“Since my last report, this employee has reached rock bottom and has started to dig.” – Unknown employee review
This month, I wanted to respond to several readers’ requests that I do some follow up on earlier stories that I’ve run. I’m guessing the phrase, “Read’em and weep!” may be a bit melodramatic here. But I’ll let you decide …
As I write, the Dodd-Frank Bill, otherwise known as the Financial Regulation Reform Bill, has been signed into law. I wrote about it two months ago when this bill came out of the Senate and was about 1,100 pages. The final product turned out to be over 2,300 pages long, and likewise still hasn’t been read by any lawmaker in Washington. The headlines say this law will end “too big too fail,” and prevent future government bailouts from ever happening again, but I doubt it. What it does do is grant unprecedented power to the Federal Reserve. It allows the Fed to seize control of any company it deems as representing a “systemic” risk to the economy. As a consequence of issuing that decree, the Fed may then regulate the size and range of activities that company may engage in. And the answer to your next question is “Yes, those powers can be exercised over any kind of company—bank or otherwise.”
Naturally, there are no specific guidelines in this law related to when this kind of seizure might be appropriate. And the process of seizure will look eerily like the “nationalization” of private companies by Venezuela as of late. However, given the fact that the Federal Reserve is actually a privately owned bank, the term “nationalization” would be inaccurate to say. We’ll just have to coin a new term for when the largest bank in the country decides to take over another company and run it as its own. Maybe we could call it “Doddamization”! Nevermind the Fed’s gross incompetence as a bank regulator, and the unique role it played in precipitating this financial collapse. This endowment of economic omnipotence is for our own good, and will protect future generations. Yeah, right! Regardless of which side of the aisle your politics fall on, the real question here should be this: How can a regulator that so thoroughly demonstrated their inadequacy as such, be logically expected to perform any differently in the future?
Next, the Dodd Frank Bill also has something new for the FDIC to do. In a likewise baffling perversion of reason, the FDIC will take the place of a Federal Bankruptcy court when a large financial firm’s failure “would imperil financial stability.” This will no doubt follow the Fed seizure and subsequent mismanagement period, I’m guessing? And outside the peruse of any bankruptcy court, the FDIC can then take over the failing firm, sell off its assets, and impose losses on shareholders and creditors as it sees fit. I know I may sound like a broken record here, but given the similar failure of the FDIC to perform as a regulator of banks, what makes anyone believe they would be superior to a bankruptcy court in these instances? Federal Bankruptcy courts do, unfortunately, have hordes of experience liquidating large complex companies over the last few decades. In fact, owing to the anticipated ineptitude of the FDIC in this role, the new law requires large financial firms to draft “living wills” to map out how they can be safely wound down. Yep, there was real genius at work here, folks!
Three months ago, I also reported on the SEC filing a civil fraud case against Goldman Sachs. I told you I was certain it would end up in settlement, with no admission of guilt on Goldman’s part, and I guessed that a fine would be levied between $50 million and $100 million. Well, Goldman must have stolen a lot more than we all thought, because the fine just announced was $550 million. That tells you their take must have been north of $5 billion, on the collective subprime con game they’ve been running. So this is nothing more than a very expensive parking ticket to Goldman.
Many more months ago than that, I told you about AIG and how they sold a kind of insurance called “credit defaults swaps,” that ended up bankrupting them. I explained that the difference with this kind of insurance is that the policy holder doesn’t have to have a financial interest in the asset being insured. So this would be like an insurance company selling insurance on your car, to everyone living in Denver. It’s great to be the insurance agent when all the premium checks come in each month—but a nightmare when you get a ding on your car. Now they have to pay claims to everyone in Denver worth far more that the car ever was. And in AIG’s case, this collective “car” was totaled. Yes, I know this violates all kinds of insurance rules and points to obvious fraud on many levels. And apparently AIG decided so, too! This week they agreed to pay out another $725 million to three Ohio State pension funds, to settle pending fraud charges there. You may recall they settled with the SEC and the state of New York a couple years back for $1.6 billion.
Now check my math here, but I think that just added up to $2.8 billion in fraud settlements paid out between AIG and Goldman, in just the last two paragraphs. So tell me how it is that there is that much fraud that needs to be settled, but no one going to jail for the crime of fraud at either firm? In fact, both the SEC and Federal prosecutors just announced this last week that they were dropping all charges against Joe Cassano, the former head of AIG’s special products division. I guess they all just figured we wouldn’t notice or care. And is it just me, but how is a new law that requires the Federal Reserve, The Treasury Department, or the FDIC to take over a huge failing company any different than a government bailout in its effect? I mean, whose money do you think they are going to do that with? If I didn’t trust all our representatives in Washington so much, I’d say we just passed a law that mandates bailouts rather than prevents them. And, gee whiz, I can’t imagine what the unintended consequence of something stupid like that might be …
Thirty-year fixed rates are at 4.25 percent as I am typing. Fifteen-year fixed rates are under 4 percent. So take advantage now and refinance or purchase whatever you need to, and get these rates locked in. Once they’re gone, it may be the last time we will see rates this low in our lifetimes!
