SEC Investigating 19 Other Banks

It's not just Goldman Sachs. The SEC is looking at 19 of the biggest banks:

The Securities and Exchange Commission is examining whether any of the 19 largest U.S. banks are using an accounting trick that a bankruptcy examiner has said led to the collapse of Lehman Brothers, SEC Chairman Mary Schapiro said Tuesday.

Schapiro testified at a congressional hearing that the SEC is scrutinizing Lehman's use of the accounting move, known as Repo 105, that allowed it to mask its weakness before it failed. She said the agency has sent letters to the 19 banks, seeking information about any such transactions. More at the AP

See Timothy Geithner's remarks at the congressional hearing here. Watch live video of the hearing here. The SEC, under Schapiro, is intent on being more responsible:

Schapiro, who was not at the SEC in the fall of 2008, said the agency didn't do enough to oversee the five largest investment banks, even though it had authority over them since 2004. That oversight program, she said, did not have enough resources.

Going forward, "the SEC is determined to become a more effective regulator," she told lawmakers. "We are determined to use the lessons of that experience to be more effective."

Her comments come days after the SEC filed civil fraud charges against Goldman Sachs, alleging it withheld information in a complex transaction involving risky mortgage securities.

Geithner on Lehman and Financial Reforms

This is Timothy Geithner's opening statement to the House Financial Services Committee. Read his written testimony here. Geithner describes the shadow banking system and how reforms will fix it:

Chairman Frank, Ranking Member Bachus, Members of the Committee, thank you for the opportunity to testify.

On September 15, 2008, Lehman Brothers became the largest bankruptcy in American history. And in the days that followed, it helped push our financial system to the brink of collapse.

Lehman's failure illustrates many of the fundamental flaws in our financial system.

These problems are exposed with great care and force in the Valukas report.

The report tells the story of the ways in which our system allowed large institutions to take on excessive risks without effective constraints.

In particular, it allowed the emergence of a parallel financial system, what many have called the "shadow" banking system."

This system operated alongside - and was almost as big as - the regulated banking system, but it lacked the protections and constraints necessary to protect the economy from classic bank failures.

Imagine building a national highway system with two groups of drivers.

The first group has to abide by the speed limit, wear seatbelts, and buy cars with anti-lock brakes.

The second group can drive as fast as they want, with no safety features, and without any fear of getting pulled over by the police.

And imagine both groups are driving on the same road.

That system would inevitably cause serious collisions.

And drivers following the rules would inevitably get hit by the drivers who weren't.

A system like that makes no sense. We would never allow it on our roads. So why did we allow it in our economy?

Our financial system allowed risk to move towards areas where regulations were most lenient.

And as you would expect, when there's a lot of money to be made by avoiding regulation, there's going to be a lot of activity and risk where the constraints are weak.

In the lead-up to this crisis, we saw a complete breakdown in basic checks and balances in the system.

Credit rating agencies failed to do an adequate job of assessing the risks in structure credit products and disclosing their ratings methodologies.

Boards of directors failed to exercise critical judgment and address critical weaknesses in risk management.

Accounting and disclosure regimes did not adequately inform investors of material risks in a timely fashion.

Executive compensation rewarded short-term gains with little attention to the risk of long-term loss.

The derivatives market, operating largely in the dark without oversight, grew to enormous scale, with firms able to write hundreds of billions of dollars in commitments without the capital needed to back them up.

And, tragically, when we saw when firms mismanage themselves to the edge of failure, the government had limited ability to step in and protect the rest of the financial system.

It certainly didn't have any ability - as we do with banks – to step in and - in an orderly and safe way - wind down major investment banks like Lehman or major insurance companies like AIG.

Failure is inevitable in financial systems. The challenge for government is to design a system in which failures of private firms cannot cause catastrophic damage to the economy.

In our system, the Federal Reserve was the fire station, a fire station with important if limited tools to put foam on the runway, to provide liquidity to markets in extremis.

However, the Federal Reserve, under the laws of the land, does not have any legal authority to set or enforce limits on risk taking by a large global financial firm that was structured as an independent investment bank like Lehman, or an insurance company like AIG, or Fannie and Freddie, or the tens and hundreds of non bank financial firms that operated outside the constraints the banking system.

The sweeping financial reforms that this Committee has embraced, that the House has passed, and that the full Senate is about to consider are designed to deal with the vulnerabilities in our system exposed by crisis, and illustrated by the Lehman example.

First, with financial reform, an investment bank like Lehman will no longer be able to escape consolidated supervision because of its corporate form.

In fact, large firms like Lehman will be subject to tougher prudential requirements – such as higher capital and higher liquidity – and more exacting oversight than other firms, reflecting the greater risk they pose.

Second, with financial reform we will bring the derivatives markets out of the dark.

We will establish transparency so that regulators can more effectively monitor risks of all significant derivatives players and financial institutions.

And we will bring standardized derivatives into central clearing houses and trading facilities, reducing the risk that the derivatives market will again threaten the system.

Third, with financial reform, if a firm like Lehman still mismanages itself into failure, the government will have the ability to wind it down with no exposure to the taxpayer. This is bankruptcy designed for banks. It is essential to deal with moral hazard - the risk that investors and executives will take risks in the expectation the government will step in to bail them out.

And finally, with financial reform we will establish stronger protections for investors and for consumers, with clear rules, enforced across the financial market.

We need a system in which regulators can act preemptively to protect, not be left to come in after the fact to clean up the mess.

The failures in our financial system were devastating.

When a conservative Republican President – a President with abiding faith in markets – is forced by a financial crisis to put Fannie Mae and Freddie Mac into conservatorship;

to ask Congress for $700 billion in authority to stabilize the financial system and then to invest taxpayer money into banks that account for three quarters of the entire U.S. banking system;

to lend billions of dollars to two of our largest auto makers;

when he does all that – and he was right to do it – it is undeniable that our system is broken.

The question we face is not whether to fix it but how best to fix it.

Any strategy that relies on market discipline to compensate for weak regulation and then leaves it to the government to clean up the mess is a strategy for disaster.

Instead, the best strategy is to force the financial system to operate with more transparency and with clear rules that set unambiguous limits on leverage and risk so that taxpayers never have to come in and protect the economy by saving firms from their mistakes.

That is the strategy behind the reforms proposed last June by the Administration; the reforms passed last December by the House; and the reforms currently under debate in the Senate.

Thank you.

Obama's Speech to Wall Street at DNC Fundraiser Video

Obama asks Wall Streeters at the DNC fundraiser in NYC to go against their greedy nature. He asks them join in on regulatory reform instead of fighting it.

But we all know greed is a powerful thing and as long as Americans view material goodies, bigger houses and high salaries as success, it will always be the heart of our economy.
The financial industry is still rewarding itself with large bonuses, despite the fact that many can't retire because they lost everything. I'm sure social responsibility on Wall Street is a laughable, quaint notion.
On NPR's Fresh Air yesterday, New York Times writer Andrew Ross Sorkin details the greed. He has a new book called Too Big to Fail. Sorkin talks about what went on behind the scenes of the financial meltdown. He says history will say that our financial system was rescued from the brink.

Obama to Speak on New Financial Regulations Sept. 14

Update: Watch the video here.
Obama will speak at 12:10 eastern at Federal Hall. It is likely to be live streamed at cnn.com and msnbc.com.

Monday marks the first anniversary of the collapse of Lehman Brothers Holdings Inc., and President Obama is not going to let the day pass without focusing attention on his ambitious plan to overhaul financial regulations.

Obama will appear at Federal Hall, on Wall Street, the same place George Washington took the oath of office as the first president, to discuss the need for new rules governing the trading of financial derivatives and tighter regulation of banks and capital markets to better protect consumers.

Press Secretary Robert Gibbs said Friday that the president was using the occasion to remind Americans just how close the economy came to the brink, and to sell a series of steps "to ensure what happened a year ago won't happen again." Read more at The Deal

FBI Investigating Freddie Fannie AIG Lehman

Perhaps this is why Paulson wants to hurry things along. They're covering up something or are looking for ways to keep their wealth. Something's not right and it seems like the tip of the iceberg. The leaders of these companies who kept passing along bad mortgages need to start a homeowner fund with their personal money. They need to lose everything. This situation is an outrage. I don't know how else to say it.

Sept. 24 (Bloomberg) -- The FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc. and American International Group Inc. in its probe of the collapse of the subprime-mortgage market, according to a senior law-enforcement official.

Those companies are among 26 being reviewed by the Federal Bureau of Investigation for possible accounting misstatements, said the official, who asked to remain unidentified. The investigations are preliminary, the official said late yesterday.

The FBI has come under pressure to hold companies responsible as the loan crisis rocked Wall Street and led to the biggest housing slump since the Depression. Financial companies worldwide have reported more than $500 billion in losses and writedowns stemming from the subprime collapse.

Housing lenders Freddie Mac and Fannie Mae, as well as insurer AIG, were all taken over by the government earlier this month. Lehman filed for bankruptcy. The crisis has led the Bush administration to ask Congress to approve a $700 billion bailout for the financial industry.

CNN has a timeline.

Black Sunday On Wall Street

An Q&A with Dealbreaker newspaper, a trade paper for Wall Street. Not to get all scary on you but the industry isn't letting on how bad it really is. Neither is John McCain cause he doesn't know anything. Obama knows.

These headlines are very scary. How bad is this really? Are we looking at soup kitchens? Should we put what little money we have under the pillow?

We're already calling it Black Sunday. It's very, very, bad, and things may deteriorate further. This is as bad as anyone alive has ever seen it. Wall Street is broken, the independent investment banks that have existed since the Great Depression are passing from the scene and we may never see their kind again. Your money is safe if it's in an FDIC insured account [one day readers, we will figure out what that is], although even there it is threatened by inflation. There aren't many places to hide. I'm sorry that's so negative but these are dark times. You might want to read all of it.

It Was a Bad Bad Day for the U.S.

I avoided watching the news in one sitting, until now. Wow.
Americans ought to be outraged. This financial meltdown all stems from greedy business making risky loans with no oversight. What does that say about our leadership?
How could anyone even glance McCain's way? Just yesterday, his adviser wrote in the Washington Post that everything is fine and dandy. I have a feeling it's a lot worse than anyone's letting on. Not to be a Debbie Downer. Just a hunch.
Somehow, I just can't bring myself to ache for the people making six figures who are now losing their jobs. Join the club.
Which bank is next?
And Galveston Texas? Decimated. What crazy times.
In case you missed the banking woes, here's the rundown.
Here's more.
The folks or folk at electoral-vote have a good explainer:

electoral-vote:For people who don't understand what is going on, here is the story in a nutshell. Decades ago, when you wanted to buy a house you went to local bank and applied for a mortgage. If the mortgage was less than three times your annual income and you had a good credit history, the bank would loan you the money and you would pay them interest and some principal every month for 30 years. Then Wall St. got a bright idea: buy up all the mortgages from the banks, collect a few thousand into a pool called a CDO (Collateralized Debt Obligation) and sell shares in it. The owner of each share would get a pro-rata share of the incoming monthly mortgage payments, analogous to what a bond owner gets.

What happened? It sounded like a great idea and soon all mortgages were sold and repackaged into shares. It didn't take long before the banks realized that they could issue mortgages of five, six, even eight times the buyer's annual income or sell them to people with terrible credit histories. After all, the shaky mortgages would soon be somebody else's headache. That's what happened. Lehman, Merrill, and others bought billions of dollars of mortgages that the homeowners had no hope of ever repaying on schedule and nobody wanted to buy shares in these worthless CDOs, so the brokers got stuck holding the bag with billions in worthless loans.

What are the political consequences of this meltdown? It is a bit early, but here's the expected pattern. Republicans will say that bankruptcies, however unfortunate, are an absolutely essential part of free markets. When managers make stupid decisions, the market punishes them by driving them into bankruptcy. This warns other managers not to be so greedy. Democrats will say that millions of innocent homeowners and small investors are going to lose their homes and life savings due to misbehavior on the part of rapacious and unscrupulous bankers and that it is the job of the government to regulate the entire financial sector to protect ordinary people who don't know the difference between a CD and a CDO.

Obama on Freddie and Fannie

Here's Obama's letter to Henry Paulson, which expresses his stance on Freddie Mac and Fannie Mae.

September 9, 2008

The Honorable Henry Paulson
Secretary

U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220


The Honorable James B. Lockhart
Director
Federal Housing Finance Agency
1700 G Street NW, 4th Floor
Washington, D.C. 20552

Dear Secretary Paulson and Director Lockhart,

News reports indicate that the chief executives of Fannie Mae and Freddie Mac will stand to reap millions of dollars in severance payments when they are removed from their posts. Under no circumstances should the executives of these institutions earn a windfall at a time when the U.S. Treasury has taken unprecedented steps to rescue these companies with taxpayer resources. I urge you immediately to clarify that the agreement with Fannie Mae and Freddie Mac voids any such inappropriate windfall payments to outgoing CEOs and senior management.

When Congress granted the Department of the Treasury the authority to step in and rescue Fannie and Freddie, we explicitly included a provision that gave the new regulator the authority to block "any" payments made to CEOs that were "contingent on the termination" of their affiliation with the organization. It would be a gross violation of the public trust to fail to use this authority now, while American taxpayers and American homeowners, already struggling in a weak economy, are being asked to accept an historic intervention to rescue these institutions.

I recognize that intervention is necessary to maintain liquidity for the housing market so that homeowners can continue to get affordable mortgages and homes can be bought and sold in neighborhoods across the country. Yet one of the central requirements that I have consistently set in evaluating any intervention under this new legislation is that such action protect taxpayers and not bail out senior management from Fannie Mae and Freddie Mac. Multi-million dollar severance payments for the executives who helped steer these institutions into the current crisis situation would violate the spirit of the authority granted by Congress to the Treasury Department and would violate the public's trust.

I understand that details of the agreement are still being worked out. Please let me know right away what steps are being taken to ensure that the agreement is responsible and that Fannie and Freddie can continue to fulfill their important missions without wasting taxpayer dollars or rewarding poor leadership. The American people are watching and have put their trust in us to look out for their interests.

Sincerely,

Barack Obama
United States Senator

More on today's latest bank closing and McCain's worldview that the economy is strong:

NYT: Updated: GRAND JUNCTION, Colo. – Hours after Senator John McCain said “the fundamentals of our economy are strong,” Senator Barack Obama seized upon the remark on Monday and offered a blistering critique of the Republican Party’s stewardship of the economy as the Wall Street turmoil created fresh ripples in the presidential campaign.

“We just woke up to news of financial disaster and this morning and he said that the fundamentals of the economy are still strong?” Mr. Obama told voters at an afternoon rally here. “Senator McCain, what economy are you talking about?”