Libertarian Leanings

Democrats and Financial Reform

It's all about taking care of your friends. According to the New York Post Chris Dodd's financial reform bill is filled with special-interest loopholes and exclusions.

But the section of the bill most littered with exemptions is probably the proposed consumer-protection bureau. In some instances, these exclusions actually roll back existing consumer protections.

Remember the mortgage crisis? Well, the primary consumer-protection law for homebuyers is the 1974 Real Estate Settlement Procedures Act. The law requires the timely, accurate disclosure of relevant closing costs and prohibits "kickbacks" for the steering of settlement services.

For example, your real-estate agent cannot, under RESPA, be paid a fee for steering you toward a certain home inspector, title company or other closing service. Yet, under the Dodd bill, real-estate agents would be exempted from RESPA. If that weren't bad enough, the Dodd bill exempts insurers and attorneys -- both now subject to RESPA -- from its consumer protections, too.

Although Dodd's bill is advertised to impose greater federal supervision over "too big to fail" institutions, It should come as no surprise that insurance companies are exempt.  Hartford, Connecticut used to be known as the Insurance Capitol of the World, hence the favored treatment.  According to the Post, the new and improved oversight will apply only to bank-holding companies, while insurance companies, which tend to have thrift charters rather than bank charters will be exempt. 

So, as the bill stands now, AIG and other insurers that accepted massive bailout funds, such as The Hartford, would not be automatically covered. That's a head-scratcher only if you forget that most insurance companies reside in Dodd's home state, Connecticut.

Business as usual – under a Democratic regime.

The Post Partisan Happy Warrior

EJ Dionne once again impresses with what he must think is his razor sharp analysis.  Sharp as a marble!  At any rate Dionne is hopeful that someone or something will rescue the Democrats between now and November, and he thinks it might be Obama peddling financial reform.  At a fund raiser for Barbara Boxer, Obama spoke words that boosted Dionne's shaky confidence – maybe that electoral tsunami isn't right around the corner after all.

In one paragraph, Obama did what many of the dispirited in his party have long been urging him to do: He linked the economic mess to past Republican policies -- much as Ronald Reagan blamed the economic downturn of the early 1980s on Democrats and liberals -- and turned the tables on bipartisanship by asserting that it is Republicans who are blocking concord.

Dionne's faith rests on three things.  First, Wall Street is solely to blame for the financial mess we're in.  Second, Wall Street hangs like an albatross around Republican necks.  And finally, American voters recognizes these facts which, are as plain to Dionne as the ears on Barack Obama's head.  If he's wrong about any it, chances are November won't be so blissful for him and his progressive cohorts.

The bad news for Dionne is that he's wrong on all counts.  Yes, Wall Street can share some blame, but the financial crisis was precipitated by foreclosures in the housing market.  Foreclosures in the housing market came about when the housing market bubble reached its bursting point.  The housing market bubble was the result of government directed lending standards that allowed just about anybody to buy a house with little or no money down.  Do the names Fanni Mae and Freddie Mac ring a bell?  Not with Dionne, they don't.

He's in denial about those "toxic assets" that were "clogging" the credit markets back in fall of 2008.  Credit markets were on the verge of meltdown because of those securitized mortgages that Fannie Mae and Freddi Mac were in the business of packaging and selling.  The mortgage backed assets became toxic because the underlying mortgages were going into foreclosure at a phenomenal pace.  Housing prices don't have to fall very far to put your house under water when you borrow 97% of the price or better to buy it. 

Yet, Obama and Dionne figure to blame the bad economy on Wall Street, and blame the state of Wall Street on Republicans. A minor fly in the ointment is the nearly $1 million in campaign contributions Obama raked in from Goldman Sachs employees.  Much to Dionne's delight the undaunted Obama fell back on his usual rhetoric.  He inherited this mess.  It's somebody else's fault.

"In this entire year and a half of cleaning up the mess, it's been tough because the folks very responsible for a large portion of this mess decided to stand on the sidelines," Obama declared. "It was as if somebody had driven their car into the ditch and then just watched you as you had to yank it out, and asked you, 'Why didn't you do it faster -- and why do I have that scratch on the fender?' And you want to say, why don't you put your shoulder up against that car and help to push? That's what we need, is some help."

Blaming political opponents is a winning argument for sure when he's preaching to his choir as he when he was stumping for Boxer.  Unfortunately for Obama and Dionne, the rest of the country is getting pretty tired of it, since the rest of the country has become a growing political opposition that has been on the receiving end of Obama's blame. 

But Obama is dense enough to think we should all be saying thank you, and Dionne is dense enough to agree.

Timing is Everything

In a letter addressed to SEC Chairwoman Mary Schapiro and signed by eight other House Republicans, Representative Darrell Issa demanded the Securities and Exchange Commission turn over records relating to the civil charges the commission brought against Goldman Sachs.  In his letter Issa accused the commission of violating federal law "by using the resources of an independent regulatory agency to promote a partisan political agenda."

From the text of Congressman Issa's letter:

...the events of the past five days have fueled legitimate suspicion on the part of the American people that the Commission has attempted to assist the White House, the Democratic Party, and Congressional Democrats by timing the suit to coincide with the Senate’s consideration of financial regulatory legislation, or by providing Democrats with advance notice. In fact, the aggressive campaign by Democrats in support of the legislation neatly coincided with the Commission’s announcement of the suit. For example:

--The Commission approved the Goldman suit in a vote that spit along party lines – a rare occurrence for approvals of enforcement litigation.

--Before the Commission had released its announcement, the New York Times published on its website a story describing the suit.

--Less than half an hour after the Times story’s publication, Organizing for America, the successor organization to Obama for America and now a project of the Democratic National Committee (“DNC”), sent millions of supporters an e-mail message from President Obama urging support for “Wall Street Reform.”

--Within hours, the Democratic National Committee had purchased AdWords advertising from Google, Inc. The DNC’s Google campaign fundraising advertisement, headed “Fight Wall Street Greed,” appeared whenever a user ran a Google search for the phrase “Goldman Sachs SEC.” It read, “Help Pres. Obama Reform Wall Street and Create Jobs. Families First!” and included a link to www.BarackObama.com, the website of Organizing for America.

--Democrats in Congress and the Administration have heralded the Commission’s suit against Goldman as a welcome boost to their case for the legislation.

--Members of the media have already begun to question the timing of the Commission’s suit and the actions of the Democratic National Committee.

Sure enough, a Google search on "Goldman Sachs SEC" returns BarackObama.com as its first hit .

Help Change Wall Street

www.BarackObama.com      It's Time for Financial Reform that Protects Main Street. Act Now!

Although Obama and the Democrats were all set and ready to pounce when the suit was announced, it's been reported that Goldman was blindsided.

Firms typically get a chance to settle such suits, but not in this case, Goldman said. The Wall Street giant said it was alerted to the probe in the summer of 2008 and was warned that it might face a suit in July 2009. It says it then responded in detail to the Securities Exchange Commission's inquiry in September, but heard nothing back from the government until Friday's unveiling of the civil suit. The SEC usually notifies firms ahead of a lawsuit as a courtesy to give them a chance for a last-ditch settlement or to prepare for the public fallout.

The move showed a combative streak from the SEC, which has been under mounting pressure after letting slip through its fingers early probes into the Ponzi scheme of Bernard Madoff and the alleged fraud of Texas financier R. Allen Stanford.

The case, SEC v. Goldman Sachs & Co. and Fabrice Tourre, sets the stage for what could become the signature lawsuit from the financial-crisis era. It comes at a time when the Obama administration is trying to move through Congress a bill to overhaul financial regulations in the wake of the crisis—legislation that would likely affect the regulation of products used in the Goldman deal.

Lawsuits by the SEC are subject to a vote by the agency's five commissioners, and the tally on the Goldman case will be closely watched in Washington, as the current commission is split along party lines—with two Republicans and two Democrats, plus one independent who was appointed by President Obama.

The way the SEC launched the suit "certainly doesn't follow the spirit" or practice of the agency, said Paul Atkins, who served as a Republican SEC commissioner last decade.

Naturally, the SEC says standard practices were followed in pursuit of the case, and the White House claims it got no advance notice. But they've been remarkably quick to use the charges against Goldman in their push for financial reform.

Update:  CNBC reports that the government has in its possession testimony directly rebutting the Securities and Exchange Commission's claim that ACA Management was unaware of Paulson & Company's intention to short a portfolio of mortgages assembled as Abacus 2007-AC1.  The SEC has charged that Goldman Sachs' failure to disclose Paulson's position was a "material" factor that might have caused ACA to back out of its own investment in the CDO.

Paolo Pellegrini told the government that he informed ACA Management that Paulson intended to bet against, or short, a portfolio of mortgages ACA was assembling.

If true, the testimony would go directly against government claims that ACA did not know Paulson was hoping the collateralized debt obligations would fail, and subvert charges that Goldman breached its duty by not informing ACA of Paulson's position.

CNBC has examined documents in which a government official asked Pellegrini whether he informed ACA CDO manager Laura Schwartz about Paulson's position in the portfolio, named Abacus 2007-AC1.

"Did you tell her that you were interested in taking a short position in Abacus?" a government official asked Pellegrini, referring to the name of the CDO portfolio.

"Yes, that was the purpose of the meeting," Pellegrini responded.

[...]

CNBC further learned that Pellegrini and Schwartz met at least three times to discuss the CDO and Paulson's short position on Abacus.

The Case Against Goldman

Regarding the SEC's case against Goldman Sachs, Wall Street Journal editors are, shall we say, skeptical.  I'd say you could add me to the list of skeptics, except that I was already on it.  It's not that I have any great financial or legal expertise, but rather that every action that the Obama administration takes has a political purpose. which is to benefit the Democratic Party.

By the way, Goldman was also one of the losers here. Although the firm received a $15 million fee for putting the deal together, Goldman says it ended up losing $90 million on the transaction itself, because it ultimately decided to bet alongside ACA and IKB. In other words, the SEC is suing Goldman for deceiving long-side investors in a transaction in which Goldman also took the long side. So Goldman conspired to defraud . . . itself?

[...]

Which leads us to the real impact of this case, which is political. The SEC charges conveniently arrive on the brink of the Senate debate over financial reform, and its supporters are already using the case to grease the bill's passage. "I'm pleased that the Obama Administration is using all of the tools in its arsenal to bring accountability to Wall Street and standing up for homeowners and small businesses across America," said Senate Majority Leader Harry Reid on Friday about the SEC case. "This is also why we need to pass strong Wall Street reform this year." Of course, this case matters to homeowners not at all.

So the Obama administration wants to give itself bailout power.  That doesn't mean they'll use it, necessarily.  It will likely depend upon how big the campaign contributions are, or whether the bailed are willing to promote some favored legislation.