I was trying to avoid mentioning this, partially because I half-suspected it was deliberately over the top, and I'm not reading tone well these days. After all:

Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make "merchant banking investments" in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.

I find it very difficult to believe that any serious bankers, no matter how "annoyed," wouldn't have known this. [links in original]

is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.

Until today, when Brad DeLong made it ones of his links of the day. Because now we have to go into context and depth, and remember a year ago.

Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance of sanity—Lehmann Brothers—dangled on the edge for a while and finally fell off, "murdered" we're now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was yet to come.



So the weekend was going to be a rocky one. And various plans in various stages were executed:

1. Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around for a sucker, saw Ken Lewis, and locked in their bonuses.
   
2. Endangered IB #4, the successor firm to Dean Witter Sears, teetered on the edge, hoping for a life preserver. And, apparently, it was more like Leo-in-Titanic than anyone wanted to admit.
   
3. Endangered IB #5, The Vampire Squid, called its buddies at Treasury.

Maybe it didn't go exactly like that, but by the end of the weekend, there was the declaration that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full access to lootsupport from the U.S. Treasury.

And now we are told—in answer to the question Simon Johnson initially raised:

If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category? [italics mine; links, again, from the original]

The response appears to be that those regulations can be circumvented with impunity. Or, as Simon unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.

But all that does is beg the question: if a BHC can do everything that GS used to be able to do, what was the actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for the Fed to save face while letting the taps flow wide?

Mark Cuban gets the FTC's artificial distinction between bloggers and journalism exactly correct.

Full disclosure: I had a Press Pass to the Clinton Global Initiative, and got things such as a disc copy of Financial Football* and a video ostensibly about the Rwandan National Forests (sadly, not so interesting) as a result.


*It's not my fault Visa describes it as "Financial Soccer" on the U.S. edition of their website.

rdan

Seeking Alpha's Matthew Goldstein notes that the OCC is continuing the last decade of regulatory non-action.

The OCC, in its quarterly derivatives report, routinely notes that the Big Four “have the resources needed to be able to operate this business in a safe and sound manner.”

In other words, the biggest banks are best suited to handle all these derivatives contracts because they’ve been doing it for so long.

But it’s this regulatory logic that has helped enshrine the too-big-to-fail doctrine. A handful of financial institutions are deemed more indispensable than others because they are too interconnected to fail. It’s the large concentration of derivative contracts at a troubled bank like Citigroup that made a big bailout necessary.

So it’s particularly disturbing to find that the total dollar value of outstanding derivatives at Citi rose by $2.3 trillion, to $31.9 trillion in the second quarter. By contrast, the notional value of derivatives transactions at JPMorgan Chase — the leader in this category — fell by $1.2 trillion, to $79.9 trillion.

It’s hard to fathom how a bank that has yet to prove it can stand on its own two feet without huge amounts of federal support should be adding to its potential derivatives exposure.

The OCC report is here with accompanying charts. Notice John [Bloody Effing] Dugan still heads the agency. [edited, links added -- klh]

Dear Barry:

The need for posts such as this one recurs because the large majority of economists are idiots. (Multiple exceptions noted—but not enough to change the truth of the initial statement.)

As the regulatory reform report notes (quoted by PK at the last link above):

In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA.

But the truth should never be allowed to get in the way of Economic Theory.

Dear Brad,

Do you want to reconsider the title of this post in the context of this article?

An examination of Mr. Geithner’s five years as president of the New York Fed, an era of unbridled and ultimately disastrous risk-taking by the financial industry, shows that he forged unusually close relationships with executives of Wall Street’s giant financial institutions.

His actions, as a regulator and later a bailout king, often aligned with the industry’s interests and desires, according to interviews with financiers, regulators and analysts and a review of Federal Reserve records.

To take a phrase more prominent in our middle-school days, he would qualify as an "unindicted co-conspirator."

by reader Movie Guy



I reviewed the OMB Watch list of proposed and final rules. If approved and published in the Federal Register, it is possible if not likely that some will be reversed.

Unfortunately, OMB Watch doesn't appear to provide government links necessary to follow up and monitor further actions. So, here are some key government links worth noting:

OMB - Regulatory Matters

Federal Regulatory Information - RegInfo.gov

Regulation.gov User Tips

Federal Register index

More interesting links:

Weekly Compilation of Presidential Documents

USASpending.gov

I recommend that those who have interest in monies flowing down to State level click on the "ASSISTANCE" and then the "BY PLACE OF PERFORMANCE" button under USASpending.gov for specifics.

This is the best government web site of its type that I have ever encountered. Pretty good info once you go a step further and click on "list of recipients" and "list of transactions" under each State or Agency concerned.

I hope the Obama Administration continues to provide the USASpending.gov web site or one just like it in the interests of transparency and time-saving research.

If the Obama Administration doesn't continue to provide a web site very similar to USASpending.gov, then a red flag should go up on the blogs and elsewhere. Hard to top this consolidated info.
_________________________
by Movie Guy

(slightly edited to hyper-link format...rdan. I have also alerted OMB Watch to be more conscientious with original sources, and should link to us...we have MG.)

by reader Movie Guy



I reviewed the OMB Watch list of proposed and final rules. If approved and published in the Federal Register, it is possible if not likely that some will be reversed.

Unfortunately, OMB Watch doesn't appear to provide government links necessary to follow up and monitor further actions. So, here are some key government links worth noting:

OMB - Regulatory Matters

Federal Regulatory Information - RegInfo.gov

Regulation.gov User Tips

Federal Register index

More interesting links:

Weekly Compilation of Presidential Documents

USASpending.gov

I recommend that those who have interest in monies flowing down to State level click on the "ASSISTANCE" and then the "BY PLACE OF PERFORMANCE" button under USASpending.gov for specifics.

This is the best government web site of its type that I have ever encountered. Pretty good info once you go a step further and click on "list of recipients" and "list of transactions" under each State or Agency concerned.

I hope the Obama Administration continues to provide the USASpending.gov web site or one just like it in the interests of transparency and time-saving research.

If the Obama Administration doesn't continue to provide a web site very similar to USASpending.gov, then a red flag should go up on the blogs and elsewhere. Hard to top this consolidated info.
_________________________
by Movie Guy

(slightly edited to hyper-link format...rdan. I have also alerted OMB Watch to be more conscientious with original sources, and should link to us...we have MG.)

Steve Benen at The Washington Monthly points to a WSJ article that cautions us:

THE ULTIMATE BUSH LEGACY FOR BIG BUSINESS.... Bush's presidency may be winding down, but he's not quite done with his conservative domestic agenda.

Bush administration officials, in their last weeks in office, are pushing to rewrite a wide array of federal rules with changes or additions that could block product-safety lawsuits by consumers and states.

The administration has written language aimed at pre-empting product-liability litigation into 50 rules governing everything from motorcycle brakes to pain medicine. The latest changes cap a multiyear effort that could be one of the administration's lasting legacies, depending in part on how the underlying principle of pre-emption fares in a case the Supreme Court will hear next month.

This amazing piece, from the Wall Street Journal's Alicia Mundy, hasn't generated a lot of attention so far today, and that's a shame. The administration's efforts on this are likely to have a huge impact.

Corporate America has been calling for some mechanism to "preempt" product-liability litigation for years, and Bush had promised to deliver. The White House, however, had limited options in dealing with a Democratic Congress which cares about consumer protections.

So, the Bush gang is adding provisions to obscure federal regulations that will block product safety lawsuits by consumers and states. The scheme would affect products ranging from cars to prescription medication to railroad cars.

But a possible Obama administration can undo this, right? If Obama wins, he'd no doubt want to, but reversing these regulations would take a long while.

These new rules can't quickly be undone by order of the next president. Federal rules usually must go through lengthy review processes before they are changed. Rulemaking at the Food and Drug Administration, where most of the new pre-emption rules have appeared, can take a year or more.

The article is online here, and an WSJ video with Mundy talking specifically about how this affects state lawsuits is here. Take a look.

Steve Benen at The Washington Monthly points to a WSJ article that cautions us:

THE ULTIMATE BUSH LEGACY FOR BIG BUSINESS.... Bush's presidency may be winding down, but he's not quite done with his conservative domestic agenda.

Bush administration officials, in their last weeks in office, are pushing to rewrite a wide array of federal rules with changes or additions that could block product-safety lawsuits by consumers and states.

The administration has written language aimed at pre-empting product-liability litigation into 50 rules governing everything from motorcycle brakes to pain medicine. The latest changes cap a multiyear effort that could be one of the administration's lasting legacies, depending in part on how the underlying principle of pre-emption fares in a case the Supreme Court will hear next month.

This amazing piece, from the Wall Street Journal's Alicia Mundy, hasn't generated a lot of attention so far today, and that's a shame. The administration's efforts on this are likely to have a huge impact.

Corporate America has been calling for some mechanism to "preempt" product-liability litigation for years, and Bush had promised to deliver. The White House, however, had limited options in dealing with a Democratic Congress which cares about consumer protections.

So, the Bush gang is adding provisions to obscure federal regulations that will block product safety lawsuits by consumers and states. The scheme would affect products ranging from cars to prescription medication to railroad cars.

But a possible Obama administration can undo this, right? If Obama wins, he'd no doubt want to, but reversing these regulations would take a long while.

These new rules can't quickly be undone by order of the next president. Federal rules usually must go through lengthy review processes before they are changed. Rulemaking at the Food and Drug Administration, where most of the new pre-emption rules have appeared, can take a year or more.

The article is online here, and an WSJ video with Mundy talking specifically about how this affects state lawsuits is here. Take a look.

It appears that the word of the month is Melamine, and that a lot of those large bags of semibiodegradeable candy may have been imported from China.

It appears that the word of the month is Melamine, and that a lot of those large bags of semibiodegradeable candy may have been imported from China.

Take a page from Douglas North et al., I will simply note that if the institutions charged with managing the process are corrupt, the chance of success approaches zero.

Case in point, Christopher Cox (R-BoughtAndPaid) and the SEC:

The interesting thing here is that we have already heard that the S.E.C. staff almost immediately demanded such changes. Christopher Cox, the chairman, emphasized Tuesday that the commission imposed its new rules after conferring with the Fed and the Treasury. If he consulted with anyone, inside or outside the S.E.C., who actually understood how markets work, I have not heard about it. [emphases mine]

So the two institutions that are battling to be able to say fu with $700,000,000,000 in taxpayer money could not provide Cox with reasonable guidance.

I feel so much better.

Take a page from Douglas North et al., I will simply note that if the institutions charged with managing the process are corrupt, the chance of success approaches zero.

Case in point, Christopher Cox (R-BoughtAndPaid) and the SEC:

The interesting thing here is that we have already heard that the S.E.C. staff almost immediately demanded such changes. Christopher Cox, the chairman, emphasized Tuesday that the commission imposed its new rules after conferring with the Fed and the Treasury. If he consulted with anyone, inside or outside the S.E.C., who actually understood how markets work, I have not heard about it. [emphases mine]

So the two institutions that are battling to be able to say fu with $700,000,000,000 in taxpayer money could not provide Cox with reasonable guidance.

I feel so much better.

by Ken Houghton

It was five degrees (C) warmer here this morning than the previous two days of taking the Eldest Daughter to her school bus.

Presumably, this is balanced out in part by record-low temperatures in Hell, as the WSJ editorial page (well, Thomas Frank, but still...) summarizes the McCain Position:

Last week, Republican presidential candidate John McCain called for a commission to "find out what went wrong" on Wall Street. It was an excellent suggestion: Public inquiries into Wall Street practices served the country well in the 1930s.

And Mr. McCain has a special advantage to bring to any such investigation -- many of the relevant witnesses are friends or colleagues of his. In fact, he can probably get to the bottom of the whole mess just by cross-examining the people riding on his campaign bus. So the candidate should take a deep breath, remind himself that the country comes first, pull the Straight Talk Express over at a rest stop, whistle up his media pals, and begin.

Go read the whole thing.

by Ken Houghton

It was five degrees (C) warmer here this morning than the previous two days of taking the Eldest Daughter to her school bus.

Presumably, this is balanced out in part by record-low temperatures in Hell, as the WSJ editorial page (well, Thomas Frank, but still...) summarizes the McCain Position:

Last week, Republican presidential candidate John McCain called for a commission to "find out what went wrong" on Wall Street. It was an excellent suggestion: Public inquiries into Wall Street practices served the country well in the 1930s.

And Mr. McCain has a special advantage to bring to any such investigation -- many of the relevant witnesses are friends or colleagues of his. In fact, he can probably get to the bottom of the whole mess just by cross-examining the people riding on his campaign bus. So the candidate should take a deep breath, remind himself that the country comes first, pull the Straight Talk Express over at a rest stop, whistle up his media pals, and begin.

Go read the whole thing.

By Steam Fangs Palin (Tom Bozzo)

On 60 Minutes, John McCain helped resolve a couple of issues that occupied the comments last week.

Q1. Did McCain support Gramm-Leach-Bliley?

A: Yes, and he still does!

PELLEY: In 1999, you were one of the Senators who helped pass deregulation of Wall Street. Do you regret that now?

MCCAIN: No. I think the deregulation was probably helpful to the growth of our economy.

(Quote via Firedoglake.)

Q2. Is McCain going to outflank Obama with a populist volte-face on the bailout? (See also Krugman.)

A: Not as long as reporters can recall their ability to do a Google. Via the AP:

In the [60 Minutes] interview, McCain defended the Bush administration's proposed bailout of financial firms as necessary, though he acknowledged it could get expensive.

"We're going to take over these bad loans," McCain said. "And we're going to have the taxpayer help you out. But when the time comes and the economy recovers, then anything that's gained back is going to go to the taxpayers first.

"I'm not saying this isn't going to be messy. And I'm not saying it isn't going to be expensive. But we have to stop the bleeding," McCain said.

None of this is to say that McCain won't continue his pattern of rampant flip-flopping by at least trying to stake out positions both for and against the bailout — as Obama deftly calls it, an "election-time conversion" — or running against all the fatcats except for Carly Fiorina and Phil Gramm (worth every penny!). And it stands to reason that the Republicans will run against the "horrible big-government program" of the Bush administration, though of course they'll also run against the Democrats for obstructing the vital economic recovery program of the Bush administration as the situation presents itself.

PLUS: Mirabile dictu, could it be that congressional Democrats are getting the Administration to concede to the major features of the bailout plan a la Dodd and Frank?* With, in particular, equity dilution now part of the deal with Treasury, the revised bailout (Dodd discussion draft here) looks to be a huge substantive improvement over the DOA blank-check plan, and has garnered early favorable reviews from CR, Krugman, and (with some more specifics) Adam Levitin at Credit Slips. Bloomberg suggests that Republicans may bolt, but they won't make things easy for McCain if they end up opposing the plan for being too tough on financial executives and too easy on stressed homeowners.

* From one perspective, this could be terrifying as it may signal that Treasury really sees itself as staring into the abyss.

By Steam Fangs Palin (Tom Bozzo)

On 60 Minutes, John McCain helped resolve a couple of issues that occupied the comments last week.

Q1. Did McCain support Gramm-Leach-Bliley?

A: Yes, and he still does!

PELLEY: In 1999, you were one of the Senators who helped pass deregulation of Wall Street. Do you regret that now?

MCCAIN: No. I think the deregulation was probably helpful to the growth of our economy.

(Quote via Firedoglake.)

Q2. Is McCain going to outflank Obama with a populist volte-face on the bailout? (See also Krugman.)

A: Not as long as reporters can recall their ability to do a Google. Via the AP:

In the [60 Minutes] interview, McCain defended the Bush administration's proposed bailout of financial firms as necessary, though he acknowledged it could get expensive.

"We're going to take over these bad loans," McCain said. "And we're going to have the taxpayer help you out. But when the time comes and the economy recovers, then anything that's gained back is going to go to the taxpayers first.

"I'm not saying this isn't going to be messy. And I'm not saying it isn't going to be expensive. But we have to stop the bleeding," McCain said.

None of this is to say that McCain won't continue his pattern of rampant flip-flopping by at least trying to stake out positions both for and against the bailout — as Obama deftly calls it, an "election-time conversion" — or running against all the fatcats except for Carly Fiorina and Phil Gramm (worth every penny!). And it stands to reason that the Republicans will run against the "horrible big-government program" of the Bush administration, though of course they'll also run against the Democrats for obstructing the vital economic recovery program of the Bush administration as the situation presents itself.

PLUS: Mirabile dictu, could it be that congressional Democrats are getting the Administration to concede to the major features of the bailout plan a la Dodd and Frank?* With, in particular, equity dilution now part of the deal with Treasury, the revised bailout (Dodd discussion draft here) looks to be a huge substantive improvement over the DOA blank-check plan, and has garnered early favorable reviews from CR, Krugman, and (with some more specifics) Adam Levitin at Credit Slips. Bloomberg suggests that Republicans may bolt, but they won't make things easy for McCain if they end up opposing the plan for being too tough on financial executives and too easy on stressed homeowners.

* From one perspective, this could be terrifying as it may signal that Treasury really sees itself as staring into the abyss.

by Ken Houghton

It's not been a Good Weekend for me to read Berkeley-based Economists. (Though DeLong is on fire, in a good way, and has been since that initial post.)

Via Mark Thoma, this from Barry Eichengreen:

In the United States, there were two key decisions. The first, in the 1970’s, deregulated commissions paid to stockbrokers. The second, in the 1990’s, removed the Glass-Steagall Act’s restrictions on mixing commercial and investment banking. In the days of fixed commissions, investment banks could make a comfortable living booking stock trades. Deregulation meant competition and thinner margins. Elimination of Glass-Steagall then allowed commercial banks to encroach on the investment banks’ other traditional preserves.

In response, investment banks branched into new businesses like originating and distributing complex derivative securities. They borrowed money and put it to work to sustain their profitability. This gave rise to the first causes of the crisis: the originate-and-distribute model of securitization and the extensive use of leverage.

It is important to note that these were unintended consequences of basically sensible policy decisions.

Consequences? Yes. Unintended??? Not a chance in the world.

Now that the final step has been taken, can anyone deny that Phil Gramm, Jim Leach, and Tom Bliley knew exactly what they were doing?

by Ken Houghton

It's not been a Good Weekend for me to read Berkeley-based Economists. (Though DeLong is on fire, in a good way, and has been since that initial post.)

Via Mark Thoma, this from Barry Eichengreen:

In the United States, there were two key decisions. The first, in the 1970’s, deregulated commissions paid to stockbrokers. The second, in the 1990’s, removed the Glass-Steagall Act’s restrictions on mixing commercial and investment banking. In the days of fixed commissions, investment banks could make a comfortable living booking stock trades. Deregulation meant competition and thinner margins. Elimination of Glass-Steagall then allowed commercial banks to encroach on the investment banks’ other traditional preserves.

In response, investment banks branched into new businesses like originating and distributing complex derivative securities. They borrowed money and put it to work to sustain their profitability. This gave rise to the first causes of the crisis: the originate-and-distribute model of securitization and the extensive use of leverage.

It is important to note that these were unintended consequences of basically sensible policy decisions.

Consequences? Yes. Unintended??? Not a chance in the world.

Now that the final step has been taken, can anyone deny that Phil Gramm, Jim Leach, and Tom Bliley knew exactly what they were doing?

At a high level, Floyd Norris explains it all to you.

UDATED, AND PULLED TO THE FORE: For the more detailed view (h/t Barry R.), the soon to be late, not very lamented, New York Sun presents the details:

The SEC allowed five firms — the three that have collapsed plus Goldman Sachs and Morgan Stanley — to more than double the leverage they were allowed to keep on their balance sheets and remove discounts that had been applied to the assets they had been required to keep to protect them from defaults.

Making matters worse, according to Mr. Pickard, who helped write the original rule in 1975 as director of the SEC's trading and markets division, is a move by the SEC this month to further erode the restraints on surviving broker-dealers by withdrawing requirements that they maintain a certain level of rating from the ratings agencies.

and the solution going forward (that is, after you give these guys $700 billion) will be an even weaker form:

The SEC said it has no plans to re-examine the impact of the 2004 changes to the net capital rule, and last week, it put out a proposal to revise the rule once again. This time, it is looking to remove the requirement that broker dealers maintain a certain rating from the ratings agencies.

Because nothing says "faith in the institution" like a non-investment grade rating.

*Title explanation: Mother Courage at the beginning of the play has two (2) children. By the end, she has two less than that. The play closes with her "silent scream" as she drags her cart along.

If you had only seen that final scene, you would think it is a tragedy of Mother Courage, not one caused by her. Working from memory: One of her children dies because she sends him(?) something that might be salable—in the middle of a battlefield. The other is similarly sacrificed. It is the reverse of the "because he's an orphan" joke.