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(Photos by Robin Holland)
This week, the U.S. Senate voted to support a new commission to investigate wrongdoing in the lead-up to the economic crisis. Bill Moyers asked economist Simon Johnson and legal scholar Michael Perino what they would want such a commission to investigate.
Simon Johnson suggested:
“I would want to understand whether the laws were broken in potentially predatory practices around the way the consumers were treated in the housing market and in the credit card markets recently… That question will reveal a lot of unethical behavior or a lot of behavior that we should be uncomfortable with and that will then lead, I think, to sensible changes in the laws. So, really digging into the micro details of who was taken advantage of, who was misled, how [they got] retired people into some of these esoteric financial products. And, of course, the selling of savings products also. We know that local governments, for example, were enticed into schemes that they really didn't understand. And, of course, it may turn out in the investigation that the banks didn't understand it either. But, going through [at] that level of detail and showing, you know, who made what kind of mistake, who was misled by whom, who misled themselves – that is going to give you the factual basis on [how] you could construct a lot of new, sensible laws.”
Michael Perino recommended:
“I'd add to it the role that the credit rating agencies played in this entire process. Particularly in the creation of these derivative instruments. It's an industry that I think is not well understood on Wall Street. I think there has been some reluctance to dig into exactly what's going on there, and that's something I think I'd want to take a hard look at.”
What do you think? In examining the causes of the economic crisis, what would you ask a new Pecora Commission to investigate?
(Photo by Robin Holland)
This week on the JOURNAL, Bill Moyers asked legal scholar Michael Perino and economist Simon Johnson for their thoughts on Congress’ proposed independent commission to explore what went wrong with the economy and how to prevent it from happening again. Johnson and Perino were skeptical that such a commission would change the status quo in the public interest.
Perino said:
“If you look back at the history of financial regulation, you see the same pattern over and over again. There are always huge biases toward the status quo. People want to keep the structure the way it is because it’s worked well for them. And it’s only when there’s some crisis occurring that the forces for reform are strong enough to overcome the status quo... It sometimes becomes very easy to obscure the broader causes of a financial crisis by doing a little finger pointing and saying ‘Ah ha, here’s the bad person. We found them and, you know, we can move on...’ Unless the political support is there, it's going to be very easy to wind things up without doing much.”
Johnson said:
“I think the banks have control of the state... They got the bailout, they got the money they needed to stay in business, they got a vast line of credit from the taxpayer... they got everything they wanted... If the economy turns around, even if we get a recovery that’s not completely convincing but we sort of feel like we're not falling, and we're not having the massive unemployment of the '20s and '30s, the pressure will come off the banks. They know this. This is why they think they won. They faced down the dangers and they've gone through this difficult phase, and they came through it stronger than ever.”
What do you think? Take our poll and share your thoughts in the space below.
(Photo by Robin Holland)
Below is an article by JOURNAL senior writer Michael Winship. We welcome your comments below.
''Where Have You Gone, Ferdinand Pecora?''
By Michael Winship
For policy wonks near and far, the celebrity of the hour isn’t Susan Boyle, the Scottish church marm who belted out “I Dreamed a Dream” with the voice of an airy angel, or ex-Somali pirate hostage Richard Phillips, or Carrie Prejean, the Miss USA contestant from California who’s against gay marriage because the Bible tells her so.
No, it’s Ferdinand Pecora.
Who he, you may ask, and guess that maybe he once played infield for the Dodgers or sang Faust at the Metropolitan Opera. But back in the ‘30s, during the depths of the Great Depression, Ferdinand Pecora emerged as an unlikely hero, leading a sensational Senate investigation of what caused the ‘29 market crash.
Over the last few weeks, public pressure fueled by rage and pain has built for a similar probe of the causes of our current economic collapse, an inquiry that will search for real answers going beyond the hearings that have been held so far – more heat and wasted fire than illumination. People want to know what really happened, and how we can keep it from happening again.
Congress is finally getting the message. Last week, House Speaker Nancy Pelosi told a crowd at San Francisco’s Commonwealth Club, “I want to initiate… the equivalent of what happened in the ‘30s. They had something that was called the Pecora Commission,” and this week the Senate passed two amendments to anti-fraud legislation, one calling for an independent investigation, similar to the 9/11 Commission; the other for an internal select committee – like the Senate’s Watergate hearings in 1973.
All of this has arisen not only from the public’s anger but renewed interest in what happened when Ferdinand Pecora took the job as chief counsel to the Senate Banking Committee in 1933. He was a savvy immigrant from Sicily, the son of a cobbler, a former Manhattan assistant district attorney with a memory for facts, figures, dates and names that proved the undoing of a Wall Street banking world gone berserk with greed.
Under threat of subpoena and under oath, one tycoon after another – including J.P. Morgan, Jr., of the House of Morgan and Charles “Sunshine Charley” Mitchell, chairman of First National City Bank (now Citigroup) – was hauled before the committee and grilled relentlessly by Pecora.
In June 1933, he even made the cover of Time magazine. “Wealth on trial” reads the headline inside, where the investigator was described in ethnic stereotypes of the day as “the kinky-haired, olive-skinned, jut-jawed lawyer from Manhattan.” To their shock, the pompous financiers, unaccustomed to having their actions or integrity questioned by anyone, much less some pipsqueak, foreign-born legalist who made 255 dollars a month, were no match for his cross-examination skills.
They found themselves confessing to a litany of financial sins, including discount stock offerings to VIP “preferred” customers (among them banker cronies, Charles Lindbergh and General “Black Jack” Pershing, as well as Washington insiders, including former President Coolidge and a Supreme Court justice), repackaging bad loans and selling them as bonds to the unsuspecting, and non-payment of income tax.
The Pecora hearings resulted in 12,000 pages of transcripts that are still a primary source for historians of the Great Crash, and important New Deal legislation that for the first time regulated the high-handed, free-wheeling banking industry and protected the public from its excesses – including the Securities Act of 1933, the Securities Exchange Act of 1934 (which established the Securities and Exchange Commission – Pecora was one of its first commissioners) and the Glass-Steagall Banking Act of 1933, which erected a firewall between commercial and investment banking – a wall torn down during the Clinton administration, leading to much of our trouble today.
A biography of Ferdinand Pecora is being written by Michael Perino, a professor of securities regulation at St. John’s University. He was interviewed on this week’s edition of Bill Moyers Journal, along with Simon Johnson, the former chief economist at the International Monetary Fund who now teaches at MIT’s Sloan School of Management.
Reading the transcripts of the Pecora hearings, Perino told my colleague Bill Moyers, “You can’t help but hear the echoes of what’s going on today.”
Simon Johnson noted that right now, “these financial issues are complex and just like Mr. Pecora did, you need to find some way to crystallize it.” He suggested that for a 21st century version of the Pecora hearings to succeed the focus should be on “predatory practices,” especially the marketing of home mortgages and credit cards. Perino adds that another important area of inquiry would be “the role that credit agencies played in this entire process, particularly in the creation of… derivative instruments.”
As plans for a real, Pecora-style investigation emerge, three things seem clear. A general counsel and staff must be engaged who possess a bulldog tenacity and legal skills similar to Pecora’s. “You have to have a strong general counsel,” Johnson said, “who asks the tough questions and who doesn’t let you off the hook. You’ve got to push it through.”
Some have suggested Elizabeth Warren, Harvard Law professor and current head of the Congressional Oversight Panel overseeing the Troubled Assets Relief Program – TARP. As Johnson notes, “She comes with expertise… the right combination of qualifications,” but perhaps lacks the prosecutorial ability necessary. Patrick Fitzgerald, the Federal prosecutor in the Scooter Libby and Rod Blagojevich cases has been mentioned. Another possibility: New York State’s ambitious Attorney General Andrew Cuomo, who has been an outspoken critic of Wall Street and Washington during the current crisis. Just this week he sent a letter to the Senate and House banking committees detailing allegations that Bush Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke forced Bank of America’s merger with Merrill Lynch.
Second, an independent commission with subpoena power is the way to go; not yet another congressional investigation led by Senators and Representatives who have received political contributions from the very companies they’ll be hauling in for questioning. As the non-partisan Center for Responsive Politics has reported, for the last 20 years, the financial services industry has been the largest campaign contributor in every federal election cycle. In the last two years alone, individual and political action committee donations from Wall Street totaled $463.5 million.
This creates, Simon Johnson said, “a potential conflict of interest. I think that’s why setting up an independent, bipartisan commission with various… technical experts, people with a deep background in finance… makes sense.
“… Really drilling down is going to show you perhaps some things that were criminal, I’m not saying very many, but a lot of things that when you shine this light on them – a very, very bright light – they look inappropriate, unethical, or at least [are] things we’re not comfortable with going forward.”
Finally, unlike his opposition to an independent commission investigating allegations of torture, President Obama needs to get involved immediately and publicly back an independent Pecora-style commission’s work. According to Michael Perino, “Roosevelt was a big booster for the [Pecora] hearings. He met secretly with Pecora on a number of occasions,” as well as the committee chairmen.
Obama, on the other hand, may have spent too much time around University of Chicago free market economists when he taught constitutional law there. He seems more inclined to salve the egos of financial titans than to challenge them, and he’s clearly smitten with his chief economics adviser Larry Summers, who struck it rich on Wall Street, and with the likes of Robert Rubin, who appears to have spawned half the people Obama has put in charge of the banking crisis. Summers and Rubin were both, ahem, witnesses at the execution when Glass-Steagall was pushed out the window.
Nonetheless, President Obama “is the key to the whole situation,” Simon Johnson said; he has to insist on “a lot of openness.” Michael Perino noted, “There’s got to be strong political support behind these hearings or they’re likely to devolve into an academic exercise that doesn’t accomplish very much.”
It may already be too late. Simon Johnson says the banking industry is pretty confident they’re already won. “They got the bailout, they got the money they needed to stay in business. They got a vast line of credit from the taxpayer,” he said. “… Their position is, ‘Look, if you want a recovery, if you want to get your economy back, you gotta be nice to us.’ I’m afraid that the government has blinked….
“They were too big to fail… Now they’re way too big to fail. Next time… they may be too big to rescue.”
Ferdinand Pecora, a nation turns its lonely eyes to you.
Please note that the views and opinions expressed by Michael Winship are not necessarily the views and opinions held by Bill Moyers or BILL MOYERS JOURNAL.
(Photo by Robin Holland)
This week on the JOURNAL, Bill Moyers spoke with David Simon, a former journalist who created HBO’s award-winning television series “The Wire.” The series, which was informed by Simon’s 12 years as a crime reporter in Baltimore, was widely praised for its gritty, unflinching portrayal of the harsh realities of life in one American inner-city.
Simon attributed the stubborn persistence of many social problems to institutions’ practice of “juking the stats,” or manipulating numbers to make themselves look better:
“You show me anything that depicts institutional progress in America – school test scores, crime stats, arrest stats – anything that a politician can run on [or] anything that somebody can get a promotion on, and as soon as you invent that statistical category 50 people in that institution will be at work trying to figure out a way to make it look as if progress is actually occurring when actually no progress is... The same game is played everywhere – nobody’s actually in the business of doing what the institution is supposed to do... If there’s an institution that is supposed to serve you or that you are supposed to serve, and it’s supposed to care for you and be a societal positive, it will betray you.”
When Bill Moyers asked how he suggests addressing inner-city social problems, Simon said:
“I would put all the interdiction money, all the incarceration money, all the enforcement money, all of the pretrial, all of the prep, all of that cash – I would hurl it, as fast as I could, into drug treatment and job training and jobs programs.”
What do you think?
Do you agree with David Simon that institutions generally serve themselves rather than those they are supposed to help? If so, do you think his plan to address inner-city social problems is practical? Why or why not?
Can citizens force institutions to live up to their mission statements? If so, how?
Speaking with Bill Moyers on this week’s JOURNAL, former reporter David Simon contended that the recent struggles of the newspaper industry cannot simply be blamed on the Internet, as many have done:
“This is not all the Internet. A lot of the general tone in journalism right now is that of martyrology: ‘We were doing our job, making the world safe for democracy, and all of a sudden terra firma shifted [with] new technology.  Who knew that the internet was gonna overwhelm us?’ I would buy that if I wasn’t in journalism for the years that immediately preceded the internet...
All that [Research and Development] money that was supposed to go into making newspapers more essential, more viable, more able to explain the complexities of the world, went to shareholders in the Tribune company... ultimately, when the Internet did hit, they had an inferior product that was not essential enough that they could charge online for it. The guys who are running newspapers over the last 20 or 30 years have to be singular in the manner in which they destroyed their own industry.... they had contempt for their own product.”
What do you think?
What are the main causes of the newspaper industry’s current struggles?
Do newspapers today provide essential information for a healthy democracy? Did they do a better job of providing that information 20 or 30 years ago?
(Photo by Robin Holland)
Below is an article by JOURNAL senior writer Michael Winship. We welcome your comments below.
''The Shipping News''
By Michael Winship
If you’re looking for signs of the Apocalypse – and who isn’t? – here’s a good one. There’s an uptick in ark building.
You heard me. According to THE WALL STREET JOURNAL, that Bible of the Financially Bilious, Hong Kong’s billionaire Kwok brothers are in the final stages of constructing the world’s first full-size replica of Noah’s Ark – 450 feet long, 75 feet wide and 45 feet high. “Just the answer,” the JOURNAL reports, “for the rising waters threatening the global economy.”
Unlike Noah’s aquatic zoo, the Kwok version will remain land bound, and its 67 pairs of animals are made of fiberglass, thus eliminating potential headaches arising from husbandry, hygiene and other housekeeping issues at sea. It also comes equipped with a restaurant and posh, rooftop resort hotel – just the thing to please the discerning plutocrat, for whom a luxury suite is probably the closest they’ll ever get to The Rapture.
The Bible says Noah’s Ark was made of gopher wood, whatever that is (no one knows for certain, it seems); the Hong Kong replica is concrete reinforced with glass fiber, and is being built to actual size, the JOURNAL says, “in part to distinguish itself from one in the Netherlands that actually floats and boasts real farm animals but is just one fifth the size of the biblical original.”
The two vessels are “just the latest additions to a veritable ark armada built around the world by the devout and the merely driven.”
The Dutch ark’s builder plans to sail his to London, the United States and Australia. Of course, as things currently stand, chances are the boat will be boarded by Somali pirates and held for ransom, so its chicks and ducks and geese better scurry now while the scurrying’s good.
Actually, the odds of such an attack happening reportedly are less than one percent per voyage. But the recent assaults on American shipping attempting to deliver food aid to Kenya – some of which is destined for Somalia – and the successful rescue of Captain Richard Phillips last Sunday (killing three pirates in the process) finally have focused this country’s attention on the problem. Bands of Somali pirates are holding at least 19 ships and more than 250 merchant mariners for millions of dollars in ransom.
“These pirates are criminals, they are armed gangs of the sea, and those plotting attacks must be stopped and those carrying them out must be brought to justice,” Secretary of State Clinton told reporters Wednesday.
True enough, but it’s worth taking a moment to recognize the conditions from which this new breed of pirate arose and to realize that, as Madison University analyst J. Peter Pham told Reuters, “It will require more than just the application of force to uproot piracy from the soil of Somalia.”
It’s not just because the sea is so great and our boats are so small, comparatively speaking. Some estimate up to a million square miles of ocean are vulnerable and even hundreds of patrolling warships probably wouldn’t be enough to do the job. (Right now, according to an official with the US Central Command, there is just a handful of US and non-US ships on pirate patrol in the Gulf of Aden and Indian Ocean.) Nor is it simply because since 1991 Somalia has been in a state of total anarchy. There’s more to it.
The seeds of the current piracy were planted around the time of that collapse when a group of vigilante fishermen calling themselves the Volunteer Coast Guard of Somalia started heading out to sea in speedboats, intercepting and levying a “tax” on foreign, mostly Western, ships, some of which were smuggling goods in and out of the country, others of which were busily overfishing coastal waters, depriving nine million starving Somalis of food.
What’s more, Ahmediou Ould-Abdallah, the United Nations envoy to Somalia, told Jonathan Hari of the British newspaper THE INDEPENDENT that European ships, taking advantage of the onshore chaos, dumped barrels of nuclear waste offshore. “There is also lead,” he claimed, “and heavy metals such as cadmium and mercury – you name it.”
Hari reports that after the Christmas 2005 tsunami, hundreds of leaking barrels washed up on shore and more than 300 died from radiation sickness. “Much of it can be traced back to European hospitals and factories, who seem to be passing it on to the Italian mafia to ‘dispose’ of cheaply,” he wrote back on January 5th. “When I asked Mr. Ould-Abdallah what European governments were doing about it, he said with a sigh, ‘Nothing. There has been no clean-up, no compensation and no prevention.’”
In the April issue of VANITY FAIR, journalist William Langewiesche has a fascinating account of last spring’s Somali hijacking of the French cruise ship Le Ponant, which finally ended with the crew’s safe return, the payment of a $2.15 million ransom and a French military assault that resulted in the arrest of six alleged pirates.
“One of the ironies at play is that the maritime industry being victimized is itself a standard-bearer for the advantages that exist in a world beyond law and regulation,” he writes, referring to a global shipping trade that has dodged the rules through the raw manipulation of flags of convenience and the law of the sea. They are, Langewiesche says, “…The very same people who for years have made a mockery of the nation-state idea. They know that whatever pirate tolls they pay will always pale in comparison with the taxes that would be imposed if global law and order ever actually prevailed.”
No wonder media commentators speak -- without irony -- of the pirates’ “business model.” Icelandic fishermen turned to banking and high finance and we know how well that turned out. Somali fisherman turned to piracy. This global economic calamity has everyone hammering together arks, and despite this week’s rescue at sea, so far, it seems, the pirates -- Somali or otherwise -- are the ones still afloat.
Please note that the views and opinions expressed by Michael Winship are not necessarily the views and opinions held by Bill Moyers or BILL MOYERS JOURNAL.
This week, the JOURNAL joined with actor Sam Waterston and historian Harold Holzer to present a special hour on the life, legend, and legacy of Abraham Lincoln.
As Holzer provided context with a rich historical narrative, Waterston breathed life into the words of a diverse group of writers and thinkers who have shaped our nation’s ever-shifting visions of Lincoln as man, as martyr, and as myth. He quoted abolitionist author Harriet Beecher Stowe:
“When we were troubled and sat in darkness, and looked doubtfully towards the Presidential chair, it was never that we doubted the goodwill of our pilot – only the clearness of his eyesight. But Almighty God has granted to him that clearness of vision which he gives to the true-hearted, and enabled him to set his honest foot in that promised land of freedom which is to be the patrimony of all men, black and white – and from henceforth the nations shall rise up and call him blessed.”
Waterston also gave voice to African-American leader W.E.B. DuBois, who felt that understanding Lincoln’s flaws was essential to appreciating his achievements:
“No sooner does a great man die than we begin to whitewash him. We seek to forget all that was small and mean and unpleasant and remember the fine and brave and good. We slur over and explain away his inconsistencies and at last there begins to appear, not the real man, but the tradition of the man – remote, immense, perfect, cold, and dead! Abraham Lincoln was perhaps the greatest figure of the nineteenth century... the most human and loveable. And I love him not because he was perfect but because he was not and yet, triumphed.”
Though Lincoln is generally considered one of America’s best presidents, some revisionists argue that his reputation rests on generations of propaganda. Libertarian scholar Thomas DiLorenzo wrote:
“[Lincoln historians] routinely refer to him as "Father Abraham" and compare him to Jesus or Moses. They do this because their agenda is not only the deification of Lincoln, but of executive power and nationalism in general... And when some of his more dastardly deeds, such as micromanaging the waging of war on fellow citizens, are mentioned they are always obscured by a mountain of hollow excuses, rationales, cover-ups, and justifications... Lincoln’s (and the Republican Party’s) "real agenda" was the old Hamilton/Clay mercantilist agenda of protectionist tariffs, corporate welfare, central banking, the creation of a giant political patronage machine, and the pursuit of an empire that would rival the British empire.”
What do you think? Who, in your view, was the real Lincoln?
(Photo by Robin Holland)
Below is an article by JOURNAL senior writer Michael Winship. We welcome your comments below.
''Let the Railsplitter Awake!''
By Michael Winship
A number of years ago, when I was writing a public television series for the Smithsonian Institution, I watched a woman in one of the museum’s conservation labs, restoring what appeared to be an old top hat.
What’s its story, I asked her? Oh, she replied nonchalantly, this is the hat Lincoln wore to Ford’s Theater the night he was assassinated.
Oh.
Actor Sam Waterston, aka District Attorney Jack McCoy on LAW & ORDER, had an even more visceral experience when he was preparing to play Abraham Lincoln and went to the Library of Congress to research the part.
“This guy took me down and down and down into the bowels of the library, down a long hall… all the way to what felt like the back of the building,” Waterston told my colleague Bill Moyers on a special edition of BILL MOYERS JOURNAL. There he met a curator who said, “Hold out your hands. These are the contents of Lincoln’s pockets on the night he was shot.”
Two pairs of glasses, a watch fob, a pocketknife, a handkerchief, monogrammed, “A. Lincoln” by his wife, Mary Todd. A wallet, inside of which were newspaper clippings and a Confederate five-dollar bill – a souvenir, perhaps, of the visit Lincoln had made to the conquered city of Richmond, Virginia, just a few days earlier.
“It was a galvanizing and very thrilling thing,” Waterston said. Proximity to such telling totems of America’s story, as sacred in their own way as the remains of a saint in a cathedral reliquary, make Lincoln human – as have Waterston’s various portrayals of our greatest President on stage and television.
So, too, the words of writers who have made Lincoln an enduring literary subject from his own lifetime right up to today, written about, it’s said, more than any other historic personage with the exception of Jesus Christ.
Lincoln was assassinated 144 years ago on Good Friday, and so Waterston is appearing on BILL MOYERS JOURNAL this week (premiering on PBS on Friday, April 10 at 9 pm ET) to read excerpts reflecting the ways in which Lincoln’s image has evolved and has been interpreted by great American writers – from Nathaniel Hawthorne and Walt Whitman to Delmore Schwartz and Allen Ginsberg.
Featured with Waterston is historian Harold Holzer, who has written, co-written or edited 22 books about Lincoln, including “The Lincoln Anthology,” published by the Library of America, from which Waterston’s readings were chosen. “Lincoln did nothing less than revolutionize the American political vocabulary,” Holzer said. “But no political leader, no political writer, not even Lincoln, can define his own place in the landscape of memory. That judgment belongs to those who portray the man in life, massage his biography into metaphor, and refine its meaning over what Lincoln called ‘all distances of time and space.’”
Lincoln himself said, “Writing – the art of communicating thoughts to the mind, through the eye – is the great invention of the world… Great, very great in enabling us to converse with the dead, the absent, and the unborn, at all distances of time and of space.” Some of the authors represented actually met him – Hawthorne, for example, a Democrat who nonetheless was won over by Lincoln’s “native sense” despite a “physiognomy as coarse a one as you would meet anywhere in the length and breadth of the States.”
“I liked this sallow, queer, sagacious visage,” he wrote, “… and, for my small share in the matter, would as lief have Uncle Abe for a ruler as any man whom it would have been practicable to put in his place.”
Whitman, Whittier and Melville worshipped him in death; African-American leader Frederick Douglass met and admired him, but kept a slight, although respectful distance, one generated by centuries of enslavement and doubt. “Viewed from the genuine abolition ground, Mr. Lincoln seemed tardy, cold, dull and indifferent,” he declared 11 years after Lincoln’s passing. “Only by measuring him by the sentiment of his country, a sentiment he was bound as a statesman to consult, he was swift, zealous, radical and determined.”
Forty-six years later, in 1922, civil rights activist W.E.B. Dubois said, “Abraham Lincoln was perhaps the greatest figure of the nineteenth century… the most human and loveable. And I love him not because he was perfect but because he was not and yet, triumphed. The world is full of illegitimate children. The world is full of folk whose taste was educated in the gutter. The world is full of people born hating and despising their fellows. To these I love to say: See this man. He was one of you and yet he became Abraham Lincoln.”
Twentieth century poet Allen Ginsberg saw Lincoln through a “radical lens,” Holzer said. “A rallying cry for, not an impediment to, revolutionary change… an urgently needed inspiration.”
“Let the Railsplitter Awake!” Ginsberg cried, in his “Homage to Neruda:”
“Let Abraham come back, let his old yeast
rise in green and gold earth of Illinois,
and lift the axe in his city
against the new slave makers
against their slave whips
against the venom of the print houses
against all the bloodsoaked
merchandise they wanna sell.”
And so it goes, right up through Barack Obama’s evocation of Lincoln’s memory in speeches and at his own inauguration. “Lincoln is an inspiration to Barack Obama,” Harold Holzer told Bill Moyers “[He] brings us nearer to the completion of the unfinished work that Lincoln spoke about at Gettysburg. His election is a validation of that dream, even if it took 150 years to get to this point...
“Two little girls, Sasha and Malia Obama, who are the descendents, through their mother's side, of enslaved people, might this very evening be playing in the Lincoln bedroom, which was Lincoln's office, and the room where he signed the Emancipation Proclamation. That is the apex of the arc of history since the Civil War.”
Please note that the views and opinions expressed by Michael Winship are not necessarily the views and opinions held by Bill Moyers or BILL MOYERS JOURNAL.
A cartoon in the Sunday comics shows that mustachioed fellow with monocle and top hat from the Monopoly game – “Rich Uncle Pennybags,” he used to be called – standing along the roadside, destitute, holding a sign: “Will blame poor people for food.”
Time to move the blame to where it really belongs. That means no more coddling banks with bailout billions marked “secret.” No more allowing their executives lavish bonuses and new corporate jets as if they’ve won the megalottery and not sent the economy down the tubes. And no more apostles of Wall Street calling the shots.
Which brings us to Larry Summers. Over the weekend, the White House released financial disclosure reports revealing that Summers, director of the National Economic Council, received $5.2 million last year working for a $30 billion hedge fund. He made another $2.7 million in lecture fees, including cash from such recent beneficiaries of taxpayer generosity as Citigroup, JP Morgan and Goldman Sachs. The now defunct financial services giant Lehman Brothers handsomely purchased his pearls of wisdom, too.
Reading stories about Summers and Wall Street you realize the man was intoxicated by the exotic witches’ brew of derivatives and other financial legerdemain that got us into such a fine mess in the first place. Yet here he is, serving as gatekeeper of the information and analysis going to President Obama on the current collapse. We have to wonder, when the President asks, “Larry, who did this to us?” is he going to name names of old friends and benefactors? Knowing he most likely will be looking for his old desk back once he leaves the White House, is he going to be tough on the very system of lucrative largesse that he helped create in his earlier incarnation as a de-regulating Treasury Secretary? (“Larry?” “Yes, Mr. President?” “Who the hell recommended repealing the Glass-Steagall Act back in the 90s and opened the floodgates to all this greed?” “Uh, excuse me, Mr. President, I think Bob Rubin’s calling me.”)
That imaginary conversation came to mind last week as we watched President Obama's joint press conference with British Prime Minister Gordon Brown. When a reporter asked Obama who is to blame for the financial crisis, our usually eloquent and knowledgeable President responded with a rambling and ineffectual answer. With Larry Summers guarding his inbox, it’s hardly surprising he’s not getting the whole story.
If only someone with nothing to lose would remind the President of that old story – perhaps apocryphal but containing a powerful truth – of the Great Wall of China. Four thousand miles long and 25 feet tall. Intended to be too high to climb over, too thick to break through, and too long to go around. Yet in its first century of the wall’s existence, China was successfully breached three times by invaders who didn’t have to break through, climb over, or go around. They simply were waved through the gates by obliging watchmen. The Chinese knew their wall very well. It was the gatekeepers they didn’t know.
Shifting the blame for the financial crisis to where it belongs also means no more playacting in round after round of congressional hearings devoted more to posturing and false contrition than to truth. We need real hearings, conducted by experienced and fiercely independent counsel asking the tough questions, or an official commission with subpoena power that can generate evidence leading, if warranted, to trials and convictions – and this time Rich Uncle Pennybags shouldn’t have safely tucked away in his vest pocket a “Get Out of Jail Free” card.
So far, the only one in the clink is Bernie Madoff and he was “a piker” compared to the bankers who peddled toxic assets like unverified “liars' loan” mortgages as Triple-A quality goods. So says Bill Black, and he should know. During the savings and loan scandal in the 1980s, Black, who teaches economics and law at the University of Missouri, Kansas City, was the federal regulator who accused then-House Speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L’s in exchange for campaign contributions and other perks. They got off with a wrist slap but Black and others successfully led investigations that resulted in convictions and re-regulation of the savings and loan industry.
Bill Black wrote a book about his experiences with a title that fits today as well as it did when he published it four years ago – "The Best Way to Rob a Bank Is to Own One." On last Friday night’s edition of BILL MOYERS JOURNAL, he said the current economic and financial meltdown is driven by fraud and banks that got away with it, in part, because of government deregulation under prior Republican and Democratic administrations.
“Now we know what happens when you destroy regulation,” Black said. “You get the biggest financial calamity for anybody under the age of 80.”
What’s more, the government ignored warnings and existing legislation to stop it before the current crisis got worse. “They didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the savings and loan crisis,” Black said. “Even while the institutions were reporting they were the most profitable savings and loans in America, we knew they were frauds. And we were moving to close them down.”
There was advance warning of the current collapse. Black says that the FBI blew the whistle; in September 2004, “there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle.”
But after 9/11, “The Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents.” So today, despite a crisis a hundred times worse than the Savings and Loan scandal, “there are one-fifth as many FBI agents” assigned to bank fraud.
Treasury Secretary Timothy Geithner “is covering up,” Black said. “Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have massive losses, and that they're fine…
“They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent, they think Americans are a bunch of cowards, and that we'll run screaming to the exits… And it's foolishness, all right?
“Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, ‘We just can't let the big banks fail.’ That's wrong.”
Black asked, “Why would we keep CEO’s and CFO’s and other senior officers that caused the problems? That’s nuts… We’re hiding the losses instead of trying to find out the real losses? Stop that… Because you need good information to make good decisions… Follow what works instead of what’s failed. Start appointing people who have records of success instead of records of failure… There are lots of things we can do. Even today, as late as it is. Even though we’ve had a terrible start to the [Obama] administration. They could change, and they could change within weeks.”
He called for a 21st century version of the Pecora Commission, referring to hearings that sought the causes of the Great Depression, held during the 1930’s by the US Senate Committee on Banking and Currency.
Ferdinand Pecora was the committee’s chief counsel and interrogator, a Sicilian émigré who was a progressive devotee of trust busting Teddy Roosevelt and a former Manhattan assistant district attorney who successfully helped shut down more than a hundred Wall Street “bucket shops” selling bogus securities and commodity futures. He was relentless in his cross-examination of financial executives, including J.P. Morgan himself.
Pecora’s investigation uncovered a variety of Wall Street calumnies – among them Morgan’s “preferred list” of government and political insiders, including former President Coolidge and a Supreme Court justice, who were offered big discounts on stock deals. The hearings led to passage of the Securities Act of 1933 and the Securities Exchange Act of 1934.
In the preface to his 1939 memoir, “Wall Street under Oath,” Ferdinand Pecora told the story of his investigation and described an attitude amongst the Rich Uncle Pennybags of the financial world that will sound familiar to Bill Black and those who seek out the guilty today.
“That its leaders are eminently fitted to guide our nation, and that they would make a much better job of it than any other body of men, Wall Street does not for a moment doubt,” Pecora wrote. “Indeed, if you now hearken to the Oracles of The Street, you will hear now and then that the money-changers have been much maligned. You will be told that a whole group of high-minded men, innocent of social or economic wrongdoing, were expelled from the temple because of the excesses of a few. You will be assured that they had nothing to do with the misfortunes that overtook the country in 1929-1933; that they were simply scapegoats, sacrificed on the altar of unreasoning public opinion to satisfy the wrath of a howling mob….”
According to Politico.com, at his March 27 White House meeting with the nation’s top bankers, President Obama heard similar arguments and interrupted, saying, “Be careful how you make those statements, gentlemen. The public isn’t buying that…. My administration is the only thing between you and the pitchforks.”
Stand aside, Mr. President, and let us prod with our pitchforks to get at the facts.
The Prompt Corrective Action Law: Section 1831o
William K. Black
Associate Professor of Economics and Law
University of Missouri – Kansas City
Please note that the views and opinions expressed are not necessarily the views and opinions held by Bill Moyers or BILL MOYERS JOURNAL
My comments in the Bill Moyers Journal interview about the “Prompt Corrective Action” (PCA) law (adopted in 1991) have sparked considerable comment in the blogsphere. Here is the portion of the interview transcript that discusses the PCA law.
WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.
BILL MOYERS: In other words, they could have closed these banks without nationalizing them?
WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.
BILL MOYERS: And that's a law?
WILLIAM K. BLACK: That's the law.
BILL MOYERS: So, Paulson could have done this? Geithner could do this?
WILLIAM K. BLACK: Not could. Was mandated-
BILL MOYERS: By the law.
WILLIAM K. BLACK: By the law.
I first published an article about the PCA law over a month ago entitled: “Why is Geithner Continuing Paulson’s Policy of Violating the Law?” (February 23, 2009).
I was the staff leader for Federal Home Loan Bank Board Chairman Ed Gray’s successful reregulation of the S&L industry. That reregulation provided the tools that allowed the agency to place in receivership many of the worst control frauds. Gray inherited (and for a time supported) a dominant strategy of covering up the scale of the S&L industry’s insolvency. He personally recruited vigorous senior regulators such as Michael Patriarca and Joe Selby to reverse that strategy. The PCA law was adopted largely in response to the enormous cost to the taxpayers of our predecessor’s failed strategy of not closing insolvent S&Ls.
The new law had an impressive start, thanks in great part to the transformed reregulatory spirit. How many readers recall the 1991-92 subprime crisis? It didn’t happen because we took prompt regulatory action against subprime S&L lenders that were following practices (e.g., qualifying borrowers at the teaser rate, offering “neg am” mortgages, etc) that we knew would lead to widespread failures.
The broadcast of Bill Moyers Journal interview has raised enormously the public’s awareness of the PCA. A commentator has responded by arguing that the PCA law does not mandate that the regulators place insolvent banks into receivership. I am delighted that the debate has turned to focus in part on the issue of why virtually all economists and white-collar criminologists believe that it is essential to take prompt regulatory action to resolve failed banks, particularly ones that are insolvent due to “control fraud”, i.e., where the person that controls a seemingly legitimate entity uses it as a “weapon” to defraud. In the financial world accounting fraud is the “weapon of choice.”
Banks owned by holding companies are fully subject to the law
The commentator’s primary concern can be answered briefly because it criticizes a claim I never made. S(he) notes that banking holding companies and insurance companies are not subject to PCA. I did not say that they were. As the interview excerpt shows, we were talking about “[savings] institutions” and “banks” that can be put into “receivership” (I’m going to use “bank” here to refer to any FDIC-insured depository institution.) The FDIC (and if it lacks the funds, the U.S. Treasury) is only legally obligated to pay depositors of FDIC-insured banks up to the deposit insurance limits. The federal banking regulators have receivership powers only over federally insured depository institutions. The FDIC and the U.S. Treasury have no obligation to pay the debts of bank holding companies or insurance companies – and shouldn’t be paying those debts.
The commentator uses this strawman argument (refuting a claim no one made) to imply that the fact that PCA doesn’t apply to bank holding companies means that the federal financial regulators did not have to comply with the PCA law. S(he) lists a series of companies, primarily large bank holding companies (BHCs) and declares that their existence means: “So, pretty much all of the really big players don't fall under the PCA in the first place.” Bank holding companies, of course, are called that because they own banks – and the U.S. banks they own are subject to PCA. The fact that a bank is owned by a holding company is irrelevant to the PCA’s requirements; it provides no immunity from the PCA. BHCs are “really big players” because they own massive banks subject to the PCA. The banks are the “really big players” and they are subject to the PCA law. When we put insolvent banks into receivership their BHCs and affiliates lose all control of the bank. The FDIC has sole control of it.
PCA does not apply to the corporate owners of banks or their non-bank affiliates.
However, the bank subsidiaries are the dominant assets of almost all holding companies that own banks. As such, the failure of the banking within the group is likely to trigger the failure of the holding company.
To sum up the first point: banks are the issue. U.S. banks have FDIC insurance and are subject to the PCA law, regardless of whether they are owned by a BHC. Deposit insurance covers only insured banks, not BHCs, so the FDIC, the Treasury and the taxpayers do not owe any obligation to pay their creditors. If the commentator is worried that BHCs will escape receivership, s(he) need not fear. BHCs and insurance companies such as AIG are subject to the bankruptcy laws, which can be used to block and even “claw back” excessive and fraudulent executive compensation. (Treasury is also requesting Congress to grant it authority to place BHCs and some insurers into receivership.)
The PCA law mandates receivership in these circumstances
The commentator’s secondary argument is that the PCA law does not mandate that deeply insolvent banks be placed in receivership. S(he) points to several discretionary exceptions in the law, but none of the exceptions apply to insolvent banks that cannot be promptly corrected (recapitalized). They must be placed in receivership to comport with the stated purpose and language of the law. Moreover, neither the Bush nor the Obama administration has purported to act in accordance with the inapplicable exceptions.
I will respond to the argument primarily by citing other scholars on the PCA that were writing at an earlier time and in an apolitical context. The scholarly literature on the PCA is fairly extensive and quite consistent. I’ve drawn on Nieto & Wall (2007) (see n. 2) for the quotations in the following discussion (other than statutory language), but other sources do not differ materially on the origins, singular purpose, and provisions of the PCA law.
The PCA law, as I noted in the interview, arose as a corrective to problems exposed during the S&L debacle. The consensus was that the central problem was that regulators, sometimes bowing to political or industry pressure (“regulatory capture”), were delaying placing failed banks into receivership and greatly raising the cost to taxpayers.
The US has a long history with the basics required to implement PCA: binding capital adequacy standards and the ability to take substantial actions against banks that failed to meet the standards. The supervisors had the authority to adopt many of the provisions of PCA using their pre-existing powers if they had so chosen. However, the experience of the 1980s had clearly indicated that US supervisors valued discretionary responses targeted at keeping some banks (especially thrifts and large banks) in operation after they had became financially distressed. (p. 12)
Economists and white-collar criminologists broadly agree that prompt receiverships of failed banks reduce taxpayer costs and systemic risk.
[A]llowing insolvent banks to continue in operation runs the risk that they will accumulate even larger losses leading to even greater market disruption when the bank’s continued operation is no longer tenable. In contrast, if a bank is required to be closed before its losses exceed the bank’s equity and subordinated debt then depositors and other creditors should not be exposed to any loss. Moreover, prompt resolution reduces the probability that more than one systemically important bank will be insolvent at the same time. In sum, a supervisory focus on limiting deposit insurance costs is unlikely to result in significantly higher expected losses due to systemic financial problems and may well result in lower expected costs. (p. 18)
Leaving the senior officers that caused bank failure in control creates particularly severe risks to the taxpayers.
Prompt corrective supervisory action seeks to minimize expected losses to the deposit insurer and taxpayer by limiting supervisors’ ability to engage in forbearance. Along with reducing taxpayer losses, PCA should also reduce banks’ incentive to engage in moral hazard behavior by reducing or eliminating the subsidy to risk-taking provided by mispriced deposit insurance. These potential benefits from PCA appear to have been recognized, as reflected in the increasing number of recommendations to policy makers to introduce PCA type of provisions in their national legislation. Japan, Korea and, more recently Mexico have adopted this prudential policy. (p. 31).
“Moral hazard” can lead to both “reactive” control fraud and wildly imprudent risks. Either can cause a dramatic increase in taxpayer losses. As I explained in the interview, leaving the managers in place that caused the failure also prevents us from obtaining honest evaluation of assets and the criminal referrals that are essential to resolve this crisis.
The PCA law states its sole, express purpose:
(1) Purpose
The purpose of this section is to resolve the problems of insured depository institutions at the least possible long-term loss to the Deposit Insurance Fund. (1831o (a) (1)).
The administration’s duty, under the rule of law, is to administer the law to achieve that purpose. Prompt receiverships “resolve the problems” of insolvent and failing banks “at the least possible long-term loss.”
Because the problem prompting passage of the PCA law was supervisory delay in closing insolvent banks, the law mandated “prompt corrective action.” This, of course, need not mean receivership for troubled banks that can promptly recapitalize themselves by raising equity. The mandate to the regulators is that either the bank or the regulator must promptly correct the capital inadequacy.
In 1991 the Congress moved to limit taxpayer exposure to losses at failed banks with the passage of FDICIA. The PCA provisions of FDICIA create a structured system of supervisory responses to declines in bank capital, culminating in the bank being forced into receivership within 90 days after its tangible equity capital dropped below two percent of total assets. (pp. 11-12)
Note that two percent tangible capital (the point below which a bank is “critically undercapitalized”) is a much higher number than it may appear, for many banks have large amounts of “goodwill” (an intangible) on their books as an asset. The authors emphasize the regulators “forc[ing]” the bank into receivership if it does not promptly restore its capital. They expressly tie these provisions to the PCA law’s intent to combat regulatory forbearance through “mandatory” supervisory intervention.
The key innovation of PCA is that it recommends a reduction of supervisory discretion to exercise forbearance by proposing a series of capital adequacy tranches with a set of mandatory supervisory actions for each of the undercapitalized tranches. Mandatory supervisory actions are intended to override the incentives supervisors would otherwise have to engage in forbearance. (p. 19)
The authors also explain that the PCA law was intended to protect the regulators “independence” from the common political pressures to keep failing banks open by “requir[ing] them to intervene.
The US supervisors did not need political or judicial approval prior to PCA to intervene at a troubled bank or to force an insolvent bank into resolution. The major change in supervisory practice resulting from PCA is that after PCA the supervisors were required to intervene as a bank’s supervisory capital ratios deteriorated. The independence of supervisory action provided to supervisors before PCA is critical to the effective operation of PCA. A system that requires the prior approval of political authorities creates the potential for delay and forbearance in supervisory intervention to the extent that the political authorities do not follow the supervisors´ recommendations. Moreover, if this condition is not met, the requirement of prior political approval reduces the effectiveness of PCA in discouraging banks from taking excessive risk. (p. 22)
If the bank cannot promptly raise capital on its own to return to health it must be placed in receivership. Nieto & Wall explain that such receiverships are the normal U.S. means of dealing with failed banks, lead to the removal of the bank officers that caused the failure, are not remotely akin to “nationalization”, and substantially reduce the cost to the taxpayers.
2.3 Should banks be closed with positive regulatory capital?
Both SEIR [the academic proposal of Drs. Kaufman and Benston that led to the adoption of the PCA law] and PCA call for timely resolution, which is a policy where banks with sufficiently low, but still positive, equity capital are forced into resolution. In the US context, resolution is understood to include: (1) the government assuming control of the failed bank, firing the senior managers and removing equity holders from any governance role, and (2) the government returning the bank’s assets to private control through some combination of sale to a healthy bank or banks, new equity issue, or liquidation. Timely resolution provides two important benefits. First, forcing a bank into resolution while it still has positive regulatory capital truncates if not eliminates the value of the deposit insurance put option, reducing the incentive of the bank’s shareholders to support excess risk taking. Second, timely resolution is critical to limiting deposit insurance losses. If insolvent banks are allowed to continue in operation then the potential losses from failure can be very large. (pp. 20-21)
These mandatory provisions of the PCA law are “critical” to its effectiveness. Note the scholars’ emphasis on the provisions that “require minimum and automatic supervisory action” and subject banks to “mandatory closure” before they become insolvent.
Three aspects of the philosophy underlying SEIR/PCA are critical to its effective operation. First, the primary goal of prudential supervisors should be to minimize deposit insurance losses, a goal which is also likely to result in a reduction in the expected social costs of systemic financial problems.
The PCA policy applied in the US goes beyond those three principles of Basle II in that it limits even further supervisory discretion as to when to forbear from intervening by specifying capital/asset ratios that require minimum and automatic supervisory action.
The third critical part of PCA follows from the first two parts, banks should be subject to mandatory closure at positive levels of regulatory capital ratio. This provides an incentive to banks’ managers to recapitalize the bank or look for a healthy merger partner and, ultimately, contribute to reduce the cost of deposit insurance. (p. 31)
The authors also explain provisions of the PCA law that make its requirements anathema to the bankers that caused the failures (i.e., firing managers and restricting management “bonuses and raises”) and the regulators whose laxity permitted widespread frauds.
No bank may make a capital distribution (dividend or stock repurchase) if after the payment the bank would fall in any of the three undercapitalized categories unless the bank has prior supervisory approval. All undercapitalized banks must submit a capital restoration plan and that plan must be approved by the bank’s supervisor. All undercapitalized banks also face growth restrictions. Significantly undercapitalized banks must restrict bonuses and raises to management. Critically undercapitalized banks must be placed in receivership within 90 days unless some other action would better minimize the long-run losses to the deposit insurance fund. Supervisors are also given a variety of discretionary actions they may take. For example, the supervisors may dismiss any director or senior officer at a significantly undercapitalized bank and may further require that their successor be approved by the supervisory agency. (p. 13)
PCA requires that the inspector general of the appropriate supervisory agency prepare a report whenever a bank failure results in material losses. The report addresses why the loss occurred and what should be done to prevent such losses in the future. A copy of the report is to be provided to the Comptroller General and to any member of Congress requesting the report.21 FDICIA also provides for public release of the reports upon request…. (p. 14)
Recent IG reports of this nature have led to the removal of two of the most senior Office of Thrift Supervision (OTS) leaders. Regulators that place fraudulent banks that they have failed to supervise properly into receivership risk their reputations and careers. One can well understand why senior regulators are so hostile to complying with the PCA law. (As Treasury Secretary, and as a leading colleague of then Secretary Paulson, I have concentrated on Mr. Geithner’s role, but each of the top federal banking regulators is complicit in failing to comply with the PCA law.)
Before the legal minutia, let’s not lose sight of the policy issue
To review the bidding to date: there is a consensus among economists and white-collar criminologists (and senior regulators that have successfully resolved prior crises such as William Seidman, Edwin Gray, and Paul Volcker) that failing banks should be placed promptly into receivership if they cannot recapitalize. So the fundamental question, even if the PCA law was never passed, is what can the nation do to end the disastrous Paulson/Geithner policy of covering up the largest banks’ losses and leaving the CEOs and senior officers that caused their failures, often through fraud, in power? How many of those of us that voted for Mr. Obama believed that they were voting for a continuation of Bush’s failed financial regulatory policies? Given the terrible cost to taxpayers during the early years of the S&L debacle of “forbearance” for failed S&Ls, the horrific failure of Japan’s embrace of the cover up of its bank losses, and the great success of the vigorous reregulation of the S&L industry why would we adopt the failed strategy instead of the proven success? The way we reregulated the S&L industry was not simply an economic success, it was vital to restoring at least some integrity. We insisted on honest accounting, used prompt receiverships, and rooted out the control frauds. This led to over 1000 felony convictions related to the debacle – the greatest criminal justice success in history against elite white-collar criminals.
On to the legal specifics
The commentator argues that the PCA law does not mandate receiverships, citing exceptions to the mandatory language. None of the exceptions apply in the circumstances we are discussing and neither the Bush nor the Obama administration purports to be following such exceptions. Instead, what is occurring is a coverup designed to evade the PCA that relies on abusive accounting to hide the banks’ losses that arose due to mortgage and accounting fraud. There is a certain awful symmetry to thinking that the cure for accounting fraud is greater accounting fraud countenanced, even arguably mandated, by the government. Governmental abuse of accounting makes it far harder to prosecute bank officials that enriched themselves through accounting fraud.
To begin, we need to review the context of the discussion during the interview. Here’s the relevant portion of interview that led to the discussion about the PCA law:
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That's a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who's covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.
BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.
TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.
Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.
WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.
BILL MOYERS: As?
WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.
BILL MOYERS: How is this happening? I mean why is it happening?
WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.
BILL MOYERS: What facts?
WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?
The context then is Geithner saying that it would cost the taxpayers $2 trillion to bail out the insolvent banks, yet virtually all the banks are reporting they are solvent and “well capitalized.” I noted that both statements could not be true. Geithner has every incentive to understate, not overstate, the cost of bailing out the banks and his $2 trillion estimate is materially lower than most analysts, so there is every reason to believe that the banks are not recognizing at least $2 trillion in losses. We know that the big banks hold a greatly disproportionate share of the worst assets. That means that many, probably most, of the big banks are massively insolvent (because $2 trillion far exceeds what they claim to hold as capital). We know that many large bank stocks (before the announcement of the huge TARP II subsidy for banks) were trading at prices that indicated market expectations that they had suffered massive capital losses and were essentially high risk options capitalizing the value of moral hazard. (Remember, the worst thing we can do is to maximize moral hazard. We are maximizing moral hazard by leaving open insolvent banks under the control of managers that caused the failure, often through fraud.)
If Geithner is right about the scale of the banks’ insolvency many of the large banks have to be hopelessly insolvent, but engaging in accounting fraud to hide that insolvency. That was the context for our PCA discussion. These large banks have not been able to recapitalize. They have been deeply insolvent since, at the latest, March 2007 when the secondary market in nonprime assets collapsed. (If we are fortunate it will never be restored because it was inherently dangerous. If it is it will cause future crises.)
The PCA law is characterized by mandates that the regulators ensure that a bank, well before, insolvency, is recapitalized – promptly. Failing that action, the PCA law requires the regulators to act to correct the problem by selling the bank or putting it in receivership. In the context we are discussing – the deep insolvency of many large banks that means that the law mandates receivership.
Here are the specifics:
Immediately after the “purpose” clause quoted above comes the mandate (“shall”) to act in accordance with that purpose to achieve prompt corrective action:
(2) Prompt corrective action required
Each appropriate Federal banking agency and the Corporation (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.
Well before insolvency, as soon as a bank becomes “undercapitalized”, it must (“shall”) file a plan to promptly restore its capital adequacy and that plan must meet strict standards.
(IV) Capital restoration plan required
(IV) In general
Any undercapitalized insured depository institution shall submit an acceptable capital restoration plan to the appropriate Federal banking agency within the time allowed by the agency under subparagraph (D).
(B) Contents of plan
The capital restoration plan shall—
(IV) specify—
(IV) the steps the insured depository institution will take to become adequately capitalized;
(II) the levels of capital to be attained during each year in which the plan will be in effect;
(III) how the institution will comply with the restrictions or requirements then in effect under this section; and
(IV) the types and levels of activities in which the institution will engage; and
Subsection (C) (1) of the law mandates (“shall not accept … unless”) tough standards on the agency in terms of capital restoration plans it is permitted to approve.
(C) Criteria for accepting plan
The appropriate Federal banking agency shall not accept a capital restoration plan unless the agency determines that—
(i) the plan—
(I) complies with subparagraph (B);
(II) is based on realistic assumptions, and is likely to succeed in restoring the institution’s capital; and
(III) would not appreciably increase the risk (including credit risk, interest-rate risk, and other types of risk) to which the institution is exposed; and
(ii) if the insured depository institution is undercapitalized, each company having control of the institution has—
(I) guaranteed that the institution will comply with the plan until the institution has been adequately capitalized on average during each of 4 consecutive calendar quarters; and
(II) provided appropriate assurances of performance
No deeply insolvent large U.S. bank could provide, “based on realistic assumptions” a plan to return itself to adequate capitalization. That means that the bank is prohibited to pay any bonus or give any raise to any senior executive official.
(4) Senior executive officers’ compensation restricted
(A) In general
The insured depository institution shall not do any of the following without the prior written approval of the appropriate Federal banking agency:
(i) Pay any bonus to any senior executive officer.
(ii) Provide compensation to any senior executive officer at a rate exceeding that officer’s average rate of compensation (excluding bonuses, stock options, and profit-sharing) during the 12 calendar months preceding the calendar month in which the institution became undercapitalized.
(B) Failing to submit plan
The appropriate Federal banking agency shall not grant any approval under subparagraph (A) with respect to an institution that has failed to submit an acceptable capital restoration plan.
Deeply insolvent banks, however, fall into a more severe category under the PCA law. They are “severely undercapitalized,” and the law mandates that the bank or the regulators promptly restore them to adequate capital or place them in conservatorship or receivership (and prohibit a wide range of business activities).
(h) Provisions applicable to critically undercapitalized institutions
(1) Activities restricted
Any critically undercapitalized insured depository institution shall comply with restrictions prescribed by the Corporation under subsection (i) of this section.
(2) Payments on subordinated debt prohibited
(A) In general
A critically undercapitalized insured depository institution shall not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on the institution’s subordinated debt.
(B) Exceptions
The Corporation may make exceptions to subparagraph (A) if—
(i) the appropriate Federal banking agency has taken action with respect to the insured depository institution under paragraph (3)(A)(ii); and
(ii) the Corporation determines that the exception would further the purpose of this section.
(3) Conservatorship, receivership, or other action required
(A) In general
The appropriate Federal banking agency shall, not later than 90 days after an insured depository institution becomes critically undercapitalized—
(i) appoint a receiver (or, with the concurrence of the Corporation, a conservator) for the institution; or
(ii) take such other action as the agency determines, with the concurrence of the Corporation, would better achieve the purpose of this section, after documenting why the action would better achieve that purpose.
(B) Periodic redeterminations required
Any determination by an appropriate Federal banking agency under subparagraph (A)(ii) to take any action with respect to an insured depository institution in lieu of appointing a conservator or receiver shall cease to be effective not later than the end of the 90-day period beginning on the date that the determination is made and a conservator or receiver shall be appointed for that institution under subparagraph (A)(i) unless the agency makes a new determination under subparagraph (A)(ii) at the end of the effective period of the prior determination.
(C) Appointment of receiver required if other action fails to restore capital
(i) In general Notwithstanding subparagraphs (A) and (B), the appropriate Federal banking agency shall appoint a receiver for the insured depository institution if the institution is critically undercapitalized on average during the calendar quarter beginning 270 days after the date on which the institution became critically undercapitalized.
(ii) Exception Notwithstanding clause (i), the appropriate Federal banking agency may continue to take such other action as the agency determines to be appropriate in lieu of such appointment if—
(I) the agency determines, with the concurrence of the Corporation, that (aa) the insured depository institution has positive net worth, (bb) the insured depository institution has been in substantial compliance with an approved capital restoration plan which requires consistent improvement in the institution’s capital since the date of the approval of the plan, (cc) the insured depository institution is profitable or has an upward trend in earnings the agency projects as sustainable, and (dd) the insured depository institution is reducing the ratio of nonperforming loans to total loans; and
(II) the head of the appropriate Federal banking agency and the Chairperson of the Board of Directors both certify that the institution is viable and not expected to fail.
(i) Restricting activities of critically undercapitalized institutions
To carry out the purpose of this section, the Corporation shall, by regulation or order—
(1) restrict the activities of any critically undercapitalized insured depository institution; and
(2) at a minimum, prohibit any such institution from doing any of the following without the Corporation’s prior written approval:
(A) Entering into any material transaction other than in the usual course of business, including any investment, expansion, acquisition, sale of assets, or other similar action with respect to which the depository institution is required to provide notice to the appropriate Federal banking agency.
(B) Extending credit for any highly leveraged transaction.
(C) Amending the institution’s charter or bylaws, except to the extent necessary to carry out any other requirement of any law, regulation, or order.
(D) Making any material change in accounting methods.
(E) Engaging in any covered transaction (as defined in section 371c (b) of this title).
(F) Paying excessive compensation or bonuses.
(G) Paying interest on new or renewed liabilities at a rate that would increase the institution’s weighted average cost of funds to a level significantly exceeding the prevailing rates of interest on insured deposits in the institution’s normal market areas.
Parsing through this legalese yields the following:
• The regulators must place an insolvent bank into receivership or conservatorship
• Normally, this should be done no later than 90 days after becoming “critically undercapitalized”, i.e., well before the bank became insolvent.
• The 90 day limit can only be pushed back if the FDIC and the primary regulator agree in writing that doing so would best serve the purposes of the Act – which is to minimize the cost of resolving the insolvent bank – and “document” that the delay would reduce that cost. To our knowledge, the FDIC and the OCC (the primary regulator of most of the largest banks) have not made such joint determinations for any of the large, deeply insolvent banks. Given the fact that delaying receiverships of deeply insolvent banks typically increases the cost of resolving the failure, it is unlikely that the regulators could provide honest documentation to support a failure to act.
• Even if we were to assume, counterfactually, that they provided such documentation, they would have to place the big insolvent banks in receivership or conservatorship. After being insolvent for 270 days (and many of the big banks will have been insolvent for roughly two years), the regulators can no longer extend the clock. They cannot extend the clock for an insolvent bank beyond 270 days. A “critically undercapitalized” bank’s clock extension can only be extended if it meets each of four criteria:
(I) the agency determines, with the concurrence of the Corporation, that (aa) the insured depository institution has positive net worth, (bb) the insured depository institution has been in substantial compliance with an approved capital restoration plan which requires consistent improvement in the institution’s capital since the date of the approval of the plan, (cc) the insured depository institution is profitable or has an upward trend in earnings the agency projects as sustainable, and (dd) the insured depository institution is reducing the ratio of nonperforming loans to total loans; and
A deeply insolvent bank (recall, that is what we were discussing) has negative net worth. It will also typically fail the other minimum requirements. The bank must meet all four of the requirements. To sum it all up, the interview explained why Geithner’s statements about a $2 trillion bailout cost means that many large banks have to be deeply insolvent. The PCA law mandates that deeply insolvent banks be placed in receivership or conservatorship. The exceptions to PCA’s mandatory closure directives do not apply to insolvent banks. Indeed, it does not appear that the regulators have complied with the provision that delays the requirement to appoint a receiver. The regulators could not, in good faith, invoke that delay provision for a deeply insolvent bank.
The PCA’s Achilles’ heel has always been accounting fraud
Nieto & Wall note the vulnerability of the PCA law to accounting fraud by banks and regulators.
3.4 Accurate and timely financial information
Arguably, the biggest weakness of PCA is its reliance on regulatory capital measures of a bank’s capital, measures which may significantly deviate from the bank’s economic capital. Banks that are threatened by PCA mandated supervisory actions have a strong incentive to report inflated estimates of the value of their portfolios. The extent to which banks are allowed to overestimate their capital under PCA depends in part on the accounting rules and in part on the enforcement of the rules. Thus, if bank prudential supervisors want to preserve their discretion despite the requirements for mandatory actions in PCA, supervisors need only accept a troubled bank’s inflated estimates of its regulatory capital adequacy ratio. In the US, PCA is vulnerable to problems both in the accounting principles and their enforcement. (p. 27)
To the extent that outside auditors are unable or unwilling to force banks to recognize losses in their asset portfolios, PCA depends on the effectiveness of bank examinations by the supervisory agencies. Yet relying on the supervisors to enforce honest accounting creates a contradiction in PCA. PCA is designed to limit supervisory discretion in enforcing capital adequacy, yet PCA will only be fully effective if the bank supervisors use their discretion in conducting on-site examinations to force timely recognition of declines in portfolio value. The vulnerability in enforcement is highlighted by Eisenbeis and Wall’s (2002) finding that deposit insurance losses at failed banks in the US did not decrease as a proportion of the failed bank’s assets after the adoption of PCA as should have happened if the supervisors were following timely resolution. (p. 28)
These are the points I was making in the interview. We need honest accounting and honest asset values. We will not get them if we allow the failed bankers and regulators to remain in charge. They have strong incentives to inflate asset values in order to escape the consequences of PCA. The people of America, however, have a compelling interest in demanding that the government comply with that law and resolve cases at the least cost to the taxpayers.
Secretary Geithner is not simply writing the PCA law effectively out of existence; he is creating an unprecedented (and unauthorized) rival system in place that will maximize fraudulent bank CEOs’ perverse incentives. The transcript of his press conference rolling out the TARP II bill contains two separate references to his creation of “capital insurance” for favored banks.
PRESS BRIEFING
BY
SECRETARY OF THE TREASURY TIMOTHY GEITHNER
U.S. Department of Treasury
Washington, D.C.
8:56 A.M. EDT
But the critical part of that program is to make it clear that they will be able to raise capital from the government if they can't raise in the markets so that they can get through a deeper recession. That will help reduce the odds of a deeper recession, help make sure, again, they can provide a level of lending that will be necessary to support recovery.
****
And a program of insurance -- you could call it capital insurance for the banking system so that banks have the cushion of capital necessary to lend and expand even if the economy goes through a broader -- a deeper recession.
This program is dangerous because it optimizes moral hazard, but it also violates the express purpose of the PCA law to resolve bank problems at the lowest cost to the FDIC and the taxpayers. Providing taxpayer “capital insurance” subsidies to insolvent or troubled banks increases the taxpayers’ costs. TARP II is designed to provide a federal subsidy to insolvent and failing banks.
Additional reading on this subject:
"How to Clean a Dirty Bank," ANDREW ROSENFIELD, THE NEW YORK TIMES, April 5, 2009.
Please note that the views and opinions expressed are not necessarily the views and opinions held by Bill Moyers or BILL MOYERS JOURNAL
(Photo by Robin Holland)
Discussing the roots of the economic crisis with Bill Moyers on this week’s JOURNAL, former regulator Bill Black said that much of the blame lies with lenders for issuing “liars’ loans,” in which borrowers’ claims about their financial situation were not verified. He said:
“Liars’ loans mean that ‘We don’t check. You tell us what your income is, you tell us what your job is, you tell us what your assets are, and we agree to believe you. We won’t check on any of those things. And, by the way, you get a better deal if you inflate your income and your job history and your assets.’ We know they said that to borrowers. That’s what you do... They just gutted the verification process. We know that [it produces] enormous fraud under economic theory, criminology theory, and 2000 years of life experience.”
In a special feature published in February, TIME magazine included “American Consumers” in its list of “25 People to Blame for the Financial Crisis:”
“In the third quarter of 2008, Americans began saving more and spending less. Hurrah! That only took 40 years to happen. We've been borrowing, borrowing, borrowing — living off and believing in the wealth effect, first in stocks, which ended badly, then in real estate, which has ended even worse. Now we're out of bubbles. We have a lot less wealth — and a lot more effect. Household debt in the U.S. — the money we owe as individuals — zoomed to more than 130% of income in 2007, up from about 60% in 1982. We enjoyed living beyond our means — no wonder we wanted to believe it would never end.”
What do you think?
Were lenders committing fraud? Why or why not?
How much responsibility, if any, do American borrowers and consumers bear for the present economic crisis? Explain.
(Photos by Robin Holland)
This week on the JOURNAL, Bill Moyers spoke with two prominent voices from alternative media, Amy Goodman and Glenn Greenwald, about how the cozy relationship between mainstream media and the Washington establishment has contributed to the daunting challenges America now faces. Both Goodman and Greenwald were cautiously optimistic that independent media is changing the ways people get information and raising public awareness.
Goodman said:
“I think there's a reason why independent media is growing all over this country. When President Bush could not find weapons of mass destruction, it exposed more than President Bush. People said, ‘how did the media get it so wrong?’ And they started looking for other sources. I think that's why DEMOCRACY NOW! is growing so much, and independent media — community radio and television and, of course, the Internet — as well. People are looking for alternative sources of information. Looking abroad, too, at all of the different forms of information access to information we can get.”
Greenwald said:
“I think that the advent of technology – the Internet, in particular – and also the collapse of trust that so many Americans had placed in political and media institutions... have really caused so many more citizens than ever before to question the kind of establishment instruments that have been used for so long to propagandize the citizenry, and to seek out alternative sources of truth... The more profound and transparent the failures of the institutions, the more the citizenry will be open to alternative ways of thinking... I actually feel rather optimistic that the work we do is paying off.”
What do you think?
Will indendent media bring Americans of varying political views together to pursue real change in the public interest? Why or why not?
If so, where do you see indications of people with different views coming together?
(Photo by Robin Holland)
Below is an article by JOURNAL senior writer Michael Winship. We welcome your comments below.
Miss Universe's Excellent Adventure
By Michael Winship
“A crown is merely a hat that lets the rain in.” That was Frederick the Great of Prussia’s take on the pain of being royalty.
Just ask Queen Elizabeth II and Michelle Obama. When they briefly touched one another at Buckingham Palace Thursday, a moment of contact that was more gentle pat than hug, you would have thought the First Lady had challenged Her Royal Highness to pistols at 20 paces. What a breach of protocol!
What a world. Luckily, Buckingham Palace jumped into the breach to announce, “It was a mutual and spontaneous display of affection and appreciation,” and besides, the Royal Press Office said, it was at an informal reception – thus convincing the media on both sides of the Atlantic to unclutch their smelling salts.
But if you needed further proof that the Earth is off its axis, spinning toward the sun, there came the news that another crowned head, Miss Universe, had paid a visit to Guantanamo Bay. Yes, courtesy of the USO, Venezuela’s Dayana Mendoza hit the beach for her personal remake of “Baywatch,” visiting the no doubt startled troops there and touring the Gitmo facilities.
Because there apparently is a higher power with a sardonic sense of humor – thank you! – Ms. Mendoza kept an Internet diary in which she told the world about boat rides and a trip to a beach covered with bits of colored glass.
“It was a loooot of fun!” she wrote. “We … met the Military dogs, and they did a very nice demonstration of their skills… We visited the Detainees camps and we saw the jails, where they shower, how they recreate themselves with movies, classes of art, book… I didn’t want to leave, it was such a relaxing place, so calm and beautiful.”
OK, Miss Universe, no doubt a more permanent stay could be arranged, your innocence notwithstanding. But you just might have to give up the swimwear competition two-piece for something in an orange jumpsuit.
I wish I was making this up. So does the Miss Universe organization, owned by General Electric’s NBC Universal and Miss Congeniality himself, Donald Trump. They quickly took down Mendoza’s blog entry and replaced it with an official statement supporting our armed forces.
Smooth move, considering the news that keeps breaking about how the detainees at Guantanamo were treated by the Bush-Cheney team.
Mark Danner and THE NEW YORK REVIEW OF BOOKS recently obtained a confidential report from the International Committee of the Red Cross describing the treatment of many detainees as torture. In detail, the report describes how Abu Zubaida, whom President Bush proclaimed was al Qaeda’s chief of operations, was waterboarded and often confined to a coffin-like black box (Of the 92 video tapes the CIA recently admitted they destroyed, all but two were of Zubaida’s detention and interrogation.)
He told the Red Cross, “I was taken out of my cell and one of the interrogators wrapped a towel around my neck; they then used it to swing me around and smash me repeatedly against the hard walls of the room.”
And for what? The front page of last Sunday’s WASHINGTON POST reports that in all probability Zubaida was not the high powered operative US intelligence thought he was and that, quote, “Not a single significant plot was foiled as a result of Abu Zubaida’s tortured confessions.”
In the words of the POST’s Dan Froomkin, “The most charitable interpretation at this point of the decision to torture is that it was a well-intentioned overreaction of people under enormous stress whose only interest was in protecting the people of the United States. But there's always been one big problem with that theory: While torture works on TV, knowledgeable intelligence professionals and trained interrogators know that in the real world, it's actually ineffective and even counterproductive. The only thing it's really good as it getting false confessions.”
Some speculate that the real motivation is retribution; the irrational lust to get even that drives us to intentional cruelty.
The Obama administration is declassifying memos and other documents on the detention and interrogation policies adopted after 9/11. Executive orders from the President suspended military commissions at Guantanamo and ordered the prison there closed within a year. On Monday, Secretary of State Hillary Clinton confirmed to reporters that the Obama White House has dropped the phrase “war on terror.”
But despite that semantic sleight-of-hand, the war goes on, and 241 men remain in the cells of Guantanamo, their stories already becoming forgotten in a world where Miss Universe searches the sandy beach for pieces of pretty glass, awestruck by military dogs and the beautiful sea.
Please note that the views and opinions expressed by Michael Winship are not necessarily the views and opinions held by Bill Moyers or BILL MOYERS JOURNAL.
Be sure to tune in next week when BILL MOYERS JOURNAL presents a deeply moving and intimate performance by award-winning actor Sam Waterston and eminent historian Harold Holzer.
LINCOLN'S LEGEND AND LEGACY features the spoken poetry and prose of American writers as different as Walt Whitman, Frederick Douglass, Allen Ginsburg, Langston Hughes, Harriet Beecher Stowe, and many others who have struggled to find words to adequately describe this tall, plain and gangling man – and the transcendent significance of his presidency.
Reflected on the arc of ideas, language and history included in excerpts of their writings, Bill Moyers says, "Lincoln changes as we hear these words, and so does the country."
For more information on next week’s special edition of BILL MOYERS JOURNAL, visit our Web page on LINCOLN’S LEGEND AND LEGACY.
This week, MOYERS ONLINE launches a special new web feature, MOYERS ON BANKS AND THE BAILOUT, that collects the diverse voices that have addressed the topic on the JOURNAL into one convenient interface.
Do you have any questions about the economy that you've been dying to ask one of our experts? Please submit below, and in the coming weeks we'll consult the experts and post their answers on the MOYERS BLOG.
Review our coverage of  Banks and Bailouts
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