Happy Anniversary Lehman Brothers, And What We Haven't Learned about Wall Street Over the Past Five Years

While attention is focused on Syria, the gambling addiction of Wall Street’s biggest banks is more dangerous than ever.

Five years ago this September, Lehman Brothers went bankrupt, and the Street hurtled toward the worst financial crisis in eighty years. Yet the biggest Wall Street banks are far larger now than they were then. And the Dodd-Frank rules designed to stop them from betting with the insured deposits of ordinary savers are still on the drawing boards – courtesy of the banks’ lobbying prowess. The so-called Volcker Rule has yet to see the light of day.

To be sure, the banks’ balance sheets are better than they were five years ago. The banks have raised lots of capital and written off many bad loans. (Their risk-weighted capital ratio is now about 60 percent higher than before the crisis.) 

But they’re back to too many of their old habits.

Consider JPMorgan Chase, the largest of the bunch. Last year it lost $6.2 billion by betting on credit default swaps tied to corporate debt – and then lied about it. Evidence shows the bank paid bribes to get certain counties to buy the swaps. The Justice Department is investigating the bank over improper energy trading. That follows the news that the anti-bribery unit of the Security and Exchange Commission is looking into whether JPMorgan hired the children of Chinese officials to help win business. The bank has also allegedly committed fraud in collecting credit card debt, used false and misleading means of foreclosing on mortgages, and misled credit-card customers in seeking to sell them identity-theft products. The list goes on.

JPMorgan’s most recent quarterly report lists its current legal imbroglios in nine pages of small print, and estimates resolving them all may cost as much as $6.8 billion. That’s not much more than a pittance for a company with total assets of $2.4 trillion and shareholder equity of $209 billion.

Which is precisely the point. No company, least of all a giant Wall Street bank, will eschew a chance to make a tidy profit unless the probability of getting caught and prosecuted, multiplied times the amount of any potential penalty, is greater than the expected profits.

Have we learned nothing since September, 2008? Five years ago this month Wall Street almost went under. We bailed it out. Millions of Americans are still suffering the consequences of the Street’s excesses. Yet the Street’s top guns and fat cats are still treating the economy as their own private casino, and raking in even more than before.

The fact is, the giant Wall Street banks are ungovernable – too big to fail, too big to jail, too big to curtail. They should be split up, and their size capped. There’s no need to wait for Congress to do it; the nation’s antitrust laws are adequate to the job. There is ample precedent. In 1911 we split up Standard Oil. In 1982 we split up Ma Bell. The Federal Reserve has authority to do it on its own in any event. (Would Larry Summers take such an initiative?)

Legislation is needed, however, to resurrect the Glass-Steagall Act that once separated commercial banking from casino capitalism. But don’t hold your breath.

Happy fifth anniversary, Wall Street.

Obama Gets Tough On Wall St

The “both parties are the same” laziness has to end:

“Federal regulators are poised to approve a tougher-than-expected version of the so-called Volcker Rule, adopting a harder line in recent weeks against Wall Street risk-taking…. The rule, which comes to a vote on Tuesday, is a symbol of the Obama administration’s post-financial-crisis crackdown on Wall Street. In particular, it bans banks from trading for their own gain, a practice known as proprietary trading. In doing so, the Volcker Rule takes aim at the sort of risk-taking responsible for a $6 billion trading blowup last year at JPMorgan Chase.”

Banks will have to act more like banks. Imagine that.

Dimon On Whether JP Morgan’s $2 Billion Loss Proves Banks Are Still Too Risky: ‘I Don’t Think So’ – [JP Morgan Chase CEO Jamie] Dimon has been one of the biggest critics of the Volcker Rule, which is meant to prevent banks from making massive bets with federally insured dollars. […] Of course, the point isn’t whether JP Morgan, the biggest bank in the U.S., can survive a trade like this. It’s whether the financial system can sustain this sort of trading by all of the big banks, many of which are not in the same financial shape as JP Morgan. As the New York Times detailed yesterday, JP Morgan and the rest of the nation’s biggest banks have been fighting to widen exemptions to the Volcker Rule that would allow banks to continue making risky trades of this sort. ”I hope that the final [Volcker] rule will prevent this,” said Rep. Barney Frank (D-MA), whose name graces the Dodd-Frank financial reform bill, on ABC today. “The Volcker Rule is still being formulated.” — Think Progress

  • RNC Chief: Leave Wall Street alone – Host David Gregory asked a straightforward question: “In light of the losses on Wall Street this week, you think we need less financial regulation rather than more?” In Preibus’ mind, it’s not even a close call: “I think we need less.” The RNC chief added that Democrats have “made things worse” by approving new safeguards and adding new layers of accountability to the financial system. It reminded me of an Upton Sinclair line: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” — Steve Benen
  • Democratic Massachusetts Senate candidate Elizabeth Warren called for JPMorgan Chase CEO Jamie Dimon to resign his position as a director at the Federal Reserve Bank of New York. In a statement posted on her website, Warren said Dimon stepping down would “send a signal to the American people that Wall Street bankers get it and to show that they understand the need for responsibility and accountability.” – The Hill
  • JPMorgan Chase has been lobbying to make exactly the kind of trades that just lost the company billions of dollars. – Edward Wyatt in The New York Times
  • JPMorgan Chase’s loss proves the need for bank regulation. – Paul Krugman in The New York Times
  • More from Ezra Klein
  • How Wall Street Killed Financial Reform – The fate of Dodd-Frank over the past two years is an object lesson in the government’s inability to institute even the simplest and most obvious reforms, especially if those reforms happen to clash with powerful financial interests. From the moment it was signed into law, lobbyists and lawyers have fought regulators over every line in the rulemaking process. Congressmen and presidents may be able to get a law passed once in a while – but they can no longer make sure it stays passed. You win the modern financial-regulation game by filing the most motions, attending the most hearings, giving the most money to the most politicians and, above all, by keeping at it, day after day, year after fiscal year, until stealing is legal again. “It’s like a scorched-earth policy,” says Michael Greenberger, a former regulator who was heavily involved with the drafting of Dodd-Frank. “It requires constant combat. And it never, ever ends.” That the banks have just about succeeded in strangling Dodd-Frank is probably not news to most Americans – it’s how they succeeded that’s the scary part. –  Matt Taibbi | Rolling Stone

JPMorganChase fought for a loophole that led to $2 billion trading loss

Not long after Dodd-Frank got passed, the company made arguments for a loophole in the Volcker Rule, which takes effect in July, to allow some of the types of portfolio hedging that that company used as it produced a $2 billion loss recently. “JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging,” noted one Treasury Department official. Officials who worked on the law, such as Sen. Carl Levin, have made it clear that allowing for this type of activity was not their intention with the law. Now, they have a pretty clear $2 billion argument against allowing such a loophole to get through. (photo by Scott Eells/Bloomberg; edit for clarity)

Administration officials and some lawmakers have expressed frustration that critical parts of Mr. Obama’s overhaul of the financial system, which was voted into law three years ago and is known as the Dodd-Frank act, remain unenforced as an alphabet soup of federal agencies wrangle over how to adopt it.

In particular, top presidential aides have highlighted the failure in putting the Volcker Rule into effect. It would prohibit banks from risking institutional money in certain speculative investments. Last month, Jacob Lew, the Treasury secretary, complained in a speech that the regulators were moving too slowly to confront the dangers of banks that are so large that governments cannot allow them to fail for fear of bringing down the economy.

“If we get to the end of this year, and cannot, with an honest straight face, say that we’ve ended ‘too big to fail,’ we’re going to have to look at other options because the policy of Dodd-Frank and the policy of the administration is to end ‘too big to fail,’ ” Mr. Lew said.

Is the Occupy movement growing up?

“In the months since Occupy Wall Street pitched its first tents last September, one criticism of the movement has been that it does not offer much in the way of solutions. Enter Occupy the SEC, an Occupy offshoot made up of activists and veterans of the financial sector. Instead of taking the public stand of OWS, they’re using a different tactic: They’ve written a detailed 325-page analysis of the Volcker rule. And, in my view, they’ve got it exactly right.”

—Jared Bernstein, “Former Obama Official: Why I Applaud ‘Occupy the SEC’

Photo courtesy of The Guardian.

From Evernote: Dodd-Frank Isn't Legislation; It's a Comedy - Money Morning Clipped from: http://moneymorning.com/2012/02/24/dodd-frank-isnt-legislation-its-a-comedy/

Dodd-Frank Isn’t Legislation; It’s a Comedy

FEBRUARY 24, 2012 BY SHAH GILANI, Capital Waves Strategist, Money Morning In last week’s Insights & Indictments, in my commentary on all the letters sent to the SEC about the proposed Volcker Rule, I not-so-casually commented that the Volcker Rule “shouldn’t exist at all.”

And then I called the parents of the Volcker Rule, the Dodd-Frank Act, a “joke.”

Well, by the amount of comments I got back from I&I readers - right now, there are about 95,000 of you (and counting) - you’d think I was talking about something really controversial, like contraception, for heaven’s sake.

Talk about passionate!

I understand that people get passionate about contraception. After all, without all that passion, we wouldn’t need contraception.

But me being passionate about the birth of the Volcker Rule, which I said should never had been conceived, apparently caused a lot of to you think I crossed some moral line.

Not me! I’m not one to ever say anything controversial! And I’m certainly not the kind of guy to wade into the contraception debate.

But, if I was, I’d be a strong advocate for it.

The unwelcome birth of the Volcker Rule is a good example…

If the inflamed passion of those two preening peacocks, Chris Dodd and Barney Frank, was sheathed before their love of public attention (and private whoring to special interests) forced them into the “Act” (I’m talking about the Dodd-Frank Act; get your mind out of the gutter), then we wouldn’t have this the bastard-child whose future we are debating.

Actually, though, it’s not that we have the Volcker Rule that’s an issue. It’s the affair between its parents that’s the issue.

There was no happy marriage in Dodd-Frank. It was always a sham.

The Act itself isn’t a marriage certificate, proving a passionate love for the public interest over private banking and financial services.

It’s nothing less than a living will pre-nup that guarantees infidelity everywhere between the sheets it’s dirtied in its making.

By “sheets,” I mean sheets of paper. Dodd-Frank is 848 pages long.

By comparison, it is 23 times longer than the 37-page Glass-Steagall Act, the sensible 1930s legislation that separated deposit-insured commercial banks from risk-taking investment banks and was aborted by Congress in 1999.

Don’t get me started on that…!

All I’ll say is that Dodd-Frank is really an attempt to put Humpty Dumpty (Glass-Steagall) back together again, with the biggest pieces missing.

Just How Ridiculous is Dodd-Frank?

It’s not legislation. It’s not a passion play. It’s a comedy.

It mandates 87 “studies,” of which only 37 have been “completed.”

I just read in The Economist that, according to super-powerhouse law firm Davis Polk (believe me, they are good!), “only 93 of the 400 rulemaking requirements mandated by Dodd-Frank have been finalized.”

If you don’t understand the significance of enacted legislation that isn’t yet written, the Volcker Rule is a perfect example.

The Volcker Rule is a part of Dud-Frankenstein (I mean Dodd Frank, or D-F, as in…).
And it, alone, is some 298 pages (or dirty “sheets”) long.

It was written by four of the five agencies charged with writing and enacting it. The fifth agency, the CFTC, wrote its own 489-page proposal on what should be in the Volcker Rule.

Good thing all our regulatory agencies all work together, right? Good thing they don’t all have their own fiefdoms and competing political agendas, right?

Anyway, Davis Polk says that the Volcker Rule includes 383 questions that themselves result in 1,420 sub-questions. The firm has created an interactive Volcker “rule map” that, according to the magazine, it produced for its clients - as well as 355 “distinct steps” for them to follow.

So, I ask you, this bad marriage, this sham affair, this monster Dud-Frankenstein that birthed the Volcker Rule, or son-of-DF…

Is this any way to legislate?

The Whole Exercise is Another Form of “Extend and Pretend”

Last week, when commenting on the Volcker Rule, I called President Obama “spineless.”

A lot of you didn’t like that either. (Of course, some of you loved it.)

What I was pointing to was that the President came into power with an OVERWHELMING American mandate (and a global mandate, for that matter) to clean up Wall Street and to protect us from what had just happened, ever happening again.

So did he take immediate action upon entering office? No.

Instead of striking while the iron was hot, the President pandered to Wall Street special interests (after all, he had accepted tens of millions of dollars from them in election funds) by pretending to attack banks and bankers, all the while extending the day of reckoning and the writing (if you can call it that) of any legislation to stomp out Wall Street abuses.

And lo and behold, we got Dodd-Frank.

We got shafted.

So today we get to pretend that laws were written (most were not, and never will be, and the ones that are written, like the Volcker Rule, well, you see what’s happening there), while banksters get to extend the time it takes to enact anything meaningful just long enough to get markets to reach new highs and the focus of discussion shifts from what Wall Street hath wrought, to contraception.

So go ahead, get mad at me for bring up contraception. After all, can’t you see that I’m just trying to divert the conversation?

Why we need the Volcker rule

You know there’s a problem when not even Paul Volcker likes the Volcker rule, said James B. Stewart. The former Fed Chairman’s initial three-page proposal outlining how to “curb risk-taking by banks” has swelled in the hands of lobbyists and lawmakers to an incredibly dense 298 pages. Wall Street firms claim the behemoth bill is now “too complex to understand and too costly to adpot,” even though they’re the ones who spent “countless millions of dollars” lobbying to water it down. Having read just five pages “before sinking in a sea of acronyms,” I can tell you the banks are right. And that’s a shame, because the Volcker rule “could be the most important reform to emerge from the financial crisis.” To see why we need it, look no further than Citigroup settlement last week for its “brazenly fraudulent” banking behavior. Now that the Volcker rule has been so hopelessly diluted, the best way to police risk may be to break up too-big-to-fail banks into separate commercial and investment units. Though no panacea, that “would be a start” toward avoiding another crisis.

Read entire article here:


The votes on the rule represent a turning point in financial reform. Although it is only one of 400 rules under Dodd-Frank – and nearly two-thirds of the regulations remain unfinished – the Volcker Rule became synonymous with the law itself. And with regulators easing other rules under Dodd-Frank, the Volcker Rule became a barometer for the overall strength of the law.

In some crucial areas, regulators adopted a harder line than Wall Street had hoped. Under the rule, which bars banks from trading for their own gain and limits their ability to invest in hedge funds, the regulation includes new wording aimed at the sort of risk-taking responsible for a $6 billion trading loss at JPMorgan Chase last year. The rule also requires banks to shape compensation packages so that they do not reward “prohibited proprietary trading.”

In addition, it requires chief executives to attest to regulators every year that the bank “has in place processes to establish, maintain, enforce, review, test and modify the compliance program,” a provision that did not appear in an October 2011 draft of the rule.

But the rule, which aims to draw a line between everyday banking and risky Wall Street activities, has its limits. For example, the regulation leaves it largely up to the banks to monitor their own trading. Some critics of Wall Street also wanted chief executives to attest that their bank was actually in compliance with the rule, not just that it was taking steps to comply.

And in another concession to Wall Street, regulators will delay the effective date of the rule to July 2015. Until then, bank lawyers are expected to scour the rule for loopholes and to consider bringing lawsuits against the regulators.

The Dodd-Frank act: Too big not to fail

The Economist “flaws in the confused, bloated law passed in the aftermath of America’s financial crisis become ever more apparent”

… SECTIONS 404 and 406 of the Dodd-Frank law of July 2010 add up to just a couple of pages. On October 31st last year two of the agencies overseeing America’s financial system turned those few pages into a form to be filled out by hedge funds and some other firms; that form ran to 192 pages. The cost of filling it out, according to an informal survey of hedge-fund managers, will be $100,000-150,000 for each firm the first time it does it. After having done it once, those costs might drop to $40,000 in every later year

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Three Parts of the Volcker Rule, in Cat Photos

The Volcker Rule is a new piece of regulation (71 pages long) that prohibits banks from making risky bets, termed “proprietary trading” on Wall Street.

In The Nation, I highlighted parts of the rule in an article called “The Volcker Rule: Wins, Losses and Toss-ups.” But for the TL;DR set, here’s some of my article, summarized in Cat Photos.

One concern is that regulators are allowing banks to write their own policies & procedures to ensure there is no more prop trading. If these aren’t watched carefully by regulators, it seems there is much potential for mischief, rule-dodging, and disguising:

Another problem with the final rule is that it treats carried interest totally different than the tax code treats it.

From The Nation:

“Private equity fund managers are often paid through ‘carried interest,’ which allows a manager to share in the profits made by the fund.”

Carried interest is taxes at a far lower rate than regular income made through salaries and wages–making this an egregious loophole for wealthy fund manager.

The argument wealthy fund managers make for why this tax treatment makes sense is, hey! Carried interest is ownership! But guess what? In the Volcker Rule, carried interest is NOT considered an ownership interest!

That sounds like reason enough to get Congress to stop the preferential tax treatment of carried interest.

“If the five regulators that wrote Volcker can all agree that carried interest is not an ownership interest, certainly Congress should be able to change the way the tax code treats this kind of compensation. If they don’t, the banks get to have their loophole and pay ultra-low taxes on it, too.” (The Nation)

Another part of the rule that could be weak, is one that is meant to prevent banks from trading with each other (which they used to do all the time, in order to gamble), and just call it “Market Making.”

From The Nation:

“consider other megabanks 'clients’ for the purposes of market-making (when the other bank has $50 billion or more in trading assets and liabilities). This is important because megabanks typically only trade with each other for two reasons: to hedge, or to proprietary trade. Goldman Sachs is a competitor, not a client, of Morgan Stanley, so this clarification makes good sense. Unfortunately, there are two exceptions.”

It will be important for regulators to (1) closely monitor any document exceptions and (2) clarify what “anonymously” means here, to ensure this new restriction on trading between banks isn’t completely subverted.

For more wins, losses and toss-ups in the Volcker Rule, please see my article.

Why JPMorgan gets away with bad bets

Updated 5:39 AM EDT, Tue May 15, 2012 : By William K. Black, Special to CNN

Editor’s note: William K. Black is an associate professor of economics and law at the University of Missouri-Kansas City. A former senior financial regulator and a white-collar criminologist, he is the author of “The Best Way to Rob a Bank is to Own One.”

(CNN) – JPMorgan Chase can be considered a systemically dangerous institution, which means that it is “too big to fail” because the government fears that its collapse would cause a global financial crisis.

It is simply irrational to allow such an institution to exist, especially when it can easily incur a $2 billion trading loss.

Banks are more efficient when shrunk to the point that they can no longer endanger the world economy. But because JPMorgan and similar banks are the leading contributors to Democrats and Republicans, neither political party has the courage to order them to reform.

The Volcker Rule, which aims to prevent insured banks from engaging in speculative bets, was passed as part of the Dodd-Frank Act over the objections of Treasury Secretary Timothy Geithner and almost the entire Republican congressional delegation.

CNNMoney: JPMorgan investment chief out

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William K. Black

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Does the "Promoting Job Creation" Bill Create Jobs, Or Kill Them?

On January 7th, Republicans tried (and failed) to ram a package of 11 bills  through the House of Representatives. The bill, H.R. 37, is officially named the “Promoting Job Creation and Reducing Small Business Burdens Act.” One of its provisions gives banks till 2019 to sell off a financial product made up, in part, of the loans often used in private equity.

Given private equity’s reputation for job destruction, it’s worth asking if this bill actually promotes jobs…or if it kills them.

H.R. 37 was re-introduced this week, and will be voted on January 14th, despite a veto threat from President Obama, and opposition from the U.S. Treasury.

At issue is when big banks need to sell their collateralized loan obligations (CLOs). As Better Markets explains, CLOs are “investment funds that consist of ‘leveraged loans’, (huge, low-rated, corporate loans).”

Leveraged loans are the loans private equity companies use to do what they do: leveraged buyouts. Leveraged loans are usually thought to be more risky, as most companies taking on leveraged loans already have a lot of debt, and thus leveraged loans have a higher risk of default.

H.R. 37 gives banks until 2019 to sell off their CLOs. One argument banks are making in favor of that extension is that if they’re forced to sell their CLOs too quickly, it will destroy the leveraged loan market.

But lessons from private equity show maybe so many leveraged loan market isn’t so great after all.

In a September interview with Disorderly Conduct, economist Eileen Appelbaum noted that private equity’s leverage buyout approach is often pretty bad news for the companies they takes over. According to Appelbaum:

“[T]he best empirical evidence shows that companies owned by private equity go bankrupt at twice the rate that comparable companies that are publicly traded.”

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