Monday, March 25, 2013

Will Determined GOP Nihilists In The House Overcome Anemic Democratic Defenses In The Senate And White House To Impose Their Failed Austerity Agenda On America? Is Cyprus Coming Here?


Wall Street lobbyists fanned out over Capitol Hill in the last few weeks with a plan to roll back regulations Congress passed on derivative trading, trading that helped send the economy into a tailspin, caused the collapse of AIG (and subsequent bailout), and nearly pushed us into a Depression when regulations were nonexistent in the recent past. “Derivatives," said Warren Buffett, "are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” These shady lobbyists haven't just reached their natural allies in the Republican Party-- always eager to remove regulations protecting society and the public from financial predators. They have also identified allies inside the Democratic Party who could help carry their agenda. We warned you about Jim Himes (D-CT), former Goldman Sachs banker, early in the month. Gaius Publius listed the 6 Democrats on the Agriculture Committee who went Galt last week, voting to roll back the protections afforded by Dodd-Frank:
Pete Gallego (Blue Dog-TX)
Ann Kuster (NH)
Sean Patrick Maloney (New Dem-NY)
Mike McIntyre (Blue Dog/New Dem-NC)
David Scott (Blue Dog/New Dem-GA)
Juan Vargas (New Dem-CA)
Awkward company for a befuddled Ann Kuster, who seems to have lost her way... or who may be transitioning to an ugly place. Of course, the Agriculture Committee isn't the only place Wall Street lobbyists are working to undermine the regulations. Michigan closet case Dave Camp runs the House Ways and Means Committee and he's determined to let the banksters and hedge fund managers who have financed his sleazy career run wild again. The lobbyists instructed Camp and his allies to call it modernization and simplification Ohio corporate whore Pat Tiberi, chairman of the Select Revenue Measures Subcommittee explained that “Simplifying the taxation of financial products is long overdue. However, it should only be done in the context of broader legislation that, amongst other things, lowers statutory tax rates. Indeed, these changes would have a different impact on financial products if the draft was enacted as a one-off revenue raiser or tax increase—something that neither Chairman Camp nor I would support.”
The ranking Democrat on the subcommittee, Rep. Richard Neal, D-Mass., noted that he has worked on the issue of the taxation of derivatives for some time, holding two hearings on the tax treatment of derivatives and exchange-traded notes, or ETNs, when he chaired the subcommittee several years ago. Neal has also introduced legislation to address the tax treatment of ETNs. In 1998, following the collapse of the hedge fund Long Term Capital Management, which needed a bailout in the billions of dollars, Neal had co-sponsored legislation to shut down the tax avoidance transactions set up through derivatives.

“With that experience, I can tell you that this topic is not for the faint of heart,” said Neal. “Just explaining the different types of derivatives can fill volumes, plus the market is constantly evolving and growing. But this is a very important area of our tax law and one in need of reform. So I applaud Chairman Camp for taking up the challenge and releasing a discussion draft that has a lot of merit. Chairman Camp's legislation updates the antiquated tax treatment of financial derivatives and replaces it with a single set of rules.”
Over the weekend, the Washington Post sounded the alarm bell on a Congress hellbent on selling out Wall Street again. They warned about the 7 bills approved--with bipartisan support-- in the House Agriculture Committee headed for floor votes-- and they explain what the bills have been written to accomplish: "They weaken Title VII of Dodd-Frank, which is the part that regulates derivatives. Since Dodd-Frank, there’s been an extensive amount of debate about the new rules for derivatives, which range from collateral to price transparency. But there has also been a counter-debate about who has to follow the new rules. Those who fall under 'end-user exemptions' are largely able to forgo following the Dodd-Frank rules, and the easiest way to understand the bills passed out of the Agriculture Committee is to note that they seek to expand the scope of those exemptions."
One bill would weaken cross-border regulations, allowing U.S. firms that run their derivatives in other countries to avoid following the new derivative rules. In the age of electronic trading and overlapping jurisdictions, this limits the ability of regulators to make sure that prudential standards are set in this country. Another would exempt inter-affiliate swaps, or derivatives between various corporate entities, from having to follow the new Dodd-Frank derivative rules (even though the CFTC has already exempted many of these types of swaps, using careful methods that the bank regulators have employed successfully for years).

Another bill exempts public utilities, and those interacting with public utilities, from having to abide by the new derivative rules. Yet another removes much of Section 716, which requires federally supported banks to run their derivatives portfolios in separate corporations without guarantees, as many already do.

...[Y]ou might support the bills is if these were small, inconsequential parts of the financial industry. They’re not. As Marcus Stanley of Americans for Financial Reform told me: “The major Wall Street banks have literally thousands of subsidiaries in dozens of countries, so proper inter-affiliate regulation is crucial. If cross-border derivatives rules are weakened, you will have regulatory races to the bottom. If both these bills pass, it’s worse than the individual parts, as financial firms are expert at moving money and will use both to effectively evade regulations.”

...As Wallace Turbeville of Demos, who also testified on the bills, noted, “These bills undercut and second-guess careful work performed by regulators in making rules for the derivatives markets. Congress should not be advancing broad and sweeping statutory exemptions that overturn the judgment of expert regulators and effectively deregulate portions of the derivatives market only a few years after the decision to regulate them for the first time and before the carefully constructed regulatory regime can be evaluated.”

The fourth and final reason to support these bills is if it were clear that the financial sector had learned its lesson from derivatives in the crisis and was showing movement in the direction of being able to regulate itself. Sadly, the opposite is true. As the recent report by Sen. Carl Levin’s subcommittee on investigations found, JPMorgan’s “Whale Trade” derivative losses were not only huge but happened very quickly and were hidden from regulators for a significant amount of time.

Normally you shouldn’t care if a business loses money, which is just part of a market economy, but one of the core tactics for ending Too Big To Fail is using a new resolution authority to kill off large financial firms in danger of collapsing. Early detection of losses is essential for the process, which involves numerous techniques to ease a firm back to solvency or into failure. Firms that are able to hide that information from regulators by using complex derivatives are a big problem for ending Too Big To Fail.

A year ago, then-Treasury Secretary Tim Geithner put out a statement saying that a number of House bills amending derivatives reform while the rules were still being considered were “at best premature” and would likely ”undermine the integrity of the rulemaking process, further complicate the work of the regulators, and increase uncertainty for forms.” It is unclear whether his successor, Jacob Lew, will put energy into opposing these specific bills by name as they go forward with some Democratic support.

It is clear, however, that these rules are a bad idea, especially when financial reform is still being implemented. Lawmakers should realize that they would be dismantling important parts of the bill, rather than tinkering along the edges, if these proceed.
Also over the weekend, PBS' Larry Kotlikoff asked one of those uncomfortable kinds of questions that has caused Paul Ryan and his cronies in the GOP to attempt, once again, to defund PBS: Cyprus: The Nightmare Scenario and How to Avoid It in America.
The Cypriot banks did what all banks do. They gambled. They borrowed money by taking in deposits, borrowed money by selling bonds. They swore to pay back all the money, plus interest, on the deposits and bonds. Then they took the money and loaned it out, at a somewhat higher rate of interest, to businesses and individuals who figured to pay it back. These loans were the banks' assets. The difference between the interest they charged their borrowers and the interest they paid to depositors and bondholders was used to run the banks, pay CEO bonuses, and cover bad loans. Whatever remained was profit.

The problem in Cyprus is simple: the banks' assets included, in large part, government bonds from nearby Greece.

The Greek tragedy that befell Greece and its bonds has thus become a Cypriot bank tragedy. Having borrowed roughly eight times Cyprus' GDP from depositors and bondholders, much of them allegedly insalubrious Russian companies and nationals, the Cypriot banks are now bust, bankrupt, belly up, and in no position to make good on their pledge to their lenders-- especially the depositors, to whom they promised, as banks do, to pay the money on demand. Indeed, Cypriot bank demand deposits are frozen at least through next Tuesday as the Cypriot government decides what to do.

...Whatever happens, no one is going to trust or use Cypriot banks for quite some time. This will shut down the country's financial highway and flip Cyprus' economy to a truly awful equilibrium-- a replay of our own country's Great Depression, perhaps, which was fueled, if not kicked off, by the failure of one in three U.S. banks. That, of course, was also the fear worldwide in 2008.

Cyprus is a small country. Still, the failure of its banks could trigger massive bank runs in Greece. After all, if the European Central Bank is abandoning Cypriot depositors, might they not abandon Greek depositors next? A run on Greek banks could then spread to Portugal, Ireland, Spain, and Italy and from there to Belgium and France and, you get the picture, to other countries around the globe, including, drum roll, the U.S. 2008 all over again. Every bank in each of these countries has made promises they can't keep if all depositors demand their money back immediately.

...[T]he Federal Reserve, European Central Bank, Bank of England and other central banks can print so-called "hard" money and give it to the banks to pay off depositors. But the specter of such massive money creation would spark fears of massive inflation, since, in the U.S. case alone, providing enough to pay off all depositors would entail printing as much as $12 trillion overnight were bank runs to happen here. The fear of inflation or "hyperinflation" might, in turn, prompt everyone to get and spend their money as fast as possible before prices rise. This transformation of money into a hot potato would, by itself, produce the inflation that everyone would fear.

Given the above, the question we need to ask about Cyprus is not really about Cyprus. The question we need to ask is why we continue to tolerate a banking system that is built to collapse at the first sign of true alarm?

Perhaps we tolerate ongoing financial and economic fragility because we don't see a safer way to run our banking system. But there is, I believe, a much safer way. It's called "Limited Purpose Banking," which I proposed in my book Jimmy Stewart Is Dead. The plan, which I explained on this page in video a while ago is detailed here. Thoroughly non-partisan, it has since been endorsed by a Who's Who of leading economists and policymakers of all stripes, including six Nobel Laureate economists, former Treasury Secretary George Shultz, former U.S. Senator Bill Bradley, and former Labor Secretary Robert Reich.

Limited Purpose Banking (LPB) eliminates the two key factors that make traditional banking so fragile. The first is leverage (how much the banks borrow in order to lend). The second is opacity (the banks don't tell us what they are doing with our money).

LPB eliminates leverage by forcing all financial corporations to operate as mutual fund holding companies that do one thing only-- give depositors 100 percent mutual funds. Such mutual funds take in money, not by borrowing, but by selling shares. They then invest this money in the securities in which they specialize. These mutual funds are, thus, small banks with zero leverage (debt). A bank that has no debt can never fail.

To eliminate opacity and ensure that people know what they are buying when they buy the shares of any given mutual fund, a new federal agency-- the Federal Financial Authority (FFA)-- would verify and disclose all securities held by the mutual funds. The FFA would do for the financial services industry what the FDA does for the drug industry-- ensure its products aren't arsenic parading as a cure-all.

Mutual fund banking is not new. Most of us have our 401(k)s or IRAs invested in mutual funds. Indeed, there are more mutual funds in the U.S. than there are banks. The ones that were equity financed-- that is, they got all their money without borrowing any-- sailed unscathed through the great crash of 2008. The ones that were leveraged, like money market funds, did not. Yes, all mutual fund investors lost money if their shares went down in value. But the funds themselves-- their part of the financial highway system-- never failed.

Those who don't learn from history repeat its mistakes. The lesson from Cyprus is the same one we should draw from the long history of banking crises and the terrible economic fallout they engender. The lesson is simple. Traditional banking is unsafe at any speed. I've been saying it for years: It's time to switch to Limited Purpose Banking.
But that isn't what Wall Street lobbyists have paid out billions of dollars in thinly disguised bribes to our political elites to accomplish. Not be a long shot. Besides, explains John Cassidy, in the New Yorker the E.U. is right to get tough with the Cypriot banks now. Because the new right-wing, pro-Austerity Cypriot government didn't want to force the wealthy who hoard their cash in Cyprus' tax haven-- many of "the wealthy" being the Russian Mafia-- they decided to spread the pain to small depositers. When it became clear that that solution would end the careers-- at the very minimum-- of the politicians, they backed away from that plan as fast as they could and tried blaming it on the Germans and the IMF.
By allowing its banking system to spiral out of control, the tiny island has gotten itself into a situation where its only options are bad ones. If it wants to remain part of the euro zone-- and evidently it does-- it will have to downsize its bloated banks and bear some of the cost of the bailout, which, relative to the size of Cyprus’s economy, is one of the biggest in recent times. (At about sixteen billion euros, it’s close to sixty per cent of G.D.P.) That’s going to be tough on Cypriots, particularly wealthy ones who will see some of their bank deposits wiped out, but it’s hard to see any realistic alternative.

When talking about the rights and responsibilities of the Cypriots, it’s important to distinguish between the ordinary people, who are understandably bewildered by the fate that has befallen their country, and the government, which has been playing a double game. Ever since Cyprus joined the euro zone, in 2008, it has been free riding on the system, enjoying the stability afforded by a strong currency as well as the pecuniary benefits of acting as an offshore tax haven for rich foreigners who want to keep their money beyond the reach of their own governments. According to analysts at Barclays, accounts holding more than half a million euros represent nearly half of the entire deposit base of Cypriot banks.

And it’s not just a matter of wealthy Russians and other Eastern European oligarchs parking some of their wealth there. It’s more systematic than that. Many Russian companies routinely route some of their cash flows through Nicosia to shelter them from domestic taxes-- a practice, known as “round-tripping,” that garnered the Cypriot banks lucrative fees and enormous deposits. With hot money of many kinds flooding into the island, Cyprus’s banks got so big that, eventually, their assets were worth about three times its G.D.P.

The engorgement of the Cypriot banking system had several negative consequences. To begin with, it left the island’s banks with a lot of cash deposits that they had to lend out or otherwise employ. Unfortunately, they chose to invest quite a lot of this money in Greek government bonds. In 2011, when the E.U. bailed out Greece and restructured its debt, the value of these bonds plummeted, leaving the Cypriot banks in a mess. Ever since then, it’s been clear that Cyprus would eventually require a bailout; the only questions were how large it would be, and who would bear the cost. To be sure, the E.U. is big enough to have picked up the entire bill and moved on, but that wasn’t a realistic prospect. In addition to setting a bad precedent, it wouldn’t have received the approval of voters in places like Germany and Holland.
So now we're back to square one, with the uncomfortable right-wing Austerians in Nicosia saying they'll get their share of the bailout from the bank deposits of "the wealthy" (the Russian Mafia). That's billions of dollars. I wonder how the Russian Mafia will react. And how Turkey will.
With Cyprus facing a Monday deadline to avoid a banking collapse, the government and its international negotiators devised a plan late Saturday to seize a portion of savers’ deposits above 100,000 euros at all banks in the country, in a bid to raise money for an urgently needed bailout.

A one-time levy of 20 percent would be placed on uninsured deposits at one of the nation’s biggest banks, the Bank of Cyprus, to help raise 5.8 billion euros demanded by the lenders to secure a 10 billion euro, or $12.9 billion, lifeline. A separate tax of 4 percent would be assessed on uninsured deposits at all other banks, including the 26 foreign banks that operate in Cyprus.
Here's how ruling elites panic "their people" into accepting Austerity agendas that serve no one but the very rich

UPDATE: Cyprus And EU Work Something Out

No one seems to have all the details yet but what I'm piecing together is that right-wing President Nicos Anastasiades had a tantrum and threatened to resign on behalf of protecting Russian Mafia interests which just funded his successful election campaign. The agreement includes shutting down the Popular Bank of Cyprus (Laiki), the country's second-biggest bank (and that means thousands of job losses), and a "tax" on bank deposits over $130,000. Cyprus gets $13 billion is aid from the EU Central Bank and the IMF as long as they raise $7.5 billion locally. That will come from 20-40% taxes of accounts above $130,000, depending on what sources you want to believe. There is no chance Cyprus will avoid a full scale depression or that their hot banking sector-- all the money that could has already fled to Latvia-- will be viable again in the coming decade or so.

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