Wednesday, July 28, 2010

More Cowbell . . .

In recent weeks, two momentous occurrences have taken place in the United States corporate world. First, as discussed by Professor Joseph Grant on this blog, Goldman Sachs entered into a settlement with the Securities and Exchange Commission agreeing to pay a massive fine and second, as wonderfully discussed in great detail by Professor Steve Ramirez on this blog, the U.S. Congress recently passed a financial reform bill that will have long lasting repercussions for both good and ill. July has been a busy month on the financial front.

There has been lots of commentary and excellent reporting in connection with these two enormous stories, some providing critique, other context and background for where we currently stand. Here are a few of the best:

John Heilemann, New York Magazine writer and author of "Game Change" attempts to drill down into the relationship between Wall Street and Barack Obama in an article entitled "Obama is from Mars, Wall Street is from Venus." Within, Heilemann seeks to analyze ("psychoanalyze" in his words) the tightrope Obama attempts to maneuver in alternately supporting Wall Street capitalism and buying into the investment bank's "smartest guys in the room" chatter, while at the same time trying to regulate and enforce market discipline upon Wall Street's leaders. See the New York Magazine story here.

Judge Richard Posner, author of "A Failure of Capitalism" opines that the financial reform bill is "politics in the worst sense." Posner argues that much of what is contained in the 2, 300 page bill is redundant and superfluous and most of the measures mandated within could already be accomplished by existing agencies, regulators and administrators. See the Bloomberg News story here.

Hailing the passage of the financial reform bill from the left, see The Huffington Post.

Decrying the passage of the financial reform bill from the right, see The Washington Times.

Goldman Sachs' official statement, posted on its website, announcing its settlement with the Securities and Exchange Commission, including an admission that it provided marketing information to clients that "contained incomplete information."

Federal judge Barbara Jones approved the $550 million USD settlement between Goldman Sachs and the SEC.

Other articles of passing interest include this one on Enron's former CFO Jeffrey Skilling having a portion of his sentence overturned by the U.S. Supreme Court. Some of Skilling's charges might be dismissed on remand and his 24 year sentence reduced, because prosecutor's misused the honest services fraud law.

Finally, my own work on the financial market crisis includes a searching examination into the underlying causes of the meltdown and examines the racial implications of the attendant blaming and scapegoating called "Racial Coding and the Financial Market Crisis."


  1. "...many pundits on the right named “minorities” and lending to “poor minorities” through the Community Reinvestment Act as a foundation cause for the market collapse. This “dirty little myth” played on loop at Fox News and on the Rush Limbaugh radio program for weeks and months resonating with those Americans that receive their politics and views from such sources.

    The dynamism and continuing intensity of American racism is clearly evident in the financial market crisis of 2008. The market collapse was caused by intense and complex economic forces and failures, not by minority borrowers." - Dre Cummings

    Ah, yes, the "dynamism and continuing intensity of American racism"; which is apparently responsible for putting the current group of racist malcontents into a position of near absolute power in the federal government. What a load of crap.

    Here's a story referencing a study conducted by a bunch of racists from the University of Chicago - Raghuram Rajan, Atif Mian and Amir Sufi. Professors Rajan, Mian and Sufi took time off from their Klan activities to study the role that Fannie, Freddie, the FHA and other government programs played in the financial crisis:

    "... Rajan offers a bold and convincing diagnosis of how a screw-up in the regulation of poor people’s mortgages in one country has brought the world to the brink of economic disaster, where it teeters still.

    This is an account of what ails us that is radically at odds with the familiar tale of greedy bankers in $5,000 suits. “Almost every financial crisis has political roots,” Rajan writes. The credit market—at least as regards housing—was distorted by government policy, not by a sudden and mysterious escalation in “greed.” The trends that shook the world economy came out of Fannie Mae and Freddie Mac, out of the Federal Housing Administration, and out of their “regulator,” the U.S. Department of Housing and Urban Development.

    By 2000, HUD required that low-income loans make up 50 percent of Fannie and Freddie’s portfolios. Out of “compassionate conservatism,” perhaps, the Bush administration raised that mandate to 56 percent. Rajan cites Fannie Mae’s former chief credit officer, Edward Pinto, who notes that, by 2008, “the FHA and various other government programs were exposed to about $2.7 trillion in subprime and Alt-A loans, approximately 59 percent of total loans to these categories.” Peter Wallison of the American Enterprise Institute found that government-mandated loans accounted for two-thirds of “junk mortgages.”

    Another way of looking at this problem is provided in a study done by Rajan’s Chicago colleagues Atif Mian and Amir Sufi. They found that, if you look at the period between 2002 and 2005, the number of mortgages obtained in a given ZIP code “is negatively correlated with household income growth.” In other words, lenders preferred un-creditworthy borrowers to creditworthy borrowers. In a market governed by “greed” and undistorted by government pressure, such a result would make no sense.

    Weekly Standard

    No one is blaming "poor minority borrowers" for the financial crisis, they're blaming the malignant government programs that target them and the mindset that creates those programs.

  2. Wall Street Reform and Consumer Protection Act included a provision that directly affects us, the consumers. Sen. Dick Durbin (D-Ill.) championed this provision that would regulate the $20 billion interchange fee system. The fees banks charge businesses for processing debit card transactions be "reasonable and proportional to the cost incurred in processing the transaction" according to Durbin's summary of the provision. The Federal Reserve would be required to issue new rules on the fees.

    This 1-2% fee on the full price of the transaction is why many small retailers don't allow consumers to pay with plastic unless the transaction is over a certain amount. Retailers would be allowed under the bill to offer discounts to use cash. They can still set a minimum purchase amount to use cards, but the Federal Reserve would have the authority to set the minimum at $10.

    Who still carries cash? For consumers like me, usually all that is in the wallet is plastic. It's frustrating to think the recently imposed legislation held lesser known provisions that could further deter businesses from permitting low miminums on debit purchases because now the Fed Reserve can regulate those minimum threshholds. Shouldn't it be up to businesses, who listen more to the consumer demands, rather than the feds?!