Top executives and world leaders discuss global economy in Davos

The World’s leading banking and finance executives, industry regulators, and billionaire investors like Warren Buffet and George Soros – the Wall Street crowd writ large – will head to the annual World Economic Forum held in Davos, Switzerland this week.  This little mid-winter get-away traditionally coincides with the banking sector’s year-end bonus season and their requisite winter ski vacation.  This comes just days after US President Barack Obama unveiled plans for the most stringent rules on financial institutions in decades as he seeks to prevent a repeat of the global financial crisis that prompted costly government bailouts of banks. President Obama is expected to repeat his newly aggressive stance toward the financial industry in a populist message in his annual State of the Union address on Wednesday.

Over 2,500 leaders from more than 90 nations representing business, finance, government and philanthropy will address pressing global issues in discussion format, often followed by Q&A from the audience. According to a number of sources, industry executives are planning to use the Swiss ski resort’s annual global economics jamboree to surreptitiously lobby against President Obama’s reinvigorated restrictions on casino-like proprietary trading, mergers, and too big to fail financial institutions who’s operations benefit from FDIC (i.e., taxpayer insured) protection or federal bailout funds (e.g., TARP).  In my opinion, this unintended role by the government prompted by taxpayer funded bailouts establishes both a legal, as well as a legitimate public role as an equity shareholder in the sector, and as such a say in how the  banks ought to be governed.  Interestingly, many financial quarters in the Euro zone have emrbaced President Obama’s firmer stance and have been calling on their regulators to follow suit.  Read more on that here.

And based on various reports I have read, bank chiefs braving the media spotlight at the glitzy Davos summit – who will include Citigroup’s Vikram Pandit, JP Morgan Chase’s Jamie Dimon, among others  – will make their own case to regulators while also networking with well-heeled clients and C-suite colleagues. Their focus will largely be on Obama’s proposals for stopping banks from taking risky bets with their own capital to make money on the financial markets – a practice known as “proprietary trading.”  According to a report in this morning’s Financial Times, some senior bankers will argue that banks’ proprietary activity was not a key source of the credit crisis – and so should not be stamped out. 

The Davos summit is also likely to be used by international regulators to try to forge a common front. A crucial plank in the strategy of the global financial lobby will be to shift the debate, as well as shifting the the burdens resulting from the financial meltdown, to regulators and international bodies such as the G-20 or Basel committees, and to argue that regulators need to take a more coordinated approach to curbing systemic risk.

Some senior private equity and hedge fund managers will argue that banks’ proprietary activity was not a key source of the credit crisis - and so should not be stamped out. They will also argue vociferously against the idea of breaking up so-called ‘too big to fail’ financial institutions. By contrast, many notable voices in the debate, myself included, have argued that institution that are considered too big to fail are, in fact, too big to exist by the sheer threat and risk that they pose to the global financial architecture. Read more on that here.

Source:  FT.com,  HuffPo.com, The Guardian (UK)      Photo: WEC.org

Finally capitulating to voter outrage, and the very kind of “Change” he campaigned on last year, President Obama proposed tough new financial industry restrictions under what he called “the Volcker Rule” – named after Paul Volcker, the former Fed Chair.  Volcker, along with Austin Goolsbee, a member of the President’s Council of Economic Advisers, have been for the last year the Administration’s fiercest advocate for stronger financial regulatory reforms.  Volcker has been particularly aggressive on the issue of “too big to fail” financial institutions, as well as the high-risk, casino-like proprietary trading operations at the big banks that nearly destroyed the financial system.  In adopting this new tougher stand, Mr. Obama appears to have set aside a ‘soft touch’ approach to financial regulatory reform that had been championed by his economic team, led by Treasury Secretary Timothy F. Geithner and White House National Economic Council Director, Lawrence Summers.  The Geithner-Summers axis appears to have been benched in exchange for the emergent Volker-Goolsbee axis.

 In rolling out his new, more aggressive, tough talk approach to Wall Street, the president added,  “We have to get this done,” and “If these folks want a fight, it’s a fight I’m ready to have.”  It was a stern, populist lecture from the president to Wall Street for what he perceives as its abandonment of Main Street. Obama said the government should have the power to limit the size and complexity of large financial institutions as well as their ability to make high-risk trades.  He said it wasn’t appropriate that banks have been able to run these trading operations with the protections afforded to regular banking services.  Among other strong language, the president branded bank executives as “fat cats” and proposed a fee on large banks to cover shortfalls in the government’s $700 billion taxpayer bailout fund.  Expanding on earlier measures, Obama endorsed Volcker’s proposal to restrict risky proprietary trading by commercial banks that is often in direct conflict with customer interests to the bank’s benefit.  The new measures would also separate commercial banks from investment banks, a line blurred a decade ago by the Republican-led Congress’ repeal of the Depression-era Glass-Steagall Act.

Obama also proposed addressing one of the clearest issues leading to the financial crisis of the past years, namely banks that stray wildly from their core mission of serving the interests of their customers.  Having met with Paul Volcker this morning, and having last week proposed new fees on Wall Street to ensure the taxpayers get their money back, the President came with a direct message for banks that might object to these changes strongly criticizing the powerful financial industry lobby, saying “But what we’ve seen so far, in recent weeks, is an army of industry lobbyists from Wall Street descending on Capitol Hill to try and block basic and common-sense rules of the road that would protect our economy and the American people. So if these folks want a fight, it’s a fight I’m ready to have.  And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can’t lend more to small business, they can’t keep credit card rates low, they can’t pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers — that’s the claims they’re making.  It’s exactly this kind of irresponsibility that makes clear reform is necessary.

The President went on to explain the reforms he was proposing in more detail saying, among other things:

First, we should no longer allow banks to stray too far from their central mission of serving their customers.  In recent years, too many financial firms have put taxpayer money at risk by operating hedge funds and private equity funds and making riskier investments to reap a quick reward.  And these firms have taken these risks while benefiting from special financial privileges that are reserved only for banks.

Our government provides deposit insurance and other safeguards and guarantees to firms that operate banks.  We do so because a stable and reliable banking system promotes sustained growth, and because we learned how dangerous the failure of that system can be during the Great Depression. 

But these privileges were not created to bestow banks operating hedge funds or private equity funds with an unfair advantage.  When banks benefit from the safety net that taxpayers provide –- which includes lower-cost capital –- it is not appropriate for them to turn around and use that cheap money to trade for profit.  And that is especially true when this kind of trading often puts banks in direct conflict with their customers’ interests.

The fact is, these kinds of trading operations can create enormous and costly risks, endangering the entire bank if things go wrong.  We simply cannot accept a system in which hedge funds or private equity firms inside banks can place huge, risky bets that are subsidized by taxpayers and that could pose a conflict of interest.  And we cannot accept a system in which shareholders make money on these operations if the bank wins but taxpayers foot the bill if the bank loses.  Read more from the White House fact sheet.

Source:   www.WhiteHouse.gov

ABA CEO: Taxpayer outrage "is perplexing to us."

Following the lead of Europe’s approach to their financial industry reforms, the Obama Administration in coming weeks is poised to take a more aggressive stance with the financial industry.  To date, the Administration’s Achilles heel in its reform efforts has been US Treasury Secretary Tim Geithner’s soft touch with Wall Street. He has come under increasing scrutiny critical of his cozy and fraternal relationship with Wall Street.  Many say Geithner, as a regulator and later as the financial industry’s ‘Bailout king,’ often aligned reform policy with the industry’s interests and desires above those of consumers and taxpayers.  However, tiring of the financial industry’s tone deafness to the nation’s populist outrage, the Administration is weighing a levy aimed at recovering bailout tax dollars and help in reducing the federal budget deficit in the first of a series of strict industry reforms being addressed on Capitol Hill this year from government-rescued financial firms.

In response to the proposed measures, Edward Yingling, President & CEO of the American Bankers Association (ABA), the banking sectors powerful industry lobby, said “It is perplexing to us,” why the Administration is seeking tougher regulatory reforms to ensure recouping taxpayers investment in the bank bailouts. Read more here.

Source:  HuffPo & NYT                           Image: www.citizen.org

CQ: Obama accummulated impressive string of legislative accomplishments

According to an interesting empirical study commissioned by Capitol Hill’s weekly newspaper and the leading publisher of the nation’s legislative record, Congressional Quarterly (CQ), President Obama has accummulated an impressive string of legislative accomplishments unrivaled by any previous POTUS.  Among other things, the study calls his accomplishments to-date an “unprecedented success rate” and outlines a number of reason’s for the president’s legilsative success rate such as (1) his propensity to negotiate and compromise on issues important to his legislative agenda, (2) the fact that his party owns a working majority in both houses of Congress, and (3) the sheer magnitude of an unusually pressing legislative calendar as the nation struggles through two wars, Healthcare reform, the Great Recession, a global economic  crisis, financial regulatory reform, an Energy crisis, an obstructionist opposition party, al-Qaida Terrorism, global warming, restructuring the Auto industry, carbon trading, and an erratic band of fringe lunatics and gratuitously hostile partisans.  I found it to be an interesting read, if not (at last!) a rare credible source willing to objectively acknowledge an impressive body of work only a year into the Obama administration.  Interestingly, a substantial portion of that body of legislative accomplishments is composed of global trade, foreign policy and economic legislation.  I am working on a piece now to be posted in the not-too-distant future outlining and summarizing the presidents global trade, markets and economic-related accomplishments. But for now, read more here.

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In his first year in office, President Obama did better even than legendary arm-twister Lyndon Johnson in winning congressional votes on issues where he took a position, a Congressional Quarterly study finds. The new CQ study gives Obama a higher mark than any other president since it began scoring presidential success rates in Congress more than five decades ago. And that was in a year where Obama tackled how to deal with Afghanistan, Iraq, an expanding terrorist threat, the economic crisis and battles over health care.

Unprecedented Success Rate

Obama has been no different from his predecessors in that he’s always ready to send a firm message to the other end of Pennsylvania Avenue as he “urges members of Congress” to come together and act. All presidents demand specific action by Congress — or at least they ask for it. But when you look at the votes of 2009 in which Obama made his preference clear, his success rate was unprecedented, according to John Cranford of Congressional Quarterly. “His success was 96.7 percent on all the votes where we said he had a clear position in both the House and the Senate. That’s an extraordinary number,” Cranford says.

The previous high scores were held by Lyndon Johnson in 1965, with 93 percent, and Dwight Eisenhower, who scored 89 percent in 1953. Cranford notes that George W. Bush’s score hit the high 80s in 2001, the year of the terrorist attacks on the World Trade Center. But Obama surpassed them all, Cranford says.

He Picked His Battles

A major reason for Obama’s record high score this year: Democrats took away a significant number of seats from Republicans in the 2006 and 2008 elections, resulting in big majorities in the House and Senate for the president’s party.

But Sarah Binder, a congressional analyst at the Brookings Institution, says there’s another key reason he scored so well. She says he only took an official position on issues that were really important to him — those that he knew he had a very good chance of winning. He picked his battles carefully.

His success was 96.7 percent on all the votes where we said he had a clear position in both the House and the Senate. That’s an extraordinary number.

“He can do that because he’s been in the Senate, his staff has been in the House and he understands the process here. They are consummate congressional insiders in understanding how this works,” Binder says. Binder says the intense partisanship in Congress these days, a condition underlined in a separate CQ vote study, meant that Democrats were more likely to rally around the president each and every time he asked them to — if only to deny the Republicans a victory.

The Downside Of Compromise

But another contributing factor here may prove more controversial for the president and his party. That’s his willingness to negotiate and to compromise. For example, as much as the president said he wanted a public option as part of a health care bill, the final legislation won’t have one. But that’s not counted as a loss for the president under the scoring of this survey. Such compromises have brought strong criticism from the liberal wing of the president’s own party. But White House Chief of Staff Rahm Emanuel, a veteran of Congress, says compromise has a long, long history — one that makes it a great part of the democratic process.

“The question is: Are you compromising a set of principles, or are you making adjustment in strategies, roads, that can still achieve the same objectives? And not every compromise is the same in weight,” Emanuel says. On health care, for example, the White House insists that compromise was the only way to get the necessary 60 votes in the U.S. Senate. Emanuel also cautions that having the president score so high on votes where he took a stand is not at all the same thing as having the White House get everything it wanted.

It will get tougher for the president in Congress this year, as more and more members of Congress look to their own re-election. Many are running in districts that voted for Republican John McCain in the 2008 presidential election. And even other districts are far from safe for the Democratic Party.

Source: Congressional Quarterly          Image: www.thewire.sheknows.com

Wall Street's favorite regulator pushed AIG to hide sweetheart deal

Jan. 7 (Bloomberg) — The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.  AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

Visit msnbc.com for breaking news, world news, and news about the economy

Issa requested the e-mails from AIG Chief Executive Officer Robert Benmosche in October after Bloomberg News reported that the New York Fed ordered the crippled insurer not to negotiate for discounts in settling the swaps. The decision to pay the banks in full may have cost AIG, and thus taxpayers, at least $13 billion, based on the discount the insurer was seeking. The e-mail exchanges between AIG and the New York Fed over the insurer’s disclosure of the transactions show that the regulator pressed the company to keep details out of the public eye. Read more here.

And this from HuffPo…

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information to the SEC,” Issa said in a statement. “The American taxpayers, who own approximately 80% of AIG, deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information. “This news ought to serve as a cautionary tale to those who advocate giving the Federal Reserve even more power over the U.S. economy. The lack of transparency and accountability is disturbing enough, but the outstanding question that remains is why the [New York Fed] didn’t fight for a better deal for the American taxpayer. Clearly, the New York Fed wanted to suppress details and limit disclosure of the counterparty deal from the American people — the only question is why?”

Read the actual e-mails on Scribd here.

In a March 12, 2009, e-mail, Kathleen Shannon, an AIG in-house lawyer and senior vice president, told AIG executives that the firm needed to come up with a reason, per the New York Fed, for why it wasn’t going to publicly disclose details regarding payments to counterparties.

“In order to make only the disclosure that the Fed wants us to make…we need to have a reasonable basis for believing and arguing to the SEC that the information we are seeking to protect is not already publicly available,” Shannon wrote in an e-mail sent at 10:55 p.m. on March 12.  Around noon the next day, a New York Fed official, Alex Latorre, e-mailed a colleague, Sarah Dahlgren, writing: “…I understand that the company is still deliberating on the proposal surrounding the disclosure. It is important that they reach consensus quickly.”

The power of the Fed in forcing AIG to keep these details secret cannot be understated. As detailed in journalist Andrew Ross Sorkin’s recent book on the bailout, “Too Big To Fail“, AIG officials had been pleading with the New York Fed for assistance throughout the crucial first weeks of September 2008 before the firm was finally given a taxpayer-funded bailout. The firm’s pleadings were largely ignored by Geithner, who was preoccupied with Lehman Brothers and other Wall Street broker-dealers like Merrill Lynch, Morgan Stanley and Goldman Sachs. The firm owes the Fed its survival. Wall Street firms like Goldman Sachs, Merrill Lynch and Wachovia got full value for their derivatives contracts with AIG, and taxpayers got stuck with the bill. In total, $27.1 billion of public money was transferred to companies that did business with AIG. It was largely seen as a “backdoor bailout” for firms like Goldman.

Instead of bargaining with AIG’s numerous counterparties to resolve its billions of dollars in souring derivatives contracts, Geithner’s team ended up having AIG pay top dollar for toxic assets — “an amount far above their market value at the time,” the November report noted. It described how the team led by Geithner failed nearly every step of the way. 

Read more from HuffPo here.

Wall Street's destructive risk-taking practices continue unchecked

Jan. 6 (Bloomberg) — On what remains of Wall Street these days, the past year was filled with one opportunity after another to fix the myriad fundamental structural deficiencies — revealed all too painfully by the financial crisis — that continue to plague the country’s large securities firms.  At year’s end, not a single one had been adequately addressed, let alone resolved.

This ongoing failure to act in the face of the worst economic downturn since the Great Depression is especially disappointing since President Barack Obama was elected, in part, on a promise to bring constructive and lasting change to the canyons of Wall Street. A few weeks after the 2008 presidential election, Rahm Emanuel, newly appointed as Obama’s chief of staff, spoke at a Wall Street Journal conference and reflected on the numerous crises — financial, energy-related and in foreign policy — that the Bush administration had left for Obama to clean up.  “You never want a serious crisis to go to waste,” Emanuel said, “and what I mean by that, it’s an opportunity to do things that you think you could not do before.” The coming changes to the financial regulatory system, he added, should be based upon the principles of “transparency and accountability.”

Emanuel had it exactly right. So did Obama, 10 months later on the one-year anniversary of the collapse of Lehman Brothers, when he addressed business leaders at Federal Hall at the corner of Wall and Broad streets. “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,” he said then. He went on to demand “strong rules of the road to guard against the kind of systemic risks we have seen” and asked Wall Street to join in rewriting the regulations for a new post-crash epoch.

Alas, we still await the reforms that are so desperately needed to prevent the recurrence of the speculative bubbles — and their vicious unwinding — that have become all too prevalent during the last 25 years of laissez-faire regulations and unalloyed hubris and greed among many finance professionals.

Not surprisingly, as Congress dallies, Wall Street has been only too happy to return with all deliberate speed to business as usual. Only now, things are better than ever for it. The Wall Street firms that were bailed out thanks to taxpayer largesse — especially Goldman Sachs, Morgan Stanley and JPMorgan Chase — have the best of all possible worlds: little or no regulatory reform, far fewer serious competitors and an absurdly low interest-rate environment that allows them to obtain financing for close to nothing, from the Fed or from the public markets. Through arbitrage, they can then take advantage of widening spreads to reap levels of profitability unimaginable a year ago.

What is most remarkable about both pieces of legislation is just how light a touch they seem to put on the powers-that-be on Wall Street. On one hand, this is entirely predictable: Wall Street remains superb at lining the pockets of its chief congressional overseers. On the other hand, it is a bitter disappointment…  Read more here.

Source: Bloomberg.com, William Cohan

William Cohan, a Bloomberg Television contributing editor, is the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street” and “The Last Tycoons: The Secret History of Lazard Freres & Co.”

Signs of revival on the factory floor emerged in the United States and Asia on Monday, fueling exultant buying on Wall Street and reinforcing a sense that genuine economic recovery was unfolding. But if the Great Recession has indeed relaxed its grip on American life, it has been replaced by something that might be called the Great Ambiguity — a time of considerable debate over the clarity of economic indicators and the staying power of apparent improvements.

Manufacturing expanded in the United States in December, the fifth straight month of gains, amplifying hopes that a job market hobbled by double-digit unemployment might finally be adding paychecks. New jobless claims slipped markedly last week. Some economists think data to be released on Friday will show the economy gained jobs in December, the first monthly net increase in two years.  “We’re really coming back,” said Allen Sinai, chief global economist at the research firm Decision Economics. “The expansion is picking up the pace.”  But many economists remain worried that momentum could soon weaken, with the economy sliding back into glum times.  Indeed, the only area in which economists can reliably declare expansion is in the supply of competing narratives about the economy — perhaps to be expected in any transition between downturn and the inevitable turn for better. “That is always the nature of the boomlet after recession,” Mr. Sinai said. “People think it’s going to fade away.”

Investors pushed up stock prices, with the Dow Jones industrial average gaining 156 points, or 1.5 percent, and oil prices reaching a 14-month high, $81.51 a barrel. [See Pages B1 and B8.]

Much of the improvement in manufacturing — a small slice of the American economy — is the result of businesses rebuilding inventories after slashing them. The economy has also been stoked by $787 billion in federal spending aimed at stimulating growth…  Read more here.

Source: NYT, 5 Jan 2010 Peter S. Goodman;  Photo: www.topnews.in/files/

Exercise your Rights, move your money before it’s too late. Don’t let Potter win.

WARNING! You are being manipulated: Government is NOT the problem.

I’m guilty.  Way back in the day when I was young and thought I knew it all, I was the biggest proponent of ‘free market capitalism’ and the ‘deregulation’ orthodoxy.  To boot, in my mind ‘Big Government’ was an evil purveyor of the ‘welfare state’ and it was anathema to innovation, job growth, free enterprise, property rights and human industriousness.  I was sold and though many tried, you could not convince me otherwise.  That is until I joined the financial industry, learned the business from the inside, out and later gained additional insight from graduate business and finance courses and professors such as Joseph Stiglitz, Jagdish Bhagwati and Charles Calomiris at Columbia.   And then more and more, I began to realize the foxes were guarding the hen house when I noted the huge  competitive advantage  Big Business  has over ordinary citizens when they leverage billions of dollars and armies of lobbyist to fight against the will of the American people and the public interest. For instance, in the way food companies have peddled money & influence to minimize FDA protections resulting in legalizing unhealthy, carcinogenic ingredients in the nation’s food supply; or the way Wall Street’s Oligarchs – with the help of their crony, Treasury Secretary Tim Geithner – snookered taxpayers out of trillions in bail-out funds; or how the financial industry lobby and credit card companies are undermining the will of American voters by watering down the proposed Consumer Financial Protection Agency, allowing banks to continue charging loan shark rates on credit cards and bank ATM fees.  With all due respect, the so-called “best and brightest minds” from the Lords of Finance to Auto Industry execs, to the Titans of Wall Street told us they knew best how to run business & industry with as little regulations as possible.  Thing is…

Business Lobby

…they ran their companies – along with the global economy – into the ground, and then stuck taxpayers with the bill for their greedy, risk-laden foibles.  What we’ve learned from this crisis (if you’ve been paying attention to Enron, Tyco, AIG, commodity price-fixing, Wall Street risk, and purveyors of faulty mortgages, etc) is that the “best & brightest” in American corporations really aren’t.  And I have more news for you: The only sector in the economy that has worked effectively throughout this financial crisis is what many pejoratively call “Big Government.”  That’s right, Government does work – they bailed-out your banks, saved millions of jobs from falling over the cliff, kept you in your foreclosed homes, provides  unemployment checks and food stamps to help put food on your table and stay afloat weekly, rescued the auto industry ensuring its future viability and gave you a great deal on that new car in the driveway – while it protects and defends the right, in far-away places, of the lunatic fringe to gratuitously condemn President Obama as a “fascist” or rally for “less  government” and “less regulation” – the very things that got us into this mess.  Yes, I trust the government when our recent experience patently reveals that “BIG BUSINESS” when left unchecked by “BIG GOVERNMENT” screw consumers, taxpayers and becomes consumed by greed and harmful, irrational risk-taking that undermines the public good.  In the aftermath, it is ‘Big Government’ — led by the president – that is expected to ride in to the rescue, clean-up the mess left by the previous administration, stabilize the economy and reset the conditions for job growth and economic prosperity. Left to ‘Big Business’ there would still be pigs at the trough. It is time we hold ‘Big Business’ accountable to be be good corporate citizens and to demand their social responsibility to uphold the public good above greed and profits.

Two final points.  ‘Big Government’ is no longer a pejorative term; it does have an important role to play in society.  And second, Ayn Rand is over-rated.   That’s why I think you’ll appreciate the piece below from today’s Washington Post.

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By Steven Pearlstein, Washington Post

Dec 30, 2009 – If you step back and look at the big economic policy issues– health care, financial regulation, immigration, education reform, the budget deficit — they appear to boil down to one fundamental question: What is the best trade-off between fairness, stability and social cohesion on the one hand and disruptive and growth-inducing free market capitalism and innovation on the other?

At its most simplistic level, this debate plays itself out as the choice between big government and small government, between regulation and deregulation, between European-style socialism and Anglo-American free-market capitalism … Over the years, the center of political gravity has swung toward one camp or the other in response to economic crises brought on by overdoing things in one direction. The pendulum has now begun to swing back from Reagan Republicanism to some still-evolving form of Obama Democracy…

What good is competition if it drives corporate executives to knowingly engage in increasingly risky behavior simply to boost short-term profits and stock prices even at the expense of long-term value creation? And what good is innovation that is used to snooker consumers, mislead investors or subvert sensible regulation?

…Americans understand that free markets are the best vehicle for generating innovative products and ever more efficient ways of producing them. But recent experience also reminds that innovation and the competitive dynamic are not always what they are cracked up to be. When investors engage in herd behavior and deploy scarce capital merely to bid up the price of real estate or financial assets, that does nothing to improve economic output or efficiency … What good is competition if it drives corporate executives to knowingly engage in increasingly risky behavior simply to boost short-term profits and stock prices even at the expense of long-term value creation?  And what good is innovation that is used to snooker consumers, mislead investors and subvert sensible regulation?

The question is not simply whether innovation will be “stifled,” as the business community likes to suggest, but whether those innovations serve a larger social purpose.  Read more here… 

Gathering legal gloom for investment firms…

NEW YORK (Reuters) – Morgan Stanley (MS) has been sued by a Virgin Islands pension fund that accused the Wall Street bank of defrauding investors by marketing $1.2 billion of risky mortgage-related notes that it expected to fail. The lawsuit filed December 24 in Manhattan Federal court said Morgan Stanley collaborated with credit rating agencies Moody’s Investors Service and Standard & Poor’s (S&P) to obtain “Triple-A” ratings for notes marketed in 2007 as part of a collateralized debt obligation (CDO) known as Libertas. According to the complaint, the CDO was backed by low-quality assets, including securities issued by subprime lenders New Century Financial Corp, which quickly went bankrupt, and Option One Mortgage Corp, then owned by H&R Block Inc (HRB). The complaint alleged Morgan Stanley knew the CDO’s assets were far riskier than the ratings suggested, but was “highly motivated to defraud investors” with pristine ratings because it was simultaneously “shorting” almost all the assets. This was a bet that their value would fall, which they did in 2008.

“Morgan Stanley was betting the entire investment it was promoting would fail,” according to the complaint, which was made available on Tuesday. “The firm achieved its objective.”

Alyson Barnes, a Morgan Stanley spokeswoman, declined to comment. S&P spokesman Frank Briamonte had no immediate comment. Moody’s did not immediately return a call seeking comment.

Morgan Stanley is also a defendant in a closely watched case in the same Manhattan court that concerns whether rating agencies deserve free speech protection for their opinions.

The complaint said Morgan Stanley knew securities in the Libertas CDO were suffering a dramatic rise in delinquencies, but provided a misleading “risk factor” in a prospectus that rising delinquencies “may” hurt values in the $1 trillion residential mortgage-backed securities market. The lawsuit seeks class-action status, and also seeks compensatory and punitive damages, among other remedies. It was filed by Coughlin Stoia Geller Rudman & Robbins LLP, a law firm specializing in securities class-action lawsuits.

The case is Employees’ Retirement System of the Government of the Virgin Islands v. Morgan Stanley & Co et al, U.S. District Court, Southern District of New York, and may have far-ranging implications for future lawsuits by public pension funds who suffered loss due to over-leveraged risk taking by Wall Street investment banks.

Source: Yahoo! Finance; Reuters by J. Stempel    Photo: brandchannel.com 

Web Resources:

Pension Sues Goldman Sachs over Bonuses

State Pension Fund Sues Former Lehman Officers 

Three CA Pensions Sue Investment Banks

Exxon Pension Fund Sues Northern Trust for Losses