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“There were two pieces of legislation that facilitated our migration toward too big to fail… Interstate Banking and Branching Efficiency Act of 1994, which permitted banks to grow across state lines, and the Gramm-Leach-Bliley Act, which eliminated the separation of commercial and investment banking. Since 1990, the largest twenty institutions grew from controlling about 35% of industry assets to controlling 70% of assets today.”

-Kansas City Federal Reserve president Thomas Hoenig. in an August 6 speech before the Kansas Bankers Association.

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There is a fascinating discussion of John Dugan, one of the earliest architects of the “too big to fail” concept, in the January 2010 issue of The Nation. Nothing in the article will surprise regular readers of this blog; however, the extent of the wrongheaded belief system and policy initiatives still has the power to shock.

Dugan’s main work came about in 1989, when Congress ordered the Treasury to conduct a study on FDIC deposit insurance. Dugan ballooned the project into a 750-page manifesto, titled Modernizing the Financial System: Recommendations for Safer, More Competitive Banks (1991).

The title is misleading: There were many policy ideas pushed in the tome, but in terms of the current economic collapse, there were three of significance:

• Allowing banks to expand into multiple states without incurring additional regulatory oversight;

• Allowing relatively safe commercial banks to merge with riskier investment banks and insurance companies (Repeal of Glass Steagall);

• Allowing commercial firms (General Electric, Sears) to purchase banks.

There is no small irony in that a hard core GOP ideologue wrote the blueprint for Democrat Bill Clinton’s deregulation. “It was the first real recipe for too big to fail” said banking scholar Arthur Wilmarth Jr., professor at George Washington University Law School.

Dugan next became head of the Office of the Comptroller of the Currency (OCC), Dugan played a leading role in dismantling the existing system of consumer protection.

Elizabeth Warren, chair of the Congressional Oversight Panel for the Troubled Asset Relief Program, and Harvard University Law School professor, lambasted the OCC: “For years, the OCC has had the power and the responsibility to protect both banks and consumers, and it has consistently thrown the consumer under the bus.”

The rest of the article details the usual revolving door story: Dugan leaves government, goes to work as an industry lawyer, helping banks circumvent the very regs he helped to create. In 2005, he is appointed as head of the OCC (it expires in August 2010).

For those people who believe that more deregulation is the way to regulate financial institutions, I advise you to closely study Mr. Dugans life work . . .

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Previously:
Sheila Bair vs. John Dugan (June 14th, 2009)
http://www.ritholtz.com/blog/2009/06/sheila-bair-vs-john-dugan/

Source:
A Master of Disaster
ZACH CARTER
The Nation, January 4, 2010
http://www.thenation.com/doc/20100104/carter

So the old 27″ Sony TV — a 32″ CRT in the bedroom is — finally dying. Turn it on, and the screen goes on and off until its warmed up. I want to replace it with a bigger flat panel — I want 37″, the wife insists on smaller. Looks like 32″ will be the compromise.

I am torn between getting something really nice or a something that’s a really good deal. I am leaning towards the latter.  The TV in the den is kickass — and I really don’t want to be tempted to watch anything other than late night TV before bedtime.

I started looking around for a replacement, and I was stunned at how much prices have freefallen. The NYT runs full page J&R ads most days, and the discounts have been pretty deep.

Here’s what I scared up:

Good (720p)

• Panasonic VIERA X1 Series TC-L32X1 LCD HDTV ($400) (More info at Panasonic)

• Sony KDL-32L5000 BRAVIA L-Series LCD Flat Panel HDTV ($449) (More info at Sony)

Better (1080p):

• LG 32LH30 LCD HDTV ($449)  (More info at LH)

• Sony KDL-32XBR9 Class BRAVIA XBR9 Series LCD HDTV ($599) (More info at Sony)

Are there any better suggestions?

I’m leaning towards the cheap Panasonic VIERA X1 Series TC-L32X1 — a 2009 model that comes with an iPod doc — it turns the tv set into a audio system.

And since the Beatles box set forced me to upgrade to a nicer pair of front bookshelf speakers in the den, I have two pretty good satellite speakers to use with this in the bedroom.

Any preferences/suggestions/ideas?

After a week of gray, rain, grayer, snow, and even more gray, the sun is finally out. The snow has melted, and its gorgeous out. Time to take the two seater out for a ride, and enjoy the weather!

Meanwhile, I have several good reads from the past few days that are worth pouring a cup of coffee and spending some time with before the weekend is over:

• Retailers Shift Focus to Post-Holiday Deals to Lure Buyers (Bloomberg)

• A Flat Dow for [another] 10 Years? Why It Could Happen (Barrons)

• Corporate Governance two-fer:

-Does Golden Pay for the CEOs Sink Stocks? (Yes) (WSJ)
-What Iceberg? Just Glide to the Next Boardroom (NYT)

• How Overhauling Derivatives Died (WSJ) Short answer: The US Congress, a wholly owned subsidiary of the banking sector.• More prime mortgages default in 3rd quarter (LA Times)

• Andy Kessler: Put Down That Shovel! Forget old-fashioned infrastructure — here are 6 government projects to foster a lasting economic recovery.

• Media two-fer:

-The Real Reason Newspapers Are Losing Money
-The Tablet Hype: Why they can’t save newspapers (Slate)

• Green Daredevils: Rise of Wind Turbines Is a Boon for Rope Workers (NYT)

• Give us our daily brand (Guardian)

• The 2009 List of 2009 Lists (Fimoculous)

What are you reading?

I do not agree with everything Austrian Economics preaches — but I believe they are dead right when it comes to the way to handle insolvent banks.

This week’s Barron’s has a short interview with Kevin Duffy and Bill Laggner of Bearing Asset Management.

I really like Kevin’s quote on the bank rescues:

“Any healthy system needs a way to correct error and remove waste. Nature has extinction, the economy has loss, bankruptcy, liquidation. Interfering in this process lengthens feedback loops. Error and waste are allowed to accumulate, and you ultimately get a massive collapse.

Capitalism is primarily attacked by two groups: utopians who wish to impose a more “compassionate” system, and political capitalists who want to enjoy the fruits of success without bearing the pain of failure. They use the coercion of the state to gain privileges, at the expense of everyone else.

As a country we’ve become less tolerant of economic failure. The result has been a series of interventions, such as meddling in the credit markets, promoting homeownership and creating a variety of safety nets for investors. Each crisis leads to an even greater crisis. The solution is always greater doses of intervention. So the system becomes increasingly unstable. The interventionists never see the bust coming, then blame it on “capitalism.”

-Kevin Duffy, Bearing Asset Management.

Good stuff . . .

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Source:
Shorting the Economic Recovery
ROBIN GOLDWYN BLUMENTHAL
Barron’s DECEMBER 28, 2009

http://online.barrons.com/article/SB126167812677704659.html

Assorted top 10 lists from 4 NYT auto reviewers:

EZRA DYER
1. BMW 335d
2. Ford Fusion Hybrid
3. Audi S4
4. Chevrolet Camaro
5. Mazda 3
6. Jaguar XFR
7. Audi R8 5.2 V-10
8. Nissan 370Z
9. Ford Flex with the EcoBoost V-6
10. Dodge Ram

LAWRENCE ULRICH
1. Volkswagen Golf TDI and GTI
2. Audi S4 and S5 Cabriolet
3. Volvo XC60
4. Ford Fusion Hybrid
5. BMW 7 Series
6. Nissan 370Z Roadster
7. Audi R8 5.2 V-10
8. Mazda 3/Mazdaspeed 3
9. Mercedes-Benz E-Class coupe
10. Land Rover LR4

JAMES G. COBB
1. Ford Fusion Hybrid
2. Mazda 3
3. Audi R8 5.2 V-10
4. BMW Z4
5. Kia Soul
6. Volvo XC60
7. Toyota Prius
8. BMW 750Li xDrive
9. BMW 335d
10. Toyota Venza

JERRY GARRETT
1. Toyota Prius
2. Ford Fusion and Fusion Hybrid
3. BMW 335d
4. Ford Mustang GT Convertible
5. Ford Taurus/Taurus SHO
6. Volkswagen Golf TDI
7. Audi A3 TDI
8. Honda Accord Crosstour
9. Toyota Venza
10. Chevrolet Camaro

Source:
Critics Pick Their Favorite Cars of 2009
THE NEW YORK TIMES, December 24, 2009

http://www.nytimes.com/2009/12/27/automobiles/27picks.html

What a lovely Christmas present from Zach Carter (discussed here Saturday).

Writing in The Nation, the banking reporter for SNL Financial News describes the wreckage left behind by John Dugan, the Comptroller of the Currency and the primary regulator for most of the US banking industry.  To say that Dugan is the lackey of the largest banks is really an understatement.  The former lobbyist and Treasury official has been the defacto advocate for the largest dealer banks through the crisis, opposing regulatory reform initiatives  on Capitol Hill and even from the FDIC, every step of the way.

Writes Carter:

Over the course of nearly a quarter-century, Dugan has proved himself a staunch ally of the American financial elite as a Senate staffer (1985-89), a Treasury official (1989-93) and a lobbyist (1993-2005), building a career that culminated in 2005 when George W. Bush appointed him comptroller of the currency. When the financial system finally succumbed to its own excesses in September 2008, Dugan’s fingerprints were all over the economic wreckage, but almost nobody noticed.

Most recently, Dugan opposed the FDIC’s issuance of a preliminary rule regarding securitizations, adding to his list of accomplishments. Dugan has consistently sided with the narrow interests of the largest banks and against the broader public interest during his tenure in Washington.  If you were to pick one Washington official who was most responsible for the problems in the US banking system over the past cycle, it is most definitely John Dugan.

The issue for Democrats and members of the American Left raised by this article in The Nation is why does Barack Obama allow this situation to continue one day longer?   The continuance of Dugan at OCC and Treasury Secretary Tim Geithner at Treasury illustrates how feeble the White House remains when it comes to financial services policy.

Or maybe the problem is one of conflict.  Like Larry Summer’s derivatives toxic waste dump inside Harvard’s endowment fund?

And let’s not forget Rahm Emmanuel’s proud legacy as a director of Freddie Mac. Maybe the Obama White House just can’t go there when it comes to financial anything.

Click here to read the rest of the article in The Nation.

Chris

Click for audio

I hope everyone is enjoying the holiday festivities. I managed to relax and do very little work today. But I did come across quite a number of interesting articles — these are worth a read, regardless of the holidays:

• China Raises GDP Estimates, Closing in on Japan as Second-Biggest Economy (Bloomberg)

• Stadium Boom Deepens Municipal Woes (NYT) In case you didn’t realize what a giant scam municiple funded stadiums were. Enormous transfer of wealth from taxpayers to the ultra-wealthy

• U.S. Uncaps Support for Fannie, Freddie (WSJ)

• What I Learned in 2009 (Barron’s)

• Year in Review: Lessons from History–No Way Back to Cheap, Easy Credit (IMF)

• The Elves Leave Middle Earth – Sodas Are No Longer Free What it means when successful startups start cutting back on the perks.

• Fast, cheap, happy health care (MarketPlace) fascinating discussion of cheap affordable healthcare

• New Film Ignites Debate on Ratings Policy: MPAA shows just how out of touch it is by slapping an R rating on Its Complicated, the new Merrill Streep/Alec Baldwin comedy. Why? Because they smoke a joint in one scene. Welcome to 1972!

• Wired for War: Interesting new blog about the “Robotics Revolution and Conflict in the 21st” Century

• My favorite holiday story this year: Chicago man’s friends gift-wrap everything he owns; An instant classic in prankdom (Chicago Sun Times)

What’s on your reading list?

My friend Lauren Stransky who owns the graphic design company, Stransky Studios Inc., is a terrific designer. Given her clients, you’ve probably seen her commercial work (but not known it). This was her holiday card, which I, with permission, have appropriated.

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You can see more samples of her work here:
www.stranskystudios.com
Graphic Design + Web + Branding + Logos + PPT Presentations
studio: 845-225-0057

David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in Economics from The Wharton School of the University of Pennsylvania, an M.S. in Organizational Dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a Masters in Philosophy from the University of Pennsylvania. Mr. Kotok’s articles and financial market commentary have appeared in NYT, WSJ, Barron’s, and other publications. He is a frequent contributor to CNBC. Mr. Kotok is also a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics (PCBE), and the Philadelphia Financial Economists Group (PFEG).

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December 25, 2009

Merry Christmas to all and best of holiday wishes. We didn’t plan on writing today but are doing so to be sure our clients and readers and the especially the 300 worldwide journalists on our list see the action just taken by the Treasury Department under Secretary Geithner. It was clearly designed to minimize the press coverage of the changes in the GSEs.

This item was released after the closure of the healthcare debate and after the extension of the debt limit passed and after the president left for his Hawaii trip. Sent out on Thursday afternoon, Christmas Eve, the press release outlines the many changes that Treasury is making because of the worsening conditions of Fannie and Freddie. And it paves the way for the recognition of losses in the hundreds of billions in the GSE mortgage pools where the face amounts of the mortgages exceed the property market values or foreclosure amounts.

This action also moves things one step closer to full nationalization of the GSEs and full specific guarantee of the GSE debt by the US Treasury. That would put official GSE debt on the US government’s sovereign debt balance sheet. That is also where it belongs since this has been a game of deception over the implied guarantee and it is time for it to stop. Technically the GSEs are still operating under an ”implied” guarantee. Because of that the foreign sources and domestic US institutions have been reluctant to buy GSE debt and the Fed has had to step in with over $1 trillion to bolster the US housing market.

Read the rest of this entry »