Struggling Financial Crisis Commission Readies Big Show

My Portfolio.com column today is a curtain raiser for the Financial Crisis Inquiry Commission's latest theatrics--a one man show by the Maestro, Alan Greenspan. This will be the first time Greenspan has appeared before an official body since October 2008, when he more or less said that maybe his thinking on regulation didn't work out.

The FCIC has been a big dud. It has issued no subpoenas, and is stumbling along, as the New York Times reported today.

Still, the Wednesday show should be illuminating.

© 2010 Gary Weiss. All rights reserved.

The Problem With Dodd's Financial Reform Bill

I can sum it up in one word: "plenty." While it has positive aspects, they're likely to be shredded in the Republican buzz saw, and excessive power is granted to a captive Federal Reserve.

More juicy details can be seen in my latest Portfolio.com column, which can be found here.

© 2010 Gary Weiss. All rights reserved.

Throw Bernanke Overboard

I explore the pros and cons of kicking Ben Bernanke to the curb in my weekly Portfolio.com column.

The problem with dumping him at this stage is that it won't really get to the heart of the matter, which is that he's just one of a cast of characters who need to be ousted. The problem is the ensemble. I think it's a bit like you're not liking the cast of Seinfeld, and just getting rid of Elaine.

Hey, that's not a bad analogy. I should have used it....

© 2010 Gary Weiss. All rights reserved.

Why Another Financial Crisis is Inevitable

The big banks know that they are too big too fail.

From today's testimony at the financial crisis commission:

"I think tomorrow in the context of this environment, at some level the government would intervene." "Because of the fragility of the system," [Goldman Sachs CEO Lloyd] Blankfein said, the government would be forced to step in.

That's it. No need for further research. The commission might as well pack its bags and go home.

Well, I don't mean that literally. They still need to publish a comprehensive 911-Commission style report. But the key aspect of their mission, which is to prevent another financial crisis, is now moot. There will be one.

In fact. expect another one within the next few years:

At another point, [JP Morgan Chase CEO Jamie] Dimon told commission member John W. Thompson, a former chief of the Symantec Corporation: “It’s not a mystery. It’s not a surprise. We know we have crises every 5 or 10 years. My daughter called from school and said, ’Dad, what’s a financial crisis?’ ” Mr. Dimon said he told her that it was an event that occurs every few years.

© 2010 Gary Weiss. All rights reserved.

When Being Right Means Nothing

Somebody just emailed to bring an interesting essay to my attention. The title "SLAP A LIMIT ON LEVERAGE--NOW."

Note this:

It's easy to lash out at [1998 hedge fund disaster Long Term Capital Management] and at hedge funds in general. And yes, new regulation is necessary--but not aimed randomly at the funds. Instead, regulators should focus on the high-octane "fuel" that powered LTCM directly into a brick wall. What is really to blame here is the excessive use of leverage, especially when investing in derivatives and currency. Whether such leverage be employed by a hedge fund or trading desks at a bank or securities firm, it is currently almost entirely unregulated.

and

True, limiting leverage may make some high-tech investment strategies difficult or impossible. It might also cut into the derivatives business of banks and Wall Street firms. If that's the case--well, so be it.

Not bad, huh? This appeared in Business Week, and the publication date is Oct, 12, 1998, ten years before the financial crisis.

I'm ashamed to say I wrote it, ashamed in the sense that I totally forgot about it, as did everyone else on the planet, until someone sent me a link today.

This commentary appeared in the largest business magazine, circulation 1 million. Nobody noticed at the time, or since. Even I forgot about it, and I wrote the dang thing.

This relates back to some points that have been made recently, such as by Dean Starkman at Columbia Journalism Review in his excellent article last May. Sure the media didn't do a particularly good job of writing about the conditions that led to the financial crisis, such as out-of-control leverage. But even if we did, nobody paid attention or cared.

Hey, that's the way it is, as Uncle Walter would have said. Journalism is not as powerful as some poeple think. Even if this had been a cover story, even if it had been a page one story in the Wall Street Journal or New York Times, even if everyone had gotten on the leverage bandwagon, in all likelihood the outcome would have been..... nothing.

Why? Because leverage was a potential problem at the time. It was a danger, and so it was until the bubble burst. And history proves, time and again, that our government does a crappy job of heading off looming threats, whether it be leverage or Al Qaeda.

It is the responsibility of government to adequately regulate the markets. Sure, we in the media can point the way, but, as Chris Byron once said, we're just "seeing eye dogs" for the blind regulators. If they choose to fall off a cliff, because that is what Wall Street wants and they are too captured to do anything about it, there is nothing the media can do to stop it.

The media have been hostile to one of my pet causes: mandatory arbitration of brokerage disputes. I've railed against it for years, and the big media have regularly described how arbitration stinks.

Do you think that has moved regulators by as much as one inch? Don't bet on it.

© 2009 Gary Weiss. All rights reserved.

One Reason to Cheer Obama's Regulation Overhaul

I missed it in my first read (er...skim) of Obama's financial regulatory overhaul scheme, but there's a pro-investor gem buried therein. Evidently I'm not the only one to have missed it, as I can't find a reference to it in the media. A trial lawyers group brought it to my attention.

Seems that the plan takes baby steps toward abolishing the hideous system of forced investor arbitration. On page 72 it says as follows:

The SEC should study the use of mandatory arbitration clauses in investor contracts.

Broker-dealers generally require their customers to contract at account opening to arbitrate all disputes. Although arbitration may be a reasonable option for many consumers to accept after a dispute arises, mandating a particular venue and up-front method of adjudicating disputes – and eliminating access to courts – may unjustifiably undermine investor interests. We recommend legislation that would give the SEC clear authority to prohibit mandatory arbitration clauses in broker-dealer and investment advisory accounts with retail customers. The legislation should also provide that, before using such authority, the SEC would need to conduct a study on the use of mandatory arbitration clauses in these contracts. The study shall consider whether investors are harmed by being unable to obtain effective redress of legitimate grievances, as well as whether changes to arbitration are appropriate.

It's namby-pamby and overcautious. Hell, why not just abolish the damn system? Well, it seems that the proposed Consumer Financial Protection Agency would have the power to do just that if the SEC won't. On page 62 it says:

To improve incentives for compliance, the CFPA should have authority to restrict or ban mandatory arbitration clauses. Many consumers do not know that they often waive their rights to trial when signing form contracts in taking out a loan, and that a private party dependent on large firms for their business will decide the case without offering the right to appeal or a public review of decisions. The CFPA should be directed to gather information and study mandatory arbitration clauses in consumer financial services and products contracts to determine to what extent, and in what contexts, they promote fair adjudication and effective redress. If the CFPA determines that mandatory arbitration fails to achieve these goals, it should be required to establish conditions for fair arbitration, or, if necessary, to ban mandatory arbitration clauses in particular contexts, such as mortgage loans.

I'd be happier if the report just said "abolish mandatory arbitration," rather than dicking around with it like this. But what the hey, this is no-drama Obama and all that.

© 2009 Gary Weiss. All rights reserved.

The Missing Link in Obama's Regulatory Scheme

I've monitored the media coverage carefully over the past couple of days, to see if anyone in the media spotted the obvious, glaring missing link in the Obama administration's financial regulation overhaul scheme (pdf).

Here are some hints as to what Obama left out:

1. It's a major reason for the financial crisis.

2. It's corrupt, hypocritical, and just downright stupid.

3. It continues to have a central role in the regulation of the markets, and few people (including myself) have figured out a way to deal with it---except to point out that it is a missing link, and that it needs to be addressed.

Give up? The missing link in the regulatory overhaul plan is Congress.

It was Congress that cut funding to the SEC and has failed to adequately supervise the agency. It is Congress that sliced to shreds the consumer protections that gave rise to the subprime and mortgage boiler-room fiasco. It was Congress that is financed, in large measure, by campaign contributions from the securities industry.

Sorry for stating the obvious, but you can't do a thing about financial securities regulation without fixing Congress--changing the campaign finance system, kicking out members who are beholden to Wall Street and Corporate America.

A good example of Congress's cluelessness is the grandstanding at the Senate Banking Committee yesterday, when Tim Geithner appeared to defend the Obama plan. The stunning hypocrisy on display yesterday was galling:

Banking Chairman Christopher Dodd (D., Conn.) used the hearing to warn financial firms not to oppose the creation of a financial-product safety agency aimed at protecting consumers. "The very people who created the damn mess are the ones now arguing that consumers ought not be protected," Mr. Dodd said.

Congress is behaving as if it was not a major participant in the regulatory mess that caused the financial crisis, and the media is letting 'em getting away with it.

© 2009 Gary Weiss. All rights reserved.

Will the 'Financial Markets Commission' Probe Congress?

Congress is moving closer to creating a "Financial Markets Commission," similar to the 9-11 Commission, to study the origins of the financial crisis.

That's a good idea, and long overdue. As I argued in my blog a few weeks ago and in my Portfolio article on Bernie Madoff, an independent commission is urgently needed tto sort through how we got into this mess, and how to prevent another one.

What's not clear is whether this commission will examine the actions of one of the key players: Congress.

The Senate provision creating the commission -- the text is here -- is pretty broad, encompassing everything from compensation to short-selling, and, thankfully, the role of regulatory agencies. But what about Congress? As I pointed out in my Portfolio blog item, there's plenty of evidence that Congress was far from a passive bystander. Congress should be explicitly mentioned in the charter of the financial markets commission.

© 2009 Gary Weiss. All rights reserved.

'A Tsunami of Excuses'

William D. Cohan's op-ed today in the New York Times, "A Tsunami of Excuses," needs to be committed to memory by members of Congress considering an overhaul of financial regulation--and, above all, needs to be read and, if possible, understood by President Obama's bad choice for SEC chairman, Mary Schapiro.

They've been blaming the destruction of their firms on circumstances beyond their control, such as short selling. Cohan stomps out those excuses for the bullfeathers that they are.

The tsunami of excuses began shortly after the Bear Stearns collapse, continued through the Lehman Brothers debacle and has continued through today, promoted by the CEOs of both companies and exploited by conspiracy theorists, con men and hustlers like Overstock.com CEO Patrick Byrne (who is a bit of each). Cohan, who has written a well-received book on the debacle, "House of Cards," observes as follows:

It’s been a year since Bear Stearns collapsed, kicking off Wall Street’s meltdown, and it’s more than time to debunk the myths that many Wall Street executives have perpetrated about what has happened and why. These tall tales — which tend to take the form of how their firms were the “victims” of a “once-in-a-lifetime tsunami” that nothing could have prevented — not only insult our collective intelligence but also do nothing to restore the confidence in the banking system that these executives’ actions helped to destroy.

. . .In fact, although they have not chosen to admit it, many of these top bankers, as well as Stan O’Neal, the former chief executive of Merrill Lynch (who was handed $161.5 million when he “retired” in late 2007) made decision after decision, year after year, that turned their firms into houses of cards.

I've dealt with all of these themes in this blog and in two of my articles on the financial crisis: my profile of Tim Geithner last June and my recent article on John Paulson, in which I described how Bear Stearns CEO Alan Schwartz tried to get short seller Jim Chanos to appear on CNBC to vouch for his firm just before the collapse.

Cohan concludes by saying that "there can be no restoration of confidence in the banking system — and therefore no hope for an economic recovery — until Wall Street comes clean. If the executives responsible for what happened won’t step forward on their own, perhaps a subpoena-wielding panel along the lines of the 9/11 commission can be created to administer a little truth serum."

I agree but would go further, as I argued here. The difference is that I think there should be a 9/11-type commission whether the bankers come clean or not.

© 2009 Gary Weiss. All rights reserved.