Fighting The Banksters

Bob Herbert in his column Monday in The NY Times asks:

What is up with the banks and the rest of the financial industry? The people running this system remind me of gangsters who manage to walk out of the courthouse with a suspended sentence and can’t wait to get back to their nefarious activities.

These malefactors of great wealth (thank you, Teddy) developed hideously destructive credit policies and took insane risks that hurt millions of American families and nearly wrecked the economy. Then they were bailed out with hundreds of billions of taxpayer dollars, money that came from the very people victimized by the industry’s outlandish practices.

Now the industry is fighting against creation of an agency that would protect taxpayers and ordinary consumers from a similarly devastating onslaught in the future. And at the same time they are scrambling to raise credit card interest rates and all manner of exploitive fees to build a brand new superstructure of questionable profits on the backs of the taxpayers who came to their rescue.

Said agency would be created by President Obama’s Consumer Fair Practices Act, the sole purpose of which is to create transparency over consumer contracts for everything from credit card agreements to home mortgage and escrow closing documents. It’s being spearheaded by Harvard law professor and chair of the Congress Oversight Panel charged with overseeing the financial industry,  Elizabeth Warren.

In the early-1980s,” said Professor Warren, the average credit card contract was about a page long. “Today, it is more than 30 pages. … I am a contract law professor, and I cannot make out some of the fine print.”

Naturally, the country’s banksters are attacking it like a pack of crazed pitbulls at a poodle party. With the salty taste of blood still fresh in their mouths following defeat of a bankruptcy mortgage write-down provision, they seem intent on proving Dick Durbin right when he said on the Senate floor:

And the banks — hard to believe in a time when we’re facing a banking crisis that many of the banks created — are still the most powerful lobby on Capitol Hill. And they frankly own the place...”

Meanwhile, another essential but often overlooked cohort in the banksters’ army, the credit rating agencies, just got sued by CALPERS, California’s 1.6 million member public pension fund. Seems that the AAA good housekeeping seal of approval ratings that the triopoly of Standard & Poor, Moody’s, and Fitch gave to the “structured investment vehicles” into which CALPER’s sunk $1.3 billion were “wildly inaccurate.” From Tuesday’s NY Times article Calpers Sue Over Ratings Of Securities:

Calpers said that the three agencies were “actively involved” in the creation of the Cheyne, Stanfield and Sigma securitized packages that they then gave their top credit ratings. Fees received by the ratings agencies for helping to construct these packages would typically range from $300,000 to $500,000 and up to $1 million for each deal.

No reason to expect that  for-profit companies paid by other for-profit companies would would refuse to bite the hand that feeds them, especially when the profits for both are directly determined by increasing volumes of product to sell and evaluate. Products so opaque and complex (many designed by nuclear physicists)  that even experienced investment managers like those that run CALPERs can’t understand them. Just how complex and opaque these instruments are and how they came into being can be found in Wired Magazine’s Recipe for Disaster: The Formula That Killed Wall Street.

Naturally, with great complexity comes greater fees:

These fees were on top of the revenue generated by the agencies for their more traditional work of issuing credit ratings, which in the case of complex securities like structured investment vehicles generated higher fees than for rating simpler securities.

The ratings agencies no longer played a passive role but would help the arrangers structure their deals so that they could rate them as highly as possible,” according to the Calpers suit.

Just how corrupt the ratings agencies have become is captured in the final paragraph of the article:

The suit also contends that the ratings agencies continued to publicly promote structured investment vehicles even while beginning to downgrade them. Ten days after Moody’s had downgraded some securitized packages in 2007, it issued a report titled “Structured Investment Vehicles: An Oasis of Calm in the Subprime Maelstrom.”

Front-running individual trades by banksters like Goldman Sachs is one thing. Front-running investments to pension funds by the ratings triopoly is quite another. Begging the question: Quis custodiet ipsos custodes? Who will guard the guards themselves?

Finally, even Rupert Pukedoch’s Wall Street Journal has had it with Goldman.  Check out Arianna Huffington’s account of the content of its Tuesday’s editorial and opinion page. Taken together, they are an indictment of the relationship between Goldman and the Obama Administration that I and others have been warning about since the bailout began. It begins and ends thus:

There, on the editorial page of the capitalist Bible, was a piece taking repeated shots at Wall Street darling Goldman Sachs. And, over on the opposite page, a two-fisted op-ed by former hedge-fund manager Andy Kessler in which he labels the government bailout of Wall Street “a dumb move” and “a bust.”

[…]

We’ve reached the point where the only people defending the administration’s Wall Street policies are the people benefiting from them — or their good friends, Tim Geithner and Larry Summers.

Time to take out the garbage.

[Image found here.]