Yours truly made the resplendent comment that the move signalled there were, “no sacred cows, anymore.” Those were exciting heady days before things with financial reform had really started to unfold. So what has happened with Goldman and the SEC since then?

Here’s what,

Goldman, Sachs & Co., the broker-dealer, has agreed to a settlement with the U.S. Securities and Exchange Commission to resolve the SEC’s pending case against the firm relating to disclosures in the ABACUS 2007-AC1 CDO offering. The settlement is subject to the approval of the United States Court for the Southern District of New York.

The firm entered into the settlement without admitting or denying the SEC’s allegations. As part of the settlement, however, we acknowledged “that the marketing materials for the ABACUS 2007-ACI transaction contained incomplete information. In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was ‘selected by’ ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson’s economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure.”

We believe that this settlement is the right outcome for our firm, our shareholders and our clients.

To cut to the chase: in order to not have to publicly admit that they committed fraud, Goldman Sachs paid $550 million to settle a case with the SEC over… committing fraud. For all the fanfare and speculation over the announcement of the SEC’s case against Goldman, the settlement, which was announced on July 15, barely warranted a blip in the news cycle. Goldman Sachs did not deny fraudulent behavior costing their own customers approximately $3.7 billion and it basically went by unnoticed in most news circles.

That is a startling fact and it helps to demonstrate why overhauling the American financial sector was so important. When a $550 million settlement over a fraud case involving the country’s previously most reputable investment bank — a bank that initially called the suit, “completely unfounded in law and fact” — goes by basically unnoticed, you know that there are serious structural problems with how finance in the country conducts its business.

It’s not.

This descriptor is employed as regularly in left leaning publications – such as The Huffington Post – as it is used by the Wall Street Journal. And it is every bit as ridiculous when suggested by the left as it is when used by the right.

That the financial companies do not like Professor Warren makes infinite sense. It was Warren who first floated the idea of a federal consumer protection bureau and then went on to play a leading role in making it happen. As a result, life will be considerably more difficult for the credit card companies that have long gouged the American middle class and, in no small measure, they have Elizabeth Warren to thank for their troubles. The banks have every reason to believe that Warren will be tough on them and are having the expected allergic reaction to her taking charge of the agency she is largely responsible for creating.

But what’s up with this whole ‘darling of the progressives’ description?

The tag implies that only progressives have been plagued by the unsavory and predatory business practices of those credit card companies and other unscrupulous lenders who have been taking advantage of their customers for so many years.

I cannot imagine a more ridiculous assertion. Warren is not the darling of the left or a favorite of the right. She’s proven herself to be a champion of all the middle class. As such, she has earned the respect of everyone in the middle class who has ever been played by a financial institution.

Nobody should kid themselves. Money in the hands of a conservative is the identical color as money in the hands of a liberal. And when the financial institutions try to separate you from that money through usurious loans and predatory practices, they couldn’t care less about the ideological sway of that money’s previous owner. They have but one concern – making your money become their money.

While there may be few things left in this country where conservatives and progressives can come together, this has got to be one of them. The desire to have someone looking out for the consumer’s interest by protecting the middle class against the powerful financial institutions easily trumps our polarized politics.After all, stopping a credit card company from ripping off a liberal means that the same credit card company will be prevented from ripping off a conservative.

This is precisely why the notion circulating today that suggests that Warren can be – and should be – appointed without a Senate hearing is a terrible idea.

I can’t imagine a better opportunity to discover who in our government stands up for the people who put them there (whether Democrat or GOP) and who stands up for the financial institutions who pay the bills of our politicians.

There is only one possible reason why a United States senator would vote against Elizabeth Warren to run this agency. That would be the banks.

I cannot recall the GOP complaining as Warren emerged as one of the key critics of the Obama Administration’s bailout of the banks. I can understand Secretary of Treasury, Tim Geithner, complaining – as he has -about Elizabeth Warren. She has effectively been serving as the ‘shadow’ Treasury Secretary and making life tough on Geithner in her effort to police the bailouts. But how could this lead to a GOP filibuster against Warren’s appointment to this new agency? She’s been a bigger problem for the Democratic administration than she has ever been to the GOP.

Given that only the banks have a reason to object to her appointment, it will only be those Senators who serve the interests of the financial institutions who can object.

What a moment!  Will there ever be a clearer line of delineation between the politicians (including President Obama) who vote the interest of their constituents – both conservative and liberal- versus those who vote the special interests of the industries that line their pockets with campaign contributions?

It won’t just be GOP senators who have a problem when faced with a vote on Elizabeth Warren. Indeed, Democratic senator Chris Dodd (D-Conn) is already trying to protect his Democratic colleagues in a comment made yesterday suggesting that Warren would not be approved by the Senate.

Dodd, speaking on National Public Radio’s “Diane Rehm Show,” said there were questions over the support for Warren, who chairs a bailout watchdog panel and is considered a top candidate for the post.

“Elizabeth could be a terrific nominee. The question is, ‘Is she confirmable?’ And there’s a serious question about that,” Dodd said.
He declined to specify why he believes Warren might have difficulty winning Senate support, saying, that’s “what I’m picking up.”
Via Reuters

Talk about trying to stick the knife in the back of a nomination.

Elizabeth Warrens don’t come around everyday. The opportunity to put both the Administration and the Senate to the test of exactly who they stand with does not come along everyday.We simply can’t let this moment pass us by.  If Elizabeth Warren is nominated by the Administration by taking advantage of language in the financial reform law that suggests the Treasury Secretary can make an interim appointment to this job without submitting it to Congress, it will only mean that Obama has bailed out the Senate so that they might avoid the wrath of their bank contributors.The good news, of course, would be the appointment of Prof. Warren. The bad news would be another instance of the President passing up another opportunity to show the public who he sides with and who those senators are that are with the special interests.

And if the President fails to nominate Elizabeth Warren? In my opinion, this would be one of his most significant political errors to date.

Image by Getty Images North America via @daylife

Republicans have not been quiet about their opposition to Democratic efforts to pass financial reform legislation aimed at reining in Wall Street and avoiding another financial collapse like that experienced in 2008. Indeed, leading Republicans got busy calling for the repeal of the legislation before it had even passed the Senate.

The Republicans’ strategy seems to be centered around the idea that opposition to government spending, which has been running rampant in independent voting circles, and a general mistrust of government overreach would, as in the health care reform debate, resonate more strongly with Americans.

However, breaking polling indicates that Republicans may have misread voters on this issue.

A poll just released by Gallup shows Democrats taking their first lead over Republicans on the generic ballot for the midterm elections,

According to Gallup, the six-point jump is due in large part to movement by the very independent voters with whom the GOP has been so successful of late.

With Republicans’ and Democrats’ support for their own party’s candidates holding steady in the low 90s this past week, independents are primarily responsible for Democrats’ improved positioning.

While registered independents still favor a Republican candidate over a Democrat on the generic ballot, Democrats have made an impressive ten point gain among independents since the beginning of July,

While Gallup is hesitant to draw any specific causality between the passage of financial reform legislation and the jump in Democratic support, it does go on to note a June poll demonstrating majority support for an expansion of regulations overseeing major financial institutions. And while a majority of Americans have expressed skepticism over the bill’s predicted efficacy, it could well be that Democrats’ message about Republican obstructionism is finally finding some purchase.

In the Huffington Post last week, outspoken reform advocate Senator Ted Kaufman advised,

Ultimately, given the make-up of the Senate and the requirement of 60 votes, this was the best bill that could pass. For those who wish the bill was stronger, let there be no confusion about where the blame lies. It is because almost every Senator on the other side of the aisle did everything they could to stall, delay and oppose Wall Street reform.

Having banked on the success of their messaging, Republicans may well be unable to pivot on what seems like breaking sentiment among a class of American voters who will hold perhaps more sway than ever in this year’s midterms.

If that is the case and Democrats are able to take full advantage of lingering anti-Wall Street sentiment, the news may prove Democrats’ first real break in the polls leading up to November’s election and the meaningful possibility of a comeback from previous predictions.

Image via Wikipedia

So I said all along Blankfein would keep his job as Goldman Sachs’ chief, no matter what happens — the firm has made yacht-loads of money under his leadership, and when all is said and done, that’s all the Goldman partners and their shareholders care about. Moreover, if they fired the chief, they’d be admitting that they did something wrong — and considering that they settled the SEC suit so they could get on with business as usual, that’s something they are simply not going to do.

So, has Goldman learned anything from this whole horror?

I doubt it. Lots of reporters have been referring to this as a “humbling settlement” for Goldman. No matter where I look, I don’t see any “humbling” going on. Way I see it, the firm has yet more proof that there is absolutely no down side to getting rich on the broken backs of others.

First of all, the $550 million fine. Yeah, that’s huge by normal-people standards, and it’s huge by SEC standards, too. But it’s not a lot of money when seen in the context of the record profits Goldman’s been raking in (almost $13.4 billion last year). We’re talking maybe half a month’s earnings here, no more than that. Goldman can absorb that expense as easily as normal folk can absorb the cost of an occasional over-priced dinner.

And even if it couldn’t — Goldman shares went up more than 5% when the settlement was announced, adding a lot more than $550 million to Goldman’s market cap. (Yeah, the stock price could plunge again, while the fine is a concrete outlay, but still….)

But maybe the most disheartening aspect of Goldman closing this chapter is that it doesn’t have to tinker with the plot-line of its book.

Remember, Goldman was charged with defrauding its own clients by persuading them to buy a mortgage security that Goldman itself knew would tank.

Goldman denied it had done anything wrong — but it did NOT deny that it had withheld the fact that it had created the toxic security for the sole purpose of letting John Paulson, a mega-respected investor, bet against it. That’s kinda like telling me to invest my 401K in a new class of stock without mentioning that it was created just so that Warren Buffett could short it. Goldman’s grudging admission: it was a “mistake” to withhold the information, a mistake it regrets.

So have clients fled the firm in disgust? No sign that’s happened. Apparently, what looks like fraud and malfeasance to people like me looks like the kind of sophisticated savvy that existing and prospective Goldman clients want on their side.

Are shareholders fleeing? Nah, as I noted above, they’re bidding up Goldman stock. And they don’t even seem overly upset that Goldman didn’t immediately tell them that it was being investigated by the SEC (definitely material information). Sure, a few have sued — but many more are applauding.

Nor am I seeing any signs that Goldman will be forced to give up its bank holding company status. Remember, it switched to that so it could have access to real cheap money,even as it got rich from bailout funds and AIG payouts. Wanna bet it continues with that, too — unless new financial rules make that onerous. If that happens, Goldman will find yet another way to turn back the clock, publicly offering “regrets,” privately patting itself for another job well done.

It’s all pretty depressing, dontcha think?

Almost four out of five Americans surveyed in a Bloomberg National Poll this month say they have just a little or no confidence that the measure being championed by congressional Democrats will prevent or significantly soften a future crisis. More than three-quarters say they don’t have much or any confidence the proposal will make their savings and financial assets more secure.

Needless to say, this is very bad news for President Obama and Democrats. With health care reform still largely unpopular, it is becoming less and less clear what the key legislative achievement that underpins the narrative upon which Democrats run in November will be.

But the senator who should do the flipping is Wisconsin’s Russ Feingold, who has been opposed to the bill pretty much from the outset because it doesn’t go far enough. Some consider Feingold’s opposition to be a principled example that other Democrats would do well to follow. Though, it is worth noting that the hold out of support by Democrats like Feingold and Cantwell have led to concessions on issues like the bank tax and the Volcker rule as Democrats have had to seek support of senators like Brown.

But speaking to the Chicago Tribune, Feingold apparently went so far as to suggest that, “the new rules for Wall Street are so timid that passing them would do more harm than good.” While the bill certainly isn’t everything that advocates from strong reform wanted, it is hard to see how, as Feingold claims, the bill has, “Wall Street’s fingerprints all over it.” Or how it would do more harm than good.

The finger prints on the bill are largely claw marks that have resulted from Democrats’ desperate attempts to secure sufficient support for the bill after it went through a process of being strengthened during debate. It is ironic that senators like Feingold went to all the trouble of pushing to strengthen the bill, only to undermine that strength at the eleventh hour by refusing to support the bill out of conference.

Meanwhile, Feingold is facing a surprisingly challenging race in the upcoming midterms,

The Wisconsin Democrat faces a wealthy political newcomer with early backing from tea party activists in a state that has many independent voters and is known for doing its own thing. The likely GOP nominee, Ron Johnson, is running an outsider’s campaign. “We have to boot professional politicians out of Washington,” he says in his first campaign ad.

Feingold apparently plans to use his sole divergence from Democratic support for the financial reform bill as a selling point to Wisconsin voters, but this strikes me as sell job that no one is going to be buying.

Firstly, over the period of time that Feingold has been opposing the bill, his approval ratings have been on a steady downward slide. In fact, according to the latest polling, Feingold’s unfavourables have not inched just above his favourables.

Feingold’s has been a remarkably precipitous drop and it’s hard to know, without a financial reform feather in his cap, what Feingold might look to use as a means of stemming his bleeding popularity. And, as previously noted, with the numbers strongly behind reform, Feingold’s decision not to help pass the bill could very well wind up being used against him in the course of the midterm race.

A sudden turnaround for Feingold would require some fancy rhetorical foot work given his very vocal opposition of late. But appealing to his better judgment so as to ensure the passage of a set of reforms that Americans are united in their belief about the need for is a narrative that may well prove vital both for Feingold, and the country.

Image via Wikipedia

I feel old. Okay, let me work on my ego here — I feel experienced and wise.
Why? There’s an interesting Op-ed in today’s NYTimes that is all doom-and-gloom for the economy, that pretty much labels the nascent recovery as illusive and transitory. One big reason, it posits: Companies are not reinvesting their recovering profits. Why not? Relentless clamor from investors — and, of course, from executives looking for huge earnings-related bonuses — for constantly improving earnings.

The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.

Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.
<…>
So instead of pursuing budget retrenchment, policymakers need to create incentives for corporations to reinvest their profits in business operations. One way to do this would be to impose an aggressive tax on retained earnings that are not reinvested within two years. Another approach would be a tax on the turnover of corporate financial investments that would raise the cost of speculating with profits, rather than putting them into the business.

The author, Yves Smith, is right, of course. But if history is a teacher, I have little reason to believe he’ll be heeded.

Back in 1980 a group of us at Business Week Magazine put out a special issue called Reindustrialization of America. Six of us expanded it into a book (which, btw, sold quite well). One of the big points in my two chapters was that Wall Street analysts consistently lauded companies that showed quarter-to-quarter earnings growth, and just as consistently slammed those whose profits were lackluster, no matter the reasons.

Executives learned early on to make decisions that would result in an immediate bottom line boost. Build a new factory? Nah. Ship jobs overseas? You betcha. Ramp up the R&D budget? Don’t be ridiculous. Make an infinitesimal improvement to an existing product (“new and improved” sound familiar?), and revitalize sales with a non-innovative brand extension? Brilliant.

We were clamoring for more thoughtful analysis from Wall Street, more patience from investors, and maybe a new social contract — including tax incentives — that would reward executives for long-term decisions, rather than cost them their bonuses and promotions.

In 30 years it hasn’t happened. Yes, some pension funds loudly positioned themselves as long-term investors, with patient money at their disposal. And some industries — forgive me for saying something nice about them, but Big Pharma is one, consumer electronics another — have continued to pump nice percentages of sales into research.

But when you look at the full economic landscape, nothing much has changed. A company misses earnings estimates, and its stock plunges. Could that change? Of course. But I’m not holding my breath.

It won’t surprise anyone that Brooks once again devoted the most valuable opinion-based real estate in the country to vagaries and platitudes.  That’s just what he does — it comes from giving an opinion despite having no intellectual standing in said field.  And since Brooks has no expertise in any field — and I mean that literally, not disparagingly or hyperbolically — he finds himself in the uncomfortable position of constantly opining on subjects which are simply beyond his grasp.  Imagine someone at a cocktail party who hasn’t seen Citizen Kane, but instead of owning up to it embarrassingly spews forth, “You know, what continues to impress me about the film is its raw power and imagery.  Though I don’t love it as much as some of the Italian films I’ve seen (Which ones? Oh, you know, the classics!) AFI was right to put it near the top of their 100 greatest films.  Really, the imagery is phenomenal!”

That’s what I hear in my head every time I read David Brooks.  It’s infuriating.  And today’s column — which can best be described as an attempt to set a Keynesian strawman ablaze with a damp match — is no different.  After describing that some pundits and policy-makers (which I’ll refer to as “Krugmans” for simplicity) believe the economy is still weak and would benefit greatly from increased stimulus spending, Brooks then simply dismisses that line of argument with a wave of his hand, without bothering to marshal any evidence at all that the Krugmans are wrong.  Brooks writes:

These Demand Siders [who I've been calling Krugmans - JK] have very high I.Q.’s, but they seem to be strangers to doubt and modesty. They have total faith in their models. But all schools of economic thought have taken their lumps over the past few years. [emphasis added.]

GAH.  It’s unforgivable that the New York Times editorial board allows this lazy, destructive, sophomoric over-generalization to pass as analysis.  This blunt tool that Brooks is employing — everyone was wrong so let’s just move on — is responsible (at least in part) for the most disgraceful episodes of the past 10 years. Iraq — everyone thought Saddam had WMDs, let’s move on.  Guantanamo Bay and indefinite detention — everyone was behind opening GITMO, and even if we don’t all love it, we have it now and we can’t just close it down.  The Housing Bubble — no one knew we were in a bubble (in fact, it is impossible to know when you’re in a bubble, says Greenspan!) and there was nothing that could’ve been done about it anyway.

The most consistent aspect of how our country operates now is to promote those pundits and policy-makers whose counsel has proven most incorrect in all aspects to the highest levels of power, and to dismiss those who saw the dangers and tried to raise the warning flag as shrill, unserious, and naive extremists.  But in every instance in which Brooks and his Centrist-loving (read: Corporate-loving) cohorts claimed everybody was wrong, there have been those who stood up to the powers that be when it wasn’t popular to do so.  Those on the left who opposed the Iraq war — especially on the grounds that we were staring down the business end of mushroom cloud — have been vindicated.  Those — like Joseph Stiglitz and Brooksley Born — who warned the real estate bubble would pop, with disastrous consequences, have been vindicated.  Those –  like Krugman — who said the stimulus was too small have been vindicated, even if the likes of Brooks are to stubborn or dim to understand it.  So, no, David Brooks, those who have “taken their lumps” over the past years have been the devotes Alan Greenspan and the School of Deregulation.

Brooks goes on to say, falsely, that, “the Demand Siders don’t have a good explanation for the past two years.”  Krugman responds — again, with admirable (coerced?) restraint — by writing, “I have no idea what he’s talking about when he says [that].”  Krugman goes on to note:

Funny, I thought we had a perfectly good explanation: severe downturn in demand from the financial crisis, and a stimulus which we warned from the beginning wasn’t nearly big enough. And as I’ve been trying to point out, events have strongly confirmed a demand-side view of the world.

The thing is, it’s clear that Brooks himself doesn’t know what he’s talking about.  Again, I mean this quite literally.  He doesn’t understand the subject about which he has chosen to write a column.  Take for instance this sentence, which sounds like a real sentence, but upon inspection reveals itself as pure nonsense.

Consumers are recovering from a debt-fueled bubble and have a moral aversion to more debt.

The distinction that has to be made here is a clear one, but one a casual reader may not be aware of.  See, the bubble was fuel by private debt, due to a lack of regulation that caused prices to inflate until the bubble popped.  The “more debt” that Brooks (again, falsely) claims Americans are averse to is government debt, used to jump start the economy to avoid extended stagnation.

There are two ways to interpret this sentence.  1) Brooks is speaking for the uneducated American who thinks that governments should operate like families — ie, tight one’s belt when times are tough; or 2) Brooks believes this sentence himself, thus betraying a fundamental lack of understanding of macroeconomic principles.  If we proceed with version (1), Brooks is simply incorrect about what it is Americans want.  In fact, 60% of the country wants increased government spending until the economy recovers.  Brooks loves to speak for Americans, but he hates to cite polls –  that’s not unique to him, it’s a common sickness among celebrity pundits.

If we go with option (2), then that means that Brooks doesn’t understand how counter-cyclical spending works, which is really impossible.  He must know the basics of Keynesian thought.  So, then, he’s either being purposefully deceptive or just plain lazy.  Either way, way to go, NY Times.

What really ticks Krugman off more than anything else, though, is Brooks unsurprising appeal to authority.  Brooks writes:

Moreover, the Demand Siders write as if everybody who disagrees with them is immoral or a moron. But, in fact, many prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economists at the international economic institutions. Are you sure your theorists are right and theirs are wrong?

To which Krugman brilliantly responds;

Yes, I am. It’s called looking at the evidence. I’ve looked hard at the arguments the Pain Caucus is making, the evidence that supposedly supports their case — and there’s no there there.

And you just have to wonder how it’s possible to have lived through the last ten years and still imagine that because a lot of Serious People believe something, you should believe it too.

You also have to wonder how it’s possible that anybody would ever read David Brooks and think to themselves, “this guy is good.”  He is so bad.

Image by AFP/Getty Images via @daylife

Despite the fact that the likely outcome of financial reform negotiations will be a bill that doesn’t go as far as many have suggested it needs to, it seems that Wall Street is already putting plans into motion to punish Democrats for their efforts.

In extracting their revenge, Wall Street intends to hit Democrats where they are best able, in the pocketbook,

With the financial reform bill likely to hit President Barack Obama’s desk in coming weeks, Wall Street’s top political players are warning Democrats to brace themselves for the next phase of the fight: the fundraising blowback.

Democrats who backed the bill are finding big banks far less eager to host fundraisers and provide campaign cash heading into the tightly contested midterm elections this fall, insiders say.

Some banks, in fact, have discussed not attending or hosting fundraisers at all for the next few months. Goldman Sachs is already staying away from all fundraisers, according to two sources. The company would not comment.

In an election year, this threat no doubt causes some not inconsiderable concern for those Democrats up for election — particularly those in New York. But in all honesty, I think Democrats need to see this latest ploy by Wall Street as electoral mana from heaven.

Anger at Wall Street over their actions remains extraordinarily high. So much so that public outrage fueled a dynamic whereby the bill in question got stronger instead of weaker over the course of debate. And while the predictable degree of moderation has occurred over the course of conference, appetite for stronger financial reform remains high.

With Goldman Sachs polling at an approval rating of 4% as recently as May — an approval rating that, at the time, clocked in lower than BP’s 11% — the Democrats should have no qualms about being publicly scorned by Goldman and their peers. Even if that scorn comes with financial repercussions.

Indeed, the Obama administration could use some perceived distance between itself and Wall Street. A May 2010 CBS News poll found that 59% of Americans feel that Wall Street has too much influence over the administration. That trend remains true even when the perceptions are broken down on party lines.

Unsurprisingly, 60% of Republicans and 63% of independents feel that Wall Street’s grip over the administration is too tight. But a whopping 53% of Democrats feel that the Obama administration is too cozy with Wall Street, according to the poll.

With mid-term polling continue to favor Republicans, Democrats need to be able to cease on as many arrows in their quiver nearing the November election. As campaigns begin to shift into high gear, a loud, public, and messy fight between Democrats and Wall Street may well wind up being a more powerful public relations tool for embattled Democrats than any amount of fund raising might be able to buy.

Who wants to be a billionaire? (Image by Getty Images via @daylife)

While we’re still trying to grind out a financial regulation reform bill that is bound to make no one really happy, we’ve got a report in the Washington Post that Wall Street’s donors are seeing red and no longer donating blue. Democrats are concerned with dwindling receipts from donors associated with Wall Street’s fanciest zip codes. The donors who helped finance the Democratic Party’s take-over of both houses of Congress are upset, probably because Congress is following through and actually passing legislation that will cause the financial industry to make a bit less money than they did in the run-up to our ongoing Great Recession.

But have no fear, financial tycoons – Republicans in Congress are looking forward to doing whatever you tell them to do – make out your checks to the National Republican Senatorial Committee. Says the Washington Post:

Republicans, aware of Wall Street’s unease with their former Democratic allies, have tried to reap the benefits, to mixed results. Senate Minority Leader Mitch McConnell (Ky.) and Sen. John Cornyn (Tex.), chairman of the National Republican Senatorial Committee, made a much-touted trip to New York in April, and House Minority Leader John A. Boehner (Ohio) lunched with Dimon in late January.

The two Republican committees that are focused on congressional races have received $2.7 million from the New York area, slightly more than at this point in 2008 but less than the $4 million they raised at this point in the 2004 cycle when the party still controlled Congress.

via Democratic campaign committees losing big Wall Street donors.

Moe Lane at RedState takes a predictably partisan reaction to this news (pointing to this story from Maggie Haberman at Politico), expressing a bit of over-eager schadenfreude at Democrats finding that the checks aren’t coming in any more.

And that leads to the question of what’s sadder? Democrats being upset that they’re no longer raising big money on Wall Street? Or Republicans so far not paying the price for making it clear in every public way they can that they’ll happily return to carrying water for the people who ruined our economy by inventing ever more reckless creative ways to get rich off of non-existent economic activity (the housing “boom”)?

I suppose it’s the Democrats’ own fault. They spent half a decade getting back in Wall Street’s good graces, and then grinned and beared a colossally unpopular bailout of the banks as the toll of their misdeeds became clear. So it’s hard for them to credibly make the case that they’re the only ones who can prevent the next crash from occurring by reining in the financial industry.

Republicans, on the other hand, are making it clear that they will eagerly fuel the next economic crazy train that Wall Street wants to ride. Why can’t anyone from the Democrats’ side of the aisle credibly deliver the political message that if you want more economic chaos driven by speculative fervor, you’ll elect a Republican majority to Congress this November? It’s a sign of our compromised times that Republicans will not only get more campaign donations from Wall Street, but ride to major victories in November on the back of ‘anti-incumbency.’

Image by Getty Images North America via @daylife

What’s it like to be in a roomful of people who are too dim to understand that you are the only person who understands how the world works?

Ask Joe Cassano, the former AIG Financial Products executive who masterminded the derivative strategy that eventually led to a $132 billion bailout of the giant insurance company.

I wish I could have been there. Without a soupcon of irony, Cassano told the Financial Crisis Inquiry Commission that the derivative contracts known as credit default swaps are still money-good. The WSJ live blog reports that one FCIC commissioner asked: “Were you too optimistic about the housing market and how it could impact the cash flows of the CDS instruments you created?”

Readers, be warned: Cassano is no Warren Buffett; he did not aw-shucks his interrogators with “who could have known?” type of assertions. Cassano is a man quite sure of himself and his analytics. The WSJ blog reports, quite incredulously: “Cassano won’t even go as far to say he was wrong about the housing market. Most everybody was wrong about how far the housing market would fall.”

The guy has serious cajones. First he sells insurance contracts on $78 billion of mortgages. No hedges. Just one caveat: The buyer can issue margin calls at will.

And Cassano, who is no longer under threat of civil prosecution, forgets to mention to the bosses that AIG is at risk for mega-margin calls. (The FCIC members seem pretty stunned that Cassano was able to keep this under his hat until 2007 when the phone started ringing — and it wasn’t Jerry Lewis at the other end of the line asking for money.)

So, is it small wonder then that Cassano is the only guy in the universe who can out-negotiate Goldman Sachs? (He was obviously good at negotiating something: He earned $300 million during his 6-year tenure at AIGFP, including consulting fees after his departure.) Cassano clearly has no patience for the way the feds handled the counterparty payouts on the CDS. The Reuters blog quotes Cassano as saying that he would have “negotiated a much better deal for the taxpayer than what the taxpayer got.”

Especially when it came to Goldman, which accounted for about 25% of the CDS book and was the most aggressive in its collateral calls. In one example, Cassano says Goldman requested $1.8 billion in collateral. He negotiated that down to $480 million. Again, from the Reuters blog, Cassano says: “”My job is not to trust Goldman Sachs’s numbers, but to verify.”

In other words, Treasury Secretary Timothy Geithner should have realized it was sunrise in America and told Goldman and friends to bugger off when they demanded 100 cents on the dollar for their contracts. True, Lehman Brothers had just bitten the dust, so it was hard in that moment to be full of optimism for the future. But a touch of the Old Gipper would have been beneficial: trust but verify.

So, it seems Cassano does have one regret: He was forced out in 2008 when the auditors decided the AIG FP accounting methods were a bit unorthodox. If he had been at AIG during the worst of the storm, he says he could have saved taxpayers billions. Who knows, maybe he could have convinced everyone to stop with all that crazy mark-to-market accounting and pretend that all was well in the land of Financial Oz. It worked for former Fed Chairman Paul Volcker during the Latin American debt crisis of the early 1980s and even has a name: extend and pretend.

We’ll never know now if it would have worked. But we know one man who has no doubts about it. In fact, for Cassano, there would have been no pretend because really, according to Joe, the investments are working out exactly as he expected.

Why, by the way, c-span didn’t air these hearings is beyond me. Also testifying today was Gary Cohn, No. 2 at Goldman, aka, CEO Lloyd Blankfein’s best friend. Twitter had great live-blogging on the hearings today from @cate_long. Check out her stream.

The eye of the needle (Image via Wikipedia)

Apparently it is easier for a camel to pass through the eye of a needle than it is for the United States Senate to pass meaningful reform legislation. It’s deja vu all over again with the financial regulation reform bill that already passed both houses of Congress – and just as he did in January with health care reform, Senator Scott Brown, the unlikely Republican of Massachusetts, says he’ll vote no on the bill that seeks to rein in Wall Street. He objects to $19 billion in taxes to be levied against major financial companies, according to The Hill.

Brown, of course, already voted for the Senate’s version of the bill. What he’s objecting to is the ‘conference report’ – the output of House and Senate negotiators who sat down together and banged a bill into shape out of the two pieces of legislation passed separately in each chamber. David Dayen sketches out some scenarios of how they could get back to 60 votes in the Senate – probably, ironically, by adding to the deficit.

But isn’t that the thing? Twice in this Congress we’ve seen important bills successfully passed in both houses of Congress, and then get held up at the conference committee stage. I’m not one who is inherently anti-filibuster – certainly there are bills that I could imagine a future Senate passing that I’d hope would be filibustered. But in both the ‘finreg’ and ObamaCare cases, we’ve seen bills severely imperiled after they’ve overcome filibusters in the Senate. There’s just something inherently ridiculous about one or two senators being able to take back their assent and kill the entire process over what really amount to minor differences over legislation that’s already successfully passed.

Which is to say that it might be too far to abolish the filibuster. But should it really be possible to filibuster a conference report? I would argue no.

One might say that the ability to fiilibuster a House-Senate compromise prevents a runaway majority from inserting major provisions into legislation that never would have passed in either house of Congress. But that’s not what commonly occurs. Usually, a small group of members in one chamber objects to provisions inserted from the other chamber’s bill, not new legislation cut from whole cloth. And if a runaway majority were to combine bill A and bill B and give us bill Z rather than bill the sequentially closer bill C, that’s certainly something that could be campaigned against by the Senate minority, perhaps persuasively enough that they can bring a coalition of 11 Senators together to flip their votes to ‘Nay.’ After all, if there was really a ‘runaway majority’ we probably wouldn’t even be having this conversation.

What happens now with the philosophy of ‘no’ is that only one Senator stands up and says “I take my vote back.” In doing so, that Senator is setting themselves up as someone who must be kowtowed to on their own terms, not as someone who wants the best law to be passed. Effectively, the sole spoiler, I mean senator – Brown in this case, but it could just as easily be a moderate Democrat in a Republican Congress – is saying that they couldn’t win a legislative fight the first time around, but they’re going to hold a majority of 534 other Members of Congress’s feet to the fire over their parochial concern.

As we’ve seen in 2010, the ability to filibuster a conference report has only produced screwed-up legislative outcomes – bills that ultimately pass, but that risk the Congress’s ability to conclude other work as both houses are forced to find ever more exotic ways to pass through needles whose eyes they believed they’d threaded. If the Senate takes up filibuster reform prior to the seating of the next Congress in 2011 as they need to, maybe they should aim low and seek to remove the filibuster from the legislative 9th inning of the conference report stage, rather than just killing the procedure outright.

Image via Wikipedia

So it looks like we have a reform bill
that will pass and be signed into law. And in many ways, it’s a pretty good one. It’s curbing what banks can do with their money (i.e., restricting derivatives trading, etc.), it’s guaranteeing consumers a new order of protection (i.e., no more prepayment penalties on mortgages, disincentives for brokers to foist lousy mortgage on you, access to credit scores). It’s using carrots as well as sticks — e.g., there are financial incentives, in the form of lower requirements for risk-retention capital, for banks to issue high-quality mortgages rather than subprime loans. And it’s strengthening oversight in general.

But there’s the rub.

Once that bill passes, it will be up to regulators to interpret and enforce it. And the lobbyists who weren’t able to derail the letter of the bill are now gearing up to derail the spirit.

Here are a couple examples from the Times:

The much-debated prohibition on banks investing their own money, for example, leaves it up to regulators to set the exact boundaries. Lobbyists for Goldman Sachs, Citigroup and other large banks already are pressing to exclude some kinds of lucrative trading from that definition.

Regulators are charged with deciding how much money banks have to set aside against unexpected losses, so the Financial Services Roundtable, which represents large financial companies, and other banking groups have been making a case to the regulators that squeezing too hard would hurt the economy.

Scary stuff. On the one hand, I take heart that they couldn’t scuttle the bill altogether (although I do tip my hat in ironic and rueful respect to the Detroit lobbyist(s) who managed to get auto dealers exempted from new financial rules). On the other, I can’t help but worry that some of the behind-closed-doors discussions involved Congressfolk reassuring their big financial industry supporters, telling them not to worry about the bill, it’s for political show, we’ll take care of you when it comes time to actually enforce it.

I have worries about the consumer protection part, too. There’s a provision that says that tighter regulations must be run by a panel of small business reps, to be sure the proposed rules don’t accidentally adversely impact small businesses. It is one thing to listen to lobbyists and take their concerns to heart; it is quite another to write lobbying into law. I’d be much happier if the government made sure that at least one of the new regulators had small-business experience.

There are other worrisome things in the bill, too, of course. I agree with Gretchen Morgenson’s take:

For example, the bill still lets the Office of the Comptroller of the Currency bar state consumer protections where no federal safeguards exist. This is a problem that was well known during the mortgage mania when the comptroller’s office beat back efforts by state authorities to curtail predatory lending.

And Dodd-Frank inexplicably exempts loans provided by auto dealers from the bureau’s oversight. This is as benighted as exempting loans underwritten by mortgage brokers.

Finally, the Financial Stability Oversight Council, the überregulator to be led by the Treasury secretary and made up of top financial regulators, can override the consumer protection bureau’s rules. If the council says a rule threatens the soundness or stability of the financial system, it can be revoked.

That last one is particularly scary — any financial system that can be destabilized by a consumer-protection rule has got to be rejiggered immediately, whether that rule is passed or not.

And my jury’s out on the annuities issue. No question they need some intervention. Lots of people invest in those because, even though they don’t pay big, they seem pretty safe. But they involve huge penalties for early withdrawal of money, so they really aren’t a great idea for elderly folks. Yet old folks make up a huge proportion of annuity holders, probably because talented snakeoil salesmen persuaded them to buy.

The new bill deems annuities to be insurance products, and thus not subject to SEC regulation. That has some consumer advocates crying foul. I don’t have an opinion…yet. The SEC’s track record hasn’t been wonderful, maybe the insurance commission will do a better job. What’s important is that someone will be on the case!

In fact, as I said up top, now the real work begins. The bank lobbies will do their best to turn this nylon purse back into a sow’s ear; here’s hoping Washington holds firm and continues to aim for silk. All told, to borrow a line from BP, it’s a start.

Image via Wikipedia

I’ve been saying for a while now that despite his populist rhetoric, the President and White House officials have really been engaged in trying to claw back the strongest components of the financial reform bill currently in conference.  Now it appears that President Obama et al may have some assistance in that regard from liberal senators,

With lawmakers scrambling to finish the bill by Thursday, Democratic negotiators are keeping a close eye on where they will find 60 votes in the Senate. Even though the House and Senate won’t consider the final bill until next week, Dodd will need to lock down his Senate votes by the time the conference committee approves the legislation.

But that goal was complicated Tuesday by Sen. Russ Feingold (D-Wis.), who issued a statement reiterating his concerns about the bill. The other Democratic opponent, Sen. Maria Cantwell of Washington, appeared just as skeptical, dismissing proposed changes to the so-called Volcker rule on speculative trading as “Volcker lite.”

I clapped pretty hard for people like Feingold and Cantwell, as well as Kaufman, Brown, and Dorgan, among others, whose willingness to play hard ball resulted in a stronger overall bill. But you have to know the steps in your end game here.

At some point, liberal senators have to acknowledge that their actions have had substantially positive impacts on the process of debate on a particular issue, but that those tactics have gotten them everything they are going to get. When your continued hold out of support stands to actually weaken the bill you’ve worked so hard to strengthen because its proponents need to go to the center/right to garner votes, you’ve officially crossed over into counter-productivity and mindlessness.

Actions like this are precisely what have garnered progressives such a bad name in the past. I mean, look, financial reform has not gone the way of health care reform. There was an argument to be made about holding out support for the health care reform bill, though no Democrat in their right mind was actually going to do so.

It is a matter of fact that health care reform started off wobbly and just got weaker from there due to lack of commitment and outright pandering. Financial reform, on the other hand, started off pretty moderate and has gotten stronger over time. The actions of key liberal Democrats actually resulted in substantial gains.

Granted, the bill might not contain everything that progressives would like to see. But saying that passing the stronger version of where the bill wound up, even after some tinkering in conference, isn’t the same kind of empty sales job that the “pass and patch” messaging for health care reform was.

To throw those gains away by holding out your support and forcing the bill’s proponents to look for center-right votes on a bill that they are going to pass — or at least do absolutely everything in their power to pass — is just flat out juvenile and stupid. If Americans wind up with a substantially weakened financial reform bill as a result, there is no question that Feingold and Cantwell should wear that outcome.

Now what’s interesting to me is that the strategy of progressives has been to force politicians who are instrumental in such losses to face primary challengers by way of accountability. So should Feingold and Cantwell continue to hold out and thereby weaken the overall bill, will folks at Firedoglake, the Daily Kos, and Act Blue start acting on plans to primary Cantwell in 2012 and start a last minute primary battle against Feingold for this year?

The outcome here offers an interesting test for what I to date have thought was an overwhelmingly positive, if not a bit late, progressive insurgency to shift the political landscape.

Image by AFP/Getty Images via @daylife

Twin sets of good news on the financial reform front.

First this from the Wall Street Journal,

Wall Street’s lobbying army is marching around Washington in a push to shape the final financial-overhaul bill. But it has gotten harder to get through the door with some lawmakers.

There are three reasons why bending the ear of lawmakers suddenly has become a bigger challenge for financial-services industry lobbyists. Some lawmakers want to avoid even the slightest appearance that Wall Street is getting one last chance to throw its weight and money around on key provisions of the bill, including toughened oversight and other banking and securities cash cows.

Some lawmakers also have said they have little time to listen to outside lobbyists, particularly since Democrats are hoping to have the financial-overhaul bill signed into law by July 4. Mr. Frank, for example, hasn’t ruled out face-to-face meetings, but his legislative schedule is packed, according to a person familiar with the matter. He still is holding meetings by phone.

The House Financial Services Committee’s top Republican, Rep. Spencer Bachus (R., Ala.), left, confers with the panel’s chairman, Barney Frank (D., Mass.), in April.

Meanwhile, some banks have been told that their views are known already, given the long debate over how many legislative changes are needed in response to the financial crisis.

The degree of frustration that Wall Street is demonstrating is indicative of just how entitled it had become to the notion that it and not the country’s elected representatives ought to be determining the kinds of rules that govern the financial industry.

And then this today from the Washington Post,

The Office of Congressional Ethics is investigating eight lawmakers who held fundraisers within 48 hours of a major House vote on a Wall Street reform bill or received substantial donations from business people with a financial stake in the bill, according to congressional sources and letters.
The probe is focused on whether the timing of accepting the campaign checks created an unacceptable appearance of a conflict, according to sources familiar with the investigation and letters sent by the OCE to lobbyists requesting information.

While I’m not sure that anyone will have the guts to say it publicly, you can practically hear the grumbling about “witch hunts” under the breathe of Wall Street Executives and Members of Congress. But this is exactly why it was so important for financial reform to be as strong as possible. As Simon Johnson wrote in his landmark Atlantic article The Quiet Coup, the relationship between Washington and Wall Street has gone so much further than just regulatory capture

[T]he American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

…

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

That kind of power extends well beyond the realm of the now famous notion of regulatory capture, introduced by Chicago School economist George Stigler. As Johnson’s article suggests, the influence of Wall Street has manifested in a much more ubiquitous and pervasive fashion: intellectual capture.

Wall Street CEOs don’t just influence the rules that government the way they play the game of finance, they flat out create the rules and dictate the terms of the game itself. And for several decades now, Washington has been more than happy to go along with that plan.

The 2008 financial collapse might have acted as a wake up call to how dangerous this arrangement is, but if that collapse was anything in regards to reforming the way that finance works in the US, it is the beginning not the ending.

Breaking the kind of  deference that has developed on the part of Washington lawmakers towards Wall Street CEOs — a deference that, for all its populist rhetoric, the Obama administration has demonstrated in numerous instances — will be not unlike the process of a junkie kicking an addiction: it will be a long, hard, and messy process.And for that process to result in a successful outcome, it will require the implementation to be swift and strict, especially in the beginning.

Hard rules and bright lines of distinction have to be laid down in order to effectively counter the all too alluring tendency towards falling back in old patterns of bad habits. There is literally a reordering of the way that finance is done in the US that is required and it must be accomplished while the entirety of Wall Street and much of Washington oppose its implementation kicking and screaming.

There are many who would suggest that the financial reform bill that Congress is currently in the midst of conferencing doesn’t go far enough in this regard. There are certainly arguments to be made to that effect.

But further reaching measures notwithstanding, the fact that the bill become stronger over the course of debate rather than weaker is a  victory whose preservation must be fought for tooth and nail. It is not an exaggeration to say that the future prosperity of the country depends upon it.

And the faster that Washington can kick its Wall Street addiction, the faster it can get on to doing what its supposed to do: contributing towards that future prosperity.

Image by Getty Images via @daylife

For those of you playing along at home, it looks like the prospect that the efforts and money spent by progressives and organized labor in the Lincoln-Halter Arkansas race continues to have a decent chance of paying dividends, even though Halter ultimately lost the race to Lincoln.

From the Wall Street Journal today,

Sen. Blanche Lincoln’s surprising victory in Tuesday’s Democratic primary in Arkansas appears to have hardened an anti-Wall Street bent in Congress’s financial-overhaul bill.Ms. Lincoln wrote a controversial provision in the bill that could force banks to spin off their lucrative derivatives-trading operations. Bankers and many lawmakers assumed the provision would wither once Ms. Lincoln lost her primary—or even if she won, given the diminished political imperative to look tough on Wall Street.

But her victory appeared to have the opposite effect, with Democrats saying her standing is now strengthened, particularly as it appears the populist provision resonated with voters.

“We’re going to work hard to keep it in,” Ms. Lincoln said after leaving a meeting Wednesday in which she was loudly applauded by fellow senators.

It’s not a sure thing that Lincoln’s derivatives reform will survive, but neither is it a foregone conclusion that it will be dropped, anymore. And it is heartening that Lincoln feels that, at the very least, she needs to pay lip service to the idea of fighting to keep the reforms alive.

And even if it is changed,

Analysts following the legislation expected Ms. Lincoln’s proposal to be watered down or stripped out. One scenario saw it being replaced by separate restrictions on banks’ ability to use their own capital to make speculative market trades, a provision known as the Volcker Rule.

“It is definitely going to be changed, and in effect it is going to be dropped, but they will want to do it in a way that will preserve it as much as possible,” said Joseph Engelhard, a senior vice president at Capital Alpha Partners LLC

House Financial Services Committee Chairman Barney Frank (D., Mass.) has backed such a concept, contending the Volcker Rule could accomplish many of Ms. Lincoln’s goals.

Increasingly, the scenario looks like a win-win outcome. So let’s do some math.

As per my post from yesterday, the White House has suggested that organized labor flushed $10 million down the toilet in the Arkansas race. And yet, the efforts of progressives and organized labor in Arkansas look increasingly like they will be successful in addressing one of the primary issues responsible for the loss of 5.1 million jobs.

$10 million spent to address an issue that cost Americans 5.1 million jobs = $1.96 spent per job.

And that is money spent addressing an issue that the administration has consistently said it would not support addressing. In other words, the money was spent forcing the administration to deal with the issue of reckless derivatives trading.

On the other hand, using President Obama’s own reported numbers, the administration’s $787 million stimulus package is proposed to have created or saved 2 million jobs thus far and believed to be set to create or save another 1.5 million jobs in 2010.

$787 million spent to create or save a total of 3.5 million jobs by the end of 2010 = $224.86 spent per job.

Right.

Listen, the point here isn’t to say that the Obama administration is clearly the party who flushed money down the toilet or has been reckless with its spending. I continue to believe that the stimulus spending was important and necessary.

But to suggest that the efforts by progressives and organized labor to move the candidates to the left on issues they needed to be moved to the left on by primarying them and then not winning is flushing money down the toilet is just ridiculous and, frankly, ought to be beneath this White House.

The Dow Jones Industrial Average and the S&P500 averted near disaster today all because those two wacky sidekicks of the financial world pulled a rabbit out of the hat.

The story goes that Goldman Sachs, the firm we love to hate, made a late-day comeback after Barney Frank said he’d snuff a provision killing derivatives trading at the nation’s banks in the new financial regulation bill. The Goldman rally helped the Dow to erase most of the 200+ plunge today; the S&P500 actually eked out a gain. Damn! You would think Greece, Korea, or rising jobless claims would at least get one of the major stock indexes on this side of the pond to break through critical support levels. I mean, the FTSE at least was able to drop through 5,000.

For the sake of the economy, I’d like to say that I’m relieved the market rallied back above 10,000 on the Dow — but I’m not. I was equally unimpressed when the index crossed the dix mille bournes back in October.

That’s because I prefer to keep a closer eye on the credit markets — especially when it comes to reading the tea leaves of the economy.

The credit markets are less cartoon-like than equities. But they are wicked. For the past month or so they have been heading into a slow-mo laughing fit: You thought the recovery would be smooth? Ho-o-Ho-o-Ha-a-a-a-h! The stock market should shrivel at the humiliation.

Some call the bond market denizens vigilantes — because they force everyone to think about rising deficits, higher taxes, growth, and inflation. Stocks have more individual “stories” attached: A great leader or product; a market niche or dominance. They can be long-running tales with apogees and deep valleys –  Apple or Worldcom. They inspire passions. Bond people are nerds. That’s how they get to be the leaders when its time for systemic upheaval. No one pays enough attention to their formulae and schemes. Interbank lending rates. Yawn. Credit default swaps. Where’s the remote, hon?  But credit people can be prescient story tellers. And here’s the story that I hear today :

Banks are becoming more suspicious of one another and are slowly jacking up the interest rates on the loans they extend to one another. Bloomberg reports that the London Interbank Offered Rate now stands at 0.536 percent, up from 0.510 percent, the highest since last July. Another key rate, called the Libor-OIS spread, is showing signs of strain in the banking system, edging up to 31.1 basis points from 28.4 basis points. After the Lehman bankruptcy, banks became so worried about the solvency of the entire system that the Libor-OIS spread jumped to 364 basis points, or 3.64%. (The spread measures the cost of 3-month Libor vs overnight swaps rates.)

Investors are seeking safety. Treasury securities are rallying hard as investors seek cover from the debt woes in Europe; the Korean imbroglio is just a bit more oil to the fire — not the thing itself.  The flight-to-safety didn’t happen overnight. It’s more than a month old (see chart below; click to enlarge). Indeed, Mike “Mish” Shedlock  says that this is a “solvency crisis” – not a liquidity crisis. The flash-crash of May 6 was a liquidity crisis in extremis. A solvency crisis can only be solved through a long-term economic recovery.

NB: Gold is hitting record highs as some doubt the safe-haven status of Treasurys as the US faces mounting debt and slow growth.

Yield curve flashing danger ahead

The junk bond market has turned tail as investors reconsider the “all is almost well” story. The Wall Street Journal (in an item so short I thought I was reading USA Today) reported that new offerings have slowed to $2.2 billion, a quarter of the weekly pace for March and April. Further, in the past month, yields on junk bonds have jumped by more than one third, rising 1.62 percentage points to 7.02 percentage points versus benchmark Treasurys. The Journal glumly notes: “That is the biggest reversal since the market began to climb back from its lows of December 2008, said Martin Fridson, of Fridson Investment Advisors.”

Mish notes on his blog that seven junk bond offerings have been scrapped. Ouch.

Investment grade corporate debt is looking a little shopworn. Again, Bloomberg reports that wary dealers are widening the difference between the bid-ask spread on that sector. In other words, they’re buying at cheaper prices but not lowering their selling price all that much.

The crazy swings in stock prices over the past month have pointed to cracks in the recovery theory as well — a point Gluskin Sheff economist David Rosenberg has been making over and over for the past few weeks. The troubles overseas are prompting both stock and bond investors alike to reconsider the stream of “good news” that has emerged over the past year. They may just be noting that, once more, jobless claims are trending higher; the broadest measure of unemployment remains at record highs; and the housing market, the source of many of our woes, is still deeply wounded (see chart below). The truth is, the credit markets are telling us that the recovery is a long, long way off.

For-sale home inventory is rising

Yield curve graphic via Mish.

Housing inventories graphic via Calculated Risk.

More entrepreneurs launched new businesses in 2009 than at any other time in the past 14 years, according to a study released Thursday.

The figures from the Kauffman Index of Entrepreneurial Activity report that entrepreneurs have remained a strength of the U.S. economy amid one of the worst recessions on record.

It is said over and over again that small business is the engine of economic prosperity in America and this recent report demonstrates why that is more than just a platitude,

Of course, it isn’t all sunshine and roses for America’s small business owners and entrepreneurs,

A report this week by the Joint Economic Committee (JEC) found that small businesses continue to face tight lending standards that are limiting their hiring. It blamed a shortage of credit, reporting that tight lending standards banks imposed during the recession have not been lifted.

Entrepreneurial businesses launched in 2009 may not have been affected by a credit crunch, according to [Dane] Stangler [research manager for Kauffman]. Such businesses are often started with cash by the entrepreneurs behind them. Families and friends of entrepreneurs also often provide the initial loans that get new businesses off the ground, he said.

As the businesses grow, however, they’ll increasingly need credit from banks to hire more workers, according to Stangler.

In many regards, I think this is what Blanche Lincoln is addressing when she says, to paraphrase, that banks need to get back to being banks. Whether Lincoln’s tough anti-Wall Street stance in nothing more than a cheap electoral ploy or what she really thinks, the point she makes is a good one.

Part of what the financial collapse of 2008 revealed is just how little value banks and other financial companies place on the larger role they play in helping to propel American economic prosperity. By investing intelligently and lending money to capable and resourceful small businesses and entrepreneurs, the financial industry stands not only to come out richer itself but help drive wealth and prosperity for the entire nation.

That is a vital role and it has underwritten the success of the country over the past decades. So much of the anger fueling anti-Wall Street sentiment is outrage over the degree to which those banks have rebuked this important economic function in favour of their own limited self-interest and greed, come what may.

It’s “I’ve got mine”-ism at its worst and people have honestly and sincerely suffered as a result.

It is for these reasons that financial reform efforts are so important. There are integral elements of the country’s financial system that have gone disastrously off the tracks and they need fixing (they, of course, needed fixing decades ago, but here we are).

And this is the great irony of financial reform. If you listen to Republicans, you would come to the conclusion that anyone who supports the efforts of Democrats to rein in Wall Street is a business hating, big government loving, anti-capitalism fascist.

The truth of the matter; however, is that reform advocates have acknowledged the ways in which the heart of capitalism has become badly scarred and that decisive action needs to be taken if further damage is to be avoided. At core, reform advocates are fighting for capitalism.

But, the capitalism we’re fighting for through financial reform is not that which is concentrated in the hands of a narrow band of Wall Street elites. Rather, it is sensible and sustainable capitalism that, per the very promise of the country, stands to generate a tide that lifts all boats.

Financial reform efforts are about fighting for a capitalism that works for Main Street as well as Wall Street.

This is not currently the case in America and it can’t be the case so long as the naked fatalism of Wall Street continues to rule the day. Tepid efforts are, I suppose, better than nothing. But is a strong reform effort that might actually shift the playing field back in the direction of those small business people and entrepreneurs who persevere unabated.

Call me an optimist, but I’m of the belief that we owe them and the country our best efforts, and nothing less.

Man, the old and the rich, they can’t do anything for themselves.  I understand if you’ve never used, say, a Twitter or the Pandora.  But an ATM?  You’ve never run out of money at a strip club and been like, “okay, I can spend $80 more but then that is it!”  It never ends at $80.

ThinkProgress is reporting that in response to Sen. Harkin’s proposal to cap ATM fees at 50 cents, Nelson bizarrely pleaded ignorance to the problem [emphasis from TP post].

“I’ve never used an ATM, so I don’t know what the fees are,” Nelson said, adding that he gets his cash from bank tellers, just not automatic ones. “It’s true, I don’t know how to use one.” “But I could learn how to do it just like I’ve…I swipe to get my own gas, buy groceries. I know about the holograms.”

Hahahahaha, “I know about the holograms.”  Good!  Then you’re ready to continue your journey, young Jedi.

By “holograms,” Nelson clarified that he meant the bar codes on products read by automatic scanners in the checkout lanes at stores such as Lowe’s and Menard’s. “I go and get my own seating assignment on an airplane,” Nelson said. “I mean, I’m not without some skills. I just haven’t had the need to use an ATM.”

Nelson went on to say, “Also, everyone is always trying to send me a facsimile of a paper they have.  What is the deal with these facsimile machines?  Have you ever even seen one?  Where does the paper come from?  And that’s another thing: What is paper?  I’m told paper is trees, but that seems like quite a stretch.

“You know what I like, is pudding, from the cash-only General Store.  Yep, good ol’ frontier dollars for me, thank you very much.  And just to get ahead of the story on this next one, yes, I have ridden in a horseless carriage, but I’ve never been conscious in one, so don’t ask me about the price of “brown car juice.”  Every morning my ward feeds me deviled eggs until I fall back into a peaceful slumber, at which point I’m placed into my sterile bubble which is then stuffed into the back of a moving van.  I wake up on the Senate floor, and vote on behalf of my constituents, who are not robots, like ATMs.”

Maybe Ben Nelson opposed the Public Option during the health care debate because he always carries around so many $100 bills that he has never been without cash in his life.  Or maybe he’s feigning ignorance because he’s been bought by the banking lobby, a group who behaves like psychotic children in possession of an economic Doomsday device.  Either way, I’m going to start referring to ATMs as “Ben Nelsons,” as in, “I have no need to go to the Ben Nelson because I have no money left after my medical bankruptcy proceeding.”  It’s catchy, right?

The market started the morning on a deep slide as this chart purloined from Bloomberg News reveals.

The reasons for the freak-out? CNBC points to jitters about rising unemployment claims combined with a bad old day in the European markets, leaving German finance minister Wolfgang Schaeuble worrying aloud that markets are ‘ really out of control’ and in need of more regulation.

The market has bounced back up a bit, but there’s a high degree of volatility, leaving market watchers wondering if today is the kind of day that regulators might step in and declare a “time-out” on trading should their proposals to do so pass. Also, could we be on the way to a day when the market reaches the pscyhological burden of closing below 10,000? That could lead to an agita-filled weekend for a lot of people in finance.