How Is That Financial Industry Reform Process Working Out?

Back in 2008, the following agencies of the Federal government failed to see the oncoming disaster known as a Great Recession, a recession that grew out of risky, shady, possibly illegal, and stupid financial activities of banks and other financial institutions:

• SEC
• FDIC
• HUD
• FHA
• Fannie Mae
• Freddie Mac
• Treasury Department
• Federal Reserve Board
• Senate banking committees
• Senate financial industry committees
• House Of Representatives banking committees
• House Of Representatives financial industry committees

None of these government agencies foresaw or acted to avert or minimize the impact of the recession. We all know the economic stress and pain this oversight caused just about every American.

As a result, the political class belatedly jumped into action with the Dodd-Frank Financial Industry Reform legislation. Although the horses were out of the economic gate, the politicians rushed in late to build and create new gate. As always, a dollar short and a day late.

But they did act so I guess they should get some credit for that. Unfortunately, there was not much meat on the bone of the legislation, once it was passed. The legislation was very general and non-specific and left the hard work of financial industry reform to various organizations of the executive branch.  That is where the actual government reform regulations would be written.

However, as we reported earlier this week, 75% of those regulations that should have already been written already have not made their expected deadlines  Thus, financial reform is very much work in progress, or work far behind schedule.

That may explain why the biggest financial business crash since the Great Recession, which recently happened, collapsed almost immediately, seemingly minutes before anyone realized it was going to collapse. Very reminiscent of Lehman Brothers, Bear Sterns, and others back in 2008, healthy companies one day, extinct companies the next day.

As before, no one in the list of suspects in the list above seemed to know MF Global was going over the edge. Could it be the delayed implementation of Dodd-Frank left the country and the industry no better off than three years ago? Details of the collapse were summarized in an article in the November 18, 2011 issue of The Week magazine, "Were The Rules Too Lax For MF Global?":

• Jon Corzine, former U.S. Senator, former chairman of Goldman Sachs, and former Governor of New Jersey took over MF Global last year.
• According to Daniel Wagner of the Associated Press, Corzine "set out to create a mini-Goldman Sachs but ended up creating a mini-Lehman Brothers" when MF Global collapsed.
• Not only did the company collapse, but the FBI is investigating whether or not Corzine and MF Global illegally co-mingled the firm's money with the money of the clients whose investments they were managing, with a reported $600 million of client money now missing.
• Jay Hancock writing in the Baltimore Sun called the regulators "negligent and clueless," stating MF Global made the same type of risky, irrational decisions on investments that helped cause the Great Recession.
• Francesco Guerra, writing in the Wall Street Journal, called for the formation of a "lead regulator" to replace the "crazy quilt of watchdogs" for non-bank financial institutions." Since there were at least four government regulators who were supposed to be keeping a watchful on firms like MF Global, and just like the run up to the Great Recession, none of the four saw the collapse coming until it was too late and $600 million went missing.
• The article concludes that the political class has been so busy just worrying about he handful of very large banks that they have been negligent in covering other financial institutions. I guess that Dodd -Frank reform bill was not as comprehensive as we were led to believe.
• Adam Ahmed writing in the New York Times claims some effort and potential rules were actually proposed for smaller companies like MF Global but they were thwarted by an influential opponent to these rules, the one and only Jon Corzine. The Times article claims that Corzine "personally pressed regulators to halt their plans" for this type of oversight. Corzine's argument won out, the additional oversight never took place, and now clients are potentially out $600 million.

So let's review:

1. A former member of the political class still has enough pull to get his way on lax oversight, a way that crashed a company and possibly lost hundreds of millions of client dollars of investment.
2. The rest of the current political class is so worried about only a handful of large institutions that this type of behavior goes unseen and not paid attention to until it is too late.
3. At least four government agencies are so inept, even after the lessons of the Great Recession, that they failed again to foresee a major financial collapse before it happened and ordinary American investors get screwed.
4. Risky Wall Street behavior still goes on despite the lessons learned from the Great Recession.

Or were no lessons learned? According to Alexandra Alper, writing for Reuters, even if the the Dodd-Frank legislation was on schedule for implementation, as opposed to being 75% behind schedule, it would not have made any difference in preventing an MF Global collapse since the main parts of the law would not have applied and MF Global was too small for the Federal Reserve to care about. Little solace to those who lost money within the $600 million mystery.

You get tired of saying it, but this is just another example of why Step 39 from "Love My Country, Loathe My Government" is so important. Step 39 would impose term limits on every Federal government politician. This is just another example of how our sitting politicians are just so ineffective in everything they do and everything they touch. There is no follow through to make sure laws get implemented in the proper way, no one ever seems to be accountable in the Federal government bureaucracy or the political class.

Tragedies and collapses are not seen ahead of time. Situations fall through gigantic cracks. Disasters are repeated over and over, costing American taxpayers and investors dearly. Even when they do try to fix something, e.g. Dodd-Frank, the effort is not comprehensive, not strategic, not effective, and in this case, not even completed on time.

And worse of all, the political class continues to take care of itself and its own members, in this case allowing Corzine to override some basic safeguards that may have prevented another financial institution collapse. Personal enrichment of themselves vs. doing the right thing for America. Sound familiar? Seems we have been writing about this disturbing trait often lately.

Thus, the answer to the question posed by today's title, "how is that financial industry reform process working out" Answer: not very well, at the cost of upwards of $600 million.



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The Blame Game = Part 2

Let's expand yesterday's discussion about the political class use of the blame game. First, complete disclosure: I have never voted for a Republican for national office in my life. Thus, as you read the following do not think I come off as a Bush apologist, in my opinion his Presidency was a failure in so many ways.

However, should the Bush administration be blamed for the economic and housing industry meltdown as the Democrats claim and were the Democrats blameless? The following comes from a website called The Gateway Pundit and was published on their website on September 21, 2008. The website definitely has a pro-Republican bent but it documents all of its data sources and if even half of them are right, it is a damning indictment of the Democrats regarding their blame for the economic meltdown. Consider what the Bush administration thought of Freddie Mac and Fannie Mae, the two massive Federal agencies that were involved with trillions of dollars in home mortgages (the incompetency of these two Federal agencies will probably end up costing the taxpayer trillions of dollars and were central causes in the economic turmoil):

1. April 2001 - Bush administration 2002 budget declares the size of Fannie Mae and Freddie Mac "a potential problem" and "financial trouble of a Government Sponsored Enterprise (Freddie and Fannie are both GSEs) could cause strong repercussions in financial markets, Federally insured entities, and economic activity."
2. May, 2002 - Bush calls for better disclosure and corporate governance principles to also apply to Freddie Mac and Fannie Mae.
3. February, 2003 - the Office of Federal Housing Enterprise Oversight releases a report that concludes unexpected problems at a GSE could "immediately spread into financial markets and beyond the housing market."
4. September, 2003 - Bush Treasury Secretary John Snow testifies before the House Financial Services Committee to recommend a new Federal agency to regulate and supervise the GSEs.
5. November, 2003 - Bush administration wants the new Federal regulatory agency to have enough power to "reduce systemic risk".
6. February, 2004 - the 2005 Bush budget reiterates the need for a new regulatory authority for GSEs and highlights the risks posed by their substantial growth.
7. February, 2004 - Bush cautions Congress about GSEs through Greg Mankiw, chairman of the Council Economic Advisors, calling for Congress to help reduce the risk of the GSEs.
8. June, 2004 - Deputy Secretary of Treasury Samuel Bodman spotlights the risk of the GSEs and calls for reform, emphasizing that stronger regulatory authority is needed.
9. April, 2005 - Treasury Secretary John Snow again calls for GSE reform citing risk concerns about the GSEs and the need for reform and warning of risks to the entire financial system.
10. July, 2007 - President Bush again calls on Congress to pass a reform package.
11. December, 2007 - Bush again warns Congress about the need to reform the GSEs and stronger oversight.
12. February, 2008 - Assistant Secretary David Nason reiterates the urgent need to move on reform.
13. March, 2008 - Bush calls on Congress to move forward on reforms of Fannie and Freddie.
14. April, 2008 - Bush again calls on Congress to pass the legislation needed to "modernize Fannie Mae and Freddie Mac."
15. May, 2008 - Bush calls on Congress for reform legislation.
16. June, 2008 - Bush calls on Congress to pass reform legislation.
17. July, 2008 - Congress passes reform legislation for Fannie Me and Freddie Mac, seven years after the Bush administration called for action to get the GSEs under control.
18. Note - in 2005, John McCain partnered with three other Republican Senators to "reform the government's involvement in lending." Their effort was blocked by the Democrats.

Thus, according to this source, there were at least eighteen instances where the Bush administration correctly predicted the problem that would occur from the ineptitude of Fannie Mae and Freddie Mac, insufficient oversight, and the horrible economic consequences. Combine this reality with the fact that Freddie Mac and Fannie Mae were restating financial results and having serious accounting issues during this whole time (2003 - Freddie restates financial results for three years, 2003 - SEC investigates Fannie regarding earnings manipulations, 2003 -Fannie discloses $1.2 billion accounting error.) Thus, the warning signs were all over the place but the political class did NOTHING to remedy or alleviate the situation. The question begs: Why?

Here's one theory: the political class did not WANT to fix anything since the status quo was to their benefit. From 1998 to 2009, the top three receivers of campaign donations from Fannie Mae and Freddie Mac were Democrats:

1. Democrat Senator Chris Dodd - Received $165,400 in donations from the GSEs
2. Democrat Senator Barack Obama - Received $126,349 in donations
3. Democrat Senator John Kerry - Received $111,00 in donations

But hold on! While the Democrats were the top beneficiaries of the GSEs, positions four through six were Republicans:

1. Bennett - $107,999
2. Bachus - $103,300
3. Blunt - $96,550

It all stinks, taxpayer supported Federal agencies using their budget dollars to support the political class. Combine this with the fact (source: factcheck.org) that although three top Fannie Mae excutives during this period ended up under investigation for fraud and accounting irregularities, Franklin Raines, Tim Howard and Jim Johnson, they all ended up working in handsomely paid positions for the Obama Presidential campaign. Stinks even more, doesn't it? Were GSE campaign donations traded by GSEs executives for preferential treatment by the recipients of said donations in the political class? Even if there was no quid pro quo, the potential for conflict of interest is extremely high.

Conclusion: most of the meltdown happened on the Bush watch and although his administration correctly identified the problem and the potential for economic disaster, he did not have the smarts or the clout to get what he wanted, beginning in 2001, to avert the problem. He is culprit number one. Culprit number two is the Congressional wing of the political class that either did not know how to fix the problem Bush correctly identified or, more likely, did not want the fixes to occur since it was a source of money for them, both Democrats and Republicans. Thus both Republicans and Democrats are to blame, the problem was staring them right in face seven years ago and they did nothing. But did you expect anything different from them? They have fixed nothing in the past forty years, what is another few trillion dollars of taxpayer wealth down the drain via bailouts as long as they can stay in office?

This is just another example of why Step 39 in the book requiring term limits is so important, entrenched politicians need to continually to get money for their re-election. In this case, their probable desire for GSE campaign donations led them to not fix a problem that is costing us all via our tax doillars.

Addition to yesterday's post: apparently I missed some of the Federal regulatory agencies that are in charge of some facet of the banking and housing market - OFHEO = The Office of Federal Housing Enterprise Oversight, Federal Housing Finance Agency = FHFA and Ginnie Mae. Thus, Howard Dean's statement that we examined in yesterday's blog is even more ridiculous, we have way too much bad and overlapping government regulation and interference in this country today, not too much capitalism.

I Am Not Conflicted So You Should Not Be Either

Conflict of interest (courtesy of The 'Lectric Law Library Lexicon)= Refers to a situation when someone, such as a lawyer or public official, has competing professional or personal obligations or personal or financial interests that would make it difficult to fulfill his duties fairly.

Note that the definition does not mean that something unethical or illegal actually happened, just that a person's interests would make it difficult. Sometimes it seems that the political class does not even know the definition of conflict of interest or chooses to ignore the part that says you do not have to have something illegal or unethical happen for a conflict to exist. In either case, consider the following short list of examples that fall under this definition and continue to undermine our belief that politicians do put themselves before their constituents and the country:

• According to an article in the St. Petersburg Times on June 30, 2009, Congresswoman Ginny Brown-Waite was very interested, both professionally and personally, in the massive taxpayer bailout of the banking industry. Not only did she sit on the House committee that oversaw the banking industry, she also personally invested in specific banks she was supposed to be regulating. The day before the bailout of Citigroup, she bought the company's stock. Eleven days later she bought stock in Bank Of America just as the administration announced another massive dose of taxpayer money going to banks like Bank Of America. The Congresswoman denied that there was any conflict of interest. Huh? You are sitting on a BANKING committee and have access to tons of information about specific banks, the industry as a whole, possible government actions, etc. and you are actively trading banking stocks. In the real world, if we did something like that we would probably by liable for insider trading violations. But as long you are a member of the political class, it seems as long as you vow no conflict of interest occurred, none did.
• On January 4, 2009, the St. Petersburg Times reported that Senator Hillary Clinton was able to get a New York developer special tax treatment and government road funding for his mall development project around the same time that the developer contributed $100,000 to husband Bill Clinton's foundation. When you are an elected official and your husband is getting money and your actions result in good things happening for that donor, it is a conflict of interest even if nothing illegal or unethical happened.
• The next example is Senator Dodd of Connecticut who, of course, has denied there was any conflict of interest in his dealing with Countrywide Financial. This past week the Senate Ethics Committee, consisting of members of the political class, cleared Dodd of any ethics violations. However, is this not a case of the foxes guarding the hen house? The pessimist in me says that if they had found Dodd violated ethics rules, they themselves might be cut off from similar deals in the future. Just my cynicism shining through I guess. Thus, I will leave it to you to decide if he had any conflicts of interest even if nothing illegal happened (source: Wikipedia):

1. Dodd is currently the chairman of the Senate Banking committee and thus, has tremendous influence and power in the entire housing and banking industry
2. In 2003, Dodd received favorable mortgage loans from Countrywide Financial on two properties
3. In 2008, Dodd proposed a program that would greatly benefit subprime lenders such as Countrywide Financial, the company that gave him the good mortgage deals
4. Countrywide Financial was bought by Bank Of America
5. Bank Of America also contributed $70,000 to Dodd's election committee
6. Dodd also received over $130,000 in campaign donations from Freddie Mac and Fannie Mae even though they are Federal housing programs, i.e. you paid taxes to the government, some of which found its way to these two government housing industry entities that turned around and took some of those dollars and gave it to a member of the political class. Thus, in essence, all of us subsided Dodd's reelection campaign.

• And one last example from the St. Petersburg Times on December 11, 2008. In mid-2008, many banks gave millions of dollars to both parties of the political class for the expense of their conventions. Several months later, the same political class throws untold billions of taxpayer dollars at this same banks . Coincidence? I do not think so. Just another example where competing obligations arose and the political class chose themselves over the interests of their districts, their states and the country.

These kinds of actions make it very difficult to believe anyone from the political class when they say they are supporting something or doing something for our own good, these examples and many other instances would indicate we are not at the top of their priority list. It undermines the very foundation of this country that the government is looking out for our individual self interests.

There is a very simple solution that would clear all of this up: during you tenure in office and for several years after your tenure ends, you are not allowed to personally deal with that industry or section of the economy that you are involved in through committee work. Sit on the Banking Committee, then you cannot invest or receive campaign donations from the banking industry. Sit on a Congressional energy committee, then you are not allowed to invest in or receive campaign donations form oil companies, electric companies etc. The fact that this simple yet bold rule is not part of our government processes indicates that the political class really does not care about conflicts of interest since it conflicts with their self interest.