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Deregulation, banks, and the 2007-8 meltdown
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mac



Joined: 07 Mar 1999
Posts: 7498

PostPosted: Mon Jan 18, 2016 1:14 pm    Post subject: Deregulation, banks, and the 2007-8 meltdown Reply with quote

So much blather gets posted on other threads, it is useful to remind people of what happened, and how and why.

Deregulation at the beginning, during the Reagan administration, was very successful. Trucking was perhaps the greatest success, with drivers allowed to accept multiple loads, and with the advent of computers to make logistics into an industry, the cost and environmental impact of shipping dropped dramatically. Deregulation of airlines was also successful, but not quite so dramatic. But there is a danger in taking a theological view of something like regulation--you tend to ignore the risks.

One of those who was either a true believer, or completely in the thrall of big business money, was Phil Gramm, Republican Senator from Texas. He was a major player in the deregulation of the energy and financial sectors. There are still those who would hold Gramm blameless for the meltdown of ENRON, and their looting of California consumers. But the protections he built into legislation for unethical practices were directly responsible for the ethical capture of all of the business checks and balances shown with great humor in the movie, the Big Short. And all of these mistakes are Republican policies, that remain near and dear to the party leaders and which the Tea Baggers have not touched. Let me set out the biggest policy choices that have been made that still pose a risk for meltdown of the economy.

Most people are at least somewhat aware of the Gramm-Leach-Bliley Bill of 1999 that repealed Glass Steagall and allowed banks to undertake more risky business ventures. As Senator Paul Wellstone said at the time, in a plea on the Senate floor, the repeal of Glass-Steagall would enable the creation of financial conglomerates which would be too big to fail. But efforts by Wall Street to deregulate their industry began well before that effort, and included both legislation and efforts to weaken regulation administratively. And Wall Street insiders, most notablhy Rubin and Greenspan, were also administration insiders convincing Clinton to sign the bill.

Of great consequence in the ENRON and financial meltdown was the 1995 Private Securities Litigation Reform Act, which restricted fraud litigation. That Act was authored by Christopher Cox, Republican from Newport Beach California, who came to latter infamy as the do-nothing while the banks burned chair of the SEC.

Also little noticed by most was the Commodities Futures Modernization Act, passed in 2000. Phil Gramm engineered the passage of this act, which prevented regulations of derivatives. With regulation blocked, and with conflicts of interest between the banks creating derivatives out of sub-prime loans, and the bond rating companies secured from litigation, the stage was set for the run-up and implosion of the too-big to fail banking industry. Cox's bill cemented in place the administrative reality--both Clinton and Bush declined to regulate derivatives--a the urging of Rubin and Greenspan.

After ENRON, Congress took up the issue of the conflicts of interest between the credit rating agencies, the auditors, that had climbed into bed with the big energy companies like ENRON. The result was the Sarbanes-Oxley Act, signed in 2002, which was a weak attempt to reform some of the worst abuses in the accounting industry which were key factors in the collapse of ENRON and similar scandals involving Tyco and World Com. Congress rejected more vigorous regulation, and arguments that fraudulent ratings by so-called financial auditing companies were protected by the First Amendment prevailed.

David Maas has written a seminal article in the Journal of Criminal Law and Criminology, published in Summer of 2011. http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=7408&context=jclc

That reaches the conclusion that existing criminal laws--after the tinkering of Senator Gramm--are insufficient to allow criminal prosecution of the credit rating agencies that colluded in marketing credit swaps and derivatives as sound investments. To be sure, Obama's desire to move beyond legal attacks on the mischief done by the Bushies, and the reluctance of Federal attorney's to pursue difficult and risky criminal prosecutions in favor of civil litigation have made this problem even worse.

Let us now return to the SEC under Christopher Cox. This from Blomberg Financial:

By Theo Francis September 19, 2008

Quote:
The SEC chairman says he did all he could, in his limited role, to prevent a financial crisis, but critics see missed opportunities all around

Criticism of the Securities & Exchange Commission and its chairman, Christopher Cox, rose sharply on Sept. 18 as Republican Presidential candidate John McCain suggested he should be fired. "Mismanagement and greed became the operating standard while regulators were asleep at the switch," McCain said at a campaign appearance in Cedar Rapids, Iowa. "The chairman of the SEC serves at the appointment of the President and has betrayed the public's trust. If I were President today, I would fire him."

While the comments sharply escalate public criticism of the SEC's role in the unfolding financial crisis, they echo complaints that have been building since Bear Stearns' collapse last spring, when Cox took heat for his apparent absence as other regulators and corporate chiefs drafted a rescue plan. Cox, formerly a representative from California, has been more visible in recent weeks, joining key weekend meetings with Federal Reserve officials and Treasury Secretary Henry Paulson—who has been careful to mention the involvement of Cox and the SEC—and issuing two statements saying the agency had "worked closely with regulators around the world…in the interest of orderly markets."

In a statement on the evening of Sept. 18, Cox defended his agency's actions during the financial crisis, saying it had taken multiple steps to curb short-selling, crack down on market manipulation, and share information with other regulators. "History will judge the quality of our response to this economic crisis, but now is not the time for those of us in the trenches to be distracted by the ebb and flow of the current election campaign," he said. "And it is precisely the wrong moment for a change in leadership that inevitably would disrupt the work of the SEC at just the wrong time."

Too Little, Too Late?

But critics argue that the agency has leaned toward a hands-off regulatory approach in recent years that has left it unprepared or unwilling to use the powers it has and slow to step in as trouble brewed. Too often, they say, it cracks down only after misdeeds have become blatant. "The SEC hasn't been leading the charge as much as they've been following it," says Howard Schiffman, a former SEC enforcement division attorney and partner at Schulte Roth & Zabel in Washington, D.C. "The house burns down and then they do a really good job to say, 'Whose fault is that?'" The philosophy in recent years, says Tamar Frankel, a Boston University law professor specializing in financial regulation, has been "to do as little as possible—the market will take care of it."

Supporters counter that the SEC's role is necessarily limited: It can't lend to struggling companies, and a balkanized regulatory structure spreads oversight of commercial banks, investment banks, mortgage lenders, and insurers across multiple state and federal agencies. Though the SEC is the primary regulator for broker-dealers—the operating units of the giant investment banks—it has less authority over their parent companies. So while it could demand that the broker-dealers stay adequately capitalized, it has little control over parent companies that have loaded up on risky investments.

"The one thing that's clear is that the SEC didn't cause these problems," says former SEC Chairman Harvey Pitt. Rather, Congress, by failing to modernize financial regulation when it deregulated the financial-services industry in the 1990s, left the SEC and other regulators without the tools to regulate new markets and securities as they arose. "In essence what we have is a 21st century financial system and a 19th century regulatory system," Pitt said. That's a view shared by Richard Breeden, the SEC chairman under President George H.W. Bush. He argues that while "we will have to reexamine how permissive [the agency] had been" about the supercharged levels of leverage the investment banks have taken on, much of the current mess can't be laid at the SEC's feet.

An agency spokesman declined to respond to criticism of the agency's actions but pointed to congressional testimony from Cox last spring and over the summer. Cox has argued that the agency's narrow authority over broker-dealers meant it wasn't in a position to rein in the holding companies that owned them or limit the risks their investment strategies posed to the broader market. "These are considerations of systemic risk that extend far beyond the commission's mandate to protect investors," Cox testified to a congressional committee in April.

Criticized as Passive

Douglas Holtz-Eakin, the former head of the Congressional Budget Office who is now McCain's top economics adviser, says such arguments let the SEC off far too easily. He says the agency has failed in its most fundamental oversight and surveillance functions. "There is the basic issue of identifying institutions that are at risk," he says. "And the surveillance would appear to be severely impaired because we're having entities show up every day that are in desperate shape without any warning." As to Cox's argument that he didn't have enough authority to adequately regulate the firms as they grew far bigger, and more leveraged, in recent years, Holtz-Eakin is blunt: "Did he ever ask for it?" he says. "The flow-of-funds [numbers] suggest that we have become an incredibly leveraged nation in the eight years of the Bush Administration. Is there anything that suggests an adequate recognition of the increased leverage or rules to support it?"

Some former SEC staff and commissioners agree the agency could have done more, particularly in the months and years leading up to the current crisis. They point out that, while the SEC's direct regulatory authority over investment banks centers on the broker-dealer subsidiaries, the agency has expanded its influence over the holding companies in recent years. Since 2004, under an arrangement designed to make it easier for U.S. securities firms to operate in Europe, the SEC collects detailed financial data about a broker-dealer's holding company and its subsidiaries to assess the company's financial stability as a whole. "The aim," then-SEC Commissioner Annette Nazareth told a securities industry gathering in March 2007, "is to effectively monitor the holding company, and unregulated entities within the group, for financial and operational weaknesses that might place regulated entities or the broader financial system at risk.

"The commission has authority under [these] rules to take action in the event of a weakness or potential weakness." Nazareth, who left the SEC early this year, could not be reached for comment. With the information it collects about investment bank finances, the agency should have taken into account the growing risks as complex financial instruments proliferated, Schiffman argues. "Why haven't they been reevaluating that as the market became more and more and more leveraged?" he asks. John Coffee, a Columbia University securities law professor, notes that Lehman Brothers' (LEH) bankruptcy, along with deals to acquire Bear and Merrill Lynch (MER) as they struggled, mean just two major investment banks remain independent. "If 60% of the investment banks of any size have disappeared, I can't say the SEC is as good at prudential financial regulation as they are at disclosure and consumer regulation," Coffee says.

Questions also remain about whether the agency has taken advantage of all the tools at its disposal, particularly its ability to demand that publicly traded companies improve their financial disclosure if it is judged inadequate. Exhibit A: To this day, many investors still don't have a clear idea of just how leveraged financial-services companies have become, or how intertwined are their various market risks. While accounting rule makers determine what types of financial information companies must reveal, the SEC can require more. "That's the basic role of the SEC—disclosure," says Barbara Black, director of the University of Cincinnati's Corporate Law Center and editor of the Securities Law Prof Blog. "If [SEC officials] think there was not adequate disclosure of the risks, they could have compelled greater disclosure."

Mixed Reviews

Moreover, the actions the agency has taken, including issuing three new rules on Sept. 18 restricting an abusive form of short-selling known as "naked shorting," stand in stark contrast to bold moves from other regulators and to actions the agency has taken in past crises. After the collapse of Enron in 2001 raised grave questions about corporate financial disclosure and executive accountability, then-Chairman Pitt quickly implemented emergency rules requiring top executives to certify their companies' financial statements. That's the kind of creative thinking that's called for in this environment, says Carol McGee, until May the SEC's deputy chief counsel and now a securities attorney at Alston & Bird. "I'm not sure the Fed and the Treasury have the authority to do what they're doing either, but they're being creative," McGee says. "The whole reason the agency exists is the stock market crash of 1929—you'd think this would be the time to grab the bull by the horns."

Yet the moves the SEC has made to rein in short-selling have drawn mixed reviews. Ordinarily, short-sellers seek to profit from a declining stock price by borrowing shares, selling them, then replacing them later, after the share price has fallen. But in naked shorting, the short-seller doesn't actually deliver shares to the buyer speedily, potentially leaving room to push prices downward by selling shares that aren't really available. Dramatic increases in shares sold short during the weeks before Lehman Brothers' and Bear Stearns' stocks collapsed suggest their failures do "have something to do with very heavily concentrated short-selling," Coffee says. But others point out that market manipulation, including by naked shorting, was already illegal, and that heavy shorting of financial-services stocks could also have reflected deep concerns about the companies' prospects. Cracking down on naked shorting "is much ado about nothing," says Stephen M. Bainbridge, a UCLA securities law professor.



Certainly the SEC's hands were tied to some degree--and Cox was instrumental in the legislation that provided the rope. And all of Obama's appointees, including some of those to the SEC, have been slow-walked or blocked by Republicans in Congress.

While the Big Short was hysterically funny, in a sick sort of way, there is something a little bit disturbing about rooting for those who are betting on the failure of the world economy. But the underlying problems remain, and Congressional Republicans besotted either by ideological faith or campaign contributions remain the biggest obstacle to even modest reform.

For those actually interested in checking the facts, I found this invaluable.

http://www.wallstreetwatch.org/reports/sold_out.pdf
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isobars



Joined: 12 Dec 1999
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PostPosted: Mon Jan 18, 2016 1:36 pm    Post subject: Reply with quote

Has mac EVER posted anything about WSing?
Is his ONLY goal here stirring up political discord?
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mac



Joined: 07 Mar 1999
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PostPosted: Mon Jan 18, 2016 2:05 pm    Post subject: Reply with quote

Education is lost on those who don't pay attention.
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nw30



Joined: 21 Dec 2008
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PostPosted: Mon Jan 18, 2016 4:56 pm    Post subject: Reply with quote

To you?
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mac



Joined: 07 Mar 1999
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PostPosted: Mon Jan 18, 2016 5:44 pm    Post subject: Reply with quote

Ahh, didn't read it, don't know. Let me guess--it was liberals fault.
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MULLDE102f



Joined: 15 Jun 1997
Posts: 126

PostPosted: Mon Jan 18, 2016 7:13 pm    Post subject: Reply with quote

Yeah, how dare Mac post a political viewpoint on a forum labeled "Politics!"

Wait....
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nw30



Joined: 21 Dec 2008
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Location: The eye of the universe, Cen. Cal. coast

PostPosted: Mon Jan 18, 2016 7:55 pm    Post subject: Reply with quote

mac, I don't know about your computer, but the security on mine won't let me go to anything that is part of wallstreetwatch.org all I get is virus warnings. So I go to Wiki search to find out about that site, it says "No info", the only thing I can find is this quote following a link the the site's blog,
"One of the most important measures we can advance to protect consumers and taxpayers is embodied in an amendment drafted by Senator Charles Schumer."
That does tell me something about the leanings of the site, however my security strongly advises me against clicking on that site, so I'm not going to. And no, my security is not a liberal filter, I use McAfee.

Kind of a warning, I suppose.

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Riptide



Joined: 15 Jan 2011
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PostPosted: Mon Jan 18, 2016 8:14 pm    Post subject: Reply with quote

There are many seniors today eating cans of cat food, thanks to the meltdown and loss of their life savings that they will never recover from.

thank you

Republicans.
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isobars



Joined: 12 Dec 1999
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PostPosted: Mon Jan 18, 2016 8:53 pm    Post subject: Reply with quote

Riptide wrote:
There are many seniors today eating cans of cat food, thanks to the meltdown and loss of their life savings that they will never recover from.

thank you

Republicans.

You're overlooking the fact that Bush warned the Congress in writing that subprime mortgages, especially when bundled to the point of anonymity, would crash the system. When the banks and legislators ignored him, he warned them again, more sternly, to no avail.

So what's happening ... AGAIN ... AWREDDY? Lax borrower scrutiny and radio ads for house flipping.

And if you think THAT meltdown was bad, what do you think is in store when this, even greater, QE/money-printing-induced, balloon explodes in a few years? (I'm fairly convinced this year's wild roller coaster ride has just begun and is a buying opportunity, that the real $#!+storm isn't due for a few more years.)
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nw30



Joined: 21 Dec 2008
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Location: The eye of the universe, Cen. Cal. coast

PostPosted: Mon Jan 18, 2016 9:21 pm    Post subject: Reply with quote

"cans of cat food", LOL, give me a break, but that's it for that, it's too far out there.

This thread, I suspect, might have been started by mac as a response to my thread "The Big Short....... the movie", but whatever, it's really not that important, even though he mentions it, so I have my suspicions.

But the fact remains, if you want to view movies that really matters (different subject), go see "13 Hours", that is where it's really at, by the guys that were there. Just don't forget, Hillary implies that the families of those who died, who were briefed by Hillary about the vid, are lying. One "classy" woman.

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