Rebel Traders – Analysis Without The Hype

Elizabeth Warren has penned an op-ed for the Wall Street Journal, and she holds nothing back.

[…]Banks and brokers have sold deceptive mortgages for more than a decade. Financial wizards made billions by packaging and repackaging those loans into securities. And federal regulators played the role of lookout at a bank robbery, holding back anyone who tried to stop the massive looting from middle-class families. When they weren’t selling deceptive mortgages, Wall Street invented new credit card tricks and clever overdraft fees.

In October 2008, when all the risks accumulated and the economy went into a tailspin, Wall Street CEOs squandered what little trust was left when they accepted taxpayer bailouts. As the economy stabilized and it seemed like we would change the rules that got us into this crisis—including the rules that let big banks trick their customers for so many years—it looked like things might come out all right.

Now, a year later, President Obama’s proposals for reform are bottled up in the Senate. The same Wall Street CEOs who brought the economy to its knees have spent more than a year and hundreds of millions of dollars furiously lobbying Washington to kill the president’s proposal for a Consumer Financial Protection Agency (CFPA). […]

[…] The consumer agency is a watchdog that would root out gimmicks and traps and slim down paperwork, giving families a fighting chance to hang on to some of their money. So far, Wall Street CEOs seem determined to stop any kind of watchdog. They seem to think that they can run their businesses forever without our trust. This is a bad calculation.

It’s a bad calculation because shareholders suffer enormously from the long-term cost of the boom-and- bust cycles that accompany a poorly regulated market. J.P. Morgan CEO Jamie Dimon recently explained this brave new world, saying that crises should be expected "every five to seven years."

He is wrong. New laws that came out of the Great Depression ended 150 years of boom-and-bust cycles and gave us 50 years with virtually no financial meltdowns. The stability ended as we dismantled those laws and failed to replace them with new laws that reflected modern business practices. […]

[…]When the history of the Great Recession is written, they can be singled out as the bonus babies who were so short-sighted that they put the economy at risk and contributed to the destruction of their own companies. Or they can acknowledge how Americans’ trust has been lost and take the first steps to earn it back.

Read the full article at the WSJ

The latest quarterly report from the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has been released. In short, the report points to fraud, failed policies, and taxpayer waste.

The ‘bottom line’ of the executive summary:

[…] The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.

It is hard to see how any of the fundamental problems in the system have been
addressed to date.

• To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

• To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases
are posting multi-billion-dollar losses) are exiting TARP programs.

• To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

• To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car. […]

That is a very bold statement from the inspector general, and one that has been spoken about by myself and many other financial bloggers who see through the noise of the Washington babble. The TARP program is indeed a complete failure in my view, it was destined to fail from the very beginning and as such is why I called, emailed, and faxed Congress back then to ‘not’ pass the the TARP bill. But, the voice of the American people does not mean anything anymore, they still went ahead and did it anyway because of the extensive lobbying from Wall Street, and Wall Street’s voice is much loader than that of the American people.

The inspector general also points out that they have opened criminal and civil investigations.

SIGTARP’s Investigations Division has continued to develop into a sophisticated white-collar investigative agency. Through December 31, 2009, SIGTARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.

The full 224 page inspector general report is provided below. Also contained within the report is criticism of the Federal reserve and Secretary of the Treasury Tim Geithner.

Finally, this interview with the chairwoman Elizabeth Warren of the SIGTARP from a few days ago.

SigTarp Quarterly Report January 2010

You better light up a ‘green shoots’ cigarette before watching this interview with Elizabeth Warren.