But hey, look over there! Ben Bernanke's the Man of the Year!

WASHINGTON — The value of loans held by the biggest beneficiaries of the government's bank bailout fell for the ninth consecutive month in October, the Treasury Department reported Tuesday, a day after President Barack Obama criticized top bankers for not doing enough to boost lending.

The department's monthly report, which monitors the top 22 recipients of support from the government's $700 billion rescue fund, showed that their average loan balances dropped in October by $36.8 billion, or 0.9 percent. That followed a decline of 1.1 percent, or $45.9 billion, in September.

Obama on Monday urged the nation's big banks to make "extraordinary" efforts to increase lending to help consumers and businesses who have been staggered by the worst recession since the 1930s.

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(The Housing Bubble . . bore a strange resemblance to the first minutes after the Titanic hit the iceberg - what problem?)

Not far enough distant to be considered "historic", and certainly not what one would consider the end of the story, but here is an interesting documentary produced by the BBC World Service in Sept of 2007 about the Credit Crunch and the Sub-prime lending crisis and the assessments given by the financial gurus at the time. Among others is this exchange with Lyle Gramley:

Lyle Gramley: “We’ve had dozens of mortgage companies go down the tubes. They’re not ever going to be revived again. We’ve had billions of dollars lost both here and abroad from investments in sub-prime mortgages. That money is not going to be recovered again. Eventually we’ll get over the panic, but we’re never going to go back to the sloppy underwriting standards, the sloppy investment practices we had during my lifetime, or perhaps yours either.”

BBC Interviewer: “Sure of that . . never again??

Gramley: “Not in my lifetime, or yours either. Twenty-five years from now, perhaps. But that’s a long ways down the road.”

I suppose hindsight really is 20/20, but it's pretty amazing how much this took everyone by surprise and how much denial was being heaped on an unsuspecting public.

Certainly gives pause when you hear breathless proclamations the recession is over.

Oh. . .yeah, speaking of which . .

This sheds some light on why they're not all that eager to legalize drugs, huh? Shades of BCCI:

Drugs money worth billions of dollars kept the financial system afloat at the height of the global crisis, the United Nations' drugs and crime tsar has told the Observer.

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organized crime were "the only liquid investment capital" available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result.

This will raise questions about crime's influence on the economic system at times of crisis. It will also prompt further examination of the banking sector as world leaders, including Barack Obama and Gordon Brown, call for new International Monetary Fund regulations.

Speaking from his office in Vienna, Costa said evidence that illegal money was being absorbed into the financial system was first drawn to his attention by intelligence agencies and prosecutors around 18 months ago. "In many instances, the money from drugs was the only liquid investment capital. In the second half of 2008, liquidity was the banking system's main problem and hence liquid capital became an important factor," he said.

Some of the evidence put before his office indicated that gang money was used to save some banks from collapse when lending seized up, he said.

Come on, we know there won't be any investigation - not a real one. Because if they found out what was going on, they'd never tell us.

Elizabeth Warren is one of the few public figures who understands and acknowledges the enormous economic stress placed on the middle class, and actually cares what happens to them:

While the middle class has been caught in an economic vise, the financial industry that was supposed to serve them has prospered at their expense. Consumer banking -- selling debt to middle class families -- has been a gold mine. Boring banking has given way to creative banking, and the industry has generated tens of billions of dollars annually in fees made possible by deceptive and dangerous terms buried in the fine print of opaque, incomprehensible, and largely unregulated contracts.

And when various forms of this creative banking triggered economic crisis, the banks went to Washington for a handout. All the while, top executives kept their jobs and retained their bonuses. Even though the tax dollars that supported the bailout came largely from middle class families -- from people already working hard to make ends meet -- the beneficiaries of those tax dollars are now lobbying Congress to preserve the rules that had let those huge banks feast off the middle class.

Pundits talk about "populist rage" as a way to trivialize the anger and fear coursing through the middle class. But they have it wrong. Families understand with crystalline clarity that the rules they have played by are not the same rules that govern Wall Street. They understand that no American family is "too big to fail." They recognize that business models have shifted and that big banks are pulling out all the stops to squeeze families and boost revenues. They understand that their economic security is under assault and that leaving consumer debt effectively unregulated does not work.

Families are ready for change. According to polls, large majorities of Americans have welcomed the Obama Administration's proposal for a new Consumer Financial Protection Agency (CFPA). The CFPA would be answerable to consumers -- not to banks and not to Wall Street. The agency would have the power to end tricks-and-traps pricing and to start leveling the playing field so that consumers have the tools they need to compare prices and manage their money. The response of the big banks has been to swing into action against the Agency, fighting with all their lobbying might to keep business-as-usual. They are pulling out all the stops to kill the agency before it is born. And if those practices crush millions more families, who cares -- so long as the profits stay high and the bonuses keep coming.

America today has plenty of rich and super-rich. But it has far more families who did all the right things, but who still have no real security. Going to college and finding a good job no longer guarantee economic safety. Paying for a child's education and setting aside enough for a decent retirement have become distant dreams. Tens of millions of once-secure middle class families now live paycheck to paycheck, watching as their debts pile up and worrying about whether a pink slip or a bad diagnosis will send them hurtling over an economic cliff.

America without a strong middle class? Unthinkable, but the once-solid foundation is shaking.

Via Raw Story. You know, I not only want the money back, I want these people put in jail. They took the money and ran from their own culpability:

The CEOs of Bear Stearns and Lehman Brothers, the two investment banks that collapsed during last year's financial meltdown, walked away with hundreds of millions of dollars in compensation even as the company's shareholders lost everything, says a new report from Harvard Law School.

The top five executives at Bear Stearns made a total of $1.4 billion from bonuses and equity sales between 2000 and 2008, while the top five executives at Lehman Brothers made around $1 billion during that same period -- the period during which the companies ran up the bad investments that would see them collapse in 2008, according to "The Wages of Failure" (PDF), a report from Harvard Law School's Program on Corporate Governance.

"The people who invested in these companies should feel betrayed," Nell Minow, a compensation expert at the Corporate Library, told NBC's Lisa Myers. "The whole idea of capitalism is that the people provide the capital and the executives take care of it for us. In this case, the people provided the capital, and the executives took it."

Bear Stearns CEO James Cayne personally made $388 million in the eight-year period leading up to the bank's collapse, while Lehman Brothers CEO Richard Fuld made $541 million. Bloomberg news service notes that "shareholders who held their shares throughout the period analyzed in the report lost most of their initial investment."

Economist James Galbraith on the Obama administration's approach to the country's financial crisis:

Technically it would have been fairly easy, 10 months ago, to get this bus back on the road. There could have been open-ended fiscal assistance to stop the budget hemorrhage of the states and cities. There could have been a jobs program and effective foreclosure relief. There could have been a payroll tax holiday. There could have been a strategy for sustained massive effort on infrastructure, energy and climate. There could have been prompt corrective action to resolve, instead of coddle, the worst of the banks.

I mostly don't blame President Obama; he and his team went as far as they felt they could. I blame the head-in-the-sand politicians in Congress, the over-optimistic forecasters, the half-educated press, and the power of the financial lobby. I blame the avatars of fiscal virtue, the public debt scare-mongerers, the astrologers for whom thirteen significant digits (a trillion) for the stimulus package was just too much. I blame the Senate, which hands the balance of power to small states at the expense of disaster areas like California, Florida and New York. I do blame the Bush-Obama financial policy team, who either believed that "credit would flow again" if you stuffed the banks with money, or knew that it wouldn't.

The Bretton Woods point deserves another word. According to the system established in 1944, the U.S. current account deficit -- and by extension our public budget deficit -- was limited by an obligation to exchange foreign-held dollars for gold. Richard Nixon abolished that arrangement. Since the early 1980s, the world has held the Treasury bonds that the U.S. chose to issue. The system is fragile. But so long as it lasts, it doesn't discipline our budget (and if it broke, we could replace it). Low interest rates prove this: despite all the dire predictions, there is no difficulty in placing Treasury debt. Hence, we are free to pursue high employment, if we choose to do it.

Can anything be done now? Well yes, technically: the same steps that could have been taken in January 2009 could be taken in January 2010. But they won't be, because for the moment we are seeing the inventory bounce, a productivity surge, real GDP growth, and other "good signs." So we'll be told to wait, to be patient, and to make sure we don't buy what we can't afford. And double-digit joblessness will linger on, breeding frustration and anger -- perhaps all the way through to the mid-term elections. After which, what will be possible is anyone's guess.

The next time some bobblehead starts talking about how this crisis "is about people living beyond their means", remind them of this latest proof that the financial services industry was thoroughly and aggressively corrupt, and that was a much bigger problem:

WASHINGTON -- As the housing market collapsed in late 2007, Moody's Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.

A McClatchy investigation has found that Moody's punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.

Instead, Moody's promoted executives who headed its "structured finance" division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: "toxic assets."

As Congress tackles the broadest proposed overhaul of financial regulation since the 1930s, however, lawmakers still aren't fully aware of what went wrong at the bond rating agencies, and so they may fail to address misaligned incentives such as granting stock options to mid-level employees, which can be an incentive to issue positive ratings rather than honest ones.

The Securities and Exchange Commission issued a blistering report on how profit motives had undermined the integrity of ratings at Moody's and its main competitors, Fitch Ratings and Standard & Poor's, in July 2008, but the full extent of Moody's internal strife never has been publicly revealed.

Moody's, which rates McClatchy's debt and assigns it quite low value, disputes every allegation against it. "Moody's has rigorous standards in place to protect the integrity of ratings from commercial considerations," said Michael Adler, Moody's vice president for corporate communications, in an e-mail response to McClatchy.

Insiders, however, say that wasn't true before the financial meltdown.

"The story at Moody's doesn't start in 2007; it starts in 2000," said Mark Froeba, a Harvard-educated lawyer and senior vice president who joined Moody's structured finance group in 1997.
"This was a systematic and aggressive strategy to replace a culture that was very conservative, an accuracy-and-quality oriented (culture), a getting-the-rating-right kind of culture, with a culture that was supposed to be 'business-friendly,' but was consistently less likely to assign a rating that was tougher than our competitors," Froeba said.

After Froeba and others raised concerns that the methodology Moody's was using to rate investment offerings allowed the firm's profit interests to trump honest ratings, he and nine other outspoken critics in his group were "downsized" in December 2007.

I can't imagine the thinking behind this. We lend them the money and then let them pay it back - before we've fixed the problems that lead to the crash in the first place? And it won't do much for consumers, since half of them are investment banks.

Elizabeth Warren is skeptical, and wants to hear the terms of repayment. She also warns that the stress tests were not as strong as they should have been. Stay tuned:

... The decision to allow the banks to exit the Troubled Asset Relief Program, or TARP, also ushered in a new, and potentially risky, phase of the banking crisis. Letting the lenders out now — earlier than many had envisioned, and without the industry reforms some consider necessary to prevent future crises — raises many sobering questions for policy makers, bankers and taxpayers.

The program was aimed at purchasing assets and equity from banks to strengthen them and encourage them to expand lending during a tightening credit squeeze. But after banks return the TARP money, the administration will forfeit much of its leverage over them. With that loss goes a rare opportunity to overhaul the industry. The administration’s ability to push institutions to purge themselves quickly of bad assets and do more to help hard-pressed homeowners will be diminished.

Of even deeper concern is the running trouble inside the banking industry. Despite tentative signs of revival, many banks remain fragile. Four of the nation’s five largest lenders, including Citigroup and Bank of America, were not allowed to return their bailout funds.

Some analysts worry that financial institutions that repay bailout money now may turn to Washington again if the economy worsens and losses overwhelm banks. One of the most vexing problems of the credit crisis — how to rid banks of their troubled mortgage investments — remains unresolved.

Which, of course, is why so many experts were urging the administration to nationalize the banks. Those bad mortgages have to be dealt with sooner or later, and the bailout program simply postponed the day of reckoning.

The banks are eager to escape TARP and the restrictions that come with it, particularly the limits on how much they can pay their 25 most highly compensated workers. (Even so, the Obama administration plans to propose guidelines on executive compensation for the broader industry as early as Wednesday.)

Yet even banks that return taxpayers’ money will remain dependent on other forms of government aid. Among them are enhanced deposit insurance, incentive payments to modify home mortgages and federal guarantees on bonds that banks sell to raise capital.

“They may need the government’s money to get through this storm,” Christopher Whalen, a managing partner at Institutional Risk Analytics, said of the banks. “If the banks have to come back and ask for more money in a few months, I don’t think the response from Washington will be too kind.”

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I actually hope this isn't as bad a plan as I (and Atrios, and Paul Krugman and numerous other economic bloggers -- Brad DeLong is in a distinct minority here) think it is. I really do, because the alternative is too upsetting to contemplate:

WASHINGTON — The Obama administration formally presented the latest step in its financial rescue package on Monday, an attempt to draw private investors into partnership with a new federal entity that could eventually buy up to $1 trillion in troubled assets that are weighing down the nation’s banks and clogging up the credit markets.

At least partly in anticipation of the program, which has been widely publicized, Asian and European markets were sharply higher. Index futures on Wall Street were also significantly higher.

Initially, a new Public-Private Investment Program will provide financing for $500 billion in purchasing power to buy those troubled or toxic assets — which the government refers to more diplomatically as legacy assets — with the potential of expanding later to as much as $1 trillion, according to a fact sheet issued by the Treasury Department.

At the core of the financing package will be $75 billion to $100 billion in capital from the existing financial bailout known as TARP, the Troubled Assets Relief Program, along with the share provided by private investors, which the government hopes will come to 5 percent or more. By leveraging this program through the Federal Deposit Insurance Corporation and the Federal Reserve, huge amounts of bad loans can be acquired.

The private investors would be subsidized, but could stand to lose their investments, while the taxpayers could share in prospective profits as the assets are eventually sold, the Treasury said. The administration said that it expected participation from pension funds to insurance companies and other long-term investors.

At least Obama's confident in it. For whatever that proves to be worth.

I love Alan Grayson. Blue America endorsed him when nobody thought he had a chance in hell to get elected. And he's taking the Hill by storm. If you want to understand the dynamic gripping Capitol Hill right now, it basically boils down to one question. Is there anything that can be done other than throw billions of dollars at banks? This is a Financial Services Committee hearing on how to fix the whole system (or in Washington-ese 'systemic risk').

Congressman Alan Grayson asks a number of financial services association directors this question, and most of them fumble around and filibuster the question. Until we find an answer, though, it's billions and billions of taxpayer money thrown at bank CEOs. Don't you just love that?

Interesting WSJ interview with Nouriel Roubini, the man who saw the crash coming and tried to sound the alarm:

"Again, I don't want to personalize things, but the last decade was one of self-regulation. But in the financial markets, without proper institutional rules, there's the law of the jungle -- because there's greed! There's nothing wrong with greed, per se. It's not that people are more greedy now than they were 20 years ago. But greed has to be tempered, first, by fear of losses. So if you bail people out, there's less fear. And second, by prudential regulation and supervision to avoid certain excesses."

How does Mr. Roubini think the media has covered the financial crisis? "The problem," he says -- after first stating to me that he intends "no offense!" -- "is that in the bubble years, everyone becomes a cheerleader, including the media. This is the time when journalists should be asking tough questions, and I think there was a failure there. The Masters of the Universe were always on the cover, or the front page -- the hedge-fund guys, the imperial CEO, private equity. I wish there had been more financial and business journalists, in the good years, who'd said, 'Wait a moment, if this man, or this firm, is making a 100% return a year, how do they do it? Is it because they're smarter than everybody else . . . or because they're taking so much risk they'll be bankrupt two years down the line?'

"And I think, in the bubble years, no one asked the hard questions. A good journalist has to be one who, in good times, challenges the conventional wisdom. If you don't do that, you fail in one of your duties."

[...] Mr. Roubini tells me that bank nationalization "is something the partisans would have regarded as anathema a few weeks ago. But when I and others put it in the context of the Swedish approach [of the 1990s] -- i.e. you take banks over, you clean them up, and you sell them in rapid order to the private sector -- it's clear that it's temporary. No one's in favor of a permanent government takeover of the financial system."

There's another reason why the concept should appeal to (fiscal) conservatives, he explains. "The idea that government will fork out trillions of dollars to try to rescue financial institutions, and throw more money after bad dollars, is not appealing because then the fiscal cost is much larger. So rather than being seen as something Bolshevik, nationalization is seen as pragmatic. Paradoxically, the proposal is more market-friendly than the alternative of zombie banks."

In any case, Republicans must now temper their reactions, he says. "The kind of government interference in the economy that we saw in the last year of Bush was unprecedented. The central bank -- supposed to be the lender of the last resort -- became the lender of first and only resort! With our recapitalizing of financial institutions, and massive government intervention in the markets, we've already crossed a significant bridge."

So, will the highest level of government be receptive to the bank-nationalization idea? "I think it will," Mr. Roubini says, unhesitatingly. "People like Graham and Greenspan have already given their explicit blessing. This gives Obama cover." And how long will it be before the administration goes in formally for nationalization? "I think that we're going to see the policy adopted in the next few months . . . in six months or so."

That long? I ask. "Six months from now," he replies, "even firms that today look solvent are going to look insolvent. Most of the major banks -- almost all of them -- are going to look insolvent. In which case, if you take them all over all at once, you cause less damage than if you would if you took over a couple now, and created so much confusion and panic and nervousness.

Leo T. Crowley (1889-1972) was the second Chairman of the FDR formed Federal Deposit Insurance Corporation (FDIC)). Prior to FDR there was no FDIC - you and your bank were on tenuous ground, and if the bank failed well . . . . .best of luck/don't forget to write if you get work/shut the door on your way out - simple as that.

But Wall Street, the collapse of the banking system and the Depression managed to change all that. And the FDIC came into existence within the first hundred days of the Roosevelt Administration.

As part of a "Meet Your Government" radio series, Crowley gives a little talk/interview in 1939.

Now to be fair, history is not always exciting and cliff-hanging and explosive. It is sometimes, well . . . dull as dirt. BUT it's important to get an idea who some of the players were in the events that more or less changed the course of history. Crowley wasn't a dynamic or emotional speaker. One could say that his vocal approach could be a good cure for insomnia. But it's the words and the ideas that count. And I promise I'll do something a little more high-voltage shortly!

"Creation of the National Banking System, establishment of the Federal Reserve System and similar measures, were all enacted in the interest of safety and stability.

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I really don't understand Obama's reluctance to lance the boil on this. I really don't. With so many economists frantically advising taking over these banks, it seems he's only postponing the inevitable:

Some of the nation’s large banks, according to economists and other finance experts, are like dead men walking.

A sober assessment of the growing mountain of losses from bad bets, measured in today’s marketplace, would overwhelm the value of the banks’ assets, they say. The banks, in their view, are insolvent.

[...] But without a cure for the problem of bad assets, the credit crisis that is dragging down the economy will linger, as banks cannot resume the ample lending needed to restart the wheels of commerce. The answer, say the economists and experts, is a larger, more direct government role than in the Treasury Department’s plan outlined this week.

The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.

It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years.

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One of the reasons Obama is having trouble with the stimulus bill is that ordinary people lump it in with this steaming pile called the bank bailout:

WASHINGTON— The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.

He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.

Because of the internal debate, some of the most contentious issues remain unresolved.

[...] Abandoning any pretense about limiting the moral hazards at companies that made foolhardy investments, the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment. Some officials had suggested that the next bailout phase not protect existing shareholders. (Shareholders at most banks that fail will continue to lose their investment.)

I wait with interest to hear Obama explain why the people who put this country's economy into a nosedive should have no restrictions on how they spend our money!

I'm more than a little depressed that Obama has done such a poor job selling the stimulus package, but a great job on rationalizing this toxic "bad bank" proposal. Yves at Naked Capitalism says it's even worse than you imagine:

So we the taxpayers are going to eat a ton of bank losses that should instead be borne first by stockholders and bondholders,]. This program should be labeled the Pimco bailout plan, since the giant bond fund holds a lot of bank debt. That shows what a fiction Obama's populism is. It's mere posturing and empty phrases. Look at where the dough goes, and it is going first and foremost to the big money end of town.

Now I do not labor under the delusion that there are cheap or easy ways out of our financial sinkhole. People are suffering, and we are only partway through the process of contraction and write-offs. I heard of a suicide today, a jewelry dealer who was $400,000 in debt (also owed a lot of money but unable to collect) who threw himself off 10 West 47th Street (from someone else in the building, this is no urban legend). A tragedy, and a visible one, and there is plenty of less acute but no less real trauma afoot.

But Team Obama is taking the cowardly approach of distributing the costs among the most disenfranchised group in the process, namely the taxpayer, when there far more obvious and logical groups to take the hits. Shareholders and bondholders bought securities KNOWING there was the possibility of loss. A lot of big financial institutions have been on the ropes for over a year. A security holding is not a marriage. When conditions change, prudent investors reassess and adjust course accordingly. If anyone is long a lot of dodgy bank paper now, they have only themselves to blame. Any why are rank and file bankers still exempt from pay cuts when the workers in another failing US industry, autos, expected to take big hits?

This is the most roundabout and probably the most costly way to not solve this problem. Another warning from the IMF paper:

All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

The most amazing bit is the government acts as if it has no leverage. Look how Paulson sent teams in to inspect the accounts of Fannie and Freddie and put them into conservatorship. The reason it is obvious that this program is a crock is that it has been cooked up in the complete and utter absence of any serious due diligence on the toxic holdings of the big banks.

As we discuss in a separate post, the one punitive element, executive comp restrictions, are mere window-dressing. Welcome to change you can believe in.