Wa Mu collapsed, no prosecution of bankers

Washington Mutual bank collapsed in 2008, the largest bank failure in U.S. history.  It was the beginning of the banking failures that created the economic crisis.

Last week the Federal Deposit Insurance Commission agree to a 64.7 Million settlement and no prosecution of Wa Mu executives.

WA Mu  finally came crashing down on September 25, 2008. After one hundred-plus years of stable steady growth and expansion, ten years of aggressive acquisitions and record profits and one tumultuous year of disaster, the US Office of Thrift Supervision seized Washington Mutual Bank from its holding company after banking hours and placed it into Federal Deposit Insurance Corporation receivership. With rumors of its potential demise spreading, depositors withdrew $16.7 billion in 9 days , crippling the company’s liquidity and ability to act as a going concern. JPMorgan subsequently purchased the bank’s assets and deposits for $1.9 billion, less than a third of what was offered earlier in the year (in stock) and turned down by WaMu’s board .

Washington Mutual’s collapse was the largest bank failure in U.S. history; when large banks fail many other stakeholders are affected, and many parties contributed to the problems that brought WaMu down. The class action complaint brought by Bernstein Litowitz Berger & Grossmann LLP on behalf of investors offers a tremendous array of insider testimony and inside information about WaMu’s operations during the period 2005-2008; it is of such high quality, breadth and scope that it will be the primary source for this analysis. Defendants include top WaMu executives, directors, underwriters of securities offerings, and Deloitte Touche Tohmatsu, a Big 4 accounting firm.

We need to create a California state bank

 U.S. companies keeping their money abroad to avoid taxes.  These taxes could be used to hire teachers, police, firemen, etc.

Microsoft.  $42  Billion, Cisco systems. $38. 8 Billion, Google, $16 Billion. According to the N.Y. times, JP Morgan Chase estimates that U.S. based multinationals hold $1.375 Trillion outside of the U.S.

Many of these companies pay more taxes outside of the U,S., and a higher percentage of taxes outside of the U.S. than in the U.S.

What is an alternative?  Well to start with we should create a publically owned California bank to promote California prosperity. We need a bank that is a part of democratic planning in which what is invested, where it is invested, and how it is invested in democratically decided.

For example, the people of California are currently paying for, and will pay in the future for, a trans bay bridge at a cost of about  $13.5 Billion. The original proposal was for a  $3.5 Billion bridge.  The steel  for this bridge is being manufactured and created in China- while California has a 11.5  % unemployment rate. Where were these decisions made? Who made them?  Someone profited from these decisions, not you and I.

If we created a Bank of California, like the Bank of North Dakota, we could create a public utility like SMUD (The Sacramento Municipal  Utility District) to collect, manage and direct our tax money.  This would save us all  money.  When the state needed money, it could borrow from the bank and pay ourselves interest instead of paying Wells Fargo.

Inside Job Trailer 2010 HD

We viewed the film on Friday sponsored by the Progressive Alliance and DSA.  It is a great video.

Many viewers were frustrated.  They asked- well what can we do?

I made a list of possible responses.  I encourage additional ideas.

10 Things you and I can do to turn this state around.

1.     Vote against the Republicans.

2.     Search for progressive Democrats.

3.     Talk to your neighbors about the issues.

4.     Shut off Fox News.

5.     Move your money to a credit union.

6.     Join a union.  Or, a union support group. www.aflcio.org, http://www.workingamerica.org/join/

How the ruling class rules: A Secretive Banking elite

A Secretive Banking Elite Rules Trading in Derivatives

By LOUISE STORY

On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan.

The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential.

Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk.

In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks.

New York Times

Financial overhaul-Boxer Yes, Fiorina No

Here is the take away. The Senate passed a bill to reform the financial system to limit the kind of bankers robbery that occurred in 20008.  Senator Barbara Boxer voted yes.  Candidate Fiorina said she would have voted No.  That is a difference of substance.  If Fiorina would have been there, the Democrats could not get the 60 votes needed, and we would still be under the rules- or lack of rules- that lead to the Second Great Recession.

WASHINGTON — The Senate on Thursday voted 60-39 to approve the most sweeping overhaul of the nation's financial regulatory system since the Great Depression, clearing the historic legislation for President Barack Obama to sign into law.

Report on the Economic Crisis Forum -Sacramento

The Economic Crisis, The Budget & The University

 A forum on  the economic crisis and the cutbacks at the university was held  Oct.13,2009. At  Sacramento State University  for over  120 students, faculty, and community members, as a part of   CFA’s week of action against the  university budget cuts, furloughs and lay offs. http://www.calfac.org/headlines.html.

Speaking representing  the Sacramento Chapter of  Democratic Socialists of America  in the forum  Dr. Duane Campbell argued political actions taken and not taken in the next 12 months may well determine the structure of our economy, our health care system, and our unions for the next two decades.  He urged participants to see the new film, Capitalism: a Love Story by Michael Moore.

Why no reform of financial mess? Moyers

Goldman Sachs and the economic crisis

Goldman's Back, and Why We Should Be Worried
July 14, 2009, 10:39AM

Should we breath a sigh of relief that Goldman Sachs has posted record earnings as revenue from trading and stock underwriting reached all-time highs (second quarter net income was $3.44 billion) -- less than a year after the firm took $10 billion directly from taxpayers and $13 billion indirectly through AIG?

In some ways, yes. That Goldman is back signals that the worst of Wall Street's recent meltdown is over. And at least New York City's economy will again benefit from the trickle-down effects of the multi-million dollar bonuses of Goldman's executives and traders.
But in another respect, Goldman's resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs. Why? Because Goldman's high-risk business model hasn't changed one bit from what it was before the implosion of Wall Street. Goldman is still wagering its capital and fueling giant bets with lots of borrowed money. While its rivals have pared back risks, Goldman has increased them. And its renewed success at this old game will only encourage other big banks to go back into it.

“Our model really never changed, we’ve said very consistently that our business model remained the same,” Goldman's chief financial officer tells Bloomberg News. Value-at-risk -- a statistical measure of how much the firm’s trading operations could lose in a day -- rose to an average of $245 million in the second quarter from $240 million in the first quarter. In the second quarter of 2008, VaR averaged $184 million.

Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation. Which means you and I are still indirectly funding Goldman's high-risk operations.

Goldman is skillful at playing the market. Now that most of its major competitors are out of the action or still under the strict control of the Treasury and the Fed, it has the market mostly to itself. Expect the others to jump back in to high-risk deals as soon as they can. But Goldman is also skillful at playing politics -- something its rivals aren't nearly as good at. Recall that last fall, at a closed meeting between Treasury Secretary Hank Paulson (formerly Goldman's CEO), Tim Geithner (then at the New York Fed), and a handful of others to decide on the fate of giant insurer AIG, Goldman's cheif executive, Lloyd Blankfein, was at the table. The decision to bail out AIG resulted in a $13 billion giveaway to Goldman because Goldman was an AIG counterparty. Indeed, Goldman executives and alumni have played crucial roles in guiding the Wall Street bailout from the start.

So the fact that Goldman has reverted to its old ways in the market suggests it has every reason to believe it can revert to its old ways in politics, should its market strategies backfire once again -- leaving the rest of us once again to pick up the pieces.
Robert Reich

Global Recession : Stiglitz

A Global Recovery for a Global Recession

by JOSEPH E. STIGLITZ

This article appeared in the July 13, 2009 edition of
The Nation.
June 24, 2009
See the entire article at The Nation

This is not only the worst global economic downturn of
the post-World War II era; it is the first serious
global downturn of the modern era of globalization.
America's financial markets failed to do what they
should have done--manage risk and allocate capital
well--and these failures have had a major impact all
over the world. Globalization, too, did not work the
way it was supposed to. It helped spread the
consequences of the failures of US financial markets
around the world. September 11, 2001, taught us that
with globalization not only do good things travel more
easily across borders; bad things do too. September 15,
2008, has reinforced that lesson.

A global downturn requires a global response. But so
far our responses--to stimulate and regulate the global
economy--have largely been framed at the national level
and often take insufficient account of the effect on
others. The result is that there is less coordination
than there should be, as well as a smaller and less
well-designed stimulus than is optimal. A poorly
designed and insufficient stimulus means that the
downturn will last longer, the recovery will be slower
and there will be more innocent victims. Among these
victims are the many developing countries--including
those that have had far better regulatory and
macroeconomic policies than the United States and some
European countries. In the United States a financial
crisis transformed itself into an economic crisis; in
many developing countries the economic downturn is
creating a financial crisis.
The world has two choices: either we move to a better
global regulatory system, or we lose some of the
important benefits that have resulted from
globalization. But continuing the status quo management
of globalization is no longer tenable; too many
countries have had to pay too high a price. The G-20's
response to the global economic crisis, crafted at
meetings in November in Washington and in April in
London, was a beginning--but just a beginning. It did
not do enough to address the short-term problems nor
did it put in place the long-term restructuring
necessary to prevent another crisis.

A United Nations meeting in late June hopes to continue
the global discussion begun at earlier G-20 meetings
and to extend this discussion to what went wrong in the
first place so that we can do a better job of
preventing another crisis. The global politics of this
meeting are complexEighth, unless regulation is comprehensive there can be
a "race to the bottom," with countries with lax
regulation competing to attract financial services.
Ninth, if that race happens, countries will have to
take action to protect their economies--they cannot
allow bad practices elsewhere to harm their citizens.
And tenth, regulation has to be comprehensive across
financial institutions. As we have seen, if we regulate
the banking system but not the shadow banking system,
business will migrate to where it is less well
regulated and less transparent.

Despite this broad consensus, the G-20 said little or
nothing about some key issues: what to do with banks
that have grown not only too big to fail but (according
to the Obama administration) too big to be financially
restructured? The G-20 failed to ask the hard
questions: if these big banks' shareholders and
bondholders are insulated from the risk of default, how
can there be market discipline? What will replace that
discipline? The G-20 has talked about the rapid return
of "private capital," but what does this bode if
private capital returns without market discipline?
There was also talk of continuing to allow over-the-
counter derivatives-trading with no transparency. But
without transparency of each trade--to assess the
nature of the counterparty risk--how can there be
market discipline?


From the perspective of the developing countries,
though, not enough was done about bank secrecy in
offshore as well as onshore centers. Developing nations
are often criticized for corruption, but secret bank
accounts wherever they may be facilitate corruption,
providing safe haven for stolen funds. Developing
countries want this money returned and want access to
information that will allow them to detect secret
accounts.

Financial and capital market liberalization--as well as
banking deregulation--contributed to the crisis and to
the spread of the crisis from the United States to
developing countries. Advanced industrial nations are
reluctant to admit that these policies, which they
pushed so hard on developing countries, are part of the
problem. No wonder, then, that the G-20 did not argue
for a reconsideration of these longstanding policies.

The global economic crisis highlights the deficiencies
of existing international institutions. As developed countries struggle to ensure a quick
recovery, they need to think of the effects of their
actions on developing countries. It is time to begin
the restructuring of our global economic and financial
system in ways that ensure that the fruits of
prosperity are more widely shared and that the system
is more stable. This task will not be accomplished
overnight. But it is a task that must be begun, now.

About Joseph E.Stiglitz
Joseph E. Stiglitz is University Professor at Columbia
University. He received the Nobel Prize in Economics in
2001 for research on the economics of information. Most
recently, he is the co-author, with Linda Bilmes, of
The Three Trillion Dollar War: The True Costs of the
Iraq Conflict.

Global Power Elite

The Sacramento Bee has a column today , April 12, 10 Tough Political Calls Obama has to make, by David Rothkopf , author of Superclass: The Global Power Elite and the World They are Making.

He frames one of his questions as follows,
“will he (Obama) be willing to increase taxes on the middle-class taxpayers – or exacerbate class tensions by continuing to place all the burden on the most affluent Americans?”

What a preposterous statement.

We are in an economic crisis directed by Rothkopf’s Global Power Elite. In the U.S. after over three decades of stagnant wages for working people, the banking and corporate elite have received over $700 billion in taxpayers’ money.

These are class tensions. The rich, with the assistance of the Federal Reserve, have looted the banks and causing severe unemployment and economic recession. This is class conflict- and the rich are winning.


Although Rothkopf’s essay uses a frame to support the views of the Power Elite, the questions which he proposes are correct.

The fundamental questions are will the policies of the new Obama Administration side with the interests of the vast majority of the people- over 80% of the electorate, or will the Administration side with the Global Power Elite?

Dr. Duane E. Campbell
Democracy and Education Institute
www.democracyeducationinstitute.org/

Economic aristocrats and the President

Economic Adviser to the Aristocracy
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Read More: Banks, Barack Obama, Economy, Hedge Funds, Honorariums, Larry Summers, Lawrence Summers, Obama Economic Advisers, Wall Street, Business News

The lately published list of the honorariums received by Lawrence Summers for lectures delivered in 2008--at firms like J.P. Morgan, McKinsey and Company, Goldman Sachs (twice), Citigroup (twice), Lehman Brothers (twice), American Express, Pricewaterhouse Coopers, Skagen Funds (twice)--shows the practical meaning of an aristocratic class. The amounts received by Summers from these banks and brokerage houses and consulting firms covered a range from $59,400 per lecture (Skagen) to $135,000 (McKinsey). Other outfits paid still more.
Summers also received a salary of $5.2 million in 2008 from the hedge fund D.E. Shaw after having brought substantial pressure to institute to a radical policy of deregulation that affords an unparalleled species of financial protection to hedge funds.

The point about such a private counselor who becomes a public servant is not that he is corrupt. He need not be. Rather, he is predictable within the world he knows and believes in, which is the world that honors him. He does not have to be told what to do. When he thinks of the American family, these banks and investment groups, and the too-big-to-fail insurance colossus, are in fact his extended family. They are the people he talks to and jokes with and eats with, the people he thinks of in his spare time. They are the people he knows.

One sees in the recent career of Summers--and not least, in his ascent to the position of economic adviser to President Obama--how subtle, consistent, and pervasive are the means by which an aristocracy perpetuates itself. How it doles out its rewards to maintain its power. How it buys the talents and shapes the careers it needs, so that even a general crisis brings only a second layer of bribed servants, and the medicine is administered by doctors whose judgment is bought and paid for. One sees, too, what drove the rage against such a class in earlier times--the feeling that its power is a monstrous imposition; the fear that no cry or protest will ever penetrate from outside the closed circle.
David BromwichProfessor of Literature at Yale

Can we survive the Great Collapse?

Surviving the Great Collapse

By Robert Kuttner | March 12, 2009

THIS ECONOMIC CRISIS doesn't have to be a second Great Depression - if government does nearly everything right, and soon. But if government doesn't do more, and fast, this could be worse than the 1930s. Why? Three big reasons:

Finance: A Doomsday Machine. The financial system is in far worse shape than it was when the stock market crashed in October 1929. In the 1920s, there was a stock market bubble, mainly because people could play the market "on margin," borrowing to invest in stocks. There were also scams like the original Mr. Ponzi's. Like in the present decade, the Federal Reserve helped to enable the game, with low interest rates and few rules.

But today, thanks to "securitization" of loans and the ability of insiders to create exotic and unfathomable financial instruments, the speculative system makes buying stocks on margin look like child's play. In the aftermath of the crash of 2008, the process of sorting it all out and getting banks functioning again is something that markets simply cannot do.

We are not even clear who owns what. The wise guys on Wall Street invented a doomsday machine from which there is no market escape.

In 1929 when the stock market crashed, the banking system was relatively healthy. Bank customers played these speculative games and took the losses, not banks. This time, the banks drank their own Kool-aid.

It took until the awful winter of 1932-'33 for the general depression to fully infect the banking system, and cause over 7,000 banks to fail. But Roosevelt's cure - deposit insurance and a temporary bank holiday to sort out good banks from bad - quickly got the financial system up and running again. Today, the banking mess is still dragging down the real economy, with no effective cure in sight.

Wealth, Deficits, and Demand. The economy now bears all the hallmarks of a depression. Between the housing collapse and the stock market crash, American households are out several trillion dollars (in the 1920s, there were no 401(k) plans and less than 2 percent of Americans owned stock).

When people are suddenly out a lot of money, they spend less. Weak demand in one sector is cascading into other sectors. People spend less on autos, air travel, hotels, restaurants, clothing - any optional purchase. Business sales and profits are down, which causes other layoffs, and the cycle deepens.

Roosevelt was said to be a big spender, but his biggest peacetime deficit was only about 6 percent of GDP. This year, the deficit will exceed 11 percent, and the recession will deepen all year. It took the truly massive deficits of World War II - nearly 30 percent of GDP - to finally end the Great Depression

A Debtor Nation. America in 1929 was a major international creditor. Today, we are the world's biggest debtor. The financial bubble created the illusion of prosperity.

During the bubble years, the foreign borrowing disguised domestic weaknesses, such as our much-diminished manufacturing sector. For now, foreigners are still willing to lend us vast sums, but that may not continue indefinitely.

All these economic calamities have solutions, but each is more radical than what's currently on offer. The government will have to temporarily nationalize major banks, sort out good assets from bad ones, and then return banks to responsible private ownership. To cure the housing collapse, government should directly refinance mortgages, rather than bribing banks to ease terms.

Deficits will have to be a lot larger before they can get smaller. That should not require a war; this is just as grave a national emergency. Those deficits could purchase much broader prosperity.

This crisis doesn't yet have a name. It has all the hallmarks of a depression, but people are understandably reluctant to use the D-word. So let me suggest one: The Great Collapse, since this was both a financial collapse and an ideological one.

Can America recover from a Great Collapse? Can we avert a second Great Depression? To coin a phrase, yes we can. But we need the right strategies and we don't have much time.

Robert Kuttner is co-editor of The American Prospect and author of "Obama's Challenge: America's Economic Crisis and the Power of a Transformative Presidency."

The Bush owned economic crisis

Yes, Democrats participated in causing it.

William K. Black
Assoc. Professor, Univ. of Missouri, Kansas City; Sr. regulator during S&L debacle
As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional. The FBI has been warning of an "epidemic" of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds. When the person that controls a seemingly legitimate business or government agency uses it as a "weapon" to defraud we categorize it as a "control fraud" ("The Organization as 'Weapon' in White Collar Crime." Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black 2005). Financial control frauds' "weapon of choice" is accounting. Control frauds cause greater financial losses than all other forms of property crime -- combined. Control fraud epidemics can arise when financial deregulation and desupervision and perverse compensation systems create a "criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman 1997.)
The FBI correctly identified the epidemic of mortgage control fraud at such an early point that the financial crisis could have been averted had the Bush administration acted with even minimal competence. To understand the crisis we have to focus on how the mortgage fraud epidemic produced widespread accounting fraud.
Don't ask; don't tell: book profits, "earn" bonuses and closet your losses
The first document everyone should read is by S&P, the largest of the rating agencies. The context of the document is that a professional credit rater has told his superiors that he needs to examine the mortgage loan files to evaluate the risk of a complex financial derivative whose risk and market value depend on the credit quality of the nonprime mortgages "underlying" the derivative. A senior manager sends a blistering reply with this forceful punctuation:…
These two documents are enough to begin to understand:
the FBI accurately described mortgage fraud as "epidemic"
nonprime lenders are overwhelmingly responsible for the epidemic 

the fraud was so endemic that it would have been easy to spot if anyone looked 

the lenders, the banks that created nonprime derivatives, the rating agencies, and the buyers all operated on a "don't ask; don't tell" policy 

willful blindness was essential to originate, sell, pool and resell the loans 

willful blindness was the pretext for not posting loss reserves 

both forms of blindness made high (fictional) profits certain when the bubble was expanding rapidly and massive (real) losses certain when it collapsed 

the worse the nonprime loan quality the higher the fees and interest rates, and the faster the growth in nonprime lending and pooling the greater the immediate fictional profits and (eventual) real losses 

the greater the destruction of wealth, the greater the (fictional) profits, bonuses, and stock appreciation
Black: The Best Way to Rob a Bank is to Own One.

Read the entire post
http://www.huffingtonpost.com/william-k-black/the-two-documents-everyon_b_169813.html

What to do about the banks?

And this from the New York Times.
JANUARY 21, 2009, 4:00 PM
Should Obama Seize Citigroup?

By ERIC ETHERIDGE
This is probably not a news story that a new president wants to read on his first full day in office. Bloomberg.com reports:

U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”

Last week’s bad news from Citigroup and Bank of America had already prompted a round-robin discussion in the blogosphere on the wisdom of nationalization. With tongue somewhat in cheek, John Quiggin blogged at Crooked Timber on Monday:
All reasonable commentators now agree that nationalisation of big banks like Citigroup, Bank of America and Royal Bank of Scotland must take place soon, explicitly or otherwise. As I said at just before the second (failed) Citigroup bailout, banks like Citi are not only too big to fail, they’re too big to rescue with any of the half-measures that have been tried so far.

Others were wary of this solution: At his New Yorker blog, The Balance Sheet, James Surowiecki wrote the same day, “I think that as the ‘nationalize now’ meme has taken hold in the blogosphere, people are talking about nationalization ‘awfully casually.’ . . . [T]he idea that most of Barack Obama’s Presidency will be spent presiding over a government-run banking system is a daunting thought.”

And at Marginal Revolution, Tyler Cowen listed his concerns about how a nationalization strategy would play out:

How many years of profits are needed to create the cushion of capital which is required for re-privatization? And how many years of government ownership will be needed to generate that many years of profits? Will banks owned by the government be allowed to pursue profits, rather than lending to troubled industries in the districts of influential Congressmen? Or will government just stick money in the bank and hope they have thereby created a sound enterprise?

Quiggin’s argument is that current rescue efforts — especially including leaving current bank managers in place — simply won’t work. Blogging today in response to Surowiecki and others, Quiggin writes:

Financial restructuring is going to be a huge challenge, involving both a radical redesign of national regulations and the construction of an almost completely new global financial architecture. To attempt this task while leaving the banks under the control of discredited managers nominally responsible to shareholders whose equity has, in the absence of massive transfers from taxpayers, been wiped out by bad debts, seems like doing live electrical work while wearing a blindfold and standing in a pool of water.

In Britain, where the banks and the pound are collapsing, and the government announced its new, just-short-of-nationalization rescue plan on Monday, Financial Times blogger Willem Buiter is leading the charge for going all the way.

Yesterday he laid out his thinking in a long post, which began with a comparison of the recent banking excesses in Iceland and the U.K.:

Both countries allowed the unbridled growth of banks that became too large to fail. In the case of Iceland, the banks also became too large to rescue. In the UK, the jury is still out on the ‘too large to rescue’ issue, but I have serious and growing concerns. Incrementally, the British authorities have guaranteed or insured ever-growing shares of the balance sheets of the UK banks. And these balance sheets are massive. RBS, at the end of June 2008 had a balance sheet of just under two trillion pounds. The pro forma figure ws £1,730 bn, the statutory figure £1,948 (don’t ask). For reference, UK GDP is around £1,500 bn. Equity was £67 bn pro forma and £ 104bn statutory, respectively, giving leverage ratios of 25.8 (pro forma) and 18.7 (statutory), respectively.

With a 25 percent leverage ratio, a four percent decline in the value of your assets wipes out your equity. What were they thinking? The fact that Deutsche Bank used to have a leverage ratio of 40 and is now proud to have brought it down to just below 34 is really not a good excuse.

Buiter goes on to argue that the near-nationalization rescue plans will only make things worse:

In the name of preventing a collapse of the UK banking system, we are witnessing the socialisation — at first gradual, but now quite rapid — of all balance sheet risk of the UK banks by the UK government. This is risky and, in my view, unwise. The manner in which it is done also seems designed to maximise moral hazard. The good news is that it is unnecessary for restoring and maintaining the flow of new credit in the the British economy. . .

My belief that the UK government should take over all UK high street banks (on a temporary basis) is based on the simplification this would provide as regards the governance of these institutions under extreme circumstances, when private ownership and governance have clearly failed, and on its positive effect on incentives for future bank behaviour (’moral hazard). When the public interest and the interests of the existing private shareholders and the incumbent managers and boards of directors diverge as manifestly as they do in this crisis, the sensible thing to do is to buy out the existing shareholders (as cheaply as possible). That way the failed and failing management and boards can be restructured (fired without golden parachutes) and the new owner can insist on and enforce an open, verifiable valuation of toxic and dodgy assets, on and off the balance sheet of the bank.

He then lays out his four-point plan:

(1) Take into complete state ownership all UK high street banks. This has to be mandatory, even for the banks that still like to think of themselves as solvent.

(2) Fire the existing top management and boards, without golden or even leaden parachutes, except those hired/appointed since September 2007.

(3) Don’t issue any more guarantees on or insurance for existing assets - regardless of whether they are toxic, dodgy or merely doubtful. Issue guarantees/insurance only on new lending, new securities issues etc. A simple rule: guarantee the new flows, not the old stocks. This will reduce the exposure of the government to credit risk without affecting the incentives for new lending.

(4) Transfer all toxic assets and dodgy assets from the balance sheets of the now state-owned banks (or from wherever they may have been parked by these banks) to a new ‘bad bank’. If possible, pay nothing for these toxic and dodgy assets. Since the state owns both the high-street banks (I won’t call them ‘good’ banks) and the bad bank, the valuation does not matter.

Back in the States, watching Tim Geithner’s confirmation hearing today, Kevin Drum seizes on this remark by the soon-to-be Treasury Secretary:

The tragic history of financial crises is a history of failures by governments to act with the speed and force commensurate with the severity of the crisis. If our policy response is tentative and incrementalist … then we risk greater damage to living standards, to the economy’s productive potential, and to the fabric of our financial system … In a crisis of this magnitude, the most prudent course is the most forceful course.

Drum’s conclusion?

Nationalization fans should rejoice at hearing this. More and more, that includes me, by the way. The news out of Britain is beyond grim right now, and [throughout] this financial crisis the U.S. has never been more than a couple of months behind the UK. If that stays the case, nationalization of at least a couple of big banks will hardly even be a debatable option a few weeks from now.

U.S. Banks claim they need more money

Please read articles below on how the major U.S. banks took the bail out money and spent it on themselves and to buy other banks.

Now, they claim they need more money.

New York Times:
January 14, 2009
NEWS ANALYSIS
Banks Are in Need of Even More Bailout Money

By EDMUND L. ANDREWS and ERIC DASH
WASHINGTON — Even before word came on Tuesday that Citigroup might split into pieces to shore up its finances, an unpleasant message was moving through Congress and President-elect Barack Obama’s transition team: the banks need more taxpayer money.

In all likelihood, a lot more money.

Mr. Obama seems to know it; a week before his swearing-in, he is lobbying Congress to release the other half of the financial industry bailout fund. Democratic leaders in Congress seem to know it, too; they are urging their rank and file to act quickly to release the rescue money. And Ben S. Bernanke, the chairman of the Federal Reserve, certainly knows it.

On Tuesday, Mr. Bernanke publicly made the case that one of the most unpopular and most scorned programs in Washington — the $700 billion bailout program — needs to pour hundreds of billions more into the very banks and financial institutions that already received federal money and caused much of the credit crisis in the first place.

The most glaring example that the banking system needs even more help is Citigroup. Though it already has received $45 billion from the Treasury, it is in such dire straits that it is breaking itself into parts.

Like many banks, Citi is finding that its finances keep deteriorating as the economy continues to weaken.

Even some of the bailout program’s harshest critics acknowledge that things most likely would be even worse without it, and that the bailout had accomplished its most important goal, which was to prevent a complete collapse of the financial system.

Since last September, no major banks have failed and the credit markets have thawed somewhat.

But analysts said the problems are still acute, if less apparent on the surface. Banks have received $200 billion in fresh capital from the Treasury since last fall and have borrowed hundreds of billions of dollars more from the Fed. But in the meantime, the economy fell into a severe downturn last fall that is likely to continue until at least this summer.

Banking Collapse Lands on America’s Schools

From Truthdig.org

By Bill Boyarsky

One of the worst casualties of the Iraq war and the Wall Street failures is the U.S. public school system, which is central to the nation’s economic, intellectual and social health. With financial resources being consumed, education cuts are on the way.

We’ll be paying for this for many years. Poorly educated young people will be unable to get good jobs. We’ll lose our intellectual capital. For that, we can thank Wall Street and its anti-regulation political friends. Thank you, John McCain and President George W. Bush. And thank you both for the war.

Sen. Barack Obama has some pretty good ideas about education, but he might as well forget them. His education proposals would cost at least $18 billion in federal funds. When Jim Lehrer, moderator of last week’s presidential campaign debate, asked him what would happen to all his plans in the wake of the Wall Street bailout, he wouldn’t, or couldn’t, answer.

The importance of the question was clear last week when I visited with several high school teachers at Los Angeles High School.

The school is located between the poor neighborhoods east of the city’s downtown and the more affluent neighborhoods toward the west. Its student body of about 3,000 draws from them all. Some come from comfortable homes with professional mothers and fathers. Others live in crowded one-bedroom apartments with two underpaid working-immigrant parents who may or may not speak English.

I walked through the halls with my friend John Ogden, a veteran Los Angeles High School teacher who had set up my meeting with the teachers. As he greeted a colleague and then a student, I felt that I had entered a community—a complicated one, I knew, but still a community united in a common purpose: education.

Although the Bush administration and Congress took a hands-off attitude toward Wall Street—until the collapse—Washington enthusiastically reached into the classrooms of every public school in the country with the No Child Left Behind Act. This legislation, passed early in the Bush administration with bipartisan support, requires the states to assess students before they receive high school diplomas. Without such testing—in California it is called the California High School Exit Examination—schools could lose federal funding, which amounted to $24.4 billion last year under the No Child Left Behind Act.

The testing is the most controversial feature of No Child Left Behind. The controversy reached into the Los Angeles High School faculty.

Several of the teachers were gathered in a classroom for a faculty meeting on teaching projects. After they finished, I got up and explained that I wanted to talk to them about education for a piece for Truthdig. They were polite but didn’t say much until I raised a question that has always puzzled me in reporting on L.A. public schools: What kind of test scores can be expected from a Hispanic kid with working parents who is trying to do homework in a noisy and overcrowded apartment?

The discussion turned lively. One veteran teacher talked of the obstacles faced by his poor students, who often have to maneuver through gang territory on their way to school.

“Testing has the reek of punishment about it,” he said. “There is something unfair about it. … Is it fair to apply the same standards to parents with little education and who are unable to help their children? … Is it fair to compare that with a Beverly Hills High School student whose parents can offer help? It isn’t fair in my view to apply the same standards.”

A younger teacher disagreed. He said that the tests were good. They required teachers and students to meet standards that will be required of young men and women when they move on from high school. “We have to step up to meet the expectations that the kids in Beverly Hills have,” rather than “give excuses for not knowing what they are supposed to know,” he said. Students should know “you have to move up your game when you go to a university.”

We talked for about an hour. Our discussion covered other controversial areas, such as merit pay for teachers.

I thought they were a dedicated bunch. No matter how they felt about standardized testing, the school’s California High School Exit Examination score was substantially up in the 2007-2008 school year.

But they have been let down by Washington. It imposed the standards but now doesn’t have the money to help school districts finance the classes and extra other programs that will permit the Los Angeles High School children of poor immigrants to compete with their contemporaries in Beverly Hills High School just a few miles away.

They and other public students across the country are real, but unnoticed, victims of the financial crisis. They are another reason why the Wall Street failures and the war are two of the great calamities of our age.

flickr.com/mcoughlin

“No Child Left Behind” is written above each of these “little red schoolhouse” entrances at the Lyndon Baines Johnson Department of Education building in Washington, D.C.

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