Friday, December 11, 2009

More Cowbell . . .

Important matters that have crossed the wires in recent weeks:

(1) On apologies and regrets: In November, the Wall Street Journal reported that investment banking giant Goldman Sachs had acknowledged publicly that the bank had "made mistakes" that it regretted, in connection with the financial market crisis. Goldman CEO Lloyd Blankfein openly admitted "We participated in things that were clearly wrong and we have reasons to regret and apologize for." This admission comes on the heels of news that Goldman expects to pay enormous bonuses to employees and executives at year end.

Simultaneously with its admission of error, Goldman also announced that it was initiating a small business rescue effort where it would contribute $500 million to "help thousands of small businesses recover from the recession." The investment bank said that it was working with billionaire investor Warren Buffet to help 10,000 small business by offering business and management education, mentoring and access to capital.

While Goldman has "bounced back spectacularly from the financial crisis" the same cannot be said for Main Street Americans. Many argue that the newfound humility on the part of Goldman's chief executive and the small business rescue plan have much more to do with softening a tarnished image, than in changing status quo business as usual. As expected, in announcing the billions of dollars in bonuses it expects to pay out shortly, Goldman argued that "it has to pay its employees well to retain top talent." Seriously.

(2) On TARP and its "effectiveness": This week, the Congressional Oversight Panel that was established to function as a bailout watchdog group, released a report finding that the Troubled Asset Relief Program (TARP) stemmed a larger global panic, but that it has left in its wake a "trail of woe." The oversight panel found that the bailout stopped the financial panic and stabilized the banking system when TARP was hurriedly passed in October 2008, but that is failed to stem or address problems of lackluster lending and growing foreclosures that continue to plague the U.S. economy. The group went further by suggesting that TARP may have done more harm by making some banks and firms even larger and ever more "too big to fail" and by creating expectations that big banks will always be saved, regardless of their leadership failures.

The Congressional Oversight Panel's chair, Elizabeth Warren, a Harvard University Professor, stated that "the TARP program was not authorized for the sole purpose of bailing out large financial institutions. . . . Congress specifically states in the legislation that it expects the benefits will be to get ahead of the foreclosure crisis and to deal with the larger economic crisis. That hasn't happened." The oversight panel identified five ways in which TARP is failing: (a) Many consumers and businesses are still having trouble getting loans; (b) Banks are still failing at a rapid rate; (c) Toxic assets remains on balance sheets of large banks; (d) Foreclosures continue to grow; and (e) Unemployment continues at a record pace.

(3) On reform legislation: In November, Senator Dodd introduced legislation that would impose sweeping curbs on the Federal Reserve. The proposal calls for "curbs on the Fed's ability to offer emergency loans to individual companies, strips away virtually all of its bank-supervision and consumer protection powers, and gives the White House and Congress some say in how the Fed's 12 regional banks are governed."

This proposed legislation is part of the Obama administration's attempt to overhaul regulation of the financial sector. This Federal Reserve legislation would create a single bank regulator, a powerful council of regulators to monitor systemic risks to the economy and a Consumer Financial Protection Agency to write and enforce rules on products such as mortgages and credit cards. Further, aside from greatly diminishing the power of the Fed, the bill would create new powers for the Securities and Exchange Commission, toughen regulation over derivatives and create new investor protection rules for public companies.


  1. Events are moving at warp speed right now and this was a very helpful post.

    Apparently today at around 3 or 4 pm the house passed a massive financial reform bill of 1279 pages that nobody really understands fully.

    Time magazine had a nice blog on it today by Justin Fox, entitled "They Passed It, They Really Passed It."

  2. thanks steve. i will try to locate justin fox's article and link it to the blog.

    very VERY interesting days ahead.