Annals Of Government Self-Promotion, Big Bank Edition

What was the main cause of the financial crisis that hit in 2008/9?  You've probably noticed that there are two main narratives.  In one, the government caused a huge bubble in housing and other asset prices through imprudent guaranties and secondary market purchases by their agents, mainly Fannie and Freddie.  And in the other narrative, greedy bankers caused the bubble by some combination of predatory lending, toxic derivative products, and shady trading.   

Well, one of those narratives would imply that the solution is to shrink government involvement in the financial sector, and the other would suggest that the solution would be yet more government involvement and regulation.   

And thus we have the exceedingly strange phenomenon of the government at the same time propping up the big banks and also requiring the same big banks over and over again to enter into huge monetary settlements as supposed compensation for the wrongdoing that led to the crisis.   The money just goes around in a big circle.  In fact, the way I see it far more money goes from the government to the big banks than the other way around.  But the money going from the government to the big banks is largely invisible and hard to quantify.  The money coming back is in the form of highly publicized settlements that gives the government the chance to support its narrative that the banks are guilty and the government must grow.

First, today's news.  Citigroup has settled with Fannie and Freddie for some $968 million, covering claims by the mortgage twins that their losses in the financial crisis were caused by Citi.  Frankly, I find it rich that Fannie and Freddie would even have the nerve to assert such claims, given their own history of setting almost all the terms of the lax bubble credit markets.  But the fact is, the case was never real.  Of course Citi would have to settle for some huge number, because it completely owes its existence and continuance to political favor from Washington.  So these claims were never going to be tested in court.

This latest settlement is of course a small part of the public penance and atonement that the big banks have been forced to undergo.   Bank of America settled similar claims from Fannie and Freddie for $2.8 billion just last January.  And how about the $25 billion settlement between and among five big banks (Ally, BofA, Citi, JPMC and Wells Fargo), 49 state AGs and the Federal government (HUD and Justice Departments) for supposed wrongful activities in enforcing under-water mortgages?  That was in January 2012.  And then those same banks and another five turned around in January 2013 and settled so-called "robosigning" claims again, this time by the Office of Comptroller of the Currency, for $8.5 billion.  Then there was Citi's settlement of $158 million with the FHA over allegedly providing false information in support of the issuance of guaranties.  That was February 2012.   Here's a list from the Daily Beast of some ten settlements of $50 million and up (only two are under $100 million) entered into between JPMC and various Federal agencies in just the two years from April 2011 to March 2013.  The article helpfully points out that even after all these settlements there are still eight federal agencies currently conducting ongoing investigations of that bank, so there should be many more settlements coming.  I could go on, but you get the point.  The Daily Beast quotes an estimate of $16 billion for the legal costs of just JPMC since 2009.

Well, where do they even get all this money?  The simple answer is, the government gives it to them through the back door.  First, the massive bond buying programs by the Fed (QE 1, 2, 3, . . . .) have driven the banks' cost of funds basically to zero for years, with spreads between what banks pay on deposits (nothing) and what they earn on loans (something) at record levels.  And then there's "too big to fail" in Dodd-Frank, a huge giveaway to the banks in that category, who get several notches of benefit in their cost of funds.  Between those two, it's billions and billions of dollars, but there's no way to quantify it specifically. 

Here's the take on this situation from the Daily Beast (Nina Strochlic, May 8, 2013): 

Screw over customers, botch foreclosures, run afoul of important regulations, and violate some important rules—and the worst you’ll have to do is pay some fines or settlements. It’s a cost of doing business, even for America’s most highly regarded banks.

Sorry Nina, but I think you're getting taken in.  Not that I'm going to stand up for everything every big bank has done; I'm sure that there's plenty to criticize.  But $33+ billion for flaws in mortgage foreclosure?  In the old days, if you botched the paperwork on a mortgage foreclosure, the worst that would happen to you would be that you had to start that one over.  And that's just one piece.  The banks are subject now to thousands upon thousands of pages of regulations.  There is no possible way to comply perfectly.  Basically, any Federal agency that wants its name in the paper can pick one of the big banks and go out and get at least a few hundred million.  Sorry, but this is a very sick game of government aggrandizement with funds provided by the taxpayers through the backdoor. 

When Did It Become OK For The Government To Use Taxpayer Money To Entrench Itself And Expand Its Power?

Back in April, in a post entitled "The Welfare State Aggressively Advertises To Expand Itself," I described a Washington Post report on state-funded "outreach" efforts in Florida seeking to expand the food stamp rolls.    Over the past couple of days I have just kept my eyes open for examples of government use of taxpayer moneys to expand itself and/or entrench its power.  This is everywhere.

In the New York Post on June 26 we have Betsy McCaughey reporting on the use of government funds supposedly to set up the California Obamacare "exchange" known as Covered California.   It seems that California has been granted some $910 million (!) of Federal funds to set up its exchange.  What is that money being used for?

More than half the funds are being handed out in contracts to third parties, and the lion's share of those contracts are for what the exchange terms "outreach."   In truth, the money is going to build Democratic Party enrollment.

Examples please?  McCaughey's article is full of them, from $600,000 to the NAACP, to $2 million to the SEIU, to $1 million to the AFL-CIO, to $1 million to the Community Health Councils, all for various forms of "outreach," otherwise known as more or less thinly disguised efforts to build enrollment of Democrat-leaning voters. 

Further on the efforts to promote Obamacare in California, we have the Heartland Institute reporting on grants to the Los Angeles schools to propagandize their students to promote Obamacare enrollment to their families.  LAUSD is getting a grant of $990,000, for a purpose described as follows: 

“Teens are part of a ‘pilot’ program to test whether young people can be trained as messengers to deliver outreach and limited education to family and friends in and around their homes,” said Gayle Pollard-Terry, a LAUSD spokesman, in an email. “Teens will be educating adults that they already know (e.g., family or friends) and not other adults.”

Well, should we at least feel good that the kids are not being paid for the effort?  Don't worry, others will be: 

LAUSD will also use tax-paid staff to promote ObamaCare through phone calls to students’ homes, in-class presentations, and meetings with employees eligible for ObamaCare’s taxpayer-covered healthcare, the grant award says.

Turning away from the promotion of Obamacare, I took a one block walk today down 125th Street in Harlem, going from the subway station at Lexington Avenue to the Metro-North station at Park Avenue.  And in that block was a hawker on the street loudly promoting "FREE PHONES!!!" (for anyone receiving government benefits) and handing out flyers for the purpose.   

And in the mail at our house, addressed to my recent-college-graduate daughter, from Sallie Mae (nickname of SLM Corporation, purveyor of federally subsidized and guaranteed student loans) junk mail promoting that she should "APPLY TODAY!" for one of their loans to go to graduate school.  Well, thankfully, she's not in graduate school. 

They are literally desperate to grow as rapidly as possible the number of people receiving the handouts.  But when did it become OK to use taxpayer money to promote the growth of the government and of government dependency? 

Obama's Plan To Make Americans Poorer

I have actually read the President's speech yesterday on climate change, and I wish I could figure out what his thought process is, or even if there is a thought process.  This speech only makes sense if the whole idea is to grow the government while in the process making Americans poorer -- a lot poorer.  That couldn't possibly be his game plan, could it?   If somebody can offer me an alternative explanation, I'm willing to consider it.  But yes, I think that that is his game plan; or, at least, his game plan is definitely to grow the government, and if that means that Americans must be made poorer, well, he doesn't know anything about that and anyway, too bad.

I start from the proposition that private actors, without any prompting from the government or any subsidies, will provide energy sufficient to satisfy all demand, and that the type of energy provided will be the cheapest for each intended use.  And that process, again without government intervention, will maximize the income and wealth of the American people.  Government, of course, can try to force the production of other types of energy for each use, which can be accomplished by rules or subsidies of various sorts.  Sometimes there may be good reasons for doing this, such as serious health reasons; but by definition there will be a cost, which will come out of the income and wealth of the people.  Given the huge size of the energy markets, the cost of government efforts to switch vast areas of the economy from cheaper to more expensive energy can be in the trillions of dollars over time, meaning that the people have been impoverished by that amount.   

Now you may say, there absolutely is reason for mankind to control carbon emissions into the atmosphere, because carbon emissions are causing catastrophic global warming that is an existential threat to mankind.  If you read this blog, you know I think that's nonsense, and that there is no evidence of any kind for it.  But for these purposes it doesn't matter, and I won't address that subject in this post.  It doesn't matter because Obama is not in this speech proposing to lead some global initiative to get world carbon emissions under control, or otherwise to engineer world temperatures.  (Not that he could do that if he tried.)  What he's proposing, short on specifics but clear enough in generalities, is immediately to hobble American use of coal, particularly for production of electricity, and gradually to hobble American use of other carbon-based energy such as oil and natural gas.

As of now, coal accounts for about 40% of electricity production in the U.S.  This is not a small item.  Clearly the utilities are using coal because it is the cheapest thing available to produce the electricity at this time and at these plants; so any change, even to natural gas, will by definition have a not small cost. 

But the real question is, even assuming that you buy into the catastrophic global warming narrative, how does shutting down coal or carbon-based energy use in the U.S. accomplish anything?  The U.S. is less than 5% of world population.  Its carbon emissions have been dropping in recent years (largely because of the natural gas "fracking" boom).  Meanwhile, third world carbon emissions have been booming.  They will continue to boom, no matter what penalties Mr. Obama imposes on the American people for their sins of carbon usage.

Over at National Review Online on Monday, Robert Bryce of the Manhattan Institute compiles lots of useful data.  Much of the data he relies on comes from the Statistical Review of World Energy 2013, compiled by BP.   For example, consider this:  just the increase  in coal production and consumption in China from 2002 to 2012 is about twice total annual U.S. coal production and consumption.   The increase in world  production and consumption of coal from 2002 to 2012 is almost triple annual U.S. production or consumption.  And this rapid increase of coal production and consumption, particularly outside the U.S. and Europe, is clearly going to continue.  These people and not going to do without electricity and keep their coal in the ground.  So suppose you could take U.S. production and consumption of coal to zero.  You would accomplish nothing. 

And it actually gets worse.  While Obama talked in vagueness and platitudes, it is clear that the initiatives he spoke about involved primarily restrictions on power production and consumption within the U.S.  But do you know that the U.S. is a huge exporter of coal -- mostly, of course, to China?  Yes, it turns out that the resourceful U.S. coal mining industry, facing increasing restriction on coal use from the EPA (let along competition from fracked natural gas) has been shipping off rapidly increasing quantities of the stuff.  According to Bryce:

In March, the U.S. set a record for coal exports in a month, 13.6 million tons. Indeed, on the same day that [White House energy advisor] Zichal was talking about Obama’s legacy on climate issues, the Energy Information Administration released a report showing that U.S. coal exports are likely to set another record this year, after setting a record of nearly 126 million tons in 2012. The EIA pointed to increased Asian demand as a major reason for the rise in U.S. coal exports.

Now there is nothing in Obama's speech about potential restrictions on coal exports, and I can't imagine he would go there, because he would be putting thousands of people out of jobs in critical swing states like West Virginia, Virginia and Pennsylvania.  So therefore, Americans will be forced to buy more expensive energy while the American coal will be mined in increasing amounts, sent off to China, and burned there, leaving the exact same amount of carbon in the air as if we had burned it here. 

So is there any possible logic by which this all makes sense?  Why yes: the war on coal gives the government an enormous opportunity to grow and seize power.  Lots of need for new regulations to make coal difficult or impossible to use.  Lots of need for inspectors and enforcers to be sure the regulations are being followed.  Lots of need for subsidies to expensive wind or solar power, providing endless opportunities for corrupt crony capitalists to make "political contributions" (pay-offs) to politicians to draw the subsidies their way.   Lots of opportunities to buy the loyalty of the corrupt crony capitalists with government handouts subject to periodic review and renewal.  Yes, if your primary goal was to grow the government, it makes perfect sense.  And if at the same time it means that the American people are to be made poorer because they must pay double or triple for the same amount of usable energy, well, we don't know anything about that and anyway, too bad.

The Race Is On To See Who Can Become The Next Eliot Spitzer

The role of government prosecutor is one of immense power, necessary to protect the people against crime but also easily subject to overreach and abuse.  With our structure of multiple layers of government comes multiple layers of prosecutors, each usually ambitious for higher office, with overlapping jurisdictions, and competing for public attention.  Needless to say, when there is a prosecution of a prominent figure or large corporation, particularly a financial institution, there is huge reason for skepticism.

The state of the art in the prosecutorial shake-down for political gain was set by Eliot Spitzer, Attorney General of New York from 1999 - 2006.  The office of Attorney General in New York is one with very limited criminal jurisdiction.  Mainly, the AG gives legal advice to state agencies and handles civil litigation for and against the state.  Almost all criminal prosecution authority in New York rests in the county District Attorneys.  But somewhere along the line the AG got the authority to enforce the Martin Act, a vaguely-worded concoction that seems to delete the mens rea requirement from financial crime.  Spitzer took that and ran with it.  He was shocked, shocked to discover that large New York banks offered investment banking and investment advice under the same roof.  Next thing you know he had shaken down, among others, Citigroup for some $400 million, Merrill Lynch for $100 million, and so forth.  And, of course, gullible journalists dubbed him the "sheriff of Wall Street," without bothering to take a critical look at the merits of the cases.  Next thing you know, Spitzer was Governor, only to flame out immediately.

But the techniques that Spitzer used to get to the top did not go unnoticed.  We now have two contenders for the title of the next Eliot Spitzer in New York. 

First up is Benjamin Lawsky, Superintendent of the Department of Financial Services.  That Department was created in 2011 by the merger of the former Banking and Insurance Departments.  Lawsky got his position by nomination of current Governor Cuomo.   A few days ago Cuomo and Lawsky put out a press release announcing a settlement with Bank of Tokyo Mitsubishi-UFJ, Ltd., a large Japanese bank, in the amount of $250 million.  The press release got front page play in the Wall Street Journal, among other places.  What did the bank do wrong?  According to the press release:

Between 2002 and 2007, BTMU moved billions of dollars through New York for government and privately owned entities in Iran, Sudan, and Myanmar, and entities on the Specially Designated Nationals (SDN) list issued by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC).

Not much more detail beyond that.  It sounds at least somewhat plausible, but do you wonder, as I do, what this has to do with New York State banking regulation, as opposed to the foreign policy of the United States?  Just a little looking quickly turns up a Bloomberg article linking to an Enforcement Information from the U.S. Government from December 12, 2012, punishing BTMU for the exact same conduct, except that the Federal sanction was only $8.6 million.  The Enforcement Information says that the conduct occurred from 2002 to 2007, and that BTMU initiated voluntary disclosure to OFAC when they discovered it.  Nothing about disclosure to the New York banking regulators -- why would they?

So what is the interest of the New York regulators here, other than hitting up a vulnerable bank for $250 million?  Follow the link in the press release to the Consent Order with BTMU.  The basis for the sanction under New York law is stated to be Banking Law Section 44.  But wait, that section only provides the procedure by which penalties can be imposed for violations of the law; it does not actually give the provisions that may have been violated.  What is the violation of New York law, people?

Are you surprised that a large international bank would pay the New York banking regulator $250 million, even though that bank just settled with the actual governing Federal regulator on the same conduct for a small fraction the amount, and the New York people can't even name the New York law that was violated?  Well, remember that these people can put BTMU out of business in New York in about two minutes, and they'd really, really like their name on the front page of the Wall Street Journal. 

And yet this year's Spitzer prize is not an automatic for Lawsky; there is competition!  In a column yesterday, Charles Gasparino of the New York Post nominates current AG Eric Schneiderman, suggesting that he leads "possibly the most politicized law-enforcement outfit in the country."    The evidence?  Well, there's the fact that Schneiderman is continuing the case against Maurice Greenberg, commenced during Spitzer's term some eight years ago, with most charges long since thrown out.  Greenberg has served a term as Chairman of the Manhattan Institute and is known for giving to Republicans.  Meanwhile, we have MF Global, where over $1 billion disappeared, while the firm was headed for Democratic ex-Senator and Governor of New Jersey and big Democratic contributor Jon Corzine.  No prosecution of Corzine from Schneiderman, or anyone else in New York.  Looks like the contest is going to be a horse race this year!

Two Alternative Lists Of Recommendations For The Next Mayor Of New York

A few weeks ago I commented here on the recent report put out by the New York City Bar Association called Policy Recommendations For New York City's Next Mayor.   The report itself is available by following the link here.

Then last week there arrived in the mail from the Manhattan Institute a special issue of the City Journal, titled After Bloomberg: An Agenda for New York.  This magazine is available online here. 

It is fascinating to compare these two documents, because although seemingly addressing the same topic, there is almost no overlap.  The contrast makes for a very clear illustration of the two ways of looking at the world.

The City Journal issue starts from the proposition that we have limited resources here and we need to set priorities going forward, including putting on the table things on which we are currently overspending.   The City Bar report has no consideration at all of costs or priorities, and is rather a wish list of new initiatives, some of which are likely very costly and others not, with no recognition that cost or priorities might even be relevant considerations in what can or cannot be done going forward.

The best analogy I can think of for the City Bar report is this:  A family living paycheck to paycheck, and heavily indebted on the credit cards, decides to get its advice on running the household from the twelve year old son.  The son, with no knowledge or information on the financial picture, recommends major new spending initiatives, such as buying fancy new video games and consoles and lots of tickets to sporting events, meanwhile completely unaware that the credit cards are already maxed out and that the mortgage is soon to be in default.

The most remarkable thing about the City Bar report is what is not in it.   How about just a basic overview of the budget situation?  The first article in the City Journal issue, by Steven Malanga, is titled "The Coming Budget Crunch," and outlines how certain categories of city spending, particularly debt service, pensions and health insurance, have ballooned during Mayor Bloomberg's tenure and promise to continue to balloon.  It's hard to argue with any of this -- it's just a summary of publicly available facts -- nor with the concept that understanding this situation is central to the task of the incoming mayor.  Yet the City Bar report contains no mention of the subject.  In fact, the City Bar report contains no mention of the cost of any of its proposals.  Nor does it contain any indication of suggestions of what spending would be appropriate to cut in order to make way for the proposed new initiatives.

The second article in the City Journal issue, by E.J. McMahon, titled "Overburdened," describes the extent to which New York City's tax regime is uncompetitive and drives away economic activity.  Well, there's an elephant in the room if ever there was one!  But the City Bar report fails even to mention the subject.

In the area of education, I have previously noted multiple times that in New York City we spend nearly double the national average per student, and get worse results.  Of course, the City Bar report does not mention that.  Instead, in the area of education, it recommends "new educational programming" to address what it views as the three most pressing educational issues of the times -- teen dating violence, "comprehensive, medically-accurate sexuality education," and humane treatment of animals.   You literally can't make this stuff up.

Well, you say, as much as they do seem to be missing everything important, it still doesn't sound like their proposals will cost too much additional money.  Keep reading.  How about this one:  "Remove administrative barriers to accessing cash assistance."  That's code for undoing welfare reform, the signature achievement of the Clinton administration in actually helping the poor.  Back in the early 90s, New York City had 1.3 million people receiving welfare, one person in six in the population.  Today it is about 400,000, about one person in twenty-one.  Going back to the old system could easily represent at $10 billion annual budget item.  The City Bar doesn't mention any of this history, or anything at all about cost, of course. 

Anyway, although of course I don't agree with everything in it, I highly recommend the City Journal issue for at least calling attention to the most important issues and getting at the priorities that need to be set and the trade-offs that need to be made.  Meanwhile, the City Bar report is a product of the delusional infinite credit card mentality, where all human problems can be solved by government spending, with no need to consider that there may be limits on resources.  It is truly embarrassing that an organization with the seeming prestige of the City Bar could come out with something like this.

Things People Are Not Paying Enough Attention To, IRS And Obamacare Edition

In the ongoing effort to protect its funding and grow still further, the government and its employees constantly seek to divert our attention from what is important, and few journalists are awake enough to push back.  (Or maybe most journalists are part of the project.)  Anyway, a couple of examples from today's news, from the IRS and Obamacare files. 

Richard Rubin of Bloomberg News is focused on whether the IRS has used a numerical test to determine which groups qualify for Section 501(c)(4) status.  A few weeks ago, then acting IRS Commissioner Steve Miller was asked whether the IRS applied a "49 percent standard" to determine the limit of political activity that a group could have and still qualify for the special tax status, and he testified "We've never been that precise."  Then yesterday one Elizabeth Hofacre, an IRS employee of the notorious Cincinnati office, testified that "[g]roups that devoted no more than 49 percent of their activities to politics were deemed acceptable."  Contradiction! 

In my view it's all a distraction.  The real issue here, from which attention is being diverted, is the definition of "social welfare" versus "political activity."  These IRS functionaries believe that advocating for the government to take care of and cure society's problems through spending and programs constitutes "social welfare" activity (hey, it's "helping the poor" and "the children"!), while advocating to shrink the government constitutes "political activity."  Under these definitions, all left/liberal advocacy groups automatically qualify for 501(c)(4) status, and all Tea Party groups automatically are disqualified.  And thus the government assures that its allies in the growth project get favored tax status and its enemies do not. 

Can somebody please ask the question, what are your definitions of "social welfare" and "political activity"?  I've looked a lot and can't find anybody asking about that.

In the Obamacare department, the diversionary tactic is to try to focus our attention on the upcoming premium level versus some arbitrary benchmark of their own choosing.  Thus the claim two weeks ago by Covered California Director Peter Lee that "we will be able to deliver exceptional value, low rates, access to health care in every region of the state . . ." blah, blah, blah.  Well, if I am a young, healthy person with no assets to protect, please compare the cost of one of these policies to the amount of health care that I would expect to buy without insurance.   Believe me, Lee will never let out that information.

Oh, but here it is in a column yesterday in the Wall Street Journal by Holman Jenkins, quoting no less a source than Justice Samuel Alito at the 2012 Supreme Court arguments on Obamacare.  (Alito must have gotten the information from one of the many amicus briefs.)  And the answer is, "young, healthy adults today spend an average of $854 a year on health care," while "ObamaCare would require them to buy insurance policies expected to cost roughly $5,800."  Well, you can fool some of the people some of the time, but no amount of diversionary tactics is going to keep that kind of disparity under wraps forever.