What the Big Banks Have Won

[Crewleader]

Weekend Edition
June 26-28, 2009


Regulatory Capture

What the Big Banks Have Won

By MIKE WHITNEY

The trouble started 24 months ago, but the origins of the financial crisis are still disputed. The problems did not begin with subprime loans, lax lending standards or shoddy ratings agencies. The meltdown can be traced back to the activities of the big banks and their enablers at the Federal Reserve. The Fed's artificially low interest rates provided a subsidy for risky speculation while deregulation allowed financial institutions to increase leverage to perilous levels, creating trillions of dollars of credit backed by insufficient capital reserves. When two Bear Stearns hedge funds defaulted in July 2007, the process of turbo-charging profits through massive credit expansion flipped into reverse sending the financial system into a downward spiral.

It is inaccurate to call the current slump a "recession", which suggests a mismatch between supply and demand that is part of the normal business cycle. In truth, the economy has stumbled into a multi-trillion dollar capital hole that was created by the reckless actions of the nation's largest financial institutions. The banks blew up the system and now the country has slipped into a depression.

Currently, the banks are lobbying congress to preserve the "financial innovations" which are at the heart of the crisis. These so-called innovations are, in fact, the instruments (derivatives) and processes (securitization) which help the banks achieve their main goal of avoiding reserve requirements. Securitization and derivatives are devices for concealing the build-up of leverage which is essential for increasing profits with as little capital as possible. If Congress fails to see through this ruse and re-regulate the system, the banks will inflate another bubble and destroy what little is left of the economy.

http://www.counterpunch.org/whitney06262009.html

[DJ13]

1. The Geithner-Summers “reform” proposals are a public relations scam

The Geithner-Summers “reform” proposals are a public relations scam designed to conceal the fact that the banks will continue to maintain their stranglehold on OTC derivatives trading while circumventing government oversight. Nothing will change. Bernanke and Geithner's primary objective is to preserve the ability of the banks to use complex instruments to enhance leverage and maximize profits.

The banks created the financial crisis, and now they are its biggest beneficiaries. They don't need to worry about risk, because Bernanke has assured them that they will be bailed out regardless of the cost. Financial institutions that have explicit government guarantees are able to get cheaper funding because lending to the bank is the same as lending to the state.


:thumbsup:

[zalinda]

3. But, but, but, they are Obama's guys

so they must be doing the right thing, right? Obama's playing a chess game and we should be patient, right?

zalinda

[lindisfarne]

2. The Money Song (Monthy Python)

http://www.youtube.com/watch?v=sor9GzivGbk

[truedelphi]

4. Since Geithner wants to preserve the exotic financial instruments that

Were at the heart of the mess we are in, and he is totally Obama's buddy, I don't see much CHANGE coming in the way of regulating away those types of "investments."

And what activities and legislation Congress supports usually have very little to do with what they are understanding about any part of the economy. It is all about which lobbyists offer them the most.

However there is no real way to gauge the lack of understanding some of the representatives and Senators are guilty of. When Bernanke has to explain to elected officials what it means to "short" or go "long" in terms of the stock market, we can only shake our heads in disbelief.

[unblock]

5. avoiding reserve requirements is not the "main goal" of derivatives and securitizations

it is more a side benefit that was abused, most notably in the last 5-10 years.

it is easily fixed by imposing stronger reserve requirements, along with greater oversight and tighter regulations.

derivatives and securitizations have a legitimate place in the economy, they just need to be properly governed.

[unlawflcombatnt]

7. Lending without capital IS the main goal

The goal most certainly is to expand credit without the capital/reserves to support it. The goal was to somehow find new ways to spend and invest money that didn't even exist. Since rerve requirements put a limit on this, the banksters and fraudsters devised new ways to make loans.

There's very little current benefit to derivatives or securitizations at present--other than to transfer wealth upward from the less affluent to the more affluent. In that respect, derivatives and securitizations have been tremendously successful.

[unblock]

8. nonsense.

there are a wide variety of derivatives and securitizations and their use goes back quite a number of years, well before leverage ratios got insane, which was really just in the last 5 years or so.

the primary purpose of a securitization is allow the investor to effectively lend against collateral (mortgages, cars loans, trade receivables, whatever) while ensuring that that collateral can't be sucked away during a bankruptcy proceding (e.g., the widget-maker can go bankrupt but the widget-maker's receivables are still backing the securitization and can't be claimed by other creditors).

banks were able to get lower reserve requirements when they set up conduits to buy securitizations with annual renewals instead of for the long term. this strategy of borrowing short to invest long is rank stupidity per finance 101, but it qualified them for the lower reserve requirements under the rules in play. THAT was one of the main problems, not the securitizations themselves. for that matter, this is not a problem at all for trade receivable securitizations which actually ARE short term. it's only a problem for mortgages and other long-term assets, but that is where the bulk of the money is.


derivatives are so varied it's sophomoric to lump them into a single group and judge them collectively. some of them are prudent and wise, others quite stupid. again the main point is that such things should be regulated rather than discarded entirely. in fact, it would be virtually impossible to discard them entirely without voiding all of contract law, as the only real thing they all have in common is that they are contracts with a financial component.

[Joe Chi Minh]

6. Standard & Poors weren't standard or even poor. They were execrable.

[wuvuj]

9. US consumers are just another...

..."third world country"?

http://www.informationclearinghouse.info/article17829.htm


" Well, really, I think it’s fair to say that since World War II, we economic hit men have managed to create the world's first truly global empire, and we've done it primarily without the military, unlike other empires in history. We've done it through economics very subtly.

We work many different ways, but perhaps the most common one is that we will identify a third world country that has resources our corporations covet, such as oil, and then we arrange a huge loan to that country from the World Bank or one of its sister organizations. The money never actually goes to the country. It goes instead to US corporations, who build big infrastructure projects -- power grids, industrial parks, harbors, highways -- things that benefit a few very rich people but do not reach the poor at all. The poor aren’t connected to the power grids. They don’t have the skills to get jobs in industrial parks. But they and the whole country are left holding this huge debt, and it’s such a big bet that the country can't possibly repay it. So at some point in time, we economic hit men go back to the country and say, “Look, you know, you owe us a lot of money. You can't pay your debt, so you’ve got to give us a pound of flesh.” "