Warren Buffett: Fed has no more bullets to stimulate the economy

Warren Buffett said according to a Telegraph report,

The Federal Reserve has "used up its bullets" to stimulate the US economy, Warren Buffet has said, as he warned that "D-Day" was here for politicians to strike a deal to solve the country's "fiscal cliff" problem. 

The billionaire investor said that it was now up to Congress to help boost America's flagging recovery. 

Speaking in an interview broadcast on Radio 4's Today Programme, he said: "I think [the Fed] has used up its bullets pretty much. When you drive interest rates to zero and when you buy almost a trillion dollars worth of securities and how you start buying longer-term securities -- you've done your part. I mean, Ben has given up the office."... 

"We've kicked it down the road for a long time," said Mr Buffett, "but D-Day is here and that doesn't mean we'll get the fiscal cliff problem solved by December 31. 

"I hope we do, but it may go over into January. But we are going to have to address important policy questions. I think Congress knows it, I think the president knows it, and certainly the American public knows it.

Mr. Buffett is right, the time to stop bailing out the banks under the Japanese Model for handling a bank solvency led financial crisis has come.  The US can no longer afford to protect bank book capital levels and banker bonuses.

The time has come to exit all the policies, like zero interest rates and quantitative easing, that were adopted to protect bank book capital levels and banker bonuses.

The time has come to see what the banks are hiding on and off their balance sheets.

As Iceland has shown and certainly the American public knows, the social safety net can be enhanced during a financial crisis when policy makers focus on protecting the real economy and the middle and lower class instead of the banks and the 1%.

The time has come to recognize that reducing the US debt is best achieved by adopting the Swedish Model and requiring the banks to recognize upfront the losses on the excess debt in the financial system.  This protects the real economy and allows money that is currently being diverted to support the excess debt burden to instead be used for reinvestment and growth.

A better economy means more tax revenue with which to repay the debt.

While we are at it, the time has come for the US banking system to recognize the value of deposit insurance and access to central bank funding and pay for the privilege.  Bankers can show their gratitude for these subsidies by donating their current balance sheet holding of US debt to the US Treasury.

This would dramatically lower the outstanding debt and would show the American public that bankers truly understand that they are there to serve the public and support the real economy and not the other way around.

Under Japanese model, repealing disclosure laws seems reasonable Part II

As discussed in Part I, one of the consequences of pursuing the Japanese models for handling a bank solvency led financial crisis is policymakers and financial regulators get comfortable with the idea that it is acceptable for banks to hide losses on and off their balance sheets.

It is a small step from this act of deception to the idea that maybe disclosure isn't needed for other firms.

As Professor Simon Johnson discusses in his post on BaseLine Scenario, the only person who stands between repeal of the 1930s disclosure laws that have served our financial markets well for 70+ years and a return to the type of opacity that produced the Great Depression is President Obama.

The question is will President Obama sign the bill and cement his place alongside Herbert Hoover or will President Obama veto the bill?

As it currently stands the "JOBS" bill now before the Senate would gut investor protection in the United States....

The "JOBS" bill would permit even very large companies to avoid all public disclosures.... 

Big companies like [the "JOBS" bill] ... the idea of escaping SEC [and the market's] scrutiny greatly appeals to them. 

Clearly, if the "JOBS" bill passes and President Obama signs it into law, the bill will go down as Wall Street's Opacity Protection Team's greatest victory.

Of course, the losers will be the 99%.

Simon Johnson rejects the 'ideology' for the ongoing gifts to bankers

In a must read column in the Guardian, Simon Johnson looks at the 'ideology' behind bailing out banks and concludes that this ideology harms the real economy as it justifies an ongoing stream of gifts to the bankers.

Regular readers know that your humble blogger has been very critical of this ideology.  Specifically, I have used historical evidence to show that the assumption underlying the ideology that banks must have a positive book value in order to make loans is simply false.

By showing that assumption is false, the rest of the ideology including the need to a) bailout the banks or b) hide the losses on the banks' balance sheets crumbles with it.

To be sure, the [Washington Mutual] executives lost their jobs and now must drop claims for additional compensation. But, according to the FDIC, the four still earned more than $95m from January 2005 through September 2008. So they are walking away with a great deal of cash. 

This is what happens when financial executives are compensated for "return on equity" unadjusted for risk. The executives get the upside when things go well; when the downside risks materialise, they lose nothing (or close to it). 

At the same time, their actions – and similar actions by other bankers – are directly responsible for both the run-up in housing prices and the damaging collapse that followed. 

That collapse has impacted non-bankers in many negative ways, including through the loss of more than 8 million jobs. 

It is also leading to austerity – taxes are increasing and government spending is falling at the local and state level around the country. A difficult fiscal conversation still lies ahead at the federal level, but cuts and contractions of various types seem likely.

Some people argue that Americans need to tighten their belts. That's an interesting discussion, particularly at a time with unemployment is still above 8% (with recent declines largely the result of many jobless workers' decision to stop looking and drop out of the labour force altogether). Precipitate austerity is hardly likely to help the economy find its way back to higher employment levels. 

But what about government support for the big banks? 

Is this contracting in the light of our current fiscal pressures? Unfortunately, it is not; much government support remains, implicitly through allowing banks to be "too big to fail," and explicitly through various kinds of backing provided by the Federal Reserve. 

The rationale – or perhaps we should call it ideology – behind supporting big banks is that they are needed for the economy to recover. But this position looks increasingly doubtful when the banks are sitting on piles of cash while creditworthy consumers and businesses are reluctant to borrow. 

The same situation exists in Europe today, where the reality is even starker. Banks are receiving ever-larger bailouts, while countries that borrowed are cutting social programmes and face rising social tensions and political instability as a result. Countries like Greece, Italy, and arguably Portugal over-borrowed, and now their citizens face severe consequences. But the bankers face no consequences whatsoever for over-lending. 

To be sure, some major European financial institutions may now face difficulties, and – who knows – perhaps some of their executives will end up being fired. But does anyone think that the people who ran European banks into the ground will leave their positions with anything less than considerable wealth? There is no real austerity – now or possibly in the future – for leading bank executives.... 

Big banks represent the ultimate in concentrated economic power in today's economies. They are able to resist all meaningful reform that could really change their compensation schemes. Their executives want to get all the upside while facing none of the true downside. 

But capitalism without the prospect of failure is not any kind of market economy. We are running a large-scale, nontransparent, and dangerous government subsidy scheme for the benefit primarily of a very few, extremely wealthy people.... 

concentrated financial power is a gift that keeps on giving – but not to you.

Jon Huntsman calls for transparency in targeting Wall Street behavior

Republican presidential candidate Jon Huntsman has put transparency at the center of his plan for reforming Wall Street.

According to a Bloomberg article,

“We’ve had implosions on Wall Street,” he said, in an interview with Bloomberg News yesterday. “We had bad behavior on Wall Street. We had lack of transparency on Wall Street. I believe they are, in some measure, responsible for a diminishment in trust.”...

By taking aim at Wall Street, Huntsman believes he can piece together a coalition of anti-bailout Republicans and anti- Wall Street independent voters in the fiscally conservative early voting state.

Last month, Huntsman released a plan that would cap the size of banks and impose new fees on the biggest financial institutions. In campaign appearances, he accuses his rivals of being beholden to their Wall Street donors, and he’s expressed support for the populist Occupy Wall Street protests....

“It’s a pretty smart tactic because Mr. Romney made a lot of money from big banks and it’s going to be hard for him to respond on this,” said Simon Johnson, an economics professor at the Massachusetts Institute of Technology who has been critical of the banking industry. 

Citing Romney’s ties to Wall Street, Huntsman, the son of a billionaire industrialist, raises questions about whether the former private equity investor would be able to stand up to the industry. 

“He would seem to be doing quite well with the Wall Street insiders,” Huntsman said. “If too big to fail is in fact an ongoing problem for this country, you’re going to need someone who can stand up and point out those deficiencies and do so without the additional pressure of an industry that built them up politically.” ...

It’s an unflattering portrait that Democrats hope will take hold. Obama’s allies have already begun painting Romney as more interested in supporting Wall Street than addressing the economic challenges facing the middle class.... 

The question is whether those attacks will resonate with Republican primary voters.... 

While the rest of the Republican field frequently promises to end all government bailouts, none have gone as far as Huntsman in introducing a specific plan to restructure the financial industry. 

His proposal, released on Nov. 28, caps bank size and total borrowing based on their assets as a percentage of gross domestic product. Those institutions that exceed the permitted size would pay a fee designed to help cover the cost to taxpayers of any future bailouts. Huntsman would also shut down Fannie Mae and Freddie Mac, two government-backed mortgage lenders caught up in the housing meltdown, and repeal the Dodd- Frank Act passed by Congress to regulate the financial industry....

On the campaign trail, Huntsman’s rivals blame the financial crisis largely on Democratic leadership, while rarely mentioning the big banks that were at the center of the government bailout.... 

Huntsman accused his rivals of being hesitant to criticize banks because they don’t want to cut off a source of campaign contributions....

“They want to be able to point out the deficiencies in front of some crowds, but they want to take money from the banking sector,” said Huntsman. “They’re not going to get contributions from the banking sector if they’re specific about how they want to remedy the situation."

Occupy Wall Street embraces ultra transparency for banks

According to an FT Alphaville post, Occupy Wall Street embraces ultra transparency for banks.

Presented below is a note prepared for the December 4th meeting of the Occupy Wall Street General Assembly by its alternative banking working group. We present it – without comment – as a document for understanding the aims of OWS... 

This note has been prepared by the alternative banking working group of the Occupy Wall Street (OWS) movement. The note is for discussion with the OWS movement and more broadly. 

The purpose of this note is to describe the characteristics of an ideal bank that embodies the values of the OWS movement. 

The current banking system lies at the heart of our current economic crisis of increasing volatility and inequality. To change that system, we need to replace it with a better bank. What would be the characteristics of this bank? 

None of these features is new, and many are already evident in credit unions, community banks and “mutuals”. But our purpose is to imagine something that might have a broader reach and impact – that might transform the banking system, and thus, by its example and through its operations, potentially create an economy that is fairer, more inclusive, democratically managed and stable....

6. Transparent – the opacity and unintelligibility (even to those working in finance) of the financial system have contributed to the “credit crunch” collapse. The operations of this bank would by contrast be wholly transparent, thus again helping minimize any risk caused by its operations.... 

In establishing the bank, the principles embodied in the characteristics outlined above should be followed as much as possible (“the means are the ends”). ... If there is general consensus within OWS and perhaps more broadly on the desirability of such a bank, the Alternative Banking group will set itself to the design and perhaps construction of the bank, drawing on the examples and experience – and perhaps the assistance – of similar such banks around the world. But there is no monopoly here: anyone is free to take inspiration from these ideas and embark upon the same challenge.

Wall Street's Opacity Protection Team meets Judge Rakoff [update]

In a MarketWatch article, A new era of Wall Street transparency, U.S. District Judge Jed Rakoff takes on Wall Street's Opacity Protection Team.

“In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers,” the judge wrote. 

“Even in our nation, apologists for suppressing or obscuring the truth may always be found.

Judge Rakoff calls out Wall Street's Opacity Protection Team.

But the SEC, of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.”

It is the SEC that was set up to ensure that market participants have access to all the useful, relevant information in an appropriate, timely manner so that the risk of any investment can be fully assessed prior to making the investment decision.

The SEC defended the settlement it reached with the bank....

In defending its actions, the SEC confirms the late Mark Pittman's observation that the regulators are members of Wall Street's Opacity Protection Team.

“The court’s criticism that the settlement does not require an ‘admission’ to wrongful conduct disregards the fact that obtaining disgorgement, monetary penalties, and mandatory business reforms may significantly outweigh the absence of an admission when that relief is obtained promptly and without the risks, delay, and resources required at trial....”

The SEC focuses on what is essentially a cost of doing business for a Wall Street firm.  It ignores the fact that the SEC had reached prior settlements with the bank that included mandatory business reforms that, if implemented, would have prevented the sale of the security which gave rise to the proposed settlement.

Rakoff’s ruling is likely to have far-reaching ramifications on Wall Street and at the SEC. 

The consent judgment settlement reached between Citi and the regulatory body, in which Citi had the ability to neither admit to any wrongdoing nor deny the allegations held against it, was a common one that the SEC typically reached with firms that it accused of wrongdoing.... 

The fact that this type of settlement is commonly used by the SEC does not mean that it is a good practice.

In fact, using it frequently makes this type of settlement look like the equivalent of a parking ticket.  As everyone knows, parking tickets are at best a nuisance and do not change people's behavior.

If Rakoff’s ruling proves to be popular in the public sphere, then it is possible that other judges might start scrutinizing settlements between the SEC and Wall Street firms more closely, and the SEC would also be compelled to be stricter in its discipline of firms who flout rules.

I can only hope that the ruling is extremely popular in the public sphere.

This ruling shows the degree of regulatory capture that has occurred at the SEC.  The SEC needs to be compelled to be stricter in its discipline of firms who flout its rules.

As Adam Sorensen of Time magazine notes: 

“Rakoff’s ruling is one small dose of exactly what Wall Street’s critics have been hankering for. 

The conflict ... is basically over whether securitization fraud cases will get swept under the rug. 

And you’d be hard pressed to find a realistic outcome more appealing to protesters hoisting ‘Jail the Banksters’ signs in Zuccotti Park than a public fraud trial for a major Wall Street institution and a rebuke to what Occupiers see as an overly sympathetic federal government. 

Judge Rakoff just gave them both of those things.”

That being said, it is still unlikely that the facts of the Citi fraud case will be uncovered, even though a trial date of July 16, 2012 has been set.

Of course, Citi will just agree to pay a bigger fine for its parking ticket.  There is precedence for paying a bigger fine and that is why SEC settlements are simply a cost of doing business as opposed to being a tool to bring about changes in the conduct of business.

In 2009, the SEC sued Bank of America (NYSE:BAC) , claiming that the bank had lied to shareholders about bonuses paid out to Merrill Lynch executives when it sought approval to acquire the troubled firm. The agency reached a $33 million settlement, which Rakoff first rejected. However, the judge later relented and approved a $150 million settlement in February 2010, even though he said the agreement was “half-baked justice at best.” 

If history is to repeat itself, what will probably happen is that the SEC will increase the penalty Citi has to pay — perhaps an amount closer to the $550 million Goldman coughed up — and Rakoff will approve the new settlement. 

Then again, populist anger toward big banks has grown since the SEC-Bank of America settlement last year, as exemplified by the nationwide Occupy movement, and perhaps Rakoff, augmented by the pro-transparency public sentiment and a growing public profile as a take-no-nonsense judge, will insist on holding the SEC and Citi accountable to the public this time around.

Clearly, this is what it is going to take if Wall Street's Opacity Protection Team is ever going to be defeated.

Update
Jesse Eisinger wrote an article in ProPublica that also addressed how Wall Street views fines from regulators.

I asked Richard Kramer, who used to work as a technology analyst at Goldman Sachs until he got fed up with how it did business and now runs his own firm, Arete Research, what was going wrong. He sees it as part of the business model. 

“There have been repeated fines and malfeasance at literally all the investment banks, but it doesn’t seem to affect their behavior much,” he said. “So I have to conclude it is part of strategy as simple cost/benefit analysis, that fines and legal costs are a small price to pay for the profits.”

Always nice to get confirmation of my analysis and the need for transparency as the solution.

Wall Street's Opacity Protection Team and Mark Pittman

In a wonderful tribute to Mark Pittman, Bob Ivry wrote a Bloomberg article describing the triumph of a single person (backed by the Bloomberg news organization) over the Federal Reserve.

Mark was not a random reporter to me.  He was someone I had dined and exchanged ideas with (either by phone or email).

Several weeks prior to his death, we had our last telephone conversation.  The focus of the conversation was Wall Street's Opacity Protection Team.

I was pointing out all the different ways that Wall Street was preventing transparency from occurring in the structured finance market (regular readers know that disclosure of the current underlying collateral performance is necessary if investors are going to know what they own and be able to value it).

Mark pointed out that the Opacity Protection Team extended well beyond Wall Street and included its regulators.

He talked about where he was in the pursuit of the Fed's bailout data and how the Fed lent new meaning to the term significant, well-financed resistance to disclosure.

He concluded our conversation by observing that with only the two of us pursuing disclosure Wall Street's Opacity Protection Team would win.

Mark, I am glad that Bloomberg News carried your quest to the finish line.  I suspect I am going to need the 99% to carry my quest for disclosure to the finish line.

One legacy of the release of the Federal Reserve’s bailout data was the triumph of a single person over the most powerful bank in the world. 

Bloomberg News’s Mark Pittman, a hulking former cop reporter from Kansas with equal love for spreadsheets and beer chasers, filed a Freedom of Information Act request with the Fed in May 2008. He asked for details of the emergency-lending programs that were then just under way. It’s the taxpayers’ money, Pittman argued. They ought to know where it’s going. 

The Fed resisted, and along with a group of the biggest U.S. banks called Clearing House Association LLC, waged a legal battle that in March 2011 reached the U.S. Supreme Court, which refused to rule against lower courts that ordered the release. 

Pittman wasn’t around to celebrate....

Pittman had a favorite joke he’d tell about the bailouts, which he believed were futile because by preserving the status quo they presumed that, without incentive to change, things would be different next time. Bankers would be prudent, regulators would be firm and the public good would be served. 

It went like this: A guy borrows money from a loan shark. When he doesn’t pay up, two goons visit him one evening at home, where he’s eating dinner with his wife. 

“Give me one more day,” the guy tells the debt collectors. “I have a dog that talks, and tomorrow I’m going to make a bunch of money from my talking dog.” 

The goons accept this, vowing to return for the money the next evening. 

After they leave, the guy’s wife looks at him like he’s nuts. 

“What will you do when they come back?” she asks her husband. 

The guy shrugs and says, “Maybe tomorrow the dog will talk.”

Irish banks face mortgage strikes

The Guardian carried an interesting article on how distressed Irish borrowers are organizing to demand that banks modify their mortgages to levels that reflect their capacity to pay.

The final straw for the borrowers was the failure of the banks to pass on the ECB's recent adoption of lower interest rates.  The banks have resisted passing it on so as to increase their profit margins - this was not surprising given the Wilbur Ross is now a large investor in one of the two remaining banks.

Should this idea of a mortgage strike spread to say the US ...

It's been a tough time to be Irish. The boom years are a distant memory and now there's just austerity and a long haul back to recovery for a nation crippled by the reckless lending of its banks. 

But, a year after the country was forced to call in the International Monetary Fund(IMF), there is a sign that the people are fighting back and targeting the hated lenders with the "nuclear option" of a mortgage strike. 

Ross Maguire is the co-founder of New Beginning, a new de-facto trade union for Irish mortgage holders and those in debt distress with banks, which aims to recruit 10,000 members in a movement that has strong parallels with the Occupy protests that have swept through scores of countries. 

"The nuclear weapon is for borrowers acting in concert and to say that unless proper and sustainable solutions are put in place which are fair and reasonable, then we should not continue to pay under these current conditions," he says. So does this mean a "mortgage strike" ....

"It is radical but it is where we are going if things don't change. It's the last option but it is better that people like us have control over it because the danger is that if that kind of people power was misdirected it could wreck the financial system. New Beginning doesn't want to smash the financial system; we merely want to reform it and re-balance power between banks and borrowers." 

With more than €70bn (£60bn) of taxpayers' money already transferred into the banks to save them from collapse and public fury intensifying after the banks refused to pass on a cut in interest rates by the European Central Bank two weeks ago, Irish people are bracing to pay a further price for the bailout....

Many blame the fiscal crisis on the banks' reckless lending to property developers – the same banks that are refusing to cut interest rates and threatening to repossess thousands of people's homes. ... 

The quiet 42-year-old who launched this crusade against the banks from his office in a trendy building near Dublin's Smithfield Market area is a barrister. But Maguire is the antithesis of the public perception of well-heeled "silks" in wigs and gowns: he doesn't charge fees for families with distressed mortgages who are fighting to keep their homes. 

After working at the Dublin bar since returning from a successful legal practice in the City of London in the 1990s, Maguire noticed how skewed Irish law is towards banks as opposed to their borrowers. A person declaring bankruptcy in Ireland will be in financial and credit purdah for 12 years, Unlike Britain's 12 months. 

Now he and New Beginning are emerging as lightning rods for the anger of an entire nation towards the banks that they believe helped bust Ireland. ... Maguire and his group, however, offer a legal, non-violent but direct action alternative to challenge bankers' power. 

His own epiphany came last year when he and two colleagues heard of a client who had fallen foul of the banks. "A man came to us who had a loan with the Irish Nationwide building society, which subsequently was forced to merge with the Anglo Irish Bank. He got his file under the Data Protection Act and discovered that the Irish Nationwide had created a completely new version of him for their credit committee! 

"They had changed his occupation. They had given him a salary far higher than his actual one of €30,000 – in fact, they said he was now earning €60,000. They had changed the grade he worked at in his job to a higher one. They had even forged not only his signature but also his employer's. It was incredible in terms of sharp practice. This was all so they could lend him more and more money during the boom. 

"We thought to ourselves that if this happened once across the state it was happening all over.

In the US for example?

It was then that we realised something needed to be done to check the power of the banks and that it had to be done collectively." 

Before they opt for the "nuclear option", Maguire stresses that New Beginning has devised a practical plan to reform the mortgage payment system that will, he claims, help the banks as much as the people. They have proposed to the government an "income annuity mortgage". It would mean a homeowner in difficulty paying a €1,000 a month mortgage could cut that to €700. If things improved, the payments could be raised to, say, €1,500. 

But would the banks accept such a system, which would entail stretching out mortgage payments for longer? 

"The Irish banks don't think we are serious," Maguire says, "but just wait." 

New Beginning are about to go on a nationwide recruitment tour ....

"When we get over 10,000 members, each paying a levy of just €15, we will see who is serious. We are offering a fair solution for all concerned, including the banks, but if ultimately they reject it there is the nuclear option of a payment strike. Individually, people go in mortal terror to meet their banks but together in a national movement they won't be in such a weak position." 

Maguire says they are not firebrand radicals hellbent on destroying the system. "Why throw a brick through a bank window? They will just replace the glass the next day," he points out. 

However, the barrister says they could link up with others in Northern Ireland and Britain, such as the Occupy movement and UK Uncut, who are equally disgusted at the banks' behaviour during this long recession. 

"Two of the taxpayer-rescued banks in Ireland – the Bank of Ireland and First Trust [Allied Irish Banks' UK operation] – have a big presence in Northern Ireland. We would like to help out borrowers who are under pressure from these banks up there too. 

"And I don't see why we couldn't see the establishment of a New Beginning force on the other side of the Irish Sea. We would like to speak to groups like UK Uncut and Occupy over there to help each other and explain some of our ideas for re-balancing the power between bankers and borrowers." 

He suggests his organisation could provide a model on how to reform banks and reduce their power to threaten customers further across the globe. 

"There is widespread discontent across the 'Anglosphere' and elsewhere regarding the banks. We are offering practical solutions on the one hand and the right of borrowers to organise and deploy the ultimate, last weapon of resort on the other."...

"This is a 21st-century struggle to re-balance power in favour of people. Whether in Britain or Ireland, we can find the power to turn off the banks' oxygen if they won't change their ways."

Why don't banks pass on the benefits intended by monetary and fiscal policies?

One of topics this blog has documented over the last several months is banks not passing on to the real economy the benefits intended by monetary and fiscal policy.

Why don't they?  [Regular readers will recall that the FSA's Lord Turner said that regulators couldn't prevent the banks required to meet a 9% Tier I capital ratio from reducing their lending and precipitating a mini-credit crunch.]

The fact that they do not is one of the points that the Occupy Wall Street movement continually points out.

In the latest example, we have Irish banks refusing to pass on the benefits of the ECB's most recent rate cut to mortgage holders.  According to an Irish Times article,

BANK OF Ireland yesterday maintained its position regarding not passing on last week’s ECB rate cut to mortgage customers, despite saying that it expects its net interest margin to stabilise in the second half of the year. 

A spokeswoman for the bank said interest rates continue to be under review. In an interim management statement, Bank of Ireland reiterated its expectation that total impairment charges on mortgages have peaked. 

However, it noted an increase in mortgage arrears in August and September which it attributed to speculation about a mortgage debt forgiveness scheme, echoing similar comments made by KBC Ireland on Thursday.

Bob Diamond prove that "banks will be good citizens" adopt utter transparency

Barclay's Bob Diamond published a column in the Guardian in which he claimed that banks will be good citizens and that they need to rebuild the trust that was lost with the 2007 financial crisis.

Fantastic.

It therefore time for Mr. Diamond to put up or shut up.

Putting up requires that Mr. Diamond and Barclays act with 'trust and integrity' and make one of those 'visible changes' he talks about and voluntarily adopt utter transparency.  Utter transparency involves ongoing disclosure of Barclays current detailed asset, liability and off balance sheet exposures at the end of each day.

In the old days, utter transparency was the mark of a bank that could stand on its own two feet.  Because of this, bankers provided all the accounts that were fit to print voluntarily and not because they were required to by regulators.  Utter transparency was a statement that the bank could be trusted because it had nothing to hide.

Please note that banks that provide utter transparency were still able to make loans and the bankers who ran them still able to make money.  There is no reason to think that acting with trust and integrity by providing utter transparency will hurt Barclays' ability to make loans, to act as a market maker or to make money as a good citizen.

Rather, with this data, market participants can assess Barclays' risk and adjust the amount and price of their exposures accordingly.

In theory, if Barclays' manages its risk as prudently as Mr. Diamond suggests, its access to capital should increase and its cost of capital should decrease - each would be very good news to its shareholders.

Based on his column, Mr. Diamond should be delighted therefore to have Barclays be the first of the global financial institutions to offer this ongoing detailed disclosure.

Of course, maybe Barclays really is a bad citizen. As Yves Smith at NakedCapitalism says no one on Wall Street was compensated for developing low margin, transparent products.  Occupy Wall Street noticed this opaque products and observed that it was wrong to sell them.

If Mr. Diamond and Barclays, as card carrying members of Wall Street's Opacity Protection Team, have something to hide they will come up with an excuse for not offering utter transparency.  This will further confirm that the global financial institutions cannot be good citizens.

I look forward to working with Mr. Diamond and Barclays in providing all market participants access to their detailed disclosure.  To reach me, Mr. Diamond simply needs to express his willingness to provide utter transparency in the comment section to this post.

Soon after the financial crisis of 2008, at a meeting in the United States, a senior economic adviser at the White House put a question to me: "Do you think banks can be good citizens?" As I started to answer yes, he interjected: "If your answer is yes, think about the fact that no one will believe you."...  

The single most important thing for banks and other businesses to focus on immediately is creating jobs and economic growth. To play their role, banks have to rebuild the trust that has been decimated by the events of the last three years. That requires us to use the lessons learned from the crisis to become better and more effective citizens. Put simply, the private sector has an obligation to become the engine of growth and job creation, and banks have a vital role to play in that. 

Frankly, though, banks have done a very poor job of explaining how we contribute to society. We need to fix that as part of the process of restoring trust in what we do. At the simplest level, banks are entrusted with deposits from individuals, businesses and governments. We put that money to work by, for instance, helping people to buy homes or lending to growing businesses. 

Banks also provide critical services to governments and business by providing direct access to global buyers of debt and equity and by establishing large, consistent markets of buyers and sellers. Some characterise these activities as speculative trading. They aren't; they serve a fundamental client need, so it's wrong when they are caricatured as gambling. 

Of course, to meet these client needs banks must be safer and stronger than prior to the crises. The reality is that much is different in today's financial sector. Banks are not borrowing as much, they have more capital, and they have far more stable and liquid sources of funds to lend. Strong banks want strong regulation, and we believe that no taxpayer money should ever again be put at risk to rescue a failed or failing bank.... 

The only way that banks will win back the public's trust is to become better citizens. That starts with how we behave, and in demonstrating we act with trust and integrity. At banks this means the interests of customers and clients must be at the very heart of every decision made.... 

That's why I think the answer to the question posed to me three years ago is that banks must be good citizens. I appreciate that believing this will require you to see a visible difference in the way we participate in society. You may not recognise that right now. It's the early stages. We're determined to keep working at it, and I am committed to making it happen.

Archbishop of Canterbury throws weight behind Occupy Wall Street/London

As a Telegraph article highlights, the push for true reform of the financial sector is picking up momentum.  The latest to lend their moral authority is the Archbishop of Canterbury.

“There is still a powerful sense around – fair or not – of a whole society paying for the errors and irresponsibility of bankers; of impatience with a return to 'business as usual’ – represented by still-soaring bonuses and little visible change in banking practices.” He added: “The best outcome from the unhappy controversies at St Paul’s will be if the issues raised… can focus a concerted effort to move the debate on and effect credible change in the financial world.”

Ultimately, the credible change is requiring banks to disclose their current assets, liabilities and off-balance sheet exposures.  It is only with this detailed disclosure that market participants can assess the risk of the banks and exert market discipline.

As MF Global showed, the financial regulators have not learned from the solvency crisis that began on August 9, 2007 that they must stop excessive risk-taking.

It is only when the other market participants, including competitors, have the detailed data that they can exert the necessary market discipline and stop the excessive risk-taking at the time the risks are beginning to build.

It is only when the other market participants, including competitors, have the detailed data that banks will shrink in size to what is necessary to support the economy and not what is necessary to support outsized compensation packages -- disclosure shrinks these compensation package by effectively eliminating the excessive risk used to achieve the compensation.

Wall Street's Opacity Protection Team meets Financial Watch

A Der Spiegel article discusses the formation of a new organization, Financial Watch, to battle Wall Street's Opacity Protection Team and its army of lobbyists.

According to its website,

Finance Watch is a public interest association dedicated to making finance work for the good of society. 

Our mission is to strengthen the voice of society in the reform of financial regulation by conducting citizen advocacy and presenting public interest arguments to lawmakers and the public as a counterweight to the private interest lobbying of the financial industry. 

Finance Watch works according to the following principles from its Articles of Association: 

 The financial industry plays an important role in allocating capital, coping with risk and providing financial services and this role has strong public interest implications. 

 The essential role of the financial system is to allocate capital to productive use in a transparent and sustainable manner.

Naturally, your humble blogger welcomes another voice calling for transparency.

The article tells a little more about the organization and the background of the individual who runs it.

..Indeed, some things will take getting used to in the offices Finance Watch has just leased near the building housing the European Parliament in Brussels. 

The project is backed by 40 European organizations, including unions, consumer-protection groups, foundations and think tanks. And it has a single goal: to make financial markets more transparent and influence future legislation so that it serves the needs of society rather than the financial industry. 

[Thierry] Philipponnat runs the organization, which will soon have a team of a dozen people. 

"When I heard about the project, I knew right away that it was the job for me," says the 50-year-old Frenchman. "As a former banker, I was immediately hooked." 

Philipponnat spent 20 years in the industry, which included positions at the Swiss bank UBS and the French bank BNP Paribas, where he was in charge of structured financial transactions, the highly complex products that have now come under sharp criticism for being both shady and highly risky. In his most recent position, Philipponnat was the global head of equity derivatives at the Euronext exchange in London....

Both areas of finance where Wall Street benefits from opacity.

Although efforts are underway worldwide to regulate the financial industry more rigorously, implementation is a different story, as evidenced by the work of the European Parliament in Brussels, where members are under constant observation and attack by an estimated 700 financial lobbyists. 

These professionals work around the clock to ensure that none of the new laws adversely affects the interests of banks, hedge funds, insurance companies and private equity firms. 

The lobbyists target EU politicians like Burkhard Balz, a member of Chancellor Angela Merkel's center-right Christian Democratic Union (CDU) from the northern German city of Hanover and a former banker himself. 

"In the runup to the regulation of hedge funds, I was constantly receiving requests for meetings with lobbyists," says Balz, who is now his party's deputy parliamentary spokesman on the European Parliament's Economic and Monetary Affairs Committee. 

Balz says he met with many of the lobbyists -- or at least until he felt that he was familiar with all of their arguments. But the lobbyists were unrelenting. "If I had said: 'I'm at the Stadthagen swimming pool with my son,' they would have said: 'No problem, we'll bring our trunks,'" he says, with some irritation. 

If you listen around in Brussels, you can hear about the opulent dinners members of parliament have in the city's most expensive restaurant during which representatives of a major bank will explain to them why their speculation in agricultural commodities has absolutely no effect on the world's food supply. Or about the amendments to existing legislation that are sent to members of parliament prewritten, and of the printed copies of voting lists that explain to the parliamentarians exactly which box to check. 

"There are 200 financial-industry lobbyists for every paragraph of the law," says Udo Bullman, a member of the European Parliament from Germany's center-left Social Democratic Party (SPD). 

This problem prompted members of the Economic and Monetary Affairs Committee to take an unusual step in June 2010, when they publicly called for the creation of "one (or more) non-governmental organization(s) capable of developing a counter-expertise on activities carried out on financial markets by the major operators … and to convey effectively this analysis to the media." 

The gulf between the capabilities of the financial industry and politicians' relatively poor understanding of the field "poses a danger to democracy," a group of parliamentarians wrote. 

Please re-read this point as even the EU lawmakers realize there is a problem.

The petition initially had 22 signatures, but soon more than 140 politicians in Brussels -- from all member countries and the entire range of political parties -- added their signatures. Eleven members donated money to fund a six-month exploratory phase and began searching for the right person to head the organization: Philipponnat. 

When he left the banking industry in 2006, Philipponnat had lost faith in the sense and purpose of his work. "Many financial transactions are useless at best," he says, "but, at worst, they have a massive impact on politics and society." He then made his way to Amnesty International and became the head of its French section.... 

Philipponnat will need both because his job comes with high expectations. Finance Watch still has a small budget of only €1 million ($1.4 million) derived from member dues and donations.  But the various EU institutions are now considering injecting another million euros into the venture. 

Even then, it will still be difficult to become a counterweight to what is probably the richest and most powerful economic sector of all, whose lobbyists are backed by an estimated €400 million in funding.

Actually, regulators are suppose to help as a counter-weight to the industry lobbyists.  After all, their primary mission is to prevent a financial crisis.

In mid-October, Philipponnat spoke for the first time as an expert at a hearing on whether to require European banks to have higher equity capital requirements. 

Last Sunday, when EU leaders meet in Brussels to discuss how to battle the euro crisis, Finance Watch appealed to them to take a closer look at the balance sheets of major banks.

Philipponnat is careful to point out that: "We are not an anti-bank group, nor do we condemn any lobbyists." The only thing that Financial Watch really wants, he explains, is a balanced debate that includes not only the players, but also those affected by their actions. "The financial industry often uses highly technical arguments," he says. "On the one hand, (it does so) because many things actually do revolve around technical issues. But, on the other hand, (it does so) because it means that no one outside the financial world can seriously follow the debate." 

Finance Watch wants to change this. For example, it wants to explain EU banking rules -- such as the cryptic CRD IV and MiFID -- to the general public as well as issue position papers and compose informational materials. In addition, Philipponnat and his team will make themselves available to the parliament and the public to serve as individuals who can debate with bankers and hedge fund managers on a level playing field. 

Occupy Wall Street: In London is focusing on breakdown of social contract between banks and economy

As Heather Stewart observed in a Guardian column, the Occupy London protesters are focusing on the important issue of the breakdown of the social contract between finance and the rest of the economy.

What the protesters, in their kooky way, are rightly identifying is that something has gone badly awry in the relationship between finance and the rest of the economy. 

Gordon Brown got it just right – only a decade late – when he warned in a speech in November 2009 that the "social contract" between banks and the people had broken down. 

Banks should be buried deep in the engine room of the economy, shovelling our savings towards profitable opportunities so that businesses can expand and evolve. 

Instead, in the 25 years since the Big Bang, finance has moved into the driving seat. Having a competitive advantage in financial innovation became one of the UK's selling points. 

That helped cement the power of the money men in Westminster, with Sir Fred Goodwin's knighthood being just the most egregious example of government believing the mystique the financial sector wove around itself. Protecting the status of the City as a world financial centre became a central goal of government policy. 

At the same time, the overvalued pound, caused in part by the surge of investment into the financial industry, helped to hollow out Britain's fragile exporting sector. And the rewards at the very top of banking ran beyond the wildest dreams of average workers — who, to add insult to injury, received consistently terrible service from the high street banks. 

For a decade or so, the pact between the banks and ordinary families held. The economy expanded steadily. The wall of cheap money flowing from China – the so-called global savings glut – helped to pay for cut-price mortgages. Supine regulators nodded through 100% home loans, driving property prices to unheard-of levels. Mortgage equity withdrawal totalled a stunning £365bn in the 10 years of Tony Blair's premiership. 

Yet beneath the surface, the banks were taking extraordinarily risky bets – with our money. 

By 2007, when Northern Rock began to shake, and politicians and central bankers finally realised the size and power of the financial monster they had unleashed, banks' assets were more than five times the size of the economy: much, much too big to fail. 

Osborne tried to close down the issue of banking reform by setting up the Vickers commission. Its recommendations would involve erecting a "ring fence" between risky casino banking and the job of looking after our savings; but they fail to tackle the deeper question – the one nagging at the protesters – of what role finance should play in the economy and society. 

It's one that's been taxing anyone in their right mind over the past three years. Adair Turner notoriously pointed out that much of what the City gets up to is "socially useless". Mervyn King said he would have liked to have seen Alistair Darling order the state-backed banks to throw open the lending taps during the recession; and he's also reflected on the "absurd" risks banks were taking before the crisis. 

There are plenty of radical ideas being drawn up outside Whitehall, starting with splitting up the bailed-out banks into a series of German-style regional champions, and establishing a state-backed investment fund to boost infrastructure. 

Yet the coalition's reflex response remains to defend the City against the pesky meddling of Brussels. While the protesters were discussing how to reform the financial system, David Cameron was warning that proposed European regulations on derivatives would harm the competitiveness of London. Sound familiar? 

Wandering among the tents last week, it was not hard to share the puzzled disbelief of the capital's happy band of tent-dwellers. Their demand was a simple one: a banking sector that serves the economy. It doesn't seem too much to ask.

A sign at Occupy Wall Street rally

An Atlantic article by Conor Friedersdorf described how the author's words made it to a sign at the Occupy Wall Street rally.  The sign said:

it's wrong to create a mortgage-backed security filled with loans you know are going to fail so that you can sell it to a client who isn't aware that you sabotaged it by intentionally picking the misleadingly rated loans most likely to be defaulted upon

Interesting discussion of why Occupy Wall Street is gaining momentum

The Guardian ran an interesting column on Occupy Wall Street.

The only surprise about Saturday's occupation of the London Stock Exchange is that it took so long to happen. No doubt the government and banking lobby was hoping that the final report of the Vickers commission last month would draw a line under so-called banker bashing in the UK. As Basil Fawlty might have put it: "I crashed the global economy once, but I think I got away with it." 

So why won't popular protests go away? Here's why: there has been no public inquiry into the causes of the crash. No calling to account of those who drove the ship on to the rocks. No assertion of the public interest over financial markets. No subordination of banks to the needs of the real economy. No politician who dares face down global finance....

The greatest triumph of the Wall Street Opacity Protection Team has been to thwart any true public inquiry into the causes of the crash.

Politicians around the globe raced to convey new powers on financial regulators without pausing long enough to investigate why these financial regulators failed in their most important function which was to prevent the crisis in the first place.

The Obama Administration extended US Treasury Secretary Tim Geithner's call to avoid administering old testament justice by not bothering to administer justice at all to Wall Street.  Quick, how many individuals have been tried for securities fraud in the packaging and distribution of opaque, toxic mortgage backed securities?  How many individual have gone to jail for the robo-signing scandal?

Why should we be surprised that these protests are springing up, and why should we expect them to dissipate until these failures are addressed? 

The global protest movement that started on Wall Street chose its nexus well. The current crisis of public and private debt ... springs directly from the 2008 financial crisis and the decades of deregulation and neoliberal orthodoxy that led us here. 

Massive injections of public money three years ago saved the system without fixing it. 

A financial crisis was transformed, through bailouts, into a crisis of sovereign debt. That sovereign debt crisis is now leaking back into the financial system. Financial collapse threatens further bailouts.  Public and private debt crises are intertwined. 

Austerity measures are unable to break the deadlock, and in fact can only accelerate a downward economic spiral. 

New ways of thinking about the economy are urgently needed, that challenge the primacy of financial markets and debt-fuelled growth. 

The system is broken, here's how we fix it.... 

Financial plutocracy must give way to financial democracy – banking as if people mattered.

Disclosure is the fundamental building block on which financial democracy rests.  It is only when all market participants have access to all the useful, relevant information in an appropriate, timely manner that markets function for everyone.