The buzz is that President Barack Obama is pushing hard for a deal with the big banks over the foreclosure crisis in advance of the State of the Union address on Tuesday. Most observers are afraid that the deal will be too small and that the banks will get a slap on the wrist despite playing a major role in creating the financial crisis that led to a recession.

AFL-CIO President Richard Trumka joined a growing chorus calling for a rejection of such a small deal and calling for an investigation of the banks over potential fraud and illegal activity:

We need to hold banks accountable for the fraudulent practices that brought about the worst economic crisis since the Depression. State Attorneys General have been investigating bank fraud, and these critical investigations must not be undermined by a premature and inadequate settlement. We call on the administration to reject any deal that insulates banks from full responsibility.

We commend state Attorneys Generals like New York’s Eric Schneiderman and Delaware’s Beau Biden for their leadership and courage in calling for a real investigation and relief on a scale that helps the millions of homeowners who face a new wave of foreclosures.

The economy is currently weighed down by $750 billion in negative home equity, so relief on a massive scale is needed to lift home values and stimulate the economy by increasing consumer demand. A comprehensive settlement must force banks to write down underwater mortgages. A sum significantly larger than the rumored $25 billion is needed for the economy to grow and create jobs.

Specifically, the administration must stand strong against the Big Banks and insist on:

1. A full and thorough investigation into problems tied to the residential mortgage-backed securities (RMBS) market, and

2. A guaranteed minimum amount of money set aside for reducing the mortgage principal of “underwater” homeowners in key states impacted by the foreclosure crisis.

This is an opportunity for the administration to demonstrate leadership and show that it has the political will to do what’s right for homeowners and right for our economy.

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If you saw the Oscar-winning documentary "Inside Job," you may have been surprised to discover that so many high-powered academic economists are essentially bought off by bankers and corporations to publicly support the policies that are so bad for the rest of us, adding a thin veneer of academic respectability with bogus "white papers." If you saw that, this may not even surprise you:

Laura Tyson, the former chair of President Clinton's Council of Economic Advisers, had a column in the NYT today urging patience in addressing the over-valuation of the dollar relative to the Chinese yuan. The heading of the piece identifies Tyson only by her role as a professor at the Haas School of Business at the University of California at Berkeley and her former position in the Clinton administration.

The NYT's identification did not mention that Ms. Tyson is also currently a member of the board of directors of Morgan Stanley. She received almost $350,000 in compensation for her work in this position last year.

This is relevant to the piece because Morgan Stanley has extensive business dealings in China. It is likely that Morgan Stanley would benefit from having the dollar remain high against the Chinese yuan, since this means that its dollar assets will go further in China. In other words, the position being advocated by Ms. Tyson in this piece happens to coincide with the interests of the company on whose board she sits.

It is entirely possible, that Ms. Tyson came to her views on the dollar and yuan without any consideration of its impact on Morgan Stanley. However, the NYT should have informed readers of this potential conflict of interest.

As far as the substance, her argument that there is little link between the value of the dollar against the yuan and the U.S. trade deficit with China is weak. When China raised the value of its currency against the dollar in 2005, many other nations followed suit. This led to a substantial decline in the U.S. trade deficit measured as a share of GDP. (The only relevant measure.) It matters little to workers in the United States whether the improvement in the deficit came in trade with China or other countries.

Also the plea for patience must be seen in a context in which tens of millions of workers are unemployed or underemployed with little hope for any improvement in sight. Deficit hawks in both political parties (including many of Ms. Tyson's former colleagues in the Clinton administration) have closed off the option of further fiscal stimulus. The current political context also seems to offer little hope for more expansionary monetary policy.

Glad to see the unions keeping the heat on the banks over Social Security (and mortgage foreclosures, too, as in the above video). Remember, there's probably a Morgan Stanley office near you -- why not join the fun yourself?

[Yesterday] more than 150 members of the United Electrical, Radio and Machine Workers of America (UE) protested the deficit commission's proposed cuts to Social Security outside of the DC offices of Morgan Stanley. One might ask, why did union members protest outside of a big bank's office when it is the President's commission that is proposing to cut Social Security?

UE Director of Organization Bob Kingsley had the answer. "We are gathered here at the scene of the crime," Kingsley said. "Morgan Stanley and the other big banks are the source of the plan to privatize and cut Social Security."

Union members also noted that Erskine Bowles sits on the board of Morgan Stanley. Erskine Bowles is co-chair of the bi-partisan "National Commission on Fiscal Responsibility and Reform," whose mandate is to find ways to reduce the federal deficit, but which has instead made Social Security its primary target. According to liberal activists, the deficit commission is widely expected to come out with recommendations after the election - too late for voters to have a say - and to call for raising the retirement age to 70 and other cuts in Social Security benefits.

In the late 1990s, Bowles served as President Clinton's White House chief of staff. Bowles negotiated with Newt Gingrich a plan to partially privatize Social Security. That deal fell apart in the Clinton-Lewinsky scandal when Republicans called for Clinton's impeachment according to Steven Gillon, author of The Pact: Bill Clinton, Newt Gingrich, and the Rivalry that Defined a Generation. A decade later, Erskine Bowles has been assigned to the Deficit Commision in order to build support among his former Democratic colleagues for cutting Social Security in order to lower the deficit.

It wasn't even close.

I'd suggest that anyone who hasn't done it yet should find a small bank and move their accounts. Clearly, the people we elected aren't going to do anything about these monster banks:

A move to break up major Wall Street banks failed Thursday night by a vote of 61 to 33.

Three Republicans, Richard Shelby of Alabama, Tom Coburn of Oklahoma and John Ensign of Nevada, voted with 30 Democrats, including Senate Majority Leader Harry Reid of Nevada, in support of the provision. The author of the pending overall financial reform bill in the Senate, Banking Committee Chairman Christopher Dodd, voted against it. (See the full roll call.)

The amendment, sponsored by Sens. Sherrod Brown (D-Ohio) and Ted Kaufman (D-Del.), would have required megabanks to be broken down in size and capped so that their individual failure would not bring down the entire system.

Under Brown-Kaufman, no bank could hold more than 10 percent of the total amount of insured deposits, and a limit would have been placed on liabilities of a single bank to two percent of GDP.

In practice, the amendment required the six biggest banks -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley -- to significantly scale down their size. It was touted as a way to end Too Big To Fail.

Though top Obama administration officials have not publicly opposed the amendment, its leading economists have opposed ending Too Big To Fail simply by breaking up the nation's financial behemoths. Austan Goolsbee and Larry Summers have both fought back against this idea, as has Treasury Secretary Timothy Geithner.

"This is certainly a defeat for those who are concerned about the dangers of financial concentration in this country," Kaufman said in a statement after the vote. "Some causes are worth fighting for, and for me, the concern about the risks 'too big to fail' banks pose to the American economy and people is deep and profound given the economic tragedy millions of American have endured. I believe the debate itself -- though failing to gain a majority of votes -- has helped to change attitudes about the degree of financial concentration and power these megabanks now represent."

Now this is exactly what we've been worried about: that Wall Street would successfully push Obama for an early end to economic stimulus (which also includes extended unemployment benefits, by the way), just as bankers and Republicans did with FDR in 1937 - tipping the country right back into recession. (Krugman's been sounding the alarm for a while.)

I predict Bernanke will withdraw anything that makes it look like they don't have faith in a spring recovery, hoping to use it as a placebo effect.

And as to the millions of us still looking for work, and whose unemployment checks are about to run out? Morgan Stanley responds that there's "never an easy time to do it." I hope Mr. Roach has a big yard, since we're all going to be camping in it:

Jan. 5 (Bloomberg) -- Morgan Stanley Asia Ltd. Chairman Stephen Roach said U.S. policy makers should start to exit emergency stimulus measures now if the economic recovery is as strong as they say it is.

“There is never an easy time to do it,” Roach said on Bloomberg Television today. “The longer they wait, the greater the chance they sow the seeds for the next bubble. So I’m in favor of an early exit strategy.”

The Federal Reserve on Dec. 16 pledged to keep interest rates “exceptionally low” for an “extended period” even as officials said financial markets were healthy enough to allow most emergency lending programs to expire at the end of this month. Chairman Ben S. Bernanke and his fellow policy makers cut the benchmark rate almost to zero in December 2008.

“We’ve seen the most extraordinary monetary stimulus on the record in the 15, 16 months post-Lehman Brothers,” Roach said. “We’ll have to see the most extraordinary withdrawal of stimulus on record” and “if this recovery is as strong as Bernanke and markets think it is, the time to exit is now.”

Data since the Nov. 3-4 Fed meeting showed that “economic activity has continued to pick up and that the deterioration in the labor market is abating,” the Open Market Committee said in a Dec. 16 statement. “Financial market conditions have become more supportive of economic growth,” while the economy is “likely to remain weak for a time,” policy makers said.

You know, I always said the Democrats would be just as easily bought as the Bush Republicans, but that doesn't make it any easier on my stomach. Howie Klein:

Or, you might want a different kind of candidate from one who isn't even in Congress yet and already selling her ass to K Street whores who represent Countrywide Mortgage and Morgan Stanley. How about making a donation today to the grassroots candidate for the seat, Doug Tudor? You can do it here.

By the way, if you can't quite remember who Allen Boyd (Blue Dog-FL) is, please recall that when George W. Bush wanted to push his bill to kill Social Security as "bipartisan" he only managed to find one "Democrat" to co-sponsor it. That's Boyd, the fella bringing Lori Edwards around Washington to meet all the lobbyists. Boyd is on the Budget Committee and on the Appropriations Committee. He's taken in $1,048,609 from the financial sector-- but not because they're buying his votes; only because he's so handsome and debonair.

I just don't know what the best options are here, but I'm not feeling reassured that the people advising Geithner were making so much money from the people they're supposed to be regulating:

Oct. 14 (Bloomberg) -- Some of Treasury Secretary Timothy Geithner’s closest aides, none of whom faced Senate confirmation, earned millions of dollars a year working for Goldman Sachs Group Inc., Citigroup Inc. and other Wall Street firms, according to financial disclosure forms.

The advisers include Gene Sperling, who last year took in $887,727 from Goldman Sachs and $158,000 for speeches mostly to financial companies, including the firm run by accused Ponzi scheme mastermind R. Allen Stanford. Another top aide, Lee Sachs, reported more than $3 million in salary and partnership income from Mariner Investment Group, a New York hedge fund.

As part of Geithner’s kitchen cabinet, Sperling and Sachs wield influence behind the scenes at the Treasury Department, where they help oversee the $700 billion banking rescue and craft executive pay rules and the revamp of financial regulations. Yet they haven’t faced the public scrutiny given to Senate-confirmed appointees, nor are they compelled to testify in Congress to defend or explain the Treasury’s policies.

“These people are incredibly smart, they’re incredibly talented and they bring knowledge,” said Bill Brown, a visiting professor at Duke University School of Law and former managing director at Morgan Stanley. “The risk is they will further exacerbate the problem of our regulators identifying with Wall Street.”

Gee, ya think?

[...] Treasury spokesman Andrew Williams said the department needs people with a deep understanding of markets and the financial system, especially as it works to fend off the worst recession in half a century.

“The secretary thought that the best way to utilize their talents was to allow these individuals to provide advice to the secretary on policy issues through appointments as counselor,” Williams said.

All of Geithner’s counselors are subject to federal ethics rules, including a pledge to avoid contact with their former firms for at least a year, Williams added.

Most officials at the Treasury who have been approved by Congress come from academic, legal or non-Wall Street backgrounds.

Don't kid yourself that this means these banks are healthy - far from it. It means they want to go back to their old carefree, criminal ways:

The Treasury Department cleared the way for 10 big banks on Tuesday to start repaying billions of dollars in taxpayer aid, a crucial step in easing the government’s grip after an unprecedented series of interventions.

The banks were deemed strong enough to leave the Troubled Asset Relief Program, or TARP, after months of lobbying and strong performances on recent stress tests. The banks are expected to return about $68.3 billion to the Treasury Department, more than double the administration’s initial estimate of about $25 billion in funds to be returned this year. The timetable is also earlier than government officials originally intended.

Although the Treasury did not identify the banks, people briefed on the situation said they include American Express, Bank of New York Mellon, the BB&T Corporation, Capital One Financial, Goldman Sachs, JPMorgan Chase, the State Street Corporation and US Bancorp. All passed the stress test and applied to return their TARP funds. Another bank, Morgan Stanley, which needed to raise $1.8 billion after the stress test, was also said to have received permission, as was Northern Trust, a large custodial bank that did not undergo the stress test.

The $68.3 billion represents about a quarter of the TARP money given to banks. So far, 22 small community banks have been allowed to return $1.9 billion in government money.

Within the next few days, the big banks will be able to wire the money back to the Treasury Department. Still, they will not fully get out from under the government’s thumb until they rid themselves of warrants giving taxpayers a share of the potential upside on their investments.

Analysts say warrants for the 10 big banks could be worth as much as $4.6 billion. Treasury officials have not disclosed how they plan to value and sell them.

This whole incestuous mess just gets worse and worse, doesn't it? It appears the foxes are dining quite well while working as henhouse security guards:

Last month, a little-known company where [Larry] Summers served on the board of directors received a $42 million investment from a group of investors, including three banks that Summers, Obama’s effective “economy czar,” has been doling out billions in bailout money to: Goldman Sachs, Citigroup, and Morgan Stanley. The banks invested into the small startup company, Revolution Money, right at the time when Summers was administering the “stress test” to these same banks.

A month after they invested in Summers’ former company, all three banks came out of the stress test much better than anyone expected -- thanks to the fact that the banks themselves were allowed to help decide how bad their problems were (Citigroup “negotiated” down its financial hole from $35 billion to $5.5 billion.)

The fact that the banks invested in the company just a few months after Summers resigned suggests the appearance of corruption, because it suggests to other firms that if you hire Larry Summers onto your board, large banks will want to invest as a favor to a politically-connected director.

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So it's not just Goldman Sachs, as first reported. Well, that makes sense. Because summer's coming up and you know how much it still costs to have the right place in the Hamptons:

NEW YORK (Reuters) - Goldman Sachs Group Inc, Morgan Stanley and other banks have applied to repay billions of dollars they borrowed under the U.S. government's Troubled Asset Relief Program, sources familiar with the situation said on Monday.

U.S. banks are scrambling to repay TARP money as soon as possible, in an effort to signal their strength to the market and to avoid the tighter regulation that comes with government funds, particularly limitations on compensation.

Banks began gearing up to repay government funds soon after the U.S. government announced the results of stress tests on May 7.

[...] Wayne Abernathy, an executive at the American Bankers Association and a former Treasury official, told Reuters earlier on Monday that he expected the Treasury would act soon to let large banks repay TARP.

"I would think we're talking a matter of weeks, and probably just a few weeks, because I think Treasury wants the money, or at least some of it," he said.

The amount of money the government could get back could be substantial. Morgan Stanley and Goldman borrowed $10 billion under TARP in October, while JPMorgan took $25 billion. American Express received $3.4 billion in January.