Archive for the ‘Financial crisis’ Category

It’s taken more than six years after the beginning of the last financial crisis for the US to finally implement some of the regulations that became glaringly necessary when the financial system began to implode at that time. The Volcker Rule, along with Dodd-Frank legislation, are a start towards the kind of systemic regulation the financial system here requires to keep it in line.

Unfortunately, the regulations are too limited in scope to keep problems in the U.S. from reaching crisis proportions, let alone spreading overseas. As Gordon Brown points out in an Op-Ed in the New York Times, the lack of regulations to restrain global financial corporations operating overseas and markets in the developed and developing world all but ensures that we will visit Global Financial Crisis 2.0.

I wrote about this more than four years ago for the New York Society of Security Analysts in a piece entitled Mending the Seams: International Regulatory Reform. In the intervening years, a few things have changed, but not much. On a global basis, rules governing everything from systemic risk to derivatives to accounting standards to hedge funds vary widely as does enforcement of those rules.

Even if the rules were consistent, financial services companies can escape regulation by moving certain operations to different jurisdictions. There’s still the propensity of the right hand to have no clue what the left hand is doing, as alleged “rouge” traders engage in mind bogglingly risky behavior.

What is the scariest is the risks that we don’t even know about. The last crisis proved that the lack of foresight into risky activities was endemic, from the ones that seemed, in hindsight to be the most obvious, to other obscure risks that few even comprehended were risky.

If Bank of England economist David Miles is right, the next financial crisis will happen sooner than we think. He predicts one every seven years. It could happen, or not. The system could stumble along for another few years, fueled by loose money and a return to economic growth.

While the developed world and the global economy may be growing at a higher rate, one thing that hasn’t really changed is the lack of global stability. And that’s what’s going to come back to haunt us.


There were many perpetrators involved in the 2007-09 financial crisis and most of them have gotten off scott free. Credit rating firms were a major player that have experienced limited fallout for their role in creating and exacerbating the global financial crisis.

And now it looks like despite a 3-year old Congressional directive for the Federal Securities and Exchange Commission to alter credit rating industry’s business model in which a bond issuer pays for the credit rating, little or nothing will actually be done to change how the industry works. So reports The Wall St. Journal.

This is very unfortunate for a couple of reasons:

  1. An inherent conflict of interest and lack of transparency for investors means that it will be difficult to judge the accuracy of credit ratings on a variety of debt instruments.
  2. The potential for another bubble, which could contribute to another global financial crisis.

The model in which an issuer pays a credit rating agency is inherently flawed because the rating agencies have a financial stake in making their clients happy by assigning the highest rating possible, regardless of the merits of the issue in question. This happened en masse during the housing bubble, when all sorts of questionable mortgage backed securities received top ratings.

Many of those issues later experienced extremely high levels of default, which was a “key cause” of the financial crisis, Congress concluded. Duh.

The SEC conducted a day-long meeting yesterday to get advice from experts about what to do about this problem, but hasn’t said what, if anything, they plan to do with this information. I mean, at this point, what more information do they need?

If they do the right thing, in a few months we’ll see some proposed rules that will change how ratings firms are compensated. If not, nothing will change. Of course, the ratings agencies are firmly in favor of the status quo because it would upset their very profitable apple cart if they had to be paid by investors or supervised more closely.

In the meantime, the U.S. Justice Dept. has somewhat tardily sued S&P — but not Moody’s, the other major ratings agency — for fraud, accusing the company of inflating ratings to gain more business during the real estate bubble. It cites 30 deals in which S&P rated collateralized debt obligations that included bundles of subprime mortgages, most of which fell steeply in value after they were sold to investors.

According to the Wall Street Journal, the Justice Department suit alleges that S&P “knowingly and with the intent to defraud, devised, participated in and executed a scheme to defraud investors.” The Justice Dept.  is seeking $5 billion in what would be the largest fines imposed on any firm for actions during the financial crisis.

S&P has filed to have the case dismissed, saying that the firm is being targeted for failing to foresee the financial crisis and bursting of the housing bubble.

On another front, S&P and Moody’s recently settled civil cases brought by investors. The firms were accused of “negligent misrepresentation” regarding their ratings of several structured investment vehicles.

What does all this mean to you and me? That another one of the major players in the global financial crisis may get off scott free and that a big part of the system that led to the crisis may go on  its merry way, completely unchanged. We can only hope that the SEC may actually do something and that failing that, the Justice Department will get some justice in it’s suit against S&P. Stay tuned…

Washington, DC has long been known for the revolving door that catapults former regulators into high-powered lobbying positions. The Wall Street Journal reported Tuesday that Mary Schapiro, the former chief of the federal Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) was hired as a managing partner by Promontory Financial Group LLC.

Promontory has become known as the “shadow” financial regulator because it’s executive ranks are loaded with former high-level regulators who peddle their insider knowledge and connections to their clients, according to illuminating articles in American Banker and Business Insider. Their knowledge is so deep that they can give clients the inside track on the direction of future regulation and how clients can manage regulatory risk in a more proactive and less reactive fashion.

For firms that can afford their fees, such knowledge is nearly priceless. Financial firms, especially, have been on the hot seat ever since the financial crisis in terms of potential regulation, even though a lot of that heat hasn’t translated into tough regulations and prosecutions.

Promontory’s executive ranks are so loaded with smart, former high ranking government officials that they are actually called on by congressional committees and federal financial agencies to advise on financial and regulatory matters. So what, you say? This happens all the time.

It does, and it doesn’t. Apparently few lobbying firms possess the specialized niche, knowledge, experience and connections that Promontory does. This elevates lobbying and influence-peddling to an unprecedented level. Promontory doesn’t appreciate being referred to as a lobbying firm; it’s CEO told American Banker that the firm endeavors to influence it’s clients to do what the government wants them to do.

It’s amazing how even the smartest, most savvy individuals can convince themselves that what they are doing is right and in the public interest.

My belief is that you can’t have it both ways and that the public interest is in no way, shape or form being served by the proliferation of lobbying firms, especially those that operate at such a high level. Regardless of their motives and intentions, the fact is that wealthy individuals and corporations have the ability to purchase access and influence at an outsize level.

That disenfranchises the vast majority of us who can only vote, make a phone call and write a letter in the hope of getting the ear of our elected representatives. It’s not right that the size of your lobbying budget determines what access and influence you have on our elected representatives.

Ultimately, that means that too much of regulation and legislation is in play for those with the resources, while the rest of us look in from the outside. If you’re wondering why not much has changed since the financial crisis in terms of the government reigning in the too big to fail firms that precipitated it, this is one of the reasons.

And it’s a reason why we’re likely to see the same thing — another global financial crisis — happen again…

In a column “Balancing Good, Bad Finance” in Wednesday’s Wall Street Journal, David Wessel asks a provocative question: “How much finance is good?”

His thesis in the column is the growth in the financial sector that led to the financial crisis was caused by too much risk taking and borrowing by financial institutions. The financial sector came to be too large of a part of the economy. Too much of the growth in the system fueled the expansion of financial firms themselves, rather than funding overall investment.

So what amount of finance, in what doses, would benefit the global economy without the financial sector careening out of control and creating another financial crisis? There are several external and internal issues that I’ll identify and elaborate on in future posts:

  • Without prudent globally-consistent regulation and enforcement, the tendency of the financial sector will be to grow in an unconstrained, risky way, courting further financial crises
  • When financial institutions are being subsidized by the government via bailouts and safety net subsidies (deposit insurance, anyone?) they have a responsibility to act in a more ethical and restrained manner, especially when it comes to risk
  • Time horizons: corporate management, financial markets and government regulators have become insanely short-sighted. The viewpoint seems to be to either take the money and run because someone else will be there to take the fall later or deal with whatever issue is on the table with the easiest, most short term solution possible.

All of these factors are leading us right down the road into the next global financial crisis. It may not happen for a year or a decade. But I believe it’s inevitable without serious regulatory, political and philosophical reforms of the financial sector and financial regulation on a global level.

Now that the election is over, the ongoing crisis in Europe is back front and center — if it isn’t on your radar, it should be. That’s because all the “solutions” so far have merely kicked the can down the road a bit farther. Meanwhile, as politicians negotiate, meet and talk, actual people are suffering. More.

Nowhere is this more evident than in Greece, which is about to be further brutalized by more austerity as the government just passed another multi-billion austerity package to keep the Euro’s leaders sweet. The bailout funds will keep rolling in, but at a steep price. If nothing else tells the story of the toll austerity is taking, this horrible photo of a riot police officer engulfed in flames should.

Protestors rioted in vain against this latest round of austerity, which looks to be the worst yet. More spending cuts will weaken the already frayed social safety net as tax increases will hit the poorest the hardest and labor reforms will allow further exploitation of workers. All this is happening with a backdrop of Greece entering its sixth year in a row of economic contraction with more than 25 percent of its population out of work.

The leader of the radical left main opposition Syriza party blasted the government for “leading the Greek people to catastrophe and chaos.” The government clung to the fact that these cuts will keep Greece in the Euro, which they believe is better than the alternative. Better for whom? The political and economic elite, no doubt, but not the unemployed, poor and disenfranchised, who make up an increasingly large share of the Greek populace.

I don’t see any good outcome for all of this. All the bailouts are doing is bailing out European banks, who could go under, bringing the entire financial system down with them a la Lehman Brothers. While I certainly don’t relish the idea of another global financial crisis, I really wonder if any kind of meaningful change is possible without one. The grip that the banks have on the political and economic leaders of the West is truly a stranglehold one, and I’m not sure what it would take to break it.

No regulatory reforms have succeeded in denting that power and it doesn’t look like the West has the political will to break the too big to fail banks and make the changes in the system necessary to restore some balance of power between the haves and the have-nots. No wishful thinking in the form of the granting of the Nobel Peace Prize to the Leaders of the Euro Zone or the G-7 leaders monitoring the crisis will have much of an impact. So, onward we go, with some type of economic crisis or catastrophe all but inevitable.

When the Occupy Wall Street protest started a month or so ago, it was dismissed as a rag-tag group of disgruntled young people, old people and the unemployed. Not surprisingly — from where I sit, at least – it has rapidly gained momentum, spreading around the country and around the world.

So what’s happening, and why? An alternative name the protesters give themselves explains at least some of what’s going on. They call themselves the 99 percent, versus the 1 percent who own and control most of the assets, politics and economics in this country and around the world.

During the past 30 years, the 1 percent have gained in every measurable way — income, assets and political and economic power — at the expense of the 99 percent. Most lower and middle class people have lost real income, political and economic power and their chance to retire comfortably, educate their children and live without fear of an economic catastrophe. For a while, the 1 percent kept the 99 percent from feeling the pain via low interest rates and easy borrowing. That masked the reality that the 99 percent were losing in just about everything.

But no more. Once the housing bubble popped and the global financial crisis appeared, there was no escape from the chilling reality that the 1 percent were on top of the world and the 99 percent were left holding the bag.

That’s the reality that the Occupy Wall Street and it’s affiliated movements spring from. The 99 percent are fed up with being on the short end of the stick. For the old, after a lifetime of working hard and striving to save for retirement, they have faced the reality that no retirement is safe from the ravages of “the market” and that one health crisis could bankrupt themselves and their children due to the shredding and pending destruction of the social safety net.

For the young, they are overloaded with student loans purchased to get an expensive college education that would allegedly position them to get a good job on graduation. Problem is, by the time they graduated, the economy went south and took many decent paying jobs with benefits with it. Now all most of them can get is low paying jobs without benefits so they can choose between paying back their student loans or eating and paying rent.

As for those of us who don’t fall into those two categories, but also fall into the 99 percent, some of us are slightly better off, but many of us aren’t. Too many of the working poor can barely make ends meet or aren’t making them meet at all. Too many who still cling to the middle class are either living paycheck to paycheck or are losing the battle and relying on credit cards — or worse, payday loans — to keep themselves afloat. And don’t forget those who are suffering in the wake of the collapse of the housing market. This includes the millions who are underwater on their homes, those who are being foreclosed against and those who were victims of housing boom fraud.

So it’s about economic injustice and the long simmering anger that many of us feel against the political and economic establishment. That is, those who bailed out the banks at the expense of the rest of us and who continue to shower political, regulatory and economic advantages on the banks, the banking class and the other 1 percent.

It’s about time this rage surfaced and the 99 percent began to hold the 1 percent accountable. It’s long overdue, and I’m hoping something lasting will come from these protests once people are over the romance of protesting. Don’t let the banking class off the hook!

As one of the tweeps who started the Global Financial Crisis 2.0 hashtag (#gfc2) on Twitter, I believe we’re right smack in the middle of a horrific financial crisis that will rival the first one in size and scope. I don’t take pleasure in that forecast for lots of reasons, mainly because of the extended misery that is being inflicted on people across the globe. But the global economy has become such a zombified Frankensteined creature of the financial elite that it’s not serving any useful function except to enrich those who already have a lot at the expense of those who have little.

If you accept that we’re in a financial crisis and that our political and economic leaders have little or no idea about how to cure it except to throw more money at the banks who are causing the crisis yet again, you’ve got to wonder what the end result will be. Like a nightmare that you can’t wake up from, the thoughts are extremely unpleasant, but riveting in some sense.

In the past 24-hours, I’ve seen several articles posted on Twitter that capture a view of what might happen if or when this crisis gets completely out of control. Here they are, plus a few comments:

  1. Nouriel Roubini channels Karl Marx: In a video interview with the Wall Street Journal, Roubini agrees with Marx’s conclusion that capitalism is ultimately self-destructive. The video 22 minutes long and well worth watching, but if you’d rather read an analysis, here’s one. Roubini dismisses the conclusion that we are at the point where capitalism will actually self-destruct; I’m not so sure. He does say that an economic depression is a possibility due to zombie housing, zombie banks and zombie governments.
  2. Buy gold, hide $$$ under your mattress: A really scary potential scenario of what could happen if the global economy completely unravels by David Freedom of  The Victory Report sees money market funds collapsing, rampant inflation and high unemployment as well as a lot of social unrest. As ugly as this is, I don’t think it’s a scenario that’s out of the question. In some ways, it’s the logical outcome of years of inequality and fiscal/economic mismanagement.
It’s entirely possible that the political and economic powers-that-be will keep this global economic charade going for a few more years or even longer. It’s not a good idea to underestimate the enormous stake that the financial and political elite have in maintaining the status quo; they will do anything and everything to maintain it. So we may sit in an economic recession/depression for a while until the whole beast collapses under it’s own weight. Either way, the next couple of years aren’t likely to be much fun for anyone but those who already are in power.