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Fed Played (s) Role in Financial Collapse and Coverup

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Tex

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http://www.huffingtonpost.com/2011/05/24/gretchen-morgenson-reckless-endangerment_n_865809.html


Mike, you were right about the Fed and the Financial Collapse. Their role has been to support big money over the interests of the country and to provide cover for the politicians and financial accountability to our current crisis.

I don't think we can continue to operate our country for the wealthy's interests and allow Congress to whore itself to the highest bidder. It is ruining our country's economy for the self interests of politicians on the take.


Partners, Not Regulators: The Federal Reserve's Role In The Financial Collapse


First Posted: 05/24/11 08:01 AM ET Updated: 05/24/11 10:36 AM ET
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This is an adaptation from "Reckless Endangerment", an exploration of the origins of the recent financial crisis, by Gretchen Morgenson and Joshua Rosner. The book will be published today by Times Books. This excerpt examines the cozy relationship between Alan Greenspan’s Federal Reserve and the banks the Fed was charged with regulating. This is the second of three excerpts.

To regulators at the Federal Reserve Board, the financial crisis of 1998 and the collapse of the giant hedge fund Long-Term Capital Management had been an undeniably terrifying event. Officials at the prestigious New York Fed knew how extraordinary it had been for them to help the hedge fund; they were sensitive to the fact that they had aided in a speculator’s rescue and worked hard to downplay their role.

In the months and years after the rescue, many Fed officials spoke publicly of the lessons to be learned from the disaster. Chief among them were the dangers of increasingly interconnected world markets and economies and the threats of institutions that had grown so large that their failures could imperil the entire financial system.

“It was a humbling and enlightening experience for us all,” said Roger Ferguson, a member of the Board of Governors of the Federal Reserve, in a 1998 speech touching on the Long-Term Capital rescue. “It should cause all of us to reassess our practices and our views about the underlying nature of market risks.”

But this advice appears to have been for public consumption only because it went unheeded, especially within Ferguson’s own organization. Indeed, the Fed seemed to have conducted precious little soul-searching as the 1998 crisis receded into the mists of investors’ memories.

One big reason everyone felt they could move on from the LTCM mess was the stupendous performance of the stock market, especially the technology sector. It is an investing truth that rising markets create complacency and in late 1998, with the Dow Jones Industrial Average marching inexorably to the never-before-scaled 10,000 level, investors were especially unfazed. The index of 30 industrial stocks had started off the 1990s at 2,753, but in March 1999 it closed above 10,000 for the first time.

It was a bubble that would create tens of billions in losses and considerable angst when it popped in 2000. But while the good times were rolling, top financial regulators like Alan Greenspan exulted over the wonders of technological advancements. Although it was obvious to many that the technology stock mania would end badly, Greenspan and his colleagues at the Fed refused to tamp down the euphoria. They could have raised margin requirements, for example, increasing the amount of their own money investors had to put up to buy stock using borrowed funds.
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Even as they ignored the stock market bubble, these very regulators were laying the groundwork for a subsequent, far more virulent mania in the credit markets -- which helped finance, among other things, mortgages and home ownership. Regulators did this by siding with the banks that wanted to loosen the capital strings that bound them, too tightly they thought, in this brave new world.

Unfettered capitalism coupled with the ownership society— where individuals were invited to participate in the wealth creation engine of the financial markets— had become a potent combination. It had produced riches for corporate executives and considerable wealth for individuals, and had replaced federal deficits with an unheard-of government surplus, generated largely from taxes paid by investors on their market gains.

The belief that the free market could police itself better than any government regulator had already taken hold. So, even as Ferguson and other Federal Reserve officials paid lip service to the important lessons of the 1998 crisis, their actions showed that they ignored those lessons. Instead of heightening the scrutiny of risky practices among the big banks they oversaw, the Fed backed these institutions’ desires to reduce capital requirements and increase their leverage and profits. Instead of reining in financial institutions in areas that could result in losses, Fed officials loosened them.

In other words, the Fed was busy becoming a pushover, not a policeman.

“It was explicit in those years, if you worked inside the Fed, that you were partners with the banks,” said a former Fed official. “You were not adversaries.”

One of the banks’ crucial partners at the Fed, albeit behind the scenes, was Ferguson, the vice chairman. From 1997, when he joined the Federal Reserve as a governor, until he resigned to return to the private sector in 2006, Ferguson was a strong advocate for the banks among global financial regulators.

President Clinton appointed Ferguson vice chairman of the Fed in 1999. He began his career as a lawyer at Davis, Polk & Wardwell, advising some of the nation’s largest banks on mergers and acquisitions, initial public offerings, and syndicated loans. Davis, Polk was closely linked to the Fed; years later, during the financial maelstrom of 2008, the firm would advise the New York Fed on its various bailouts.

Ferguson was also the Fed’s point man on the Basel Committee, the group of central bankers and international financial regulators that met regularly to discuss and hammer out international banking standards. And according to those who interacted with Ferguson in this capacity, he consistently pushed for rule changes requested by the nation’s largest banks and that were beneficial to them.

In 1998, when the Fed governors voted 5-0 to approve the mega-merger of Citibank and Travelers, Ferguson abstained. His wife, Annette Nazareth, was a managing director at Smith Barney, a Travelers unit, when the application was being considered.

In a speech in October 1999 to the Bond Market Association in New York City, Ferguson outlined his preference for less, not more, regulation. “Heavier supervision and regulation of banks and other financial firms is not a solution, despite the size of some institutions today and their potential for contributing to systemic risk,” he said. “Increased oversight can undermine market discipline and contribute to moral hazard. Less reliance on governments and more on market forces is the key to preparing the financial system for the next millennium.”

A belief had arisen during the late 1990s that bankers had so improved their risk-management and loss-prediction techniques that regulators could rely on the banks to decide how much extra funding they needed to keep in their coffers in case of a financial downturn -- a surplus guided by regulatory measurements known as “capital standards.”


Partners, Not Regulators: The Federal Reserve's Role In The Financial Collapse


First Posted: 05/24/11 08:01 AM ET Updated: 05/24/11 10:36 AM ET
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Not everyone agreed that it was prudent to rely on the banks themselves for guidance -- certainly the FDIC rejected the notion. But the Fed was among those regulators who were more than willing to put the bankers in the driver’s seat. Others were the Office of Thrift Supervision, which oversaw savings banks, and the Comptroller of the Currency, which scrutinized large national banks.

Executives at the big banks knew that their profits would be bolstered if they could reduce the amount of money regulators required them to set aside for problem loans. Smaller set-asides meant more money to be deployed in lending or purchases of income- producing securities. Banks also recognized that higher profits meant loftier executive pay.

But reducing capital requirements would also leave the banks in a more perilous position if their loans and investments went bad. And thanks to the elimination of Glass-Steagall, banks were now allowed to extend and expand their operations almost without limit. Such expansion increased the likelihood of losses in the years ahead.

The Fed bought into the banks’ argument that because losses and bank failures had been rare during the mid-to-late ’90s, this was evidence that these institutions had become better at managing their risk taking. Top Fed officials ignored one of the most basic lessons in economics -- that even though the sun may be shining today, you should set aside money for the inevitable rainstorm.

Others, such as Chairman Greenspan, seemed to have consciously decided that because it rained so infrequently, it wasn’t worth discussing such an outcome. In a 2000 speech, he said: “We have chosen capital standards that by any stretch of the imagination cannot protect against all potential adverse loss outcomes. There is implicit in this exercise the admission that, in certain episodes, problems at commercial banks and other financial institutions, when their risk-management systems prove inadequate, will be handled by central banks.”

In a May 2002 speech in Lexington, Va., Ferguson weighed in: “Any regulatory capital standard must, of course, require banks to hold an amount of capital sufficient to get them through, not the worst imaginable, but nevertheless rough times. Competition within the industry and among banking systems of different countries often presses for less. Such pressures must be resisted.”
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But internally, at meetings in which the new standards were discussed among regulators and market participants, granting the banks’ wishes seemed to be the Fed’s priority, according to a regular attendee.

The Fed concluded that regulators could use banks’ own risk metrics to devise capital requirements because the regulator started from the position that these institutions had learned to estimate losses more reliably than they had in the past.

To some outside the Fed, relying on banks’ figures represented, at best, a delegation of an important oversight task and, at worst, a dereliction of duty. “They were going to the industry to get a lot of the data,” the fellow regulator said. “They were calibrating their formulas off the banks’ data. The Fed would have been hard-pressed to even come up with the estimates because only the banks really had the data.”

Some regulators argued that instead of relying on banks’ estimates of future losses, a better approach would be to determine capital requirements using actual losses that the banks had experienced in the 1980s and 1990s. Applying those real and painful losses to the equation, officials at the FDIC concluded that the new capital requirements left little room for error if banks experienced losses outside their own estimates.

“The Fed’s worldview was dominated by the big banks,” the fellow regulator said. “If you look back at all the things that were done, all the rulemaking was in the same direction -- that the banks knew what they were doing and we needed to rely more on their internal systems.”

This view came through loud and clear in meetings at the New York Fed’s wood-paneled boardroom where regulators and the big banks discussed the new capital requirements. According to a regulatory official who attended these meetings, the message transmitted to the banks was to fear not, the Fed was on their side.

“At one of the first meetings I went to,” this official said, “there were people from the highest levels of all the regulatory agencies, both policy and staff, along with chief risk officers at the top 10 banks. The banks were told point-blank the changes were going to be attractive from a capital standpoint.”

Although after the financial crisis occurred Ferguson denied that he and others at the Fed had transmitted a dual message, its existence could not have been clearer to participants in these meetings. In public speeches, at congressional hearings, Fed officials insisted it had no interest in reducing capital requirements. But behind the scenes, the message to the banks was an emphatic “we understand where you are coming from” and “we’re on your side,” one participant said.

The Fed also angered its fellow regulators by maintaining a disturbing secrecy about the figures and formulas it was using to come up with the new capital requirements. According to people involved in the discussions, the Fed repeatedly pushed back against the FDIC’s desire to publish tables showing the range of effects that capital changes would have on different institutions. These tables showed how the big banks benefited from the proposed rule changes far more than small banks did.

“When you publish a bunch of formulas with a lot of Greek letters it’s hard to understand what that means,” said one regulator involved in the battle. “They did not want to risk having the small banks get wind of the differences and raising a stink on Capitol Hill.”

The FDIC prevailed, however, and the tables were included. As it happened, the credit crisis hit before many of the changes suggested by the Basel Committee and backed by the Fed could be implemented. But as banks wrote down hundreds of billions in bad loans and sought on-the-fly ways to press for accounting changes that would protect them from writing down hundreds of billions more, it was evident that relying on the banks’ loss estimates to reduce capital requirements would have been a disastrous decision. It would have made the crisis even more devastating than it was.

The Fed’s determinedly bank-centric approach in the years leading up to the 2008 financial crisis meant banks were dangerously undercapitalized just when they most needed large cash cushions to protect against losses.

But even after it had become clear that the Fed had been wrong to push for relaxed capital standards, the regulator continued to take a pro-bank worldview in its various rescues of big banks hobbled by bad credit decisions.
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Oil traders accused of manipulation
They allegedly drove the prices to artificial highs and lows
By GRAHAM BOWLEY
NEW YORK TIMES
May 24, 2011, 11:50PM


Read more: http://www.chron.com/disp/story.mpl/business/7580019.html#ixzz1NNIcSdbb




U.S. authorities are suing three companies and two individuals for reportedly manipulating the crude oil market in early 2008, when supplies were tight and the world oil price was cracking $100 a barrel.

The Commodity Futures Trading Commission asserted that in January 2008 the defendants bought millions of barrels of physical crude oil at Cushing, Okla., one of the main delivery sites for West Texas Intermediate, the benchmark for U.S. oil.

The defendants, part of the Arcadia group of energy trading companies, headquartered in Switzerland, also invested in large positions in the oil futures market and profited when their expansive buys in the physical market pushed the oil futures higher.

They then bought short positions in the futures market and dumped their holdings of physical oil, most of it in the course of one day, making money again when the oil price fell.

"According to the allegations, defendants conducted a manipulative cycle, driving the price of W.T.I. to artificial highs and then back down, to make unlawful profit," the commission said in a statement.

The civil enforcement action, filed in the Southern District of New York on Tuesday, names two individuals, James Dyer of Australia and Nicholas Wildgoose of California, and three related companies, Parnon Energy of California, Arcadia Petroleum of Britain and Arcadia Energy, a Swiss company. Calls for comment left at Arcadia Petroleum in London were not immediately returned. A person who answered the phone at Arcadia Energy in Switzerland said that he was unaware of the complaints and that Dyer and Wildgoose were on vacation and unavailable for comment.

The commission would not say whether it was conducting any other investigations into oil price speculation. This case appears to be one of the few to emerge so far from the sharp run-up in oil during 2007 and 2008.

The oil price increase in 2008 drew intense political scrutiny amid suspicions that speculators were artificially manipulating markets before prices dropped again at the end of 2008.

Oil prices have again moved higher this year, exceeding $110 a barrel and again raising questions about whether oil is being pushed higher by fundamental market factors or by speculation.

The commission could seek penalties of up to $150 million, plus $50 million reportedly made in profits, from the defendants. The defendants could also be banned from trading in U.S. markets.



Read more: http://www.chron.com/disp/story.mpl/business/7580019.html#ixzz1NNIjFdAY






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"There's always crooks in any market, free or regulated. We have laws to prevent it, and it's up to our government to prosecute the crooks. But we all know, governement is run by crooked politicians, so they prosecute selectively only when it buys them votes."


With the collapse of the banks and costly bailouts, why has anyone prosecuted for their grand theft of tax payers' dollars???

Bankers/traders and politicians are crooks.



Read more: http://www.chron.com/disp/story.mpl/business/7580019.html#ixzz1NNJPLKWv



Read more: http://www.chron.com/disp/story.mpl/business/7580019.html#ixzz1NNJ5VzkQ



http://www.chron.com/disp/story.mpl/business/7580019.html




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Tex

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The book, "Reckless Endangerment" by Gretchen Morgensen and Joshua Rosner is a good read on who we should hold accountable but haven't yet:

http://www.npr.org/2011/05/24/136496032/how-reckless-greed-contributed-to-financial-crisis

How 'Reckless' Greed Contributed To Financial Crisis
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Gretchen Morgenson is assistant business and financial editor and a columnist at The New York Times.
Enlarge The New York Times

Gretchen Morgenson is assistant business and financial editor and a columnist at The New York Times.
Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
By Gretchen Morgenson and Joshua Rosner
Hardover, 352 pages
Times Books
List price: $30
text size A A A
May 24, 2011

Gretchen Morgenson, who covers world financial markets for The New York Times, has been untangling the complex foreclosure mess and efforts to reform government regulations on Wall Street for several years.

Now Morgenson and co-author Joshua Rosner have written a book about the origins of the financial meltdown. In Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon, Morgenson and Rosner describe how regulators failed to control greed and recklessness on Wall Street.

Morgenson focuses on the managers of Fannie Mae, the government-supported mortgage giant. She writes that CEO James Johnson built Fannie Mae "into the largest and most powerful financial institution in the world."

But in the process, Morgenson says, the company fudged accounting rules, generated big salaries and bonuses for its executives, used lobby and campaign contributions to bully regulators, and encouraged the risky financial practices that led to the crisis.

Morgenson is an assistant business and financial editor and a columnist for The New York Times and the author of the Forbes publication Great Minds Of Business. She won the Pulitzer Prize in 2002 for her "trenchant and incisive" coverage of Wall Street. Joshua Rosner is a managing director at the independent research firm Graham Fisher and Co., which advises regulators and institutional investors.
Excerpt: 'Reckless Endangerment'

by Gretchen Morgenson and Joshua Rosner
Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon
By Gretchen Morgenson and Joshua Rosner
Hardover, 352 pages
Times Books
List price: $30

This is not the first book to be written about the epic financial crisis of 2008 and neither will it be the last. But Josh and I believe that Reckless Endangerment is different from the others in two important ways. It identifies powerful people whose involvement in the debacle has not yet been chronicled and it connects key incidents that have seemed heretofore unrelated.

As a veteran business reporter and columnist for the New York Times, I've covered my share of big and juicy financial scandals over the years. For more than a decade as an established financial and policy analyst, Josh has seen just about every trick there is.

But none of the scandals and financial improprieties we experienced before felt nearly as momentous or mystifying as the events that culminated in this most recent economic storm. That's why we felt that this calamity, and the conduct that brought it on, needed to be thoroughly investigated, detailed, and explained. The disaster was so great — its impact so far-reaching — that we knew we were not the only ones who wanted to understand how such a thing could happen in America in the new millennium.

Even now, more than four years after the cracks in the financial foundation could no longer be ignored, people remain bewildered about the causes of the steepest economic downturn since the Great Depression. And they wonder why we are still mired in it.

Then there is the maddening aftermath — watching hundreds of billions of taxpayer dollars get funneled to rescue some of the very institutions that drove the country into the ditch.

The American people realize they've been robbed. They're just not sure by whom.

Reckless Endangerment is an economic whodunit, on an international scale. But instead of a dead body as evidence, we have trillions of dollars in investments lost around the world, millions of Americans jettisoned from their homes and fourteen million U.S. workers without jobs. Such is the nature of this particular crime.

Recognizing that a disaster this large could not have occurred overnight, Josh and I set out to detail who did it, how, and why. We found that this was a crisis that crept up, building almost imperceptibly over the past two decades. More disturbing, it was the result of actions taken by people at the height of power in both the public and the private sectors, people who continue, even now, to hold sway in the corridors of Washington and Wall Street.

Reckless Endangerment is a story of what happens when unfettered risk taking, with an eye to huge personal paydays, gains the upper hand in corporate executive suites and on Wall Street trading floors. It is a story of the consequences of regulators who are captured by the institutions they are charged with regulating. And it is a story of what happens when Washington decides, in its infinite wisdom, that every living, breathing citizen should own a home.

Josh and I felt compelled to write this book because we are angry that the American economy was almost wrecked by a crowd of self-interested, politically influential, and arrogant people who have not been held accountable for their actions. We also believe that it is important to credit the courageous and civically minded people who tried to warn of the impending crisis but who were run over or ignored by their celebrated adversaries.

Familiar as we are with the ways of Wall Street, neither Josh nor I was surprised that the large investment firms played such a prominent role in the debacle. But we are disturbed that so many who contributed to the mess are still in positions of power or have risen to even higher ranks. And while some architects of the crisis may no longer command center stage, they remain respected members of the business or regulatory community. The failure to hold central figures accountable for their actions sets a dangerous precedent. A system where perpetrators of such a crime are allowed to slip quietly from the scene is just plain wrong.

In the end, analyzing the financial crisis, its origins and its framers, requires identifying powerful participants who would rather not be named. It requires identifying events that seemed meaningless when they occurred but had unintended consequences that have turned out to be integral to the outcome. It requires an unrelenting search for the facts, an ability to speak truth to power.

Investigating the origins of the financial crisis means shedding light on exceedingly dark corners in Washington and on Wall Street. Hidden in these shadows are people, places, and incidents that can help us understand the nature of this disaster so that we can keep anything like it from happening again.

Excerpted from Reckless Endangerment by Gretchen Morgenson and Joshua Rosner. Copyright 2011 by Gretchen Morgenson and Joshua Rosner. Published in 2011 by Times Books, an imprint of Henry Holt and Co. All rights reserved. This work is protected under copyright laws and reproduction is strictly prohibited. Permission to reproduce the material in any manner or medium must be secured from the Publisher.

This kind of reporting and what they did on air is why we need NPR. The other stuff has turned too much into entertainment. So has NPR to a degree. I saw a show the other night, undoubtedly helped by the mass of money Tyson has thrown at legal and PR firms, about "ethical" corporate culture. Tyson was one of them along with Cargill. I couldn't help but laugh. I guess they think money can buy the truth in this here world we have constructed.


Tex
 

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