Occupy Offshoots Return

Dodd Frank Defanged, or Why Occupy the SEC is so badly needed

You don’t need to be in NYC. There are lots of protests around the country.

We will be at the Bank of America Tower at 6th Avenue and 42nd St starting at noon. If you are willing to log into Facebook (please be cautious) more info here.

Info about past protests on our blog, the LA Times and elsewhere.:

The “Fantastic performance artist” will appear as the Ethical Fiscal Fairy. Not to be missed.

It poured rain but a “small but fierce” crowd showed up including the Ethical Fiscal Fairy, of course!

Here are a couple of photos

This article holds a debate between Glenn Hubbard, adviser to Bush and Romney, and Larry Summers, Treasury Sec. under Clinton and adviser to Obama.

It is surprising, and appalling, that Hubbard gets any respect at all. He is the “architect” of Bush’s failed policies. Haven’t we had enough of that? Unfortunately cutting taxes on the rich is a policy that will never die. Quelle surprise, as Yves Smith would say.

Summers isn’t quite as discredited. Not everything went wrong in the Clinton years. But Summers was a prime mover in squelching regulation of derivatives and getting rid of Glass-Steagall. He was also instrumental in the earlier rounds of bank bailouts — remember the “Committee to Save the World”.

Even the principals in the merger that killed Glass-Steagall, John Reed and Sandy Weill agree that was a mistake.

The problem is that we keep going back to the old, failed ideas. There is a mystique that only the bankers and business people know how to run the economy. Well they know how to run it to their own benefit but it is not working for the 99%. Their arguments have all the substance of the Emperor’s New Clothes.

Hey Adam Davidson, if you like sports analogies, shouldn’t we look for a coach with a new playbook. There are lots of people out there with new, better, ideas. How about James Galbraith or Dean Baker?

Financial Times: Banks got bailed out, we got sold out

Marni got the most notice, well done.

Dealbreaker: Spandex-clad roller-girl

Huffington Post: Fantastic Performance Artist.

They were also interviewed by the Associated Press and Korean and Dutch news agencies. Will post as they are published.

Event Listings:

• NYCGA.net
• Facebook

Some things take intolerably long to change. The following was written almost a year ago for “Occupy the Citi,” which was a “Day of Public Outrage and Education” held by Occupy Astoria LIC at the “other” Citigroup Tower, the one in Queens. The text needs only minor changes – we turn “four years” into five, switch the name of the suit at the top from Pandit to Corbat – and presto! It’s as timely as ever; a sad truth. This is why Occupy Wall Street is still protesting Citigroup next Wednesday morning. This time we’ll be at the annual shareholders’ meeting. (Note: Following views and opinions belong to Nicholas Levis. Blame him.)

Why Occupy the Citi? What Are Our Grievances?

Five years ago, Citigroup and other major Wall Street banks became insolvent as a result of their own predatory and reckless actions in the mortgage-backed security and derivatives markets. This caused the most dramatic financial crash since 1929.

The institutions responsible for the resulting global depression and worldwide misery constitute a public danger. They should have been liquidated. The executives should have been fired and subjected to criminal investigation. A banking system that causes such a disaster should have been reinvented.

Instead, a government corrupted by Wall Street money decided that the insolvent “zombie banks” were “Too Big To Fail” (TBTF). While smaller and often more solvent banks were allowed to go bankrupt, the TBTFs were rescued with trillions of dollars from taxpayers and the Federal Reserve.

Citigroup alone received $45 billion in direct cash bailouts from the Treasury – the taxpayers – and was privileged with an incredible total of $2.5 trillion in near-zero interest loans (GAO-11-696, p. 131) as well as additional guarantees from the Federal Reserve. Together, the TBTF banks received more than $13 trillion in bailouts from the Treasury and Federal Reserve, and ongoing potential taxpayer exposure on all government guarantees for banks to date exceeds $3.5 trillion. [Note: In the year since this was first written, much has been made of how banks have "paid off" TARP or other bailouts, without noting the continuing exposure in case of future failure, or asking: Why were criminal institutions entitled to a bailout in the first place?]

Since the crisis, while the Federal Reserve discount window has offered the TBTFs loans at almost zero percent interest, the big banks have also been able to buy Treasury bills paying 3 percentage points higher. In other words, the US government is providing free money and free profit to the TBTFs, helping to keep them afloat. Furthermore, in 2009 the government suspended “mark to market” accounting rules for banks, which means that banks can value their assets at ideal value, rather than at the prices actually available on the market. In short, banks are allowed to cook their books so that they can look solvent.

Because they were bailed out, the TBTFs were able to continue foreclosing on individual debtors, for whom no effective rescue has been offered.

Because We the People were forced to rescue banks like Citigroup, Goldman Sachs and Bank of America, today they continue to pay exorbitant bonuses to the executives who helped to crash the world.

Thanks to taxpayer money, Citigroup and its siblings can continue to pay for an army of lobbyists in Washington and influence legislators with campaign donations. Citigroup was #3 among the 10 biggest corporate campaign contributors in U.S. politics over a 20-year period, just behind Goldman Sachs. Its spending peaked during the crash year of 2008, in the run-up to receiving its bailouts. Citi’s biggest recipients in the 2010 election cycle included our New York senators, Charles Schumer and Kirsten Gillibrand, and Queens Congressman Joseph Crowley. This doesn’t count Citi’s spending on lobbyists in Washington, which totaled $62 million from 2001 to 2010.

Thanks to the TBTF doctrine, Citigroup can still buy favorable PR by purchasing endless ad time to tell us of its supposed charitable works, and, incidentally, by sponsoring our beloved New York Mets.

How does Citigroup show its gratitude for the federal rescue? In 2010, Citigroup declared $4 billion in profits and paid no federal income tax. In fact, it received a $1.9 billion tax refund. (Similar numbers apply in the cases of Bank of America and Goldman Sachs.)

During the final phase of the housing bubble, Citigroup was one of several institutions known to have conned investors into buying securities that were designed to fail, even as they bet against the same securities they were selling. When the government found evidence of one such multi-billion-dollar fraud, however, no one was prosecuted. Instead, the US Securities and Exchange Commission (SEC) asked Citi to pay a penalty worth only a fraction of the amount defrauded from the investors: a mere business expense. The SEC settlement – which for now has been blocked by a courageous judge – did not even require Citigroup to acknowledge wrongdoing.

Today, the Wall Street banks bailed out by the public continue to profit from predatory actions. In a system where money controls politics, Wall Street is above the law… (continued)

The Citi That Always Cheats:
201 Years Are Enough

In the wake of its 200-year anniversary in 2012, the time remains ripe for Citigroup to be put to sleep. Citigroup is a model for the Wall Street greed, fraud and failure that have devastated the lives of millions of people.

In the late 1990s, Citigroup chief Sanford Weill spearheaded the lobbying campaign to repeal the 1933 Glass-Steagal Act, which barred banks from speculating with depositors’ accounts. As a souvenir, Sandy Weill received the White House pen with which the repeal was signed into law.

As a result, depositor banks like Citi were able to participate in the enormous housing market and other speculations of the 2000s. Citigroup was and remains the largest single holder of the subprime mortgages used in creating and selling the toxic securities that triggered the 2007-2009 crash.

During this time, Citigroup economists found a new name for the philosophy that has always guided the company’s policies. They called it “plutonomy” – an economy built to meet the demands and whims of the richest 1 percent. A 2005 memo by a Citigroup global strategist reads: “We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization… Since we think the plutonomy is here, is going to get stronger… It is a good time to switch out of stocks that sell to the masses and back to the plutonomy basket.”

Citigroup is no stranger to bailouts. In the 1970s, Citi led the banking industry’s charge into knowingly lending US-backed Latin American dictatorships more than they could repay. When major Latin American countries defaulted in 1982, Citi received a backdoor bailout from the IMF and wealthy countries like the US.

Wherever there is misery and crisis, Citi and its Wall Street siblings see the opportunity to profit. Citi subsidiary Banamex in Mexico is best-known for its massive involvement in laundering money for the illegal drug industry.

Damn You, OWS, What Are Your Demands?!

We’d like to imagine we could make demands of such an organization.

We’d like to appeal to the consciences of Wall Street executives who receive million-dollar bonuses for failure, while they foreclose on underwater mortgages and throw families out on the street.

We’d like to imagine Citigroup would put an immediate moratorium on foreclosures, and help the people it has made homeless.

We’d like to imagine Citigroup would throw open the books on any and all of its wrongdoing in recent decades, just because it would be the right thing to do.

We’d like to imagine Citigroup will pay full restitutions to the investors it defrauded, and deliver a refund to the taxpayers who rescued it, along with a giant-size Thank-You card.

We’d like to imagine that former Citigroup CEO Vikram Pandit will finally make good on his promise to meet with Occupy Wall Street members..

We’d like to imagine that former Citigroup CEO Sandy Weill will apologize for spearheading the deregulations of 1999 that helped cause the crash of 2008, and that he will return the White House pen with which the repeal of Glass-Steagal was signed into law. We want to put it in a future Museum of Corporate Crime.

We love our Mets, so we’d love it if Citi would take its disreputable name and logo away from the new Shea Stadium, since they’re not actually paying for any of it. The taxpayers gave Citigroup $45 billion in the same year that Citi Field opened.

(Incidentally, the Mets and Yankees between them received more than $1.1 billion in public subsidies to build their new stadiums. Therefore the new Mets ballpark is properly called Taxpayer Field, not “Citi Field.”)

We apologize if some of our imagined demands seem to be in a humorous vein, or academic. Given the human suffering, a moratorium on foreclosures and debt relief for individuals would certainly be the most important, life-or-death issues. But we also think the history is essential to remember.

We can always submit our appeals to the Citigroup executives and call these our “demands.” We can stand outside the building and chant, “Stop your bad bets – Free the New York Mets – Citi must markdown – all housing debts!”

But we’ve learned enough from 201 years of Citigroup history to know how its executives will respond to our demands.

We have seen that the banks who caused the 2007-2008 crash – like Citigroup and Goldman Sachs and Bank of America – were rewarded for it. With help from our captured government, today they are bigger, and more powerful, and more dangerous than ever.

As long as it’s profitable, Wall Street won’t stop committing fraud. Like his predecessor Vikram Pandit, Mike Corbat won’t do the right thing just because we ask nicely. Citigroup, the Wall Street megabanks and the other plunder-happy institutions of the financial sector won’t surrender to reason without a peaceful and powerful, political struggle of the people – a struggle that aims to end the concept of “too big to fail,” to break up the megabanks and end the risk they pose and to restore meaningful regulation of the financial sector. Financial markets must be unseated as the driver of all things, and redefined and restructured into a utility to the productive economy and to the actual needs of the people.

As Rortybomb reported yesterday on the Roosevelt Institute blog (hat tip Adam Obeng), a recent paper written by Thomas Herndon, Michael Ash, and Robert Pollin looked into replicating the results of a economics paper originally written by Carmen Reinhart and Kenneth Rogoff entitled Growth in a Time of Debt.

The original Reinhart and Rogoff paper had concluded that public debt loads greater than 90 percent of GDP consistently reduce GDP growth, a “fact” which has been widely used. However, the more recent paper finds problems. Here’s the abstract:

Herndon, Ash and Pollin replicate Reinhart and Rogoff and find that coding errors, selective exclusion of available data, and unconventional weighting of summary statistics lead to serious errors that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies in the post-war period. They find that when properly calculated, the average real GDP growth rate for countries carrying a public-debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0:1 percent as published in Reinhart and Rogoff. That is, contrary to RR, average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.

The authors also show how the relationship between public debt and GDP growth varies significantly by time period and country. Overall, the evidence we review contradicts Reinhart and Rogoff’s claim to have identified an important stylized fact, that public debt loads greater than 90 percent of GDP consistently reduce GDP growth.

A few comments.

1) We should always have the data and code for published results.

The way the authors Herndon, Ash and Pollin managed to replicate the results was that they personally requested the excel spreadsheets from Reinhart and Rogoff. Given how politically useful and important this result has been (see Rortybomb’s explanation of this), it’s kind of a miracle that they released the spreadsheet. Indeed that’s the best part of this story from a scientific viewpoint.

2) The data and code should be open source.

One cool thing is that now you can actually download the data – there’s a link at the bottom of this page. I did this and was happy to have a bunch of csv files and some (open source) R code which presumably recovers the excel spreadsheet mistakes. I also found some .dta files, which seems like Stata proprietary file types, which is annoying, but then I googled and it seems like you can use R to turn .dta files into csv files. It’s still weird that they wrote code in R but saved files in Stata.

3) These mistakes are easy to make and they’re mostly not considered mistakes.

Let’s talk about the “mistakes” the authors found. First, they’re excluding certain time periods for certain countries, specifically right after World War II. Second, they chose certain “non-standard” weightings for the various countries they considered. Finally, they accidentally excluded certain rows from their calculation.

Only that last one is considered a mistake by modelers. The others are modeling choices, and they happen all the time. Indeed it’s impossible not to make such choices. Who’s to say that you have to use standard country weightings? Why? How much data do you actually need to consider? Why?

[Aside: I'm sure there are proprietary trading models running right now in hedge funds that anticipate how other people weight countries in standard ways and betting accordingly. In that sense, using standard weightings might be a stupid thing to do. But in any case validating a weighting scheme is extremely difficult. In the end you're trying to decide how much various countries matter in a certain light, and the answer is often that your country matters the most to you.]

4) We need to actually consider other modeling possibilities.

It’s not a surprise, to economists anyway, that after you include more post-WWII years of data, which we all know to be high debt and high growth years worldwide, you get a substantively different answer. Excluding these data points is just as much a political decision as a modeling decision.

In the end the only reasonable way to proceed is to describe your choices, and your reasoning, and the result, but also consider other “reasonable” choices and report the results there too. And if you don’t like the answer, or don’t want to do the work, at the very least you need to provide your code and data and let other people check how your result changes with different “reasonable” choices.

Once the community of economists (and other data-centric fields) starts doing this, we will all realize that our so-called “objective results” utterly depend on such modeling decisions, and are about as variable as our own opinions.

5) And this is an easy model.

Think about how many modeling decisions and errors are in more complicated models!

Last night I went to an event at Barnard where Ina Drew, ex-CIO head of JP Morgan Chase, who oversaw the London Whale fiasco, was warmly hosted and interviewed by Barnard president Debora Spar.

[Aside: I was going to link to Ina Drew's wikipedia entry in the above paragraph, but it was so sanitized that I couldn't get myself to do it. She must have paid off lots of wiki editors to keep herself this clean. WTF, wikipedia??]

A little background in case you don’t know who this Drew woman is. She was in charge of balance-sheet risk management and somehow managed to not notice losing $6.2 billion dollars in the group she was in charge of, which was meant to hedge risk, at least according to CEO Jamie Dimon. She made $15 million per year for her efforts and recently retired.

In her recent Congressional testimony (see Example 3 in this recent post), she threw the quants with their Ph.D.’s under the bus even though the Senate report of the incident noted multiple risk limits being exceeded and ignored, and then risk models themselves changed to look better, as well as the “whale” trader Bruno Iksil‘s desire to get out of his losing position being resisted by upper management (i.e. Ina Drew).

I’m not going to defend Iksil for that long, but let’s be clear: he fucked up, and then was kept in his ridiculous position by Ina Drew because she didn’t want to look bad. His angst is well-documented in the Senate report, which you should read.

Actually, the whole story is somewhat more complicated but still totally stupid: instead of backing out of certain credit positions the old-fashioned and somewhat expensive way, the CIO office decided to try to reduce its capital requirements via reducing (manipulated) VaR, but ended up increasing their capital requirements in other, non-VaR ways (specifically, the “comprehensive risk measure”, which isn’t as manipulable as VaR). Read more here.

Maybe Ina is going to claim innocence, that she had no idea what was going on. In that case, she had no control over her group and its huge losses. So either she’s heinously greedy or heinously incompetent. My money’s on “incompetent” after seeing and listening to her last night. My live Twitter feed from the event is available here.

We featured Ina Drew on our “52 Shades of Greed” card deck as the Queen of diamonds:

Back to the event.

Why did we cart out Ina Drew in front of an audience of young Barnard women last night? Were we advertising a career in finance to them? Is Drew a role model for these young people?

The best answers I can come up with are terrible:

1. She’s a Barnard mom (her daughter was in the audience). Not a trivial consideration, especially considering the potential donor angle.
2. President Spar is on the board of Goldman Sachs and there’s a certain loyalty among elites, which includes publicly celebrating colossal failures. Possible, but why now? Is there some kind of perverted female solidarity among women that should be in jail but insist on considering themselves role models? Please count me out of that flavor of feminism.
3. President Spar and Ina Drew actually don’t think Drew did anything wrong. This last theory is the weirdest but is the best supported by the tone of the conversation last night. It gives me the creeps. In any case I can no longer imagine supporting Barnard’s mission with that woman as president. It’s sad considering my fond feelings for the place where I was an assistant professor for two years in the math department and which treated me well.

Please suggest other ideas I’ve failed to mention.

1. Carbon Cycle and Phanerozoic History of CO2
2. Climate history over last 11,000 years (recent paper from Science)
3. Link between CO2 and T (Vostok Ice Cores, paleo records, Berner)
4. Where we’re headed with CO2 and climate (not so bad now, but look at RCP 8.5)
5. The bathtub: avoiding overflow (MIT psych paper)
6. Extreme Weather Events and Loaded Climate Dice (Hansen et al)

It will be Sunday from 2-3 PM. Followed by our regularly weekly Alternative Banking meeting.

Details here:http://www.nycga.net/events/event-edit/?action=edit&event_id=93

Sunday, March 31  2-3 PM: Will be followed at 3 pm by the regular weekly meeting of OWS – Alternative Banking working group.

Details here:

One thing I kept track of while I was away was the ongoing, intensely interesting situation in Cyprus. For those of you who have been following it just as closely, this will not be new, and please correct me if you think I’ve gotten something wrong.

Background

Cyprus banks have recently gotten deeply in trouble, partly because of their heavy investment in Greek government bonds which as you remember were semi-defaulted on in spite of them being “risk-weighted” at zero, and partly because of an enormous amount of Russian money they hold (Russian businessmen enjoy lowering their taxes by funneling their money to Cyprus), which created a severely bloated financial sector.

To be fair, just having deposits of rich Russian businessmen doesn’t make you fragile. But it’s just not done in banking, I guess, to simply hold on to money – you have to invest it somewhere, and they invested poorly.

To get an idea of how bloated the finance sector is and how badly the banks were hurting, if the Cyprus government was to give them the money they need, it would be 70% of GDP, and they’re already about 90% of GDP in debt. Even so, that’s only 17.2 billion Euros, or a bit more than twice Steven Cohen’s personal fortune ($10 billion) even after his firm, SAC Capital Advisors, settled with the SEC for insider trading “without admitting nor denying wrongdoing”.

What are the options?

• Do we ask the government of Cyprus to prop up the failing banks? Then it (the government) would be underwater and people would stop investing in its bonds and we’d need a bailout of the government. In other words, we’d just be handing the hot potato to the people.
• Does the EU or IMF loan money to government to give to the banks?
• Or to banks directly? Either way this would feel wrong to the northern European taxpayers, who would be essentially bailing out a bunch of Russian businessmen. Europeans are suffering from bailout fatigue, and German elections are coming up, making this even stronger.
• Or do we make the banks deal with their solvency issues themselves? After all, their shareholders, bond holders, and depositors all represent money they have which they can theoretically keep.
• Or some combination? Actually, all plans below are combo plans, whereby the banks make themselves solvent and then, after that, the EU/IMF team kicks in a few billion euros. Whether it will be enough money after the ricochet effects of the plan is not at all clear.

Plan #1: anti-FDIC insurance.

The plan as of more than a week ago was to take money from all the accounts as well as bond holders and shareholders. This included even the so-called insured deposits of accounts below 100,000 Euros.

So normal people, who thought their money was insured, would be paying 6.7% of their savings into a so-called “bail-in” fund, and people with more money in their accounts would be paying 9.9%.

This was across-the-board, by the way, for all Cyprus banks, independent of how much trouble a given bank was in. The banks closed down before this was announced so people couldn’t grab their money.

Compare that to the US version of a bailout from 2008, when shareholders got partially screwed, bondholders were left whole, deposits were untouched, but taxpayers were on the hook (and still are).

Plan #1 was baldfaced: it was saying to the average person in Cyprus, “Hey we fucked up the banks, can we take your money to fix it?”. It was incredible that anyone thought it would work. The ramifications of such an anti-FDIC insurance would be immediate and contagious, namely everyone in any related country would immediately start pulling their money out of banks. Why keep your money in an institution where you’re surely losing 7% when you can hide your money in a suitcase with only a small chance of it getting stolen?

Reaction by public: Hell No

Needless to say, the people in Cyprus didn’t like the plan. In fact, they strongly objected to directly paying for the mistakes of rich bankers and to protect Russians. They protested loudly and the Cypriotic politicians heard them, and voted down plan #1.

Plan #2

Since plan #1 failed, how about we just take money from uninsured depositors? Oh, and also make it bank-specific. So the banks that are in bigger poo-poo would seize more of their deposits than the banks that were in less poo-poo. That makes sense, and seems to be the current plan.

Problems with the current plan

There are a few problems with the new plan. But mostly they are what I’d call transition costs versus long-term problems. Easy for me to say, since I don’t live in Cyprus.

Rich people moving their money

First, rich people everywhere will no longer park lots of money in uninsured accounts in weak banks. Rich people have lots of options, though, so don’t feel too bad for them. They will instead put their money into lots of little accounts in lots of places, each of which will be insured. If this means they distribute their money over more banks, this is good for the banking system because it diversifies the capital and we’d end up with lots of biggish banks instead of a few enormous banks.

I’m not sure what the technical rules are, though. Say I’m stinking rich. Can I open 15 Bank of America accounts, each with $250K and so FDIC-insured? If I can’t do that for my local Bank of America branch, can I use Bank of America subsidiaries? Are the rules the same in the US and Europe? These rules are all of a sudden more important.

This is a transition cost, and within a few months all of the rich people will have their accounts insured or hidden.

Job losses

Second, there will be severe job losses in the bloated finance sector in Cyprus. Right now there are protests by workers from Laiki Bank, which is the worst off Cyprus bank, because they’re poised to lose their jobs. Again, it’s easy for me to say since I don’t live in Cyprus, but that’s what happens when you have an industry that’s too big – at some point it gets smaller and people lose jobs. I was around when the same thing happened to fisherman off the coast of New England, and it wasn’t pretty.

Again, though, it’s transitional. At some point the number of people working in banks in Cyprus will be reasonable. The question is whether they will have found another industry to replace finance.

Capital controls

The banks re-opened today, and of course people are standing in line to get cash, but things generally seem calm.

The big problem for businesses in Cyprus is that various “temporary” capital controls (which just means limits on taking money out of the country and on taking money from your bank) have been put into place that may lead to long-term problems.

Update (hat tip commenter badmax): many Russians already took their money out before the capital controls were imposed.

Euros don’t flow into and out of Cyprus effortlessly anymore, so the so-called monetary union has been broken. Depending on how quickly those rules are removed, and how quickly Cyprus comes up with other things to do, this could be a huge problem for the country.

Take-aways

• What’s become blatantly clear by following this process is that there is no actual process. Things are being made up as they go along by a bunch of economists and finance ministers. A lot of faith in their abilities was lost permanently when they hatched plan #1 which was so obviously stupid.
• Going back to that stupid plan, whereby normal depositors were supposed to pay for the mistakes of banks at the expense of their insured deposits. It was so bald-faced that the citizens rebelled, and politicians listened. So just to be clear, there has been actual input by average people in this process. The economists and finance ministers have lost face and the people have found a voice.
• This is not to say that the Cyprus people are sitting pretty. They are not, and by some estimates the economy of Cyprus is poised to contract by 20%. This may lead to more bailouts or Cyprus leaving the Eurozone for good.