....From Karl Denninger in the Market Ticker blog on Thursday 12 February '09...To Republicans,
Ok, you lost the election.
But your response to what has happened thus far with the Obama Administration ranks somewhere below "pathetic" and is dangerously close to "puerile."
You are still soliciting people to donate to the RNC under the rubric that you were and are a better choice. Your standard-bearer, McCain, made a fool of himself in the Senate the other day. And you still maintain that "tax cuts" are the fix for all that ails us.
If you want any chance of ever having a majority in Congress again, say much less The White House, you need to cut the crap and examine why you lost - then change it.
Here's the facts folks:
The Republican Party not only sat idly by while various banksters and their pals looted the public and the Treasury, they were actively complicit in allowing it. Paulson came to a republican Congress and SEC to ask for leverage limit removal in 2004, remember?
These frauds and scams, the root of the problems in our economy, were not born overnight. The CRA was not a major part of this. Not by any stretch of the imagination. The root of this credit bubble was the willful and deliberate destruction of oversight and regulation that would have prevented it from happening. Specifically, the evisceration of reserve requirements via sweeps and other games and the evisceration of leverage limits via off-balance-sheet nonsense, "deregulation" of the banking and Wall Street investment houses and willful blindness to blatant corrupt and fraudulent practices. Both political parties were evenly involved in the creation of this mess.
The reason this mess got out of hand was excessive leverage. For the last 20 years the banksters and their cronies (including a whole bunch of Republicans) have dismantled regulations capping leverage at sane ratios. The only way to prevent this from happening again is to reinstate those limits.
If you want to regain power in Washington DC and once again become a party of the people, you can - since it appears The Democrats are refusing to step to the forefront and seize the opportunity (damn foolish of them too, as they have power now and were they to take this advice they would literally feed The Republican party into a wood chipper feet-first) then you must become the "first mover" and shift the debate.
Americans are angry, and with just cause. The 535 Moes, Larrys and Curlys on Capitol Hill have taken hundreds of millions of dollars in campaign contributions which have purchased the right to blow serial bubbles and skim off fraudulent profits - their scheme of serial fraud has collapsed, destroying the average American's retirement, job security and economic prospects.
Here's the prescription to fix it now and forward - your platform on economics:
Reinstate Glass-Steagall. No more "Chinese Wall" nonsense. If you're a commercial, government-backed bank that accepts customer funds (e.g. anything with an FDIC guarantee) you may not offer investment products of any sort (including insurance-style products such as annuities) nor may you have cross-ownership or control with a firm that does. Period. Banking - the fractional reserving of depositor funds and issued debt for the purpose of issuing loans - is a utility function and its plenty profitable (if a bit stodgy) when operated as one.
Drop the 10% deposit concentration cap to 5%, and give existing banks that are over the 5% limit three years to get under it by splitting off or selling off assets. This applies to fewer than 25 institutions, and it needs to happen right now to control systemic risk. Bluntly, if you're too big to fail you're too dangerous to the banking system as a whole. See #1 above - commercial/retail banking is a utility function and should be regulated as same.
Repeal the "Bankruptcy Reform" law. Consumers must have the same right to go bankrupt and discharge debts that corporations have. Banks and others who grant loans must have this Sword of Damocles over their head - you make a bad loan and the borrower can file Chapter 7 and stick you with it, without exception. This will immediately collapse the outrageously overpriced bubbles that remain and are credit-driven, including post-secondary education.
Remove the obscure little change made in the EESA/TARP legislation that allows Bernanke to set the reserve ratio to ZERO for banks, and set it statutorily to 8%. Enhance the law by declaring that ALL funds taken in by a bank irrespective of their source are subject to the 8% reserve requirement (thereby removing the "sweeps" exemption that started this mess.) This will force leverage in the regulated banking system to no more than approximately 12:1.
Set the lawful leverage limit to 12:1 for all investment banks and other entities including hedge funds. Any firm that wishes to be domiciled or operate in the United States must comply. Period. I know what the counter-argument is - "they'll go somewhere else." Fine! Go blow up some other nation's economy. We've had enough of it.
Said 12:1 leverage limits must apply to all assets. Yes, even US Treasuries. If you hold it at most (for the safest assets) you can gear it at 12:1. Period.
Ban all off-balance-sheet vehicles; no exceptions of any sort. If you have control of it or are responsible for it in any form or fashion you must consolidate it on your balance sheet. "Shell corporations" set up to evade this requirement that have no capital or assets of their own are deemed a fraudulent shell company. Close the SIV loopholes.
No more Level 3 anything may count as "assets" and all model-marked assets in Level 2 must be disclosed specifically along with their pricing models and the inputs for same in quarterly and annual reports. The proper disinfectant for chicanery and fraud is sunlight. If a regulated or public company wishes to hold an "asset" without marking it to a market price they're free to do so - what they're not free to do is claim a value on it. This forces the recognition of the "worst case" value of all such "assets" at inception; there can thus only be upside surprises when they are eventually disposed of. Bingo - no more incentives to claim "value" that doesn't exist.
Bar the trading of derivatives contracts by commercial banks except where those contracts are backed by or insure a hard asset (e.g. a CDS on an actual bond or mortgage) and they are exchange-traded with a central clearing counterparty and thus guaranteed "good". If some Hedge Fund wishes to write or hold naked CDS and immolate themselves that's fine, but they cannot blow regulated financial firms (including insurance companies) to pieces nor can they distort share and debt-pricing mechanisms in the public, regulated markets.
Bar The Federal Reserve from any action that results in other than fully-collateralized lending. Further, force The Federal Reserve to publicly post in real time all transactions they undertake identifying the counterparty, the asset(s) taken in as collateral and the terms thereupon so that the public can verify that violations are not taking place and favoritism is not being employed.
All derivatives traded by regulated financial entities must be cleared and traded through a public exchange with a central counterparty, nightly margin supervision and published bid/ask/open interest.
Extend bank fraud statutes to explicitly cover actions taken by The Fed or any banking or financial institution in violation of statutory limits and name the members of the board of any such institution as personally responsible for violations. This stops the game-playing where institutions feel free to be "fast and loose" because all they will get is a slap on the wrist by FINRA or the SEC. With these offenses being federal criminal offenses the calculus changes immediately on what someone will and will not attempt.
The Republicans are the party of "law and order." Calculate the economic impact of violent crimes and set penalties for financial and other "white collar" criminal offense commensurately. For "white collar" criminal offenses that have more financial impact than an actuarial analysis shows would be the case for a murder, the appropriate penalty is life imprisonment without the possibility of parole. Change the law to make it uneconomic to pull scams and many of the scammers will stop. Those who don't we lock up and the good news is that unlike most violent offenders the scammers have enough money to pay for their own incarceration via disgorgement proceedings.
Stop trying to prop up asset (especially house!) prices. Instead, preach the truth - affordable housing means no more than 28% of your income goes toward all housing expenses, you should put 20% down, and you should not take anything more aggressive than a 30 year fixed-rate loan. For many areas this means median home prices must still contract. A house is shelter, not a speculative vehicle.
Make the following changes to the ratings paradigm:
Ratings agencies have no "speech" protection for opinions that prove flawed due to errors, omissions or acts of commission.
All data used by said agencies must be made available for verification by individual or firm that wishes to verify a claimed rating (e.g. no "proprietary" lockdown on data which is inhibiting firms like Egan-Jones from being able to fully analyze deals)
Purchasers of instruments may not rely on ratings soundness for "haircut" or "reserve" provisions under BASEL or similar regulations unless they paid for the opinion (that is, it was a "buyer's opinion", not a "sellers opinion".) Absent same the instrument is considered "unrated" for reserve purposes.
NRSRO certification is removed; any firm that wishes to offer opinions on debt instruments is free to enter the business.
Pledge to lock up all of the parties who engaged in fraud during the bubble years and to seek and obtain disgorgement of all of their profits, stock (restricted or not), salaries and bonuses during the time the fraud was going on.
Ban all "dark pool" trading. You want to trade it, the market has a right to know about it. Transparency and honest markets require public disclosure of bid, offer and size. Period.
The Fair Tax. Period. No more IRS. No more BS. No more lobbyists gaming the system. Nobody has to file a tax return ever again, save businesses who already do monthly for their sales tax returns. Taxation becomes completely transparent and voluntary based on your desired level of consumption. It is a radical step, it will create a huge boost to GDP as every firm that has fled the US for Bermuda and similar will repatriate and in addition it will cut the compliance costs out of every American's budget. Finally, it will tie government income inexorably to GDP, prohibit raising taxes without it being instantly visible to the public and provide incentives for capital formation - exactly what we need to create millions of new jobs.
The bank "stress test" that President Obama has proposed is a good start - provided that it is "clean". I have my doubts. I was planning on penning a Ticker on the "stress test" this morning but frankly one of the forum's brighter lights, Mtgspy, penned a blog entry that says it at least as well as I could have - go take a read.
The essence of why we continue to have these zombies walking around and the shorts are pressing their bets in all markets they can access is simple - the banks continue to run their scam by keeping all their worthless toilet paper in "Level 3" at or near par. So long as this charade continues - and it will until the cashflow shortfall from these "assets" forces their free cash flow below zero or the cops put a stop to it - the market cannot and will not clear. This has resulted in a loss of fifty percent in the equity markets, and we both can and will lose another fifty percent in short order (and perhaps another one after that!) until and unless this game is stopped.
Private investment money will not return until the fraud is flushed out. The people with private capital have been screwed blind by the charade of "Level 3" toilet paper sold off as "Grade AAA" securities, suffering hundreds of billions of dollars in losses, along with more than $10 trillion in public equity market losses. The banks have literally trillions of dollars of so-called "assets" marked at or near par because they don't like the market price, with even more held off-balance sheet in ENRON-esque structures that must be collapsed. Many of these "assets" are fully-synthetic monstrosities or second lines that have no actual physical asset behind them - they're literally unsecured credit with no real hope of principal repayment despite claims to the contrary. They are worthless or nearly so, despite the protests of those with "computer models" and as the market has seen through these fictions money has fled the markets.
There is only one way to get that capital back into the market and working - the frauds must cease, the malefactors must go to jail, and the bright sunlight of truth must shine upon the firms and individuals involved in this charade from the top down.
The political party that does this owns Washington DC and The White House for the next 20 years.
While lobbyists make lots of campaign contributions they cannot vote. The body politic, on the other hand, can and does, and it is looking for real change, not faux promises wrapped in a fancy suit that hides yet more used toilet paper - all marked "AAA", of course.
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This could be more well said and stated.
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