Simon Johnson writes: Two diametrically opposed views of Wall Street and the dangers posed by global megabanks came more clearly into focus last week. On the one hand, William B. Harrison, Jr. – former chairman of JP Morgan Chase – argued in the New York Times that today’s massive banks are an essential part of a well-functioning market economy, and not at all helped by implicit government subsidies.

On the other hand, there is a new powerful voice who knows how big banks really work and who is willing to tell the truth in great and convincing detail. Jeff Connaughton – a former senior political adviser who has worked both for and against powerful Wall Street interests over the years – has just published a page-turning memoir that is also a damning critique of how Wall Street operates, the political capture of Washington, and our collective failure to reform finance in the past four years. “The Payoff: Why Wall Street Always Wins,” is the perfect antidote to disinformation put about by global megabanks and their friends.

Specifically, Mr. Harrison makes six related arguments regarding why we should not break up our largest banks. Each of these is clearly and directly refuted by Mr. Connaughton’s experience and the evidence he presents.

First, Mr. Harrison claims that megabanks are the natural outgrowth of requests from customers, rather than the result of extraordinary resources spent on lobbying over the past 30 years. Mr. Connaughton’s book contains all you need to know – and more than you can stomach – about the realities of how the influence industry has worked diligently to build and defend megabanks. The people who really wanted the banks to become bigger were the executives in charge of those organizations – like Mr. Harrison. They spent a lot of money to make this happen. [Continue reading…]

Matt Taibbi writes: Something very interesting is happening.

There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all.

But there’s something brewing that looks like it might be a blueprint to effectively take on the financial services industry: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can’t speak for how well the program will work, but it’s certaily been effective in scaring the hell out of Wall Street.

Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble. Cooked up by a small group of businessmen and ex-venture capitalists, the audacious idea falls under the category of “That’s so crazy, it just might work!” One of the plan’s originators described it to me as a “four-bank pool shot.”

Here’s how the New York Times described it in an article from earlier this week entitled, “California County Weighs Drastic Plan to Aid Homeowners”:

Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County … are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater.

Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property.

I’ve been following this story for months now – I was tipped off that this was coming earlier this past spring – and in the time since I’ve become more convinced the idea might actually work, thanks mainly to the extremely lucky accident that the plan doesn’t require the permission of anyone up in the political Olympus.

Cities and towns won’t need to ask for an act of a bank-subsidized congress to do this, and they won’t need a federal judge to sign off on any settlement. They can just do it. In the Death Star of America’s financial oligarchy, the ability of local governments to use eminent domain to seize toxic debt might be the one structural flaw big enough for the rebel alliance to exploit. [Continue reading…]

The Daily Beast reports: As the chairman of Barclays resigns in the wake of an interest-rate fixing scandal, the city of London is in crisis and Prime Minister David Cameron has announced an urgent Parliamentary inquiry.

“It’s a turning point,” said Martin Vander Weyer, a former director of the investment arm of the British bank, now known as Barclays Capital. “Three scandals have come in Britain in a perfect storm last week.” The NatWest online bank didn’t work for 10 days because of a software problem. Meanwhile, Barclays was caught mis-selling complex interest-rate insurance to small companies and, more important, a LIBOR scandal has emerged.

The London Interbank trading system, known as LIBOR, and its smaller counterpart, EURIBOR, between them set the benchmark for interest rates around the world. The self-regulated system relies on banks accurately reporting the costs of their own borrowing, but the Financial Service Authority and the U.S. Department of Justice fined Barclays a combined $450 million last week for fixing the rate from 2005 to 2009. The early misreporting was to the benefit of the company’s derivatives traders. During the credit crunch, when Lehman Brothers collapsed, Barclays systematically underreported its borrowing costs in order to appear healthier—and thus avoid the nationalization that overtook other British banks, such as Royal Bank of Scotland and Lloyds Halifax.

“It’s not a victimless crime,” Labour MP John Mann, a member of House of Commons Treasury select committee, told The Daily Beast. “If there’s fraud and misreporting, other people lose out: mortgage holders, other counterparties,” he said. “It’s like insider dealing”

Internal emails published by the Justice Department reveal a culture of greed and apparent insider trades, with one trader thanking another for rigging the rates: “Dude I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger! Thanks for the libor.” The Serious Fraud Office in the U.K. is now investigating the case, with class-action lawsuits pending in the U.S.

Despite the resignation of chairman Marcus Agius, the CEO of Barclays, American-born Bob Diamond, remains in place. He wrote to his staff today to apologize to the thousands working in the retail branches for the misbehavior of the traders in the investment arm and to announce an internal investigation. However, Diamond is being described as “the most hated man in Britain” and is due to face the new parliamentary inquiry on Wednesday.

“Mr. Diamond should be sacked,” said Mann, “and LIBOR should be regulated rather than self-regulated.”

Diamond resigned today.

Umair Haque writes: To the long, dismal list of fatally broken institutions — GDP, governments, schools, corporations — we can add the mysterious Libor, and its conveniently comfortable calculation. It’s difficult to overstate what a pillar of the global economy Libor is — it’s used in setting interest rates that affect the daily lives of pretty much every citizen of every advanced economy across the globe. And it’s difficult to overstate how troubling it is that this, too, is an institution rigged by the few, for the few; that this institution too, is, corrupted.

This scandal isn’t about price-fixing. It’s not about a bank. It’s not even about power and privilege, corruption and compromise. It’s about life, tragedy, and human potential. It’s about the capacity to create a worthwhile future. It is, in short, about you and I, and the places we seek for ourselves in the world.

Let me couch this for you in the pedestrian terms of financial hydraulics — the tawdry terms which seem to substitute for thinking in what’s become of our thin, shallow economic and political discourse. The most basic function of a financial system is to price money. If a financial system can’t undertake that simple task effectively — if the price of money is fixed like a roulette wheel stuck on red — all else must necessarily fail: investment must become malinvestment, speculation must precede creation, “profit” must become divorced from benefit, and wealth is effectively transferred from poor to rich, in a form of quiet but lethally effective institutionalized theft.

Now, let me couch this for you in the human terms of political economy — the terms in which you and I should rightly conceive of an “economy” as the sum of the enduring human good; not merely as a set of pipes for the grease of finance to be injected into.

Who authors the destiny of nations? Which compact governs the relations between the powerless and the privileged? Whose rights are sacrosanct? How are fortunes earned — and spent? What does “wealth” mean? If money is in a basic sense a currency in which the fruits of enterprise past are safely kept, to seed the soil of prosperity tomorrow — and if the value of that money itself is corrupted — can one be said to be a participant in “an economy”? Or is one more a pawn in a rigged game of self-destruction; a mark in a Ponzi scheme; a dull-eyed pack animal to which the engines of extraction are yoked? Does “freedom” — in the most primitive sense, autonomy from the circumscription of one’s own inalienable rights, those basic liberties which don’t just accrue to us, but inhere in us — still allow one freedom? Who’s who — master and servant, mechanism and operator, principal and agent, sovereign and serf?

These are the terms of the debate we’re not having. These are the words that are left unsaid. These are the concepts and ideas on which prosperity itself was built. These are the unspoken phrases that flit like ghosts through what’s left stammeringly unspoken by the finely-suited pundits and so-called “leaders” too cowering and afraid, too tempted and silenced, too timid and too petrified to challenge the primacy of a system that’s leaving millions to choke on the fumes of the collapse of their own futures. [Continue reading…]

Yves Smith writes: In case it isn’t yet apparent to you, the unfolding scandal over manipulation of Libor and its Euro counterpart Euribor is a huge deal. Even though at this point, only Barclays [the fourth largest bank in the world], the UK bank that was first to settle, is in the hot lights, at least 16 other major financial players, which means pretty much everybody, is implicated.

First, Libor is the basis for pricing over $10 trillion of loans. As the CTFC noted:

US dollar Libor is the basis for the settlement of the three-month Eurodollar futures contract traded on the Chicago Mercantile Exchange, which had a traded volume in 2011 with a notional value exceeding $564 trillion.

The Wall Street Journal puts total in contracts affected at $800 trillion.

Second is that price fixing is a criminal violation under the Sherman antitrust act. The Department of Justice stressed that Barclays had been the first bank to cooperate with the investigation and had been extremely forthcoming, and for that reason it would not be prosecuted if it complied with the settlement terms for two years. The implication is that the DoJ will not be as generous with other banks involved in the price-fixing scheme. This is an overview from the Financial Times of Barclay’s misdeeds:

The bank admitted that it lowballed estimates of its borrowing costs from late 2007 to May 2009 because it wanted to reassure investors of its strength during the financial crisis and it believed other banks were doing the same. It also admitted that its traders improperly influenced the rate submissions from 2005 to 2008 to make money on derivatives.

Note that, according to Barclays, there were two scandals: one is the usual “rogue traders” sort, which took place from 2005 to 2007 (funny how these CEOs take credit for overall performance for bonus purposes and blame inadequately supervised lower level employees whenever real trouble arises?); the second, as we will discuss, is that Barclays submitted lower rates for the daily Libor “fixing” than its actual funding costs to make itself look healthier than it was during the crisis. [Continue reading…]

Will Hutton writes: Investment banking is an organised scam masquerading as a business. It is defined by endemic conflicts of interest, systemic amoral behaviour and extreme avarice. Many of its senior figures should be serving prison sentences or disgraced – and would have been if British regulators had been weaned off the doctrine of ” light touch” regulation earlier and if the Serious Fraud Office’s budget had not been emasculated by Mr Osborne. It is a tax on wealth generation and an enemy of honest endeavour – the beast that is devouring British capitalism.

Matt Taibbi writes: Someday, it will go down in history as the first trial of the modern American mafia. Of course, you won’t hear the recent financial corruption case, United States of America v. Carollo, Goldberg and Grimm, called anything like that. If you heard about it at all, you’re probably either in the municipal bond business or married to an antitrust lawyer. Even then, all you probably heard was that a threesome of bit players on Wall Street got convicted of obscure antitrust violations in one of the most inscrutable, jargon-packed legal snoozefests since the government’s massive case against Microsoft in the Nineties – not exactly the thrilling courtroom drama offered by the famed trials of old-school mobsters like Al Capone or Anthony “Tony Ducks” Corallo.

But this just-completed trial in downtown New York against three faceless financial executives really was historic. Over 10 years in the making, the case allowed federal prosecutors to make public for the first time the astonishing inner workings of the reigning American crime syndicate, which now operates not out of Little Italy and Las Vegas, but out of Wall Street.

The defendants in the case – Dominick Carollo, Steven Goldberg and Peter Grimm – worked for GE Capital, the finance arm of General Electric. Along with virtually every major bank and finance company on Wall Street – not just GE, but J.P. Morgan Chase, Bank of America, UBS, Lehman Brothers, Bear Stearns, Wachovia and more – these three Wall Street wiseguys spent the past decade taking part in a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from “virtually every state, district and territory in the United States,” according to one settlement. And they did it so cleverly that the victims never even knew they were being ­cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it, and its manner of disappearance had a familiar name: organized crime.

In fact, stripped of all the camouflaging financial verbiage, the crimes the defendants and their co-conspirators committed were virtually indistinguishable from the kind of thuggery practiced for decades by the Mafia, which has long made manipulation of public bids for things like garbage collection and construction contracts a cornerstone of its business. What’s more, in the manner of old mob trials, Wall Street’s secret machinations were revealed during the Carollo trial through crackling wiretap recordings and the lurid testimony of cooperating witnesses, who came into court with bowed heads, pointing fingers at their accomplices. The new-age gangsters even invented an elaborate code to hide their crimes. Like Elizabethan highway robbers who spoke in thieves’ cant, or Italian mobsters who talked about “getting a button man to clip the capo,” on tape after tape these Wall Street crooks coughed up phrases like “pull a nickel out” or “get to the right level” or “you’re hanging out there” – all code words used to manipulate the interest rates on municipal bonds. The only thing that made this trial different from a typical mob trial was the scale of the crime. [Continue reading…]

Matt Taibbi writes: Two years ago, when he signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, President Barack Obama bragged that he’d dealt a crushing blow to the extravagant financial corruption that had caused the global economic crash in 2008. “These reforms represent the strongest consumer financial protections in history,” the president told an adoring crowd in downtown D.C. on July 21st, 2010. “In history.”

This was supposed to be the big one. At 2,300 pages, the new law ostensibly rewrote the rules for Wall Street. It was going to put an end to predatory lending in the mortgage markets, crack down on hidden fees and penalties in credit contracts, and create a powerful new Consumer Financial Protection Bureau to safeguard ordinary consumers. Big banks would be banned from gambling with taxpayer money, and a new set of rules would limit speculators from making the kind of crazy-ass bets that cause wild spikes in the price of food and energy. There would be no more AIGs, and the world would never again face a financial apocalypse when a bank like Lehman Brothers went bankrupt.

Most importantly, even if any of that fiendish crap ever did happen again, Dodd-Frank guaranteed we wouldn’t be expected to pay for it. “The American people will never again be asked to foot the bill for Wall Street’s mistakes,” Obama promised. “There will be no more taxpayer-funded bailouts. Period.”

Two years later, Dodd-Frank is groaning on its deathbed. The giant reform bill turned out to be like the fish reeled in by Hemingway’s Old Man – no sooner caught than set upon by sharks that strip it to nothing long before it ever reaches the shore. In a furious below-the-radar effort at gutting the law – roundly despised by Washington’s Wall Street paymasters – a troop of water-carrying Eric Cantor Republicans are speeding nine separate bills through the House, all designed to roll back the few genuinely toothy portions left in Dodd-Frank. With the Quislingian covert assistance of Democrats, both in Congress and in the White House, those bills could pass through the House and the Senate with little or no debate, with simple floor votes – by a process usually reserved for things like the renaming of post offices or a nonbinding resolution celebrating Amelia Earhart’s birthday.

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.” [Continue reading…]

Even if the recession is over as far as Wall Street is concerned, it sounds like the 1% still feel deeply wounded by a nation that fails to recognize their true value.

Nicholas Confessore describes the Obama campaign’s struggle to collect money from those who were once the president’s biggest financial backers.

One day in late October, Jim Messina, Obama’s campaign manager, slipped into the Regency Hotel in New York and walked up to a second-floor meeting room reserved by his aides. More than 20 of Obama’s top donors and fund-raisers, many of them from the financial industry, sat in leather chairs around a granite conference table.

Messina told them he had a problem: New York City and its suburbs, Obama’s top source of money in 2008, were behind quota. He needed their help bringing the financial community back on board.

For the next hour, the donors relayed to Messina what their friends had been saying. They felt unfairly demonized for being wealthy. They felt scapegoated for the recession. It was a few weeks into the Occupy Wall Street movement, with mass protests against the 1 percent springing up all around the country, and they blamed the president and his party for the public’s nasty mood. The administration, some suggested, had created a hostile environment for job creators.

Messina politely pushed back. It’s not the president’s fault that Americans are still upset with Wall Street, he told them, and given the public’s mood, the administration’s rhetoric had been notably restrained.

One of the guests raised his hand; he knew how to solve the problem. The president had won plaudits for his speech on race during the last campaign, the guest noted. It was a soaring address that acknowledged white resentment and urged national unity. What if Obama gave a similarly healing speech about class and inequality? What if he urged an end to attacks on the rich? Around the table, some people shook their heads in disbelief.

“Most people in the financial world,” a top Obama donor later told me, “do not understand how most of America feels about them.” But they think they understand how the president’s inner circle feels about them. “This administration has a more contemptuous view of big money and of Wall Street than any administration in 40 years,” the donor said. “And it shows.”

Historically, Wall Street, like many large and heavily regulated industries, has been Republican in its politics but pragmatic when it comes to political giving. For most of the last two decades, according to the Center for Responsive Politics, the financial world has split its donations between the two parties, usually favoring Republicans but also giving generously to the Democratic lawmakers who dominate New York.

Even if they didn’t agree with Obama on everything in 2008, many in the financial industry looked at him then and saw a reflection of their imagined best selves: brainy, self-made, above the mewlings and histrionics of partisan politics. He seemed like the kind of Democrat even white-shoe Republican bankers and libertarian hedge-funders could get behind, and many of them did. “There is a growing belief on Wall Street that Barack Obama has the capacity to lead us out of this wilderness,” Jim Cramer, the financial journalist, wrote several weeks before Election Day.

Obama far outraised his Republican rival, John McCain, on Wall Street — around $16 million to $9 million — and Goldman Sachs executives sent Obama more money than employees of any other company in the world. But four years, one recession and a host of battles — over financial regulation and the nomination of Elizabeth Warren, over Dodd-Frank and the Buffett Rule — have taken their toll. Some on Wall Street are apoplectic. One former supporter, Dan Loeb, compared Obama to Nero; the president’s enemies insinuated worse. In 2010, Stephen A. Schwarzman, a founder of Blackstone, said that an Obama proposal to raise taxes on “carried interest” — the main source of income for most private-equity managers — reminded him of “when Hitler invaded Poland in 1939.”

Part One is divided into two episodes. Episode one has four chapters:

Continue reading →

Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa. In an op-ed for the New York Times, Smith describes as the company’s toxic and destructive culture.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.

It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.

These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.