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Sunday, November 20, 2011

The Committee to Save the World and Brooksley Born - 4 Men and a Woman

This is a short conversation about derivatives and credit default swaps and what part they played in the breakdown of our financial system in 2008. It is also about some of the significantly responsible people who were involved.

First, it is possible to separate, to some extent, the housing bubble from the machinations of the financial institutions. The housing bubble, to a great extent, was caused by having interest rates too lowfor too long a period and by the overzealousness of Fannie and Freddie to move hordes of people to home ownership. It was then that Wall Street got into the picture. The mortgages were incorrectly rated , traunched and sold, some as backers of securities. Then derivatives, along, with other sophisticated devices were used to hedge their bets. Derivatives are, in effect, insurance policies and derivative contracts were entered into by private parties so that there was no transparency or regulation.

Before that, however, in 1998, after President Clinton appointed Brooksley Born Chairman of CFTC (Commodity Futures Trading Commission), the dirty work began. Brooksley Born was a woman who had earlier applied to Stanford University to study medicine. She was advised by her guidance counselor to become a nurse. Instead, Ms. Born decided to go to law school at Stanford and graduated first in her class.

Later, she became an expert on derivatives and, thus, was named the head of the CFTC, an agency with the sole authority to regulate derivatives. Brooksley Born, as chairman of the Commodity Futures Trading Commission, was well aware of the danger that unregulated, sophisticated financial instruments such as derivatives would be likely to cause.

At the time, there were four men who were named to the President's powerful “Working Group on Financial Markets.” Three of them, Alan Greenspan, Robert Rubin and Larry Summers were called, by Time magazine, “The Committee to Save the World.” After the CFTC started its work in earnest to regulate derivatives, “The Committee to Save the World,” joined by Arthur Levitt, head of the SEC, decided that Brooksley Born had to be stopped.

One morning, Larry Summers called Ms. Born and told her that he had thirteen bankers in his office who had just told him that her actions would bring chaos to the derivative market and, further, would stifle financial innovation and encourage financial capital to transfer its transactions offshore. “You're going to cause the worst financial crisis since the end of World War II.” He further said, “Stop, right now. No more.”

Later, the four men (Arthur Levitt, Alan Greenspan, Larry Summers and Robert Rubin) subsequently appeared before Congress and completely discredited Brooksley Born. They, in effect, told Congress that this is just a woman who doesn't understand derivatives. Arthur Levitt was to say, much later, that he had never met Ms. Born and that he totally relied on the other three in his criticism of her.

As to Alan Greenspan, he was in part responsible for the housing bubble in that he held interest rates unreasonably low for 2 ½ years or more. In addition, Greenspan was, in part, responsible for the financial crisis because of his opposition to the regulation of derivatives. Derivatives are seen, by many experts, as playing a central role in the financial breakdown. Bob Rubin, in his role as chairman of the executive committee of Citicorp, contributed to the downfall of Citicorp. Larry Summers, by his bullying of Brooksley Born, played a major role in the deregulation of derivatives. In fact, in the year 2000, once again, under President Clinton, the Commodities Futures Modernization Act was passed and signed into law. (The act would more appropriately be called, “The Tax Payers Net Worth Reduction Act.”) The chief proponents of this law were "The Committee to Save the World.” In addition, Sen. Gramm, Republican from Texas, insisted that the act include Swaps. It does.

The question remaining is, “What do these perpetrators suffer?”-these mighty individuals who played so great a part in losing trillions of dollars for millions and millions of Americans. Apparently, they suffer nothing. Alan Greenspan appears frequently on CNBC for his sage financial advice. Larry Summers was named chief financial advisor to and by President Obama. As for Bob Rubin, President Clinton, in an interview in 2010, said that Rubin was wrong in the advice he gave him not to regulate derivatives. Since his demise, Bob Rubin has appeared for very few interviews.

Is it any wonder that many people in America are, even now, parading in the streets against those policymakers in our government and those big banks and others they bailed out on Wall Street?

Tuesday, May 31, 2011

Too Big to Fail

A MUST SEE based on the best seller by Andrew Ross Sorkin. Just saw the HBO film "Too Big to Fail" and it is a compelling, insightful look into the financial crisis and behind the scenes bargaining beginning in 2008. See the trailer below.

Saturday, October 2, 2010

POTPOURRI OF OPINION - the Economy, the Building Industry, the National Debt, The Mosque

The Economy

The economy will not begin full recovery until the building industry recovers. For a number of reasons, the home buying public has decided that this is not the right time for them to buy. When the buyers decide to release the huge pent up demand for housing, the industry will quickly recover. With that, the economy has the greatest chance of complete recovery.

It sounds simple, but we can't forget the 535 articulate incompetents in the Congress. In their constant pursuit of re-election, they will tinker and tinker some more. Antecedent probability tells us, by looking at at least six of the recessions since World War II, that it makes little difference that the interest rates are at an all time low or that housing prices are probably, in most markets, as low as they are going to fall. People are simply not ready to buy. Tinkering with the economy may do more harm than good. Don't forget that FDR tinkered continually and started more programs than all his predecessors combined. Ten years after the Wall Street crash, and six years after he assumed office, in 1939, unemployment still stood at 17%. We'll just have to wait and see if the great minds of the Congress don't end up stifling the recovery. Keynesianism has its limits. It's axiomatic that recessions begin and recessions come to an end.

The National Debt

In 2000, the National Debt of the United States was a little more than $5 trillion. When George W. Bush left office, in the year 2008, it was over $11 trillion. It is now almost $13.5 trillion. As a result, other developed countries are beginning to lose confidence in the ability of the United States to contain its spending. The national debts of most European countries relative to GDP are in the 70+% range. In Zimbabwe it is 300%. In Chile, the national debt is 11% of GDP. In the United States it's racing towards 100% of GDP. This is a result of the free spenders in Congress spending for political purposes with little regard to the state of the union and a President who was unwilling to veto even the wildest of spending bills.

On the other hand, President Gerald Ford, with 2 years in office, vetoed 49 spending bills. He, at least, did what he could to restrain the Congress from their insatiable drive to spend our money. For this, at the end of 2 years, he was asked to leave. Apparently, he didn't live up to the political standards of the American public. The national debt the size of ours is a very serious problem, which will take years, if ever, to narrow down to workable proportions. It would be interesting to finance an independent study to determine where we are compared to during the 500 year decline of the Roman Empire.

The Mosque

As we painfully watch the saga of “The Mosque” drag forward, we see bigotry, ignorance, shortsightedness and a barrel full of demagoguery; all combined will probably lead to major problems for us in the future.

Tuesday, April 20, 2010

A Letter, Intercepted - Eleanor Clift and a painless fix for Social Security

TO: Eleanor Clift
C/O The McLaughlin Group

Dear Ms. Clift:

Several weeks ago, on McLaughlin, you made a statement that one of the painless ways to solve the Social Security problem is to simply raise the retirement age. We are astonished and disappointed that you would join the likes of Pat Buchanan and Charles Krauthammer. Pat Buchanan, the great protector of the working class, wants to raise the retirement age to 70. Charles Krauthammer, in his customary arrogance, says “fixing Social Security is simple. It just requires raising the retirement age.” To arrive at this conclusion involves a process of reasoning which violates nearly all of the 8 rules of the syllogism.

It simply does not follow that because one lives longer, one can work longer. This is unjust, and an insult, to the millions of Americans who work with their arms, legs and backs. These people are the assembly line workers, the men and women who hang sheet rock, the brick layers, the concrete finishers, the coal miners and all the people who toil with their bodies from the time they are 18, or even earlier. We would suggest that you ask your doctor, but we are afraid your doctor wouldn't have any idea what the working class endures. The fact is, that these people, after at least 40 years when they reach age 60, cannot work at their trades or jobs any longer. Even hairdressers who stand on their feet for 40 years are usually finished by age 60.

Of course, it's not expected that those among us who have never lifted anything heavier than half a ream of paper would give this a second thought. The elitists of this country don't even know that these people exist. They think that all these myriads of jobs performed for them to make their lives easier in all respects, are performed by some invisible robot. These working Americans do exist, their bodies do wear out, no matter how long they live. Yet, their lives are affected by the positions that people of your ilk take concerning their future.

We urge you to think more in depth about this subject before, so cavalierly, adopting an idea which is so detrimental to the millions of Americans of the working class. We also suggest that you take a hard look at the present system historically. For the first 50 years, 1935 to 1985, the system worked moderately well. Then the tinkering started and it will continue until it becomes evident to all that the present system was never designed to be viable over the long haul. There are plans on the planet which are designed to work for centuries. No doubt, there will be objection to this, especially from our leaders who will say that we know best and that we don’t have to lift any ideas from any other countries. Our response is what H. L. Mencken said when the situation demanded it. Bosh and folderol.

We would love to hear your thoughts on raising the retirement age.

Monday, April 5, 2010

Justice with Michael Sandel

Justice is one of the most popular courses in Harvard’s history. Now it’s your turn to take the same journey in moral reflection that has captivated more than 14,000 students, as Harvard opens its classroom to the world.

In this twelve part series, Sandel challenges us with difficult moral dilemmas and asks our opinion about the right thing to do. He then asks us to examine our answers in the light of new scenarios. The results are often surprising, revealing the important questions are never black and white.

This course also addresses the hot topics of our day—affirmative action, same-sex marriage, patriotism and rights—and Sandel shows us that we can revisit familiar controversies with a fresh perspective.