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May 13, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View

More Investigations of Wall Street

Posted: 13 May 2010 12:55 AM PDT

Things are heating up for the banks:

Wall Street Probe Widens, by Susan Pulliam, Kara Scannell, Aaron Lucchetti, and Serena Ng,WSJ: Federal prosecutors, working with securities regulators, are conducting a preliminary criminal probe into whether several major Wall Street banks misled investors about their roles in mortgage-bond deals, according to a person familiar with the matter.
The banks under early-stage criminal scrutiny—J.P. Morgan Chase & Co., Citigroup Inc., Deutsche Bank AG and UBS AG—have also received civil subpoenas from the Securities and Exchange Commission as part of a sweeping investigation of banks' selling and trading of mortgage-related deals... Under similar preliminary criminal scrutiny are Goldman Sachs Group Inc. and Morgan Stanley, as previously reported by The Wall Street Journal. ...
At issue is whether the Wall Street firms made proper representations to investors in marketing, selling and trading pools of mortgage bonds called collateralized debt obligations, or CDOs. ...
Prosecutors so far are simply gathering evidence. ... It's possible the probe could end with no charges being brought against any of the firms. ...


Prosecutors Ask if 8 Banks Duped Rating Agencies, by Louise Story, NY Times: The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities...
The investigation parallels federal inquiries into ... interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities. ... The inquiry ... suggests that ... the agencies may have been duped by one or more of ... Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch...
The companies that rated the mortgage deals are Standard & Poor's, Fitch Ratings and Moody's Investors Service. ... Mr. Cuomo's investigation follows an article in The New York Times that described some of the techniques bankers used to get more positive evaluations from the rating agencies.
Mr. Cuomo is ... interested in the revolving door of employees of the rating agencies who were hired by bank mortgage desks to help create mortgage deals that got better ratings than they deserved... His ... focus is on information the investment banks provided to the rating agencies and whether the bankers knew the ratings were overly positive...

Edmund Andrews says financial reform legislation is not yet a done deal, and could still be watered down to appease banking interests:

Financial overhaul, perils ahead, by Edmund L. Andrews: It's tempting to think that financial regulatory reform is already a done deal in Congress... Don't be fooled. It's true that the Senate is likely to pass some kind of bill. Unfortunately, the legislation is still at risk of death by a thousand cuts: scores of seemingly anodyne amendments that, if passed, turn the bill into a cynical joke.
You know the drill..., some people – on Wall Street, or at the banks -- want to spare us from "unintended consequences."
Today, Senate Democrats managed to vote down a major Republican push to gut portions of the bill to regulate derivatives, like the credit-default swaps that blew apart AIG. ...
Tomorrow, Republican Sam Brownback will push an amendment to exclude car dealers from oversight by the new Consumer Financial Protection Bureau. ...
But I would like to focus on a third imminent that seems drier than derivatives or car loans but is at least as important: federal pre-emption of state financial regulations. And this time, it's moderate Dems who are carrying water for the banks.
In the run-up to the mortgage meltdown, federal bank regulators fought hard to pre-empt any state efforts to crack down on shady bank practices. A number of states, like North Carolina and New York, were trying to crack down on abusive mortgage practices by subprime lenders. But many of the lenders were subsidiaries of national banks, and the Office of the Comptroller of the Currency declared that states had no right to touch them whatsoever. ...
The amendment to watch out for in the days ahead actually comes from a Democrat: Tom Carper of Delaware. Carper's amendment would forbid state attorney generals from prosecuting banks that violate national consumer laws, much as the fed's blocked Elliott Spitzer and Andrew Cuomo of New York from investigating racial and ethnic targeting by subprime lenders. It would also allow the Feds to override state consumer laws...
 Don't let it happen.

The bill needs to be made stronger, not weaker, so let's hope that amendments to water down the bill's impact continue to lack the necessary support.

On a broader note, there seems to be a shift in the narrative about what caused the crisis. Fraud, deception, and other questionable if not illegal behaviors are beginning to take on a larger role in the story of what happened to bring about the problems in the financial sector. The turning point was, of course, the investigation of Goldman, and the investigations have been growing more numerous ever since.

The shift in attitude has probably helped to stave off challenges designed to weaken the legislation, and if a smoking gun turns up in one of the investigations like those described above, that would likely make it even harder for banks get the political support needed to water down the legislation. But I'm not counting on that happening, and as noted above, the deal isn't done yet. It's still possible for the legislation to be weakened, and as pointed out above there's no shortage of attempts to do just that.

links for 2010-05-12

Posted: 12 May 2010 11:04 PM PDT

"The American Power Act"

Posted: 12 May 2010 07:11 PM PDT

Will this pass? If it does pass, will it meet the goals described below? I see the chances of it passing as about 50-50 right now, and a lower chance that the legislation will reduce greenhouse gas emissions as much as hoped:

Senate Climate Bill Makes Its Debut, by John Broder: Senators John F. Kerry ... and Joseph I. Lieberman ... presented their long-delayed proposal to address global warming and energy Wednesday afternoon. They are calling it the American Power Act.
The nearly 1,000-page plan provides something for every major player – loan guarantees for nuclear plant operators, incentives for use of natural gas in transportation, exemptions from emissions caps for heavy industry, free pollution permits for utilities, modest carbon dioxide limits for oil refiners and expansion of offshore drilling for those states willing to accept the risks.
The bill's overall goal is to reduce greenhouse gas emissions by 17 percent from 2005 levels by 2020 and 83 percent by 2050. The targets match those in a House bill passed last year and the Obama administration's announced policy goal.
It is impossible to know now whether all the concessions will add up to the 60 votes needed to thwart an attempt to filibuster the bill.
But Senator Kerry said he was confident he had found a winning formula for a comprehensive approach to climate change and energy independence. ...

The full text of the bill can be found at

Grist's David Roberts says "Chances for passage are quite slim, but not as slim as generally perceived, and ironically, the path to passage now involves the bill getting stronger, not weaker."

"Estate Tax: Leave it Alone"

Posted: 12 May 2010 10:17 AM PDT

Linda Beale says Congress should allow the estate tax should to revert to 2001 levels as scheduled under existing legislation:

Estate Tax: leave it alone, by Linda Beale: We are almost halfway through 2010, the weirding time under the GOP's estate tax plan when there is no estate tax and the step-up in basis is gone. They had, of course, intended to eliminate the estate tax for good, but knew that it would cause huge deficits and so didn't want to pass that along with the rest of their 2001 tax cuts that already amounted to more than a trillion dollars. So they left it for later.
Repeal was a bad idea to start with. Most of the mythology around the estate tax is just that--sob stories ginned up by the coalition of wealthy families who want to shirk their responsibility to the country for taxes. This is where the President and the Democratic Party should use the bully pulpit to inform people about how the estate tax works. It is relevant for only the largest estates. It doesn't cause family farms to be lost, no matter how many times the wealthy families' coalition spokespersons claim that it does.
We are at a turning point in this country, where our inability to think long term and our need for immediate gratification mean that we are spending ridiculous amounts on a military budget, too little on infrastructure, and incapable of passing a single payer health care system like every other developed economy has. The Bush regime cut taxes over and over again--mostly aiding the wealthy but also costing us in terms of long-term deficits... The economic theory on which the tax cuts were based has been proven wrong again and again...: tax cuts don't generate more revenues, wealthy people who are not taxed on their capital gains don't turn overnight into entrepreneurs.
So now we need to stop the drain of revenues from the federal fisc. Stop excessive military spending--we can't sustain ongoing wars in Iraq and Afghanistan for another decade any better than the USSR could do. ...
That means that the estate tax is an ideal tax. The tax comes at the point when wealth from one generation is being passed to the heirs in the next generation who have done nothing to merit having it. The extraordinarily wealthy that bear the tax already have the lion's share of the wealth of the country, and some method of evening the odds is needed, else we will be a country of the gated rich and the multitudinous poor. The estate tax can be easier to enforce than other taxes (and would be even fairer if only Congress would act to make the various estate planning techniques using trusts and family partnerships unlawful). So Congress should just let the Bush tax change lapse according to the sunset provision that the GOP built into the law. That would mean that in 2011 we would revert to the law before the 2001 tax change.
There is no huge constituency worried about the estate tax--just the wealthy few whose estates might be subject to some taxation. But apparently Sens. Kyl, Baucus, Grassley and Lincoln are working to include a "bipartisan" proposal in the small business tax bill that they hope to put through Congress. Odds are it will cut the estate tax rate and increase the exemption amount, making the wealthy even less likely to pay any estate tax. ...
Will somebody tell me how these Senators can justify another huge tax break for the wealthy when this country has the highest deficits its ever recorded and little prospect of recouping that ... without adding tax increases ... to the mix? ...

We are not Greece, that's clear, but there is a similarity. It's not excessive government spending like you may have been led to believe by deficit hawks, see this comparison chart. The similarity is the (successful) attempt by those with power and influence to avoid paying their fair share of the nation's bills.

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