed when a person assumes that a departure from what occurs on average or in the long term will be corrected in the short term.”  There is also an investment oriented version of this definition:

“When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. This line of thinking is incorrect because past events do not change the probability that certain events will occur in the future.”

Why are we reminding you of all this?  Because … the more you believe  you can lose without doing irreparable harm to your economic or vocational life  the less likely you are to play the games responsibly, and the more susceptible you are to the Gamblers’ Fallacy.   There isn’t all that much difference between playing at one of our roulette tables and playing with high stakes bets on derivatives.   Remember — Past events do not change the probability that other events will occur in the future — the next roll on the wheel or the next position taken on oil futures are not fundamentally all that different.

One may be emotional, ” X is my lucky number,” but there’s a reason for those two green slots on the roulette wheel — which create just enough margin for the house to make a profit.  No matter how elegant the algorithms created by the Quants in the investment bank office building, no bet is without risk, even those bets made in the interest of reducing risk.

Perhaps individuals like Nick Leeson, who brought down Barings Bank in 1995, or the collapse of Long Term Capital Management in 1998 [FRBC pdf], or the failure of Lehman Brothers in September 2008, or AIG facing a potential $60 billion loss in early 2009, or more recently the London Whale backwash for JP Morgan — should be a reminder that he or she who adopts the Gamblers’ Fallacy can easily become a “problem gambler” who disrupts major areas of life — like our economic system.

Goosing the Pot? One of the problems with current suggestions that the “Job Creators” be allowed to keep more of their earnings by lowering capital gains taxes and reducing taxes for the top 0.1% of American income earners is that we don’t know whether those funds will be allocated for venture capital and entrepreneurial support — OR — if they will be returned to the Wall Street Casino in the form of esoteric “bets” on the behavior of other investments.

If a bank believes it can bet its funds with impunity, without having a Financial Stability Oversight Council monitoring its behavior, then why not indulge in the kind of “gambling” that created the Credit Meltdown in 2008?  If the Federal government has no power to require the orderly liquidation of banks making too many bad bets, then all that remains is the status quo ante- Dodd Frank Act, and the chaos created as Lehman Brothers and other investment houses almost totally wrecked our financial sector. This is a timely topic because:

“The attorneys general of Michigan, Oklahoma and South Carolina argued that the government’s new power to liquidate large, non-bank financial companies that are on the brink of failure is unconstitutional.” [LATimes]

All three attorneys general are Republicans.  All three are arguing that the Federal government cannot monitor  financial sector behavior, and cannot order the rational liquidation of a troubled investment institution if something like those irresponsible bets in our immediate past go horribly wrong — again.   The only options left are a potentially catastrophic collapse or a — Heaven forefend — a bailout.

Frankly, this is tantamount to hugging the unrehabilitated problem gambler and politely admonishing him “not to do it again.”

At least the state of Nevada is willing to acknowledge that some people have serious gambling problems, that some need oversight and help to deal with their issues, and that some need a firm reminder that they have no business gambling money they cannot afford to lose.

The question remains: When will the Republican Party acknowledge the insufficiency of voluntary oversight of financial institutions entirely too prone to sail close to the winds of the Gamblers’ Fallacy, and admit that the Wall Street Casino requires the same level of diligence Nevada exercises over “problem gambling?”

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Filed under 2012 election, banking, Economy, financial regulation, Politics, Republicans, Romney, secondary mortgage market, Taxation, Treasury Department

What Matters? The Long Climb Back From A Very Deep Pit

Often it’s easy to have the attention span of a gnat, a problem exacerbated by the 24 hour news cycle in which topics are headlined for a time, and then hit the public equivalent of the Lost and Found barrel.  Nevada’s economic situation in 2008 and early 2009, and how we got to our current position, are illustrative of the issue.  The Las Vegas Sun has a summation, a kernel of which says:

“Even though the government stepped in to stabilize the system, the economy still seized up. Only last year did we learn that the American economy saw an annualized decline of an astounding 8.9 percent in the fourth quarter of 2008, far worse than original estimates. By the time Obama took office, the private sector was losing 700,000 jobs per month, with state and local governments soon to follow with their own layoffs.”

The point made by Sun writer J. Patrick Coolican deserves repetition:  When something crashes this hard it takes more time to recover.

#1.  Recapitalize the investment institutions.  Done. Although the term “bank bailout” is as popular in some quarters as fire ants at a ‘clothing optional  beach’ picnic, the lending institutions had become so baffled in 2008 that they couldn’t properly determine the price of their own financial products, nor could they assess the price of their risks — hence the seizure.

#2. Enact legislation to prevent the repetition of the banking issues. Done. The Dodd-Frank Act (pdf) is far from perfect, however it does (a) require more regulatory oversight of the derivatives markets, a major component of the initial problem, (b) revise regulations involving the ratings agencies, another important issue, (c) create a Financial Stability Oversight Council to act as an Early Warning System to evaluate the financial viability of our banking institutions, (d) require banks to draft a type of Living Will, in the form of a plan for orderly liquidation, (e) seek to prevent “regulator shopping” in which institutions sought to slide under the jurisdiction of the least restrictive regulator, (f) include the Volcker Rule, and (g) create the Consumer Financial Protection Bureau.

This item on the check-list is a work in progress. While, the legislation has been enacted, the drafting of regulations associated with the new law is still a work in progress.  The Federal Reserve Bank of St. Louis has an updated time line of the drafts, and is a good resource for those wanting to see what has been done and what remains.

There are two essential points included in the Dodd Frank Act which are extremely important, and speak directly to avoiding another crash based on the lack of adult supervision associated with the 2008 Debacle.  First, is the oversight of the derivatives markets — an activity loudly criticized by some on Wall Street, but nevertheless necessary for insuring that the next amalgam of Quants, Wizards, and Masters of the Universe, doesn’t repeat their performance of 2008.  The second is the inclusion of an independent panel to warn banks of impending problems combined with the Orderly Liquidation Authority provisions.   The bankers are still squawking about being subject to the Financial Stability Oversight Council because they believe in “self regulation;” however, they were “self regulating” prior to 2008 and they drove the system into the ditch.

#3.  Stabilize the housing market.  Getting there.  This is crucial for Nevada, and for middle income Americans in all 50 states.   The Crash of 2008 was a cruel blow to everyone, but middle class Americans whose wealth was in large part a function of home-ownership were particularly hard hit.  Between 2007 and 2010 the average American middle class family lost about 40% of their total wealth as property values plummeted. [CNN]  However, we need to be realistic and remember that part of that wealth was illusory:

“For the vast majority of families, “wealth” essentially means, “home equity”. And the relatively high wealth levels of the mid-2000s reflected the inflation of the housing bubble. The bursting of the bubble exposed the wealth gains as having been unreal and produced the sizable declines in net worth revealed in the government data.”  [RCM]

As mentioned previously, American families are de-leveraging, i.e. paying down debt and restructuring their family finances.  At this juncture it appears that stagnating wages and job losses are more pressing concerns than loss of home equity for most families.*  The inflated equity is already gone, the problems associated with wages and job losses remain.

The housing sector is adjusting to reality, home construction may be declining but if we compare year-over-year numbers building permit requests are up 21.5% over last year. [LAT]

#4. Halt the suppressed demand cycle.  Stalled.  Deleveraging is good.  American consumers had piled on the debt during the Housing Bubble. They needed to deleverage.  Financial institutions which grabbed up the mortgages and repackaged them in altogether too many creative ways needed to deleverage.  However, the down side to deleveraging is that when people stop spending  our economic growth slows down.

The necessity of looking at the demand side of the economic equation has been covered here, here, here, and here.  I believe at one point I’ve even threatened to rename this blog something like the Aggregate Demand Review.

At the risk of even more redundancy, let’s review — the formula for aggregate demand is AG = C + I + G + (X-M).  That would be consumer spending + business spending + government spending – (exports – imports).  Demand drives orders, orders drive hiring.  Economic policies which depress orders will depress economic growth.  The current case of Republican obsessive-compulsive discussion of reducing government spending threatens to further diminish the “G” part of the equation AND the layoff of public sector employees tends to decrease the “C” part of the equation.  As if we needed any more reduction in aggregate demand, the Republicans would very much like to reduce government support for SNAP and other social safety net programs which act as our old friend, the economic automatic stabilizer — the shock absorbers on our economic vehicle.

Then there’s the American Jobs Act which is stalled in the 112th Congress.  Obviously, when people have jobs they have money to spend.  When they spend money that creates — you guessed it — demand.  Demand drives orders, orders drive hiring.  The economic concepts involved really aren’t very complicated.

One of the more interesting features of the Republican argument is the “government doesn’t create jobs” line,  but eventually every subsequent argument about cutting defense spending includes a recitation of the number of jobs which will be lost by those employed by defense contractors.   If it’s true in the defense sector, then it ought to be true in the education business — cuts to defense spending mean job losses in defense industries, and cuts to education funding lead to job losses in the education sector — the public safety sector, etc.   Job losses depress demand, depressed demand reduces economic growth.  Now, how hard was that?

The Bottom Line

All it takes to comprehend the terrain on the long hard slog we have ahead of us, is to focus on what really matters.   Reducing the likelihood of another Wall Street Debacle matters.  Stabilizing the housing market matters.   Enacting and implementing measures to increase demand for goods and services matter.  Everything else falls into two general categories: (1) Self serving promotion of policies designed to protect the 1% of the American population already doing well; and (2) Ideological assertions which describe neither the current American economic system, nor present solutions to contemporary American economic problems.   There is a choice.

We can either follow the Voodoo economics of the Supply Side Hoax and dig ourselves more deeply into the pit, or we can pay attention to both sides of the economic equation and start digging some ‘stairs’ in the side and climb up.

* At least one source is counseling against being too optimistic about the current decline in foreclosures, because there is still an inventory of properties in the pipeline, and although foreclosures have hit a five year low, realistically there is more to come.

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Filed under Economy, financial regulation, Nevada economy

Unsolicited Questions for the Press Corps

There was a post like this a while back, but after listening to the President’s remarks this morning and then sitting through some rather inane inquiries from the White House Press Gaggle — how about this:  We put a moratorium on questions that begin, “Mr. President… The _____ are saying that ____ and how would you respond?

First, this makes the person asking the question sound lazy.  The easiest question in the world is something someone else writes for you.  A right wing bloviator of some infamy writes — “The president had control of both houses of Congress during his first two years, and the economy didn’t bounce back.” And, then the intrepid reporter asks, “How do you respond?”

Step two, now the reporter sounds uninformed.  The President’s party had control of the House, and titular control of the Senate.  A majority is sufficient to establish Committee appointments in the Senate, BUT it is insufficient to overcome 137 Republican filibusters.  [Senate]   The question also indicates that somehow we were supposed to rebound enthusiastically from the worse Crash since 1929, all while some $50 trillion of global wealth was erased by the Wall Street casino.  Not to mention the $7 trillion lost in U.S. equity wealth, and another $6 trillion lost in the housing debacle. [CBS]

Thus, in the interest of assisting a more energetic, more informed, Fourth Estate, here’s a humble offering of possible questions:

#1.  Background: In 2006 JPMorganChase hired a trading manager who rescinded the company’s guidance that traders exit any position in which there were $20 million in losses, and in February 2012 the firm adopted an index comprised of 125 credit default swaps on investment grade entities.   By April 5, 2012 the London Whale was involved in position so large that he was moving prices in the $10 trillion credit market.  As of May 18, 2012 JPMorgan’s losses were calculated at $3 billion and rising.

Question:  What actions have the SEC, CFTC and other regulators taken which might control the gambling in credit markets exemplified by JPMorgan? And, are U.S. capital requirements sufficient to protect American investors from fall out?

Question: What progress has been made by the CFTC and other regulators to assure the investing public that credit default swaps (and the indices based thereon) are transparent enough so that risk can be properly assessed and debacles like the one at JPMorgan avoided?

#2. Background:  From the Bureau of Economic Analysis, “the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.9 percent in the first quarter of 2012 (that is, from the fourth quarter to the first quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2011, real GDP increased 3.0 percent. ” (May 31, 2012)

Question: If public sector hiring has decreased of late, and the Department of Labor is predicting, “Slower population growth and a decreasing overall labor force participation rate are expected to lead to slower civilian labor force growth from 2010 to 2020: 0.7 percent annually, compared with 0.8 percent for 2000-10, and 1.3 percent for 1990-2000. The projected 0.7 percent growth rate will lead to a civilian labor force increase of 10.5 million by 2020. (See table 1.)” Then, what role does public sector hiring play in the full recovery of our consumer based economy?

Question: If private sector worker compensation costs (wages and benefits) increased by 2.1% YOY, and public sector worker compensation costs increased 1.5% YOY,  [DoL] and if this trend continues will this constitute a drag on consumer spending?

#3. Background:  As of January 2007, the GAO reported that our national transportation infrastructure were at risk in terms of financing and capacity, and that funding sources were eroding  just as investment was needed to expand capacity.

Question:  What inroads into this imbalance might have been made by ARRA projects?  What employment advances might be made if funding was available for contracts to improve air traffic and transportation facilities? For highway improvements?

Question: In terms of our national parks, the GAO reported in 2006:  “Each of the 12 park units reported their daily operations allocations were not sufficient to address increases in operating costs, such as salaries and new Park Service requirements. In response, officials reported that they either eliminated or reduced services, or relied on other authorized sources to pay operating expenses that have historically been paid with allocations for daily operations.”   What should Congress and the Administration do to prevent this trend from continuing, and what might the economic benefits be in the private sector if sufficient funding were available for the operation of our national parks?

#4. Background: During the 2011 legislative sessions, states across the country passed measures to make it harder for Americans – particularly African-Americans, the elderly, students and people with disabilities – to exercise their fundamental right to cast a ballot. Over thirty states considered laws that would require voters to present government-issued photo ID in order to vote. Studies suggest that up to 11 percent of American citizens lack such ID, and would be required to navigate the administrative burdens to obtain it or forego the right to vote entirely.” [ACLU]

Question:  What actions are currently being taken by the Department of Justice to confirm every eligible American citizen’s right to vote?

Thank you.  You’re welcome.


Filed under 2012 election, ARRA, Economy, employment, financial regulation, Infrastructure, Vote Suppression, Voting

Monday Morning Roundup

##  Is Nevada ready for it’s close up?  Take a look at Nevada Progressive today.   Meanwhile, Senator Dean Heller (R-NV) and Governor Sandoval didn’t seem to want to get anywhere close to the state GOP convention:

“And around the country, Republican officials and the powerful interests that own them worry that their party’s ongoing drift to the Island of Whackadoodledoo could seriously damage their electoral, and hence financial, interests in 2012 and beyond.”  [More From The Gleaner]

While you are at it, and speaking of expunging some of the Whackadoodledoo, take a gander at the NVRDC’s post on same-sex marriage equality. This is one of the better compilations of the current situation you’ll find recently.  No hype, no emotionality, just good old fashioned relevant facts.

## As our Republican Representatives in Congress were voting to shave the national indebtedness by sticking it to working families who need the SNAP program to help with the groceries, the Sin City Siren reports of Nevada’s food insecurity problems,” Unless my eyes are failing me, it looks like the lowest percentage is 8.5%, sadly a real anomaly in our valley (in terms of how low it is), and a high hunger mark of 27.6% (holy crap!). And don’t think that it’s all bad in the valley’s core and cream puff dreams in the suburbs. There’s a 10 to nearly 15% rate in Summerlin zip codes and 11 to 15% range in Henderson. 89109, which is fairly close to center of the valley is 18.3%. The take-away: Hunger doesn’t care where you live.”

##  Hey We’re Number ___! Oh, who cares?  The U.S. is falling behind the rest of the globe in providing health care, and many important measures included in the Affordable Care Act aren’t scheduled to kick in until 2014.

China, after years of underfunding health care, is on track to complete a three-year, $124 billion initiative projected to cover more than 90 percent of the nation’s residents.  Mexico, which a decade ago covered less than half its population, completed an eight-year drive for universal coverage that has dramatically expanded Mexicans’ access to life-saving treatments for diseases such as leukemia and breast cancer.  In Thailand, where the gross domestic product per person is one-fifth that of the United States, just 1 percent of the population lacks health insurance. And in sub-Saharan Africa, Rwanda and Ghana — two of the world’s poorest nations — are working to create networks of insurance plans to cover their citizens.  [WaPo] (emphasis added)

Unfortunately, “American Exceptionalism,” is rapidly coming to mean that everyone EXCEPT Americans can expect basic services from their governments.   Speaking specifically to the ACA, FactCheck finds the Chamber of Commerce advertising on the ACA “misleading.”   Surprised?

## How’s that Austerity Thingie working for you?  Not all that well for German Chancellor Angela Merkel.  “Yesterday was a bitter day, it was a bitter, painful defeat,” Merkel said after results showed the SPD won 39.1 percent against 26.3 percent for the CDU.”  [Reuters] The voters seem annoyed. Additionally, an overly complex system perpetuates mistakes in the Eurozone?  More from Reuters.

## ICYMI:  The Congressional Budget Office has some very pertinent and cogent comments to make on the national debt, among them the following:

“There is no commonly agreed-upon amount of federal debt that is optimal. Higher debt has a number of negative consequences that CBO discusses regularly, but reducing debt or constraining its growth will require some combination of tax increases and spending reductions, and those policy changes can have negative consequences themselves.”

Negative consequences like cutting off the SNAP program and diminishing the automatic economic stabilizer effect maybe?

##  JP Morgan Chase isn’t the only bank having “a problem.”  There’s still some fall out from the GMAC (ALLY) venture into the mortgage market during the Bubble, “Ally’s mortgage unit, called Residential Capital, or ResCap, filed for bankruptcy protection in federal court in Manhattan under a plan that has the support of some of its creditors, although it was still expected to be a drawn-out and litigious process.”  [Reuters]

In view of the mess over at JP Morgan Chase, perhaps this isn’t exactly what we want to be hearing from the CFTC?

The Commodity Futures Trading Commission (CFTC) today voted to propose an Order regarding the effective date for swap regulation.  The Order is a six-month extension from certain provisions of the Commodity Exchange Act that otherwise would have taken effect on July 16, 2011, the general effective date of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act .  Today’s order further narrows the scope of the Order because some rules, for example the further definition of swap dealer and major swap participant, have become effective.

Today, the Commission is extending the effective date for swap regulation until December 31, 2012, or until the Commission’s rules and regulations go into effect, whichever is sooner. The Order proposed today would allow the clearing of agricultural swaps; and remove any reference to the exempt commercial market; and exempt board of trade grandfather relief previously issued by the Commission.   (emphasis added)

How long can the traders’ lobby keep dragging out the regulations?

## Some good news: “The Securities and Exchange Commission today suspended trading in the securities of 379 dormant companies before they could be hijacked by fraudsters and used to harm investors through reverse mergers or pump-and-dump schemes. The trading suspension marks the most companies ever suspended in a single day by the agency as it ramps up its crackdown against fraud involving microcap shell companies that are dormant and delinquent in their public disclosures.”  [SEC]

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Filed under Amodei, Economy, financial regulation, gay issues, Health Care, Heath Insurance, Heck, Heller, Nevada economy, Nevada news, Nevada politics

At Play With The Whales Of The Board: JP Morgan Chase and The Need For Financial Regulations

On March 31, 2011 Senator Jim DeMint (R-SC) introduced S. 712, the Financial Takeover Repeal Act — which would repeal all the provisions of the Dodd-Frank Act.  On May 18, 2011 Senator Dean Heller (R-NV) signed on as a co-sponsor. [GovTrack]   Gone would be the orderly liquidation process requirement for banks, gone as well the provisions requiring more transparency and accountability for derivatives trading, and gone would be any protection for bank depositors under the Volcker Rule.   Perhaps in light of what’s happened to JP Morgan Chase of late the Senators would like to alter their positions?

Remember 2008? Remember when trading by investment firms created a Mortgage/Housing Bubble?  Remember when traders scrambled to grab up mortgages hand over fist to warehouse offshore, slice and transform into CDOs, and then hedge their bets with credit default swaps?  Remember how they managed to cost the U.S. economy some $10 Trillion in wealth? Or, how they deftly wiped some $50 Trillion in wealth from global totals?

Evidently, someone at JP Morgan Chase didn’t get the memo.

JP Morgan Has a Whale of a Time?

The story started coming out on April 5th and by the next day Business Insider had an interview posted on The London Whale:  “Well it’s reported that he’s taken a huge bet worth possibly tens of billions of dollars on so-called corporate credit default swaps — these are essentially insurance policies against particular companies going bust. Now, this guy’s gone one step further and bet on an index of policies for 125 U.S. companies.”   Hmmm, now “corporate credit default swaps” — where have we heard that one before?

We won’t know because the information is “proprietary” as to exactly what got the London Whale harpooned, but there is information in the public domain about some of JP Morgan Chase’s “creative trading.”  For example, there was this report from Bloomberg on April 3, 2012:

(JP Morgan Chase) “sold $59.1 million in structured notes tied to a proprietary volatility index in March, the most for any month since the gauge was created more than a year and a half ago.

The J.P. Morgan Strategic Volatility Index, which uses a strategy based on a set of rules, has increased 17 percent this year. The gauge seeks gains when the market for longer-term futures on the VIX trade higher than those with closer expirations, which is referred to as “contango,” and also when the reverse is true, called “backwardation.”

If “backwardation,” “contango,” and “proprietary volatility indices,” sound like so much blubbering jingo, it’s probably because they are.   By May 10, 2012 Jamie Dimon, JP Morgan Chase CEO, was finished trying to brush off the reportage about $2 billion losses as being a “tempest in a teapot,” and changed the company line:

“Yesterday, Dimon changed tacks. Losses on the investment office’s “synthetic credit portfolio” had reached $2 billion so far this quarter, though he refused to give any meaningful details on how that had happened. Presumably, these are derivatives of some sort, but even that basic fact was too much for the bank to specify.”  [Bloomberg]

“Synthetic credit portfolio.”  Doesn’t that have a familiar ring?  Dimon continued:

“Here’s what little Dimon said of the trades in question: “The synthetic credit portfolio was a strategy to hedge the firm’s overall credit exposure, which is our largest risk overall in this stressed credit environment. We’re reducing that hedge. But in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective as an economic hedge than we thought.” [Bloomberg] (emphasis added)

Interesting phrases: “synthetic credit portfolio,” “hedge credit exposure,” new strategy,” and “riskier than we thought.”  Sound familiar?

We can conjecture that JP Morgan Chase’s problems began with bets from their bond portfolio, including those “synthetic credit” instruments:

“The bank’s problems may have started with its bond portfolio, worth $379 billion at the end of March. JPMorgan had just 30 percent of its portfolio investment in securities guaranteed by the federal government or its agencies, generally considered some of the safest bonds. It was a shift from the end of 2010, when those types of bonds amounted to 42 percent.” [NYT]

What if we substituted “speculative bet” for “economic hedge,” because as it’s been pointed out very clearly an “economic hedge” is one that doesn’t qualify for hedge accounting.  And, if it doesn’t qualify for hedge accounting then how it can work to offset a risk is a matter more akin to speculation than determination.  [Bloomberg]   Translation:  The Little Wizards were back at it — assigning values to things based on happy assumptions and elegant algorithms, a process perilously close to Mark to Mythology valuation.  We’ve seen that movie before.  Now, what inspired model failed this time?

“Dimon at least had the good sense to sound a note of contrition yesterday. He said the firm’s new “value-at-risk” model had proved inadequate and the company was going back to using an older model. He said the money-losing trade was “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” He said it was “sloppy” and that “all appropriate” measures would be taken. He said there were “egregious mistakes” made and that the wound “was self-inflicted.” Before he answered questions, he said, “We will admit it, we will learn from it, we will fix it and move on.” [Bloomberg]

New Value At Risk Model“* — if we thought the Wall Street Wizards, having been burned by Black Swans, Outliers, and Fat Tails when the Mortgage Market Collapsed, had learned something about the dangers of Quantifying Manic Mr. Market in 2008 — we should think again.

Perhaps JP Morgan Chase CEO Mr. Dimon would like another look at its  VAr models as well:

In the first quarter, he said, the bank deployed a new model that underestimated losses on the hedges that relied on credit derivatives. When it redeployed the old model, it nearly doubled the estimated potential losses in the chief investment office, where the hedges were done. [NYT]

Additionally, we ought to be thinking of the intent expressed in the Dodd-Frank Act to make such proprietary trading more transparent.

What we don’t know CAN hurt us.

We don’t know, for example, how “economic hedges” were supposed to work, that’s proprietary information.  We don’t know who traded what with whom, that, too, is proprietary information.  We don’t know who valued what when trading whatever with whomever.  Yes, it’s proprietary information.  We don’t really know if, or how much, depositor’s funds were used in some way in these speculative bets.  We have Mr. Dimon’s word that the trades “didn’t break the Volcker Rule,” but that’s problematic because the final provisions of the Volcker Rule haven’t been determined.  However, we do know that because JP Morgan Chase is a bank, and a very big bank, it is “covered” by the FDIC, and the U.S. taxpaying public.

We also know that Dimon, and to be fair many others on Wall Street, have been quick to complain about the “onerous burdens” of financial regulation reform.

He has criticized the new, post-financial-crisis regulations — Basel III, Dodd-Frank, the Volcker rule and the new rules governing derivatives — as being Draconian. He has whined that the time to criticize Wall Street has come and gone. [Bloomberg]

Not quite.  Senator Carl Levin (D-MI) noted the obvious:

“The enormous loss JP Morgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called ‘too big to fail’ banks have no business making. Today’s announcement is a stark reminder of the need for regulators to establish tough, effective standards to implement the Merkley-Levin language to protect taxpayers from having to cover such high-risk bets.” [Business Insider]

Senator Levin is referring to the loophole in Volcker Rule drafting sought by JP Morgan Chase and other big banks.

“The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down. ”  [NYT]

“Portfolio hedging?”  As in “economic hedging,” as in a loophole to allow the bankers to perform some more magic with the numbers and the valuation of risk.   This is hardly the time to blame the regulatory agencies either.

Both the SEC and the CFTC argued against loosening the restrictions in the Volcker Rule, which isn’t officially to go into effect until July 21, 2012, and Fed Chairmen Ben Bernanke has already stated that the deadline won’t be met.  Treasury, the Fed, and the OCC all argued in favor of more “generous” terms for the bankers. [NYT]

Reflections in an Emboldened Eye

One of the more intriguing comments from Mr. Dimon was his statement that the bank would “learn from the mistake and move on.”  Unfortunately, this is also what the Wall Street Bankers said in 2009.  What was one of the reasons for all those Toxic Assets on the bank books in 2008?  The failure of their Value At Risk computations! What happened in 2012?  JP Morgan Chase’s Value Ar Risk computations failed — again.

What was one of the crucial factors in the Mortgage Meltdown?  Credit swaps and other exotic derivative trades which were based on Mark to Mythology valuations.  What’s the value of JP Morgan Chase’s hedge portfolio now?  Who knows?  There is Mark to Market (valuing positions based on current price), Mark to Model (valuing positions based on statistical predictions), but Mark to Myth (valuing positions based on statistical predictions themselves heavily weighted to the management’s most optimistic projections for monumental revenues) appears to have won the day on Wall Street.

There is probably a message in here somewhere:  If you can’t determine the value of a position it likely isn’t a good idea to bet (excuse me, “economically hedge”) depositors money on it.

However, the real message of the JP Morgan Chase debacle of 2012 may well be that for all of Wall Street’s proclamations of innocence in the Mortgage Meltdown of 2008, and all their pious promises that they’ll be good boys from now on (i.e. 2008) — the regulators were right — they are in need of adult supervision.


* Value At Risk Models were at the heart of the last credit fiasco, Joe Nocera, economics writer at the New York Times explains:

“VaR isn’t one model but rather a group of related models that share a mathematical framework. In its most common form, it measures the boundaries of risk in a portfolio over short durations, assuming a “normal” market. For instance, if you have $50 million of weekly VaR, that means that over the course of the next week, there is a 99 percent chance that your portfolio won’t lose more than $50 million. That portfolio could consist of equities, bonds, derivatives or all of the above; one reason VaR became so popular is that it is the only commonly used risk measure that can be applied to just about any asset class. And it takes into account a head-spinning variety of variables, including diversification, leverage and volatility, that make up the kind of market risk that traders and firms face every day.”

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Filed under Economy, financial regulation, Heller