Greetings, Updates, and Don’t Hit the Screen When You Read About “Moral Hazard”

It is an honor to join the Alternative Banking blog as a new contributor. Given the mess of the world made by establishment economists with their model voodoo, I come to this subject as a proud generalist, a voracious auto-didact, and a believer in citizens’ empiricism as well as people power – but also with respect and humility before the many contemporary commenters who possess a more fundamental and experienced command of the stuff. The “recovering trade attorney” Lori Wallach (see the PBS broadcast of her 2008 lecture on the world trade system, see also full transcript here), Yves Smith, Michael Hudson, Ellen Brown, Nomi Prins, Dean Baker, Naomi Klein, Michael Lewis and so many others come to mind. Such as the man who should be our patron saint, or rather, heading up the Department of Justice, William “The Best Way to Rob a Bank Is to Own One” Black. This is a personal list. You know my praise is honest, because unlike the Big and Failed, it’s unlikely any of these authors can afford to hire me.

In this humble vein, allow me to begin my new appointment with a grab-bag of updates and links to items of interest:

- Katya Grishakova and Elizabeth Friedman, both of the Alternative Banking committee, wrote an article on “How Wall Street Sets the Rules for Regulators” in American Banker. Katya, who spent a decade with Wall Street before her escape, also cooked up this one-minute advertisement calling for “Honest Competition.”

- A few days ago, we linked to an article from Le Monde with a photo of Carne Ross, former UK diplomat now with Occupy Bank, speaking at the “Occupy the Citi” action in Long Island City on June 27th. Here is a video and transcript of Carne’s presentation, “The Occupy Bank Is Coming,” thanks to Occupy Astoria LIC.

- We have really interesting meetings every Sunday at Columbia University, with a good mix of philosophy and action. No, I’m serious. Check out our thrilling minutes from last Sunday, and the Sunday before that, and the Sunday before that. (Of course, these don’t mention and I am bound by oath not to tell you about the Eleusian Mysteries and bacchanalia that follow.) This site has a Forum – you’re invited to join and post there, since we’re not currently allowing comments on the blog until we can find a way to control the spam floods. And here’s the official Alternative Banking Reading List and a rundown of press on the different Occupy banking groups.

- Good news, everyone! The high-end art market is being securitized! The likes of Christie’s will collaborate with auteurs of the liminal space like Goldman Sachs to slice-and-dice ownership in artworks (not the works themselves) and lovingly collage the pieces into bonds. This will open “the exclusive club of art speculation to the investing public.” Now never mind the art-backed securities, which are likely to have AAA ratings and enticing yields, until the day they melt down. Those are for pension fund patsies and the philistines running Norwegian municipalities. Here’s what I want to know: Where can I get me some derivatives that allow me to bet on the eventual collapse of the Damien Hirst-backed securities bubble? Dripping with 30 times the leverage and some side salad, please.

- Oh my god, we’re all falling in love with Neil Barofsky for the memoir of his days as the Special Inspector General for TARP bailout programs, BAILOUT: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street. In his book, Barofsky reports on how he arrived on the DC scene at the tail-end of the world’s biggest heist, and saw how the government drove the getaway car for the banksters. He details the machinations behind the Treasury Department’s series of corporate bailout schemes with the obscure acronyms, like CPP, TALF/PPIP and HAMP. It’s a miracle that I didn’t literally punch the book until page 197, when he describes a 2010 meeting with Herb Allison, one of the Treasury officials overseeing TARP. Barofsky asks Allison why the HAMP program wasn’t living up to its original promise of effecting real mortgage modifications for underwater borrowers and helping them to avoid foreclosure:

When I pressed Allison about why Treasury wasn’t doing more to push for principal reduction, he cited “moral hazard” and argued that doing so would be unfair to “responsible borrowers” who stayed current on their payments.

Though there was some element of truth to the contention that any mortgage modification – principal reduction or otherwise, voluntary or mandatory – had an element of unfairness to home owners who did not also receive a modification, we viewed Treasury’s position as reflecting a remarkably myopic and politicized view of the current crisis. The housing crisis wasn’t just about individual home owners; it was also hindering economic recovery.

[...]

I also found it beyond ironic that Treasury was now emphasizing moral hazard with respect to home owners. Though some homeowners might try to take advantage of the program by intentionally not making mortgage payments in order to qualify – that risk paled in comparison to that created by Treasury by the way it had rescued the too-big-to-fail banks. Rather than requiring those executives to suffer the consequences of their failures, Treasury had handsomely rewarded those who had failed to do their jobs, saving their banks and making sure that almost all of them kept their jobs and the enormous bonsues that they had taken home before the crisis struck. As the AIG bailout demonstrated, the government had even sent a clear message that there was no such thing as a bet too outrageous for the government to guarantee as long as the insitution making it was deemed too big to fail. The same government that had already jumped into the deep end of the moral hazard pool when it came to bank executives was now using the same concept as an excuse not to fulfill its original promise to use TARP to help struggling home owners.

Remember, this is a former assistant prosecutor from the Southern District of New York, writing: “I now realize that American people should lose faith in their government.” We’ll return to Barofsky’s book in a future piece on the coming “Rental Society.”