April 02, 2009

Are the "brightest minds in finance" finally onto something?

[Lynn writes somewhere else, copied without shame:]

A repeated theme in the Madoff hearing (by the person trying for a decade to get SEC to do something about Madoff) was that while new legislation and regulation was required, it was much more important to have transparency and visibility; crooks are inventive and will always be ahead of regulation.

however ... from The Quiet Coup:

But there's a deeper and more disturbing similarity: elite business interests -- financiers, in the case of the U.S. -- played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

From The DNA of Corruption:

While the scale of venality of Wall Street dwarfs that of the Pentagon's, I submit that many of the central qualities shaping America's Defense Meltdown (an important new book with this title, also written by insiders, can be found here) can be found in Simon Johnson's exegesis of America's even more profound Financial Meltdown.

... and related to above, Mark-to-Market Lobby Buoys Bank Profits 20% as FASB May Say Yes:

Officials at Norwalk, Connecticut-based FASB were under "tremendous pressure" and "more or less eviscerated mark-to-market accounting," said Robert Willens, a former managing director at Lehman Brothers Holdings Inc. who runs his own tax and accounting advisory firm in New York. "I'd say there was a pretty close cause and effect."

From Now-needy FDIC collected little in premiums:

The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

with respect to taxes, there was roundtable of "leading expert" economists last summer about current economic mess. their solution was "flat rate" tax. the justification was:

  1. eliminates possibly majority of current graft & corruption in washington that is related to current tax code structure, lobbying and special interests
  2. picks up 3-5% productivity in GNP. current 65,000 page taxcode is reduced to 600 pages ... that frees up huge amount of people-hrs in lost productivity involved in dealing directly with the taxcode as well as lost productivity because of non-optimal business decisions.

their bottom line was that it probably would only be temporary before the special interests reestablish the current pervasive atmosphere of graft & corruption.

a semi-humorous comment was that a special interest that has lobbied against such a change has been Ireland ... supposedly because some number of US operations have been motivated to move to Ireland because of their much simpler business environment.

with respect to feedback processes ... I (Lynn) had done a lot with dynamic adaptive (feedback) control algorithms as an undergraduate in the 60s ... which was used in some products shipped in the 70s & 80s. In theearly 80s, I had a chance to meet John Boyd and sponsor his briefings. I found quite a bit of affinity to John's OODA-loop concept (observe, orient, decide, act) that is now starting to be taught in some MBA programs.

Posted by iang at April 2, 2009 06:51 PM | TrackBack

a couple months ago there was CSPAN program looking at congressional financing that mentioned in the session that repealed Glass-Steagall, the financial industry made $250m in contributions and in the session that approved $800B TARP, there was $2B in contributions from financial industry. More recently there was report that there was a total of $5B in funds from the financial industry during the period (nearly evenly divided between the two parties).

Posted by: Lynn Wheeler at April 3, 2009 09:56 AM

additional articles about the FASB rule change:

The FASB Rally: More Dishonest Breathing Room For Banks
Mark To Market Eased: Making A Silk Purse From A Sow's Ear? Example Included Below

Why We Need to Keep Mark to Market

from above:

Investors once believed that U.S. markets were sufficiently protected from political pressure and manipulation by a system of interlocking independent agencies and rule-making bodies -- some government-run, some not. That system is being dismantled, piece by piece, by political jawboning and rushed rule rewrites. Now, investors find themselves with fewer protections and weakened protectors.

... snip ...

and ...

FHLB, the ‘B’ stands for Bowsher
Seattle FHLB Had ‘Material Weaknesses’ in Internal Controls

older post mentioning magnitude of problem:

Bank's Hidden Junk Menaces $1 Trillion Purge

from above:

So investors betting for quick solutions to the financial crisis could be disappointed. The tangled web that banks wove over the years will take a long time to undo.

At the end of 2008, for example, off-balance-sheet assets at just the four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- were about $5.2 trillion, according to their 2008 annual filings.

... snip ...

Posted by: Lynn Wheeler at April 4, 2009 09:53 AM

Mayo Says Loan Losses Will Exceed Depression Levels

from above:

Banks committed the “seven deadly sins” of banking in trying to compensate for lower natural growth rates and will now feel the costs of those actions, Mayo wrote.

... snip ...

Posted by: Lynn Wheeler at April 6, 2009 10:16 AM
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