Tag Archives: Dodd Frank

Heads Up Nevada, We Could Once More Join The Sand States

Heads up, Nevada!  There’s another storm on the horizon, and it’s not meteorological, nor is it related to the proliferation of high powered rifles and stockpiles of ammunition.  It has to do with a crisis we thought we’d withstood and overcome.

We were one of the Sand States eight years ago, those with massive development projects in which homes were constructed, mortgages were offered, and then sold into secondary markets to be sliced, diced, tranched, and manipulated into financial products in the Wall Street Casino.  We know what happened next.  The investment banking sector collapsed, the financial markets were in ruins, and Nevadans felt the aftermath with unconscionable unemployment levels and lost income.

The response was the Dodd Frank Act, a set of regulations to control the excesses of the Wall Street Casino and investment banking practices.  The first major assault came from the House of Representatives last June:

“The House legislation, called the Financial Choice Act, would undo or scale back much of Dodd-Frank. The bill was approved 233 to 186. All but one Republican — Walter Jones of North Carolina — voted for the bill. No Democrats supported it.

Its major changes include repealing the trading restrictions, known as the Volcker Rule, and scrapping the liquidation authority in favor of enhanced bankruptcy provisions designed to eliminate any chance taxpayers would be on the hook if a major financial firm collapsed.

The bill also would repeal a new Labor Department regulation, largely still pending, that requires investment brokers who handle retirement funds to put their clients’ interests ahead of their own compensation, company profits or other factors.”

Representative Mark Amodei voted in favor of this bill, HR 10, on June 8, 2017.   What Representative Amodei voted for was to allow banks to play in the stock market with depositors money (remember deposits are guaranteed up to $250,000) and to allow financial advisers to recommend products to their customers which are not necessarily to the advantage of their retired clients, but which may happily enhance the financial advisers’ bottom lines.   In light of what happened to this Sand State in 2007-2008 Nevadans should be especially concerned about this.  But, wait, there’s more

Remember that one of the major problems for working Americans, Nevadans included, was the burden of pay-day lending?  The Consumer Financial Protection Bureau, created by the Dodd Frank Act, is seeking to limit the negative impact of some of the more egregious practices in this sector of the banking industry.  Now the Comptroller of the Currency has another idea, publicized on October 5th:

“…the Office of the Comptroller of the Currency surprised the financial services world by making its own move—rescinding guidance that made it more difficult for banks to offer a payday-like product called deposit advance.”

Lovely, so now banks can “offer” those insidious high rate pay-day loans, only changing the name to “deposit advance,” and consumer will be right back on the hook.  At almost the same time as the CFPB issued a rule preventing pay day lenders from handing out loans without reviewing a customer’s capacity to repay the loans, the bankers get the green light to hand out “deposit advances.”

There is one bill in the US Senate which does offer some improvements on Dodd Frank, Senator Claire McCaskill (D-MO) and Senator David Perdue (R-GA) have introduced a bill to address some of the problems for community banks.  There are more reasons to support this legislation than to oppose it, but beware of the rationalizations and gamesmanship.

Those who want to eliminate the CFPB, gut its authority, or toss the Dodd Frank Act altogether may wish to convince us that (1) the entire act needs to be repealed to “enhance the free market,” or some other euphemism for re-opening the Wall Street Casino, (2) the CFPB places “burdensome” regulations on those pay day lenders who (bless their hearts) are only trying to provide more “options” for consumers.   This isn’t the most interesting or engaging story of the moment, but it is an issue Nevadans would do well to follow very closely.

We don’t need to be ground into the sand again.

 

 

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Filed under Amodei, Economy, financial regulation, Nevada, Nevada economy, Politics

Capitalism Won’t Be Saved By Republicans

For the sake of this argument let’s assume that while capitalism may not be the most egalitarian system of resource management and allocation, it’s the best one we have to date.  It’s a bit like the definition of democracy – it isn’t perfect, but no one’s come up with anything better.  So, with this in mind we can propose that capitalism is worth saving.  But, saving from what?  And here I climb back on the hobby horse – we need to save free market capitalism from Financialism.

What is Financialism?  If you’ve just tuned in, I’ve been operating with the Armistead definition:

“Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments.  Financial instruments…are in their original form firmly linked to economic reality.  However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own.”  [Armistead]

When this “life of its own” comes in to play there are some serious problems for the underlying economy.  Michael Konczal summarizes the issue as succinctly as anyone:

“If you want to know what happened to economic equality in this country, one word will explain a lot of it: financialization. That term refers to an increase in the size, scope, and power of the financial sector—the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities—relative to the rest of the economy.

The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.”

That second paragraph is a summation of what we’ve been looking at for the last 20 years.   If we were discussing capitalism we’d be talking about economic growth predicated on development in manufacturing, housing, infrastructure, energy, agriculture, primary industries, transportation, etc.  However, we’ve not been talking about capitalism, especially in the media. We’ve been lathered up and shaved by financialism.

We barely know what capitalism is anymore.  What’s the first thing that comes to mind when someone says, “business news?”  If you said, “stock market report” that would reflect what the evening news gives you. Usually the Dow Jones Industrial Average comes first, and then ‘what drives it’ comes in commentary purporting to be analysis.  Consider the following reaction to inquiries about the strength of the economy in 2012:

“The stock market in the past has been a leading indicator, but that leading quality has weakened in recent years. Stock prices are driven by profits and profit growth. During the Great Recession, corporations have been able to maintain profitability by slashing employment to reduce costs. They have streamlined their operations and have squeezed more productivity out of their remaining workers. Thus, higher stock prices don’t necessarily mean a stronger economy, especially in terms of employment growth. That said, I do think the economy is on an upward path, with job growth of about 2 million expected for the national economy in 2012.” [SDUT]

And here we have an illustration of the third point Konczal was making:  Corporations are judged not by the quality of their products, the character of their work forces, the direction of their research and development – but by the immediate income paid to shareholders.

Couple this with the Shareholder Theory of Value, which Jack Welch once referred to as the “dumbest idea in the world,” and the financialist  incentive is to maximize productivity, prioritize immediate results, and ignore the stakeholders for the benefit of the shareholders.  Now, view the Epi Pen issue from the perspective of the shareholders – the object was to increase immediate shareholder value, but:

“While individual consumers may not have had a voice or recourse, the market did. Mylan may have improved its margins and ultimately driven higher returns and shareholder value, but within a week the price increase cost the company $3 billion in market cap and a stock tank of over 12% in 5 days.” [Fortune]

Ethics do matter, especially to stakeholders.  If there is a silver lining in this cloud it is that the stakeholders (individual consumers, school districts, emergency responders, local fire departments…) can place significant pressure on shareholders.  Breach the bounds of acceptable human behavior and the amorphous market will take a bit out of the corporate hide; illustrating former CEO Welch’s point precisely.

Now, let’s enter the political phase.  Republicans would love to dismantle the financial regulation structure which has curtailed some of the excesses of Financialism which precipitated the last Great Recession.  Out with Sarbanes-Oxley, Out with Dodd Frank, out with “excessive regulation.”   This is a recipe for disaster.  Regulation restrains, and restraint is what is needed to prevent capitalism from degenerating into financialism.

Again, a summation from Konczal:

“…the most important change will be intellectual: we must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can’t just be strip-mined for a small sliver of capital holders; we’ll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.”

Income inequality on steroids? More Bubbles? More volatility? And, more economic problems associated with those issues.  It will be up to Democrats to resist the financialization of the American system of capitalism because the Republicans are either trapped in its web or ignorant of its consequences.

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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

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

Romney-Ryan 2012: Be Very Quiet! Be Very Very Quiet!

The Romney-Ryan campaign keeps adding to the impression that it is run by Elmer Fudd who has mistaken his opponents for the rascally rabbits.  Elmer would like for everyone to be Very Quiet, but periodic outbursts of honesty keep impeding his adventures.  Example Number Whatever:  Hedger funder John Taylor on CNBC:

“Hedge funder John Taylor is on CNBC and expressing major disappointment in Romney for selecting Paul Ryan for being his running mate.  Why? Because he’s too open about wanting to cut Medicare, and that will cost the election.

Taylor thinks Romney would have been better for the economy, but that now he blew it.

Taylor even thinks that the budget cutting needs to be done, but that it’s a mistake to be so open about it.

I agree that we have to do this stuff… but you don’t want to do it in public,” he said.”  [Business Insider] (emphasis added)

No, it would definitely be counter-productive to tell the American voting public you want to end the Medicare program as we know it, end assistance for nursing home residents under Medicaid, or — cut Pell Grants for students from middle class families, gut clean air and clean water regulations, end urban redevelopment programs under HUD, or cut funding for WIC programs for women and infants….

Be Quiet, Be Very Very Quiet!  The Republican plan gives every appearance of being entirely composed of vague generalities, unspecified numbers, soaring rhetoric, carefully crafted talking points, and lots of Flags and references to freedom.   The first step is to get elected, the second is to (do what?)

End Medicare as we know it for future generations, and cut every social safety net program to shreds so that there aren’t any economic  stabilizers left the next time unshackled Wall Street enthusiasm creates the next crash.

Be Very Quiet.  The Romney-Ryan Budget Plan doesn’t really reduce the federal deficit.  Ezra Klein ran the numbers:

“The question then is how should we in the media report on Ryan’s plan? Do we use the revenue numbers he tells us to assume, despite the fact that he offers no path for reaching those numbers, and despite the fact that he and his party have a long history of choosing tax cuts over deficit reduction? Or do we use the policy changes on the page, in which case Ryan’s plan is wildly fiscally irresponsible? […]

At the very least, people should know that when they hear about the Ryan plan’s deficit reduction, those numbers are assuming that Ryan, who has thus far refused to name even one tax break that he would get rid of, has either eliminated almost every expenditure in the tax code, including the capital gains tax break and the home mortgage interest deduction, or he’s sacrificed his tax cuts.”  [WaPo]

And, there we have the formula: Don’t specify what tax breaks would be eliminated!  Get the votes and then happily revert to the Voodoo Economics of the Bush Administration which got us into the current mess in the first place.

Be Very Quiet! The Romney-Ryan Ticket promises to dismantle financial regulation.   OK, the President certainly isn’t talking about dismantling financial regulation or de-regulating the Wall Street Wizards, and Governor Romney definitely doesn’t want to say much beyond making his new regulations “modern” and “streamlined.”   Whatever on Earth that might mean.   We’re all supposed to be very very quiet and accept that the Romney-Ryan ticket promises “freedom,” “prosperity,” “employment,” and all those other buzz words associated with happy feelings.

We are not supposed to ask tricky questions like:

(1) Would former Governor Romney eliminate the Consumer Financial Protection Bureau which protects customers from invidious practices by unethical lender, mortgage scam artists, and seeks to prevent lenders from practicing predatory lending practices on members of our Armed Forces?

(2) Would former Governor Romney repeal the provisions of the Dodd Frank Act which require large banks to create a plan for their orderly liquidation in case of bankruptcy?

(3) Would former Governor Romney repeal the provisions of the Dodd Frank Act which grant the Commodity Futures Trading Commission authority to regulate and oversee the derivatives markets?

If we’re all very very very quiet, then the Romney-Ryan ticket can be elected and then they can “do all that stuff…without having to DO it in PUBLIC.”

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Filed under 2012 election, financial regulation, Medicaid, Medicare, Politics, Romney

Management Prerogatives and Workplace Equity: A Small Argument Illustrating Bigger Questions (Update)

The life-long hope of liberals is that if the opponents will just listen to facts and logic correct conclusions can be reached on questions of national policy. The apparent abiding hope of modern day conservatives appears to be that if the liberals would just shut up life would march on toward a replication of some golden era.  Both are dead wrong.  The 2012 election will be about the economy, but there’s far more to it than that.

Consider for a moment the Paycheck Fairness Act, which is supported by Rep. Shelley Berkley (D-NV1) and opposed by incumbent appointed Senator Dean Heller (R-NV).   The act itself is fairly simple.  [C&L] [OpenCongress] [CRS summary]  Here’s the essence of the bill:

“Revises the exception to the prohibition for a wage rate differential based on any other factor other than sex. Limits such factors to bona fide factors, such as education, training, or experience.

States that the bona fide factor defense shall apply only if the employer demonstrates that such factor: (1) is not based upon or derived from a sex-based differential in compensation, (2) is job-related with respect to the position in question, and (3) is consistent with business necessity. Avers that such defense shall not apply where the employee demonstrates that: (1) an alternative employment practice exists that would serve the same business purpose without producing such differential, and (2) the employer has refused to adopt such alternative practice.

Revises the prohibition against employer retaliation for employee complaints. Prohibits retaliation for inquiring about, discussing, or disclosing the wages of the employee or another employee in response to a complaint or charge, or in furtherance of a sex discrimination investigation, proceeding, hearing, or action, or an investigation conducted by the employer.”

Simple enough really, there will be equal pay for equal work, the employer must not discriminate, and an employer cannot retaliate if an employee complains about lesser pay for the same work done by male counterparts.

What enlightened components of our society, during the 21st century, could have a problem with these requirements?  The U.S. Chamber of Commerce.  Note how the issue is framed:

“Several business groups, including the U.S. Chamber of Commerce and associations representing bankers, construction firms and retailers, issued a statement opposing the legislation, saying it would result in “unprecedented government control over how employees are paid at even the nation’s smallest employers.”  [WaPo]

“Unprecedented government control?”  This framing allows the opponents of the Paycheck Fairness Act to mouth “I love my (wife, mother, aunt, sister) and want them to be paid fairly BUT I hate guv’amint control.”  And here we have the crux of the matter.  For the conservative Republicans in the halls of the Congress, this is a matter of preserving the prerogatives of management even at the expense of equity in the workplace.

When we start talking about preserving prerogatives we’ve stopped discussing economic issues and started another discussion about power.   Liberals and centrist Democrats focus on the equity in the workplace, no one with any credibility is attempting to argue that the average woman isn’t getting shortchanged by some 25¢ for every dollar earned by the average male employee.  Conservative Republicans are arguing that this situation is really too bad, a regular hand wringer, BUT to do something about it would be to encroach on the prerogatives of management.

The Conservative thinking is that all enterprises should be as free as possible from any and all incursions into the realm of management.  Businesses should not be humiliated by having the Consumer Product Safety Commission publish information about product recalls.   Businesses should not be subjected to rules and regulations regarding clean air, clean water, and the disposal of toxic waste.  Businesses should not be required to comply with regulations regarding their financial transactions.  Those topics, in the ideal world of the Financialist conservatives, are management decisions, and not the proper subjects of polite conversation around the kitchen tables of the employees.

There are a thousand ways to tell liberals and Democrats to “shut up,” and the behavior of conservative, financialist, management oriented representatives in the 112th Congress has demonstrated several categories  of these.

Opposition to the Paycheck Fairness Act, the Affordable Care Act, and the Dodd-Frank Act are predicated on the “unprecedented government interference” theme.  There’s really very little new in these acts, the Paycheck Fairness Act extends and modifies legislation already on the books.  The Affordable Care Act sees its beginnings in the Romney Care system in Massachusetts, itself generated by a plan for the individual mandate from the Heritage Foundation.  The Dodd-Frank Act tentatively moves back to a system of regulation familiar to anyone who even vaguely remembers the New Deal.

Opposition to the expiration of the Bush Tax Cuts, which primarily benefit the ethereal upper reaches of the management class, is framed as preserving the capital of the job creators.  Likewise, any suggestion that the capital gains tax should be increased brings wails beseeching the deliberative bodies not to consider any measure which might restrict the financialist endeavors.

Few examples of the orientation toward the upper echelons of income earners and the needs of average small business owners have been so clear as when Republicans oppose capital gains tax increases citing the impact on small business — that would be hedge funds and lobby shops with fewer than 500 employees.  Discussion of the estate tax brings on cries that “farms, ranches, and small businesses, will be left bereft of assets — conveniently omitting the part where  the new rules will benefit only the top one-quarter of one percent of all estates since those are the ones eligible under the 2009 rules. [CBPP] Republicans all but ignore additional tax cuts enacted during the Obama Administration which now have federal tax liabilities as low as they’ve been since 1955.

When the choice comes down to one between management prerogatives and workplace (or national) equity, conservative Republicans have demonstrated a definite preference for management prerogatives.   If all attempts to construct an equitable or sustainable system can be caricatured as “unprecedented” government encroachment then the peril is that what has been categorized as freedom can easily devolve into license.

Should executives have the power to decide that it is more profitable to manufacture ladders with just a few rivets or bolts less than ideal for each rung? Should a manager have the power to  decide that dumping toxic contaminants into the local water supply is a good thing because it is cost effective?  Should a financier have the latitude to make London Whale like trades even if those endanger the very existence of his or her bank?  Should a banker be free to keep from view positions which could create another disaster like the credit meltdown in 2008?  Should an employer feel perfectly “free” to pay female employees 25% less than their male counterparts for the same work?

Finally, there’s a predictable argument from Republicans in D.C., and the argument offers that any modification of legislation regarding equity will “open the floodgates of litigation.”  Note that Senator Heller uses this contention in his response to Rep. Berkley in the video clip below.  The same arguments were made against the passage of the Lily Ledbetter Act — if the flood gates were open, it seems there was precious little water behind them.  Funny thing, the business insurance sector which watches these kinds of things,  reports:

“The Lilly Ledbetter Fair Pay Act of 2009 has kept lawsuits alive that otherwise would have been dismissed and revived others, but it has not generated the significant increase in litigation that some observers had feared.

Furthermore, federal courts generally have been conservative in interpreting the law, observers say.”  […]

“The sky hasn’t fallen,” said Martha J. Zackin, of counsel with law firm Mintz Levin Cohn Ferris Glovsky & Popeo P.C. in Boston.

“Some people got more excited” than the situation justified, said Thomas H. Christopher, a partner with law firm Kilpatrick Stockton L.L.P. in Atlanta. The legislation “applies only to a very limited situation and those kind of situations come up sometimes in the courts, but not as much as I think some people would think.”  [BusIns.com]

In short, the old “floodgates” argument as applied to paycheck equity has produced a trickle rather than any sort of deluge.  So, when Senate candidate Shelley Berkley asks incumbent Dean Heller to drop his opposition to the Paycheck Fairness Act, is she asking that he desist from continually supporting the demands of corporate management that they be allowed to progress without any encumbrance from questions of equity?

Update: The Senate Republicans blocked consideration of S. 3220 today on a 52-47 vote.  60 votes were needed to break the Republican filibuster.   Senator Heller voted to sustain the filibuster and block the bill from getting an up or down vote on the Senate floor. [vote 115]

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Filed under 2012 election, Berkley, consumers, Economy, financial regulation, Heller, Nevada politics, Women's Issues, Womens' Rights

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.

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* 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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