Replies to post #299004 on $Stock*Shop*Charts*News*Option$

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AT: You Fools, Prop Trading Is What SAVED The Big Banks!

Bank Prop Trading Restrictions: Obama Doesn’t Get It

ASIA TIMES
January 22nd, 2010
By David Goldman

I have boundless regard for Paul Volcker, but the proposed restrictions on bank proprietary trading are, well, fixing the barn’s roof after the horse has bolted. The Obama administration really, really doesn’t get the joke. The banks went bankrupt by loading up on supposedly ultra-safe, AAA-rated assets, spawned out of the derivatives hatcheries with the collusion of corrupt rating agencies (who made most of their money rubber-stamping these time bombs).

They did NOT, NOT, NOT blow up taking risky proprietary bets. Yet the rating agencies (who claim no liability for mis-judgments on the grounds that they are exercising the same Constitutionally-protected free speech as a newspaper editorialist!) are in charge of rating credit quality.

Proprietary trading is what SAVED the banking system earlier this year. I laid this out in advance exactly a year ago — on Jan. 23, 2008 — in an essay for Asia Times entitled, “Fixing the bank crisis is the easy part.” I wrote:

Today’s problem is far worse than the previous two system insolvencies, to be sure. It is so large that nationalization the banking system very well might crush the credit of the United States. But with close to zero-percent funding from the Federal Reserve, American banks can acquire cheap assets that pay yields of 15%-20%. The cash flow available on non-agency mortgage bonds, credit card bonds, structured bonds backed by corporate loans, and other high-yielding assets is big enough to provide banks with positive cash flow despite mounting losses on real estate, mortgages and consumer loans.

At that point credit markets had broken down, as I observed:

What has happened, rather, is that the market’s willingness to buy credit-sensitive American bonds has collapsed. Between the first quarter of 2007 and the third quarter of 2008, mortgage-backed securities issuance dropped by roughly half, corporate bond issuance by three-quarters, and asset-backed issuance by more than nine-tenths.

$US bn Municipal Treasury Mortgage Related Corporate Agency Asset Backed
Q107 107.6 188.5 540.4 305.6 265.4 323.2
Q2 123.6 184.4 628.2 345.8 234.1 329.1
Q3 93.4 171.1 485.4 239.4 185.8 139.3
Q4 104.7 208.3 396.3 236.7 256.5 110.0
Q108 85.0 203.8 391.5 213.1 432.4 59.7
Q2 144.5 219.8 437.8 333.3 387.9 69.7
Q3 89.6 244.8 286.6 82.6 198.8 23.5

The banks earned outsized cash flows by stripping the dead on the battlefield through an enormous proprietary bet. If they hadn’t done so, the economy would be in far worse shape than it is now.

The banks have government support and deep pockets, and can afford to step in when everyone else is in full-tilt panic.

If you want to limit proprietary risk, there are several obvious things to do:

1) Limit the amount of risk banks can take on their books (through Value at Risk and similar models)

2) Take into account the embedded leverage in derivatives as well as actual balance-sheet leverages. This requires modeling, but there are thousands of unemployed hedge fund risk managers who know how to do this, and the models are fairly generic

3) Fix the ratings system. This is an area in which the enormous Fed staff of academics might do a better job than Moody’s, S&P and Fitch, who have lost a great deal of credibility.

The Federal Reserve allowed the banks to put on massive off-balance-sheet leverage during the lead-up to the banking crisis, through Special Investment Vehicles and such like. The regulators simply can take a more conservative approach to leverage.

All this is sensible. But the idea that one can separate proprietary from customer trading is silly to begin with, and undesirable in the extreme. When there’s panic, you want the banks to take proprietary risk as the buyer of last resort.

This entry was posted on Friday, January 22nd, 2010 at 10:29 am and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

http://blog.atimes.net/?p=1334

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TBI: STRATFOR'S TOP PREDICTIONS FOR THE NEXT DECADE: China Collapse, Global Labor Shortages, New American Dominance

Lawrence Delevingne | Jan. 22, 2010, 9:07 AM |

What will the next decade bring for the world?

STRATFOR has the answers. In a Decade Forecast released yesterday, the global intelligence company predicts Chinese economic collapse, game-changing global labor shortages, and continued American dominance because of a gradual retreat from international engagement. Welcome to 2010.

We spoke with Peter Zeihan, Vice President of Strategic Intelligence, about STRATFOR's predictions, of which he was an author. Below are edited excerpts from our conversation.

TBI: What are the broad trends that Stratfor sees shaping the world in the next decade?

Zeihan: Probably one of the biggest breaks that Stratfor has with conventional wisdom is that most of the world is convinced that the United States is a power in terminal decline. In fact we see the United States withdrawing from its two wars, regardless of whether or not they've ended, and returning to a more balanced attention span in dealing with the rest of the world.

Most of the rest of the world will view that as an American retreat from prominence and a sign that the U.S. is in decline once again. But really when you're a naval power and a merchant power, being out of the Middle East is increasing greatly your power to act and you willingness to act. So we see it as a very American-centric decade moving forward.

Which predictions are most surprising?

Aside from the United States not going anywhere, I would say we expect the economic collapse of China in this coming decade. We've been talking for awhile about how the economic system there is remarkably unstable and we think that they're going to reach a break point as all of the internal inconsistencies come to light and shatter. By the end of the decade, it'll be pretty obvious to everybody that the China miracle is over. As we enter the decade, people are finally, finally starting to talk about China bubbles. If only their problem was that simple!

With the Europeans, the new European treaty actually matters. The Lisbon Treaty is the first of dozens of treaties that the EU has done, but it's the first one that actually does away with most of the single member vetoes; and so you've got Germany actually able to force its will upon a lot of states. Germany is going to be ascendant in a manner that it has not been since the late 1930s! Doesn't mean it's going to be rolling tanks into Poland or anything like that, but they are going to be using their institutional power to push everybody around.

That is going to cause a remarkable degree of discord and unpredictability in Europe, and that is something that the Russians are going to take advantage of every chance that they get. The Russians realize that they're in a race against the clock before their demographics kill them as a country, and so they want to make sure that they've got as wide of a buffer as possible. As long as Europe is at each others throats, even if its just with bureaucratic paper, the Russians are going to take advantage of that to strengthen their western perimeter and push the frontier into Europe as far as they can. They know in 20 or 30 years they're not going to be able to do much, so they want to buy as much time and space as possible.

What does the American business community need to pay closest attention to?

The business community is probably going to get its shirt handed to it over China. Now American investment into China is not nearly as robust as most people think. It's actually only five or six billion dollars every year, very, very small in the grand scheme of things, even by Chinese standards. But the ability of China to continue to supply cheap exports to the United States might come into danger. Not on the whole, because all of the Chinese regional cities will still have an interest in doing that, even once the Chinese system cracks. But you're going to have to pay very close attention to your supply chain there as the politics of China become unglued.

Japan -- also a major investor in a lot of places, also a major supplier of a lot technology and a lot of capital -- Japan's demographics are the worst in the world. In the next decade, they're going to have to find some way to rectify the fact that they just don't have sufficient number of workers to supply what they need.

They could turn to their traditional surplus labor source, which is Korea and China, in which case we could have some sort of East Asian conflict, perhaps even military in nature. You have the world's second or third largest economies starting to duke it out in some manner, and businessmen in America are going to take notice. Or at least they'd better.

In a broader demographic issue, all of the countries in the developed world and most of them in the developing world are aging. We're going to be seeing a lot of countries maybe not start to have their populations decline but certainly have them age and no longer grow. The core economic platform that has driven the human condition for the last millennia is that populations will continue to get larger, markets will continue to get larger, there will be more capital available. In this next decade that starts to invert. The cost of capital is going to go up, the availability of markets are going to go up, and that's ultimately a deflationary environment. It'll get worse in future decades, but this next decade is when the rules of the game start to change.

China: doomed

"China’s economy, like the economies of Japan and other East Asian states before it, will reduce its rate of growth dramatically in order to calibrate growth with the rate of return on capital and to bring its financial system into balance. To do this, it will have to deal with the resulting social and political tensions," says STRATFOR's Decade Forecast.

It explains: "First, China’s current economic model is not sustainable. That model favors employment over all other concerns, and can only be maintained by running on thin margins."

"Second, the Chinese model is only possible so long as Western populations continue to consume Chinese goods in increasing volumes. European demographics alone will make that impossible in the next decade."

"Third, the Chinese model requires cheap labor as well as cheap capital to produce cheap goods. The bottom has fallen out of the Chinese birthrate; by 2020 the average Chinese will be nearly as old as the average American, but will have achieved nowhere near the level of education to add as much value. The result will be a labor shortage in both qualitative and quantitative terms."

"Finally, internal tensions will break the current system. More than 1 billion Chinese live in households whose income is below $2,000 a year (with 600 million below $1,000 a year). The government knows this and is trying to shift resources to the vast interior comprising the bulk of China. But this region is so populous and so poor — and so vulnerable to minor shifts in China’s economic fortunes — that China simply lacks the resources to cope."

Europe: heightened native-immigrant tension

"A deep tension will emerge in Europe between the elite — who will see foreign pools of labor in terms of the value they bring to the economy, and whose daily contact with the immigrants will be minimal — and the broader population. The general citizenry will experience the cultural tensions with the immigrants and see the large pool of labor flowing into the country suppressing wages. This dynamic will be particularly sharp in the core states of France, Germany and Italy," says STRATFOR's Decade Forecast.

It adds: "The elites that have crafted the European Union will find themselves under increasing pressure from the broader population. The tension between economic interests and cultural stability will define Europe. Consequently, inter-European relations will be increasingly unpredictable and unstable."

SEE ALL OF STRATFOR'S 2020 CALLS HERE>>>
http://www.businessinsider.com/stratfor-predictions-for-the-next-decade-2010-1#turkey-rising-3

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UKT: Obama rips up the rule book

The President's attempt to reform US banks may have unintended consequences, as billions are wiped off their shares prices and opponents sharpen their knives

By Philip Aldrick
Published: 9:00PM GMT 23 Jan 2010

Just over two years ago, a junior trader on Société Générale's proprietary trading desk in Paris was celebrating after making his bank a profit of almost £1bn. His success, he reckoned, would justify a bonus of about £200,000 and catapult him up the corporate hierarchy and on to greater riches. And why not? He had taken bold positions on a number of European stock exchange indices and they'd come good.

Within weeks, though, the positions had unravelled. The £1bn profit turned into a £3.7bn loss and nearly broke his bank. The SocGen individual was Jérôme Kerviel, the biggest rogue trader of them all.

As Kerviel went on the run and the bank launched an investigation into how he had evaded its controls, it emerged that the loss-making positions he held totalled £37bn – more than the value of the bank. Such huge exposures were only possible on the proprietary trading desk ("prop desk") – the casino in the bank – where a select group of traders are trusted to gamble with the lender's own money.

When it works, prop trading can be a source of great riches – for both the bank and the banker. Citigroup's prop trading oil unit Phibro made an average profit of $371m (£230m) a year between 2003 and 2008. With performance like that, some might say its British-born boss, Andrew Hall, deserved the $100m he was paid.

President Barack Obama, though, was not among them. When details of Hall's deal emerged last year, the White House described it as "out of whack" given that Citigroup had been rescued by the state. Last week, as he unveiled the biggest potential shake-up of banking since the Great Depression, the President went one step further. He described such payments as "obscene" and illustrative of the "binge of irresponsibility".

Prop trading is little more than gambling with depositor money that puts the taxpayer at risk, he declared, and would be banned. With major operations in the US, Britain's Barclays, Royal Bank of Scotland and HSBC would all caught by the move. After a year of haggling between global regulators over whether to use safety nets to fix the financial system or tear up the text book and start again, Obama had chosen the latter. Banks would be broken up and he was willing to go it alone.

"Never again will the American taxpayer be held hostage by a bank that is 'too big to fail'," he railed, in a short but pugnacious speech. "This economic crisis began as a financial crisis, when banks and financial institutions took huge, reckless risks in pursuit of quick profits and massive bonuses." Alongside prop trading, under "a simple and common-sense reform ... banks will no longer be allowed to own, invest, or sponsor hedge funds [or] private equity funds".

In other words, banks should stop taking investment risk and get back to boring old lending. A cap on size was also floated, though precious little detail provided. The centrepiece, though, was the ban on "proprietary trading operations for [banks'] own profit, unrelated to serving their customers".

Regulators across the world have long wanted to rein in the speculative activity of traders. As one partner at a "Magic Circle" law firm describes it: "Politicians think these markets are a daily incestuous gang bang of 10 consenting adults trading with each other and making money."

His florid point is that the authorities often consider prop desks to be the only real buyers of certain products, such as the toxic credit default swaps or CDO-squared traders seem to have loved so much. As a result, the thinking is, they effectively make a market among themselves where they can bid up prices. The higher the market rate, the more profitable their operations seem, and the higher their bonuses.

That worked until prices started to fall, the markets seized, banks' losses on such "structured finance" assets were no longer quantifiable, and the ensuing "credit crunch" precipitated a global recession.

Viewed like that, it's hard to argue with Lord Turner, chairman of the Financial Services Authority, when he says much of what the City does is "socially useless". For him, the "economic crisis [was] cooked up in trading rooms where many people earned annual bonuses equal to a lifetime's earnings of some of those suffering the consequences". Like Obama, Lord Turner blamed the "trading rooms" – the casino in the bank.

Obama has had a tough week. He had lost Massachusetts, a Democratic stronghold for 47 years, to the Republicans – costing him a vital seat in the Senate and jeopardising his flagship healthcare reforms. Making matters worse, the defeat came on the first anniversary of his taking office. Media attention was concentrating on his shortcomings and the public had expressed its dismay in a ballot. Obama needed to get on the front foot.

The banks were an easy target. The previous week the President had unveiled a "super-tax" to claw back the $90bn of taxpayer money written off as part of the $700bn bank bail-out. "Every single dime" US taxpayers are owed would be recovered, he pledged. "We want our money back, and we're going to get it. We cannot go back to business as usual."

It had been a popular rallying cry and, Obama realised, could change the debate. Summoning his 6ft 7in, 82-year-old economic adviser Paul Volcker, the former Federal Reserve chairman, to his side, he made the announcement on breaking up the banks at Thursday's lunchtime address. He timed the statement to go out just after Goldman Sachs, the arch-symbol of investment banking excess, revealed it was paying staff $16.2bn – a 37pc increase per banker to $498,250.

"My resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can't lend more to small business, they can't keep credit card rates low, they can't pay a fee to refund taxpayers for the bail-out without passing on the cost to shareholders or customers – that's the claims they're making. It's exactly this kind of irresponsibility that makes clear reform is necessary," he said.

"While the financial system is far stronger today than it was one year ago, it's still operating under the same rules that led to its near collapse. These are rules that allowed firms to act contrary to the interests of customers; to conceal their exposure to debt through complex financial dealings; to benefit from taxpayer-insured deposits while making speculative investments; and to take on risks so vast that they posed threats to the entire system ...

"If these folks want a fight, it's a fight I'm ready to have."

His rule on prop trading, private equity and hedge funds, he said, would be "the 'Volcker Rule' – after this tall guy behind me".

Volcker's sudden emergence as Obama's visionary of choice for banking reform took everyone by surprise. As recently as December 23, in an interview with Business Week, Volcker conceded that his ambition to see the banks spin off their prop desks was not gaining much purchase. "Why haven't your views prevailed?" he was asked. "I wasn't persuasive enough ... the President has heard my arguments a number of times," he replied.

Back in the UK, at the Treasury and in Downing Street, officials gathered to watch Obama's address. There had been no forewarning from Washington of any big news, so nothing significant was expected.

The mood soon changed. Press officers were dispatched with holding statements as the Government tried to work out its position. The Conservatives and Liberal Democrats jumped on Obama's plan as evidence that their earlier calls for a separation of risky prop trading activities would now be borne out. Bankers, meanwhile, hung their heads in their hands. "It's the writing on the wall," one said. "We're all being sent back to the Dark Ages, for sure."

As the dust settled, analysts were not so sure. Frederick Cannon, at Keefe, Bruyette & Woods, said: "We believe the timing of the announcement and the lack of detail are indications that the administration's proposal is more of a political statement than a serious legislative proposal."

At UBS, Philip Finch asked: "The proposal has raised a number of questions making it difficult to assess at this stage. How is proprietary trading defined? Does it include taking positions in client flows? What is the likely market-share cap on non-deposit funding? Will all banks be affected? Can bank holding companies opt out?"

Without the answers to Finch's questions, the pledge is meaningless political rhetoric. If the rule is that banks in the US are not allowed US prop desks, they will simply move them overseas – a relatively easy process as prop desks have no clients. In theory, pushing the trading under the auspices of other regulators could increase risk.

If the rule is that US incorporated banks cannot operate any prop desks anywhere in the world, then many will relocate to more favourable locations – including London.

It was a point not lost on Lord Myners, City minister. "Three weeks ago I was answering questions about the UK being an unattractive place to operate," he said in reference to the 50pc tax on bonuses. "Now it's the opposite and we're being accused of being too timid."

Just days after the announcement, Obama is already looking isolated. "The argument is that hedge funds, private equity and proprietary trading are a source of risk – that is not our general view," Myners said. "In the UK, the three activities were not responsible for RBS, HBOS or Northern Rock, who, on the whole, failed in the rather classic way of making bad loans.

"We certainly don't want to crack down on hedge funds and private equity, and prop trading is best handled through capital and leverage controls." Even the Conservatives, who initially applauded the Volcker rule, soon retreated to the safety of calling for international co-operation.

In France, Christine Lagarde, finance minister, welcomed the proposals a "very, very good step forward" but was only supportive of the fact that finally "they see that regulation, which was a taboo word difficult to use in financial circles in the US, is vital to contain ... banking excesses".

For analysts at Credit Suisse, the "Volcker Rule" is the start of a new round of beggar-thy-neighbour regulatory arbitrage. "In previous episodes of US re-regulation, the reaction of European governments has not been to duplicate the US but to take advantage of it by allowing US banks to use the euromarkets to carry out business that would not be possible under domestic regulation," they wrote.

For all its bad publicity, prop trading serves the vital function of providing liquidity to markets. Large corporates often need their bank to buy assets. In an underwritten rights issue, for example, banks pledge to take the company's shares at the issue price, ensuring the business raises its money and grows.

On other occasions, clients may need to sell an asset to their bank when there is no other buyer available. The bank will hold it and offload it at a future date. It's all part of the client service. In its 2008 annual report, Barclays revealed that the bank held £54.5bn on its own accounts related to trading portfolio assets. Such operations are prop trading because they involve the bank taking a principal risk, but client-facing, which it appears will be allowed under the Volcker Rule. However, even Volcker himself has said the lines are "cloudy at the border".

Lord Turner, along with most bankers, prefers the use of capital and liquidity requirements to change behaviour. Demanding banks hold large amounts of capital and liquidity will make it too expensive to operate a prop desk. Unveiling his proposals last year, Lord Turner said he and Volcker were not that far apart – it's just that he'd rather the banks draw the line. If someone could show him where to split a bank in two, he even added, he would do so without hesitation.

It is all about the line. At one extreme, if all prop trading is deemed "for [banks'] own profit, unrelated to serving their customers", "it will have profound implications for markets", the Magic Circle lawyer said. "If you remove banking as a facilitation function, you push market trading back 50 years."
At the other, prop trading is just a little internal business that JP Morgan estimates accounts for only 1pc of revenues and 10pc at Goldman Sachs. Analysts at Credit Suisse took a stab at the kind of effect the Volcker Rule would have on exposed European banks and came up with a 14pc of profits at Deutsche Bank and 10pc at UBS, if it was enacted around the world. The impact on UK banks will be even less. Barclays claims to have no prop trading for personal profit at all and RBS is in the process of shutting its prop desk down.

Even so, analysts said the Volcker Rule at the extreme could cost Barclays £1.5bn in trading revenues and possibly lead to a rapid sale of its private equity unit, which generates as much as £350 million in revenues. At RBS, the ruling on prop trading has jeopardised its sale of RBS Sempra, a US commodities joint venture that it is close to offloading to JP Morgan in a £2.5bn deal. Some estimate that half RBS Sempra's income is from prop trading. Lloyds has a £2bn private equity fund that would be under threat if the UK adopted the Volcker Rule. Uncertainty alone wiped billions off UK bank share prices on Friday.

The Volcker Rule may have further unintended consequences for hedge funds and private equity. According to Preqin, a data source for the alternative assets industry, US banks "managing private equity funds and fund of funds have raised a total of 60 funds since 2006, with a total value of over $80bn ... [and] represent around 9pc of the capital invested in the asset class".

US banks have 19 fund of hedge funds, "all of which could be affected by these restrictions". They represent over $180bn in assets, or approximately 16pc of all US capital flowing into hedge funds. "The potential disruption that such widespread reform could bring to the alternatives industry is significant," Preqin spokesman Tim Friedman said.

"The situation is currently very unclear, with one possible outcome being a widespread spinning out of alternative assets divisions within banks."

How much of a "fight" Obama is up for depends on where Volcker draws his line. If he demands too much be carved out of US operating banks, he will damage the industry. Too little, and his tough talk will look toothless. Much will also depend whether other countries sign up to the plan, with talks likely to reach a head at the gathering of G20 finance ministers in Canada in a fortnight's time.

In Britain, the debate will begin tomorrow, when Lord Myners hosts G7 finance ministry officials at 11 Downing Street to discuss the prospect of a resolution fund levy on the banks. "There is a general discussion about how we might charge a premium to cover the implicit state guarantee. It can be argued that banks benefit from an implicit guarantee for which no premium is paid to the taxpayer," he said. "I think it's inevitable the Volcker Rule will also be discussed."

Obama is likely to get his best hearing in the UK on Tuesday, when Mervyn King, Governor of the Bank of England, sits before the Treasury Select Committee to discuss what can be done about banks deemed "too big to fail". He will push the argument for breaking them up. The Bank's head of financial stability, Andy Haldane, has suggested Lord Turner's capital reforms don't go far enough because financiers will always try to "game the state". Changing the rules might stop them in their tracks.

To listen to the analysts and banks we are heading down that road, anyway. The threat of reform and tough new capital rules may be enough to enforce change. Mike Trippitt, banks analyst at Oriel securities, reckons Barclays' recent restructuring "could be a precursor to a demerger ... splitting mainstream commercial banking from investment banking".

Should that happen, and other banks follow suit, it would make Obama's controversial ban on prop trading look pretty tame.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7061312/Obama-rips-up-the-rule-book.html

[Stock Lobster]

BI Law Review: Is "Bank Tax" Unconstitutional?

Oh No! Obama’s Bank Tax Is Unconstitutional!

John Carney | Jan. 20, 2010, 2:22 PM | 4,563 | 58

The banking lobby plans to object to the Obama administration's bank tax proposal on the grounds that it is unconstitutional.

We don't hate this tax proposal. But we cannot avoid coming to the conclusion that, unfortunately, the banks are probably right.

The notion that the banks might be able to defeat the bank tax on constitutional grounds is risible, annoying, and enervating. But the world is often all those things. We can laugh, complain, and collapse with exhaustion but, as we used to say back when I was doing M&A, “it is what it is.”

And what the bank tax is is an unconstitutional Bill of Attainder.

The constitution bars bills of attainder in Section 9 of Article I: “No Bill of Attainder or ex post facto Law shall be passed.”

This was a truly revolutionary departure from English law, which had featured Bills of Attainder since the fourteenth century. But when the framers met in Philadelphia to write the constitution, they unanimously decided to ban them. Despite the contentiousness of much of the constitutional debate, there was not one objection raised to the ban.

Thanks to this legal innovation, most of us are not very familiar with attainder. Basically, it is a criminal conviction by the legislature rather than the judiciary, circumventing due process protections of the accused. It is closely linked with “ex post facto” law making, since often the person was punished despite not having violated any law at all.

There is not a lot of US legal precedent when it comes to bills of attainder. But what there is suggests that a bill of attainder might be said to have five elements:

- Ex Post Facto: It penalizes actions committed before the law is passed.
- Severe: The penalty is severe enough that it is readily identifiable as punitive.
- Punitive Intent: It was passed with the intent to punish.
- No Legit Purpose: There is no legitimate, non-punitive purpose for the law.
- Targeted: It applies to an identifiable individual or group.
- Unavoidable: The targets cannot change their behavior to avoid the penalty.

The new bank tax pretty clearly qualifies under each of these elements.

Ex Post Facto: The tax attaches to banks that took TARP funds that were offered by the government to shore up the financial system. This was—and remains—perfectly legal. Yet now banks are being penalized for participating in the government program.

Severe: The tax is expected to confiscate hundreds of billions of dollars from the banks, which surely qualifies it as severe. Courts have found that to be the punitive confiscation of property.

Punitive Intent: Obama’s remarks introducing the tax proposal sounded very vindictive to almost everyone who has heard it. Joe Biden emailed Coakley supporters in Massachusetts that Scott Brown's opposition to the tax was "a perfect opportunity to show where his loyalties lie -- with working families in Massachusetts or with the bankers on Wall Street who helped lead us into the mess we're in -- guess who he chose?" That's the language of punishment for the financial crisis.

No Legit Purpose: There’s no other legitimate purpose to the tax but to punish banks for being bailed out. It will probably be argued that the tax will reduce risk at banks—but if that were anything more than a pretext the tax would be permanent rather than expiring when the TARP is fully repaid. And the government cannot argue that the purpose is the collection of revenue—that would be an absurdly broad rationale that would exempt any confiscation, fine or tax from the ban on Bills of Attainder.

Targeted: The tax is obviously targeted at the large banks that took TARP. No one expects the list of banks that qualify for the tax to grow, and Obama’s proposal actually exempts the automaker TARP recipients. The courts have ruled that corporations count as individuals who cannot be targeted in this way, so there’s no getting around it by saying Bank of America isn’t a person. And just because there are dozens of banks that will be taxed doesn’t mean it is too broad to qualify—the Supreme Court once ruled that a law aimed at the entire membership of the communist party counted as a Bill of Attainder.

Unavoidable: There’s nothing the banks can do to avoid the tax. No management changes or better risk controls will exempt them. There is literally no new regulation to comply with in order to avoid the penalty. They’re stuck with the taint of TARP.
In short, the bank tax looks an awful lot like it should qualify as a Bill of Attainder. This means that lawmakers conscientious of their constitutional obligations should refuse to allow the tax to become law.

The president, once he is made aware of the attainder issue, should not sign it into law. And the courts should strike it down.

Whether or not any of that will happen is another issue. Lawmakers seem eager to show the public they can stand up to the banking lobby, and a punitive tax is just the ticket for that. Obama hasn’t shown any signs that he is open to being persuaded by arguments about the constitutionality of his proposals. And successful court challenges on attainder grounds are rare.

http://www.businessinsider.com/obamas-bank-tax-is-unconstitutional-2010-1

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World Bank Planner: West must cut consumption, banks must be split, 'capitalism' must change

me: Thank you Mr Davos/Bilderberg. heaven help us from World Bank "solutions

Joseph Stiglitz: Why we have to change capitalism

In an exclusive extract from his new book, Freefall, the former World Bank chief economist, reveals why banks should be split up and why the West must cut consumption.

Published: 9:04PM GMT 23 Jan 2010

In the Great Recession that began in 2008, millions of people in America and all over the world lost their homes and jobs. Many more suffered the anxiety and fear of doing so, and almost anyone who put away money for retirement or a child's education saw those investments dwindle to a fraction of their value.

A crisis that began in America soon turned global, as tens of millions lost their jobs worldwide – 20m in China alone – and tens of millions fell into poverty.

This is not the way things were supposed to be. Modern economics, with its faith in free markets and globalisation, had promised prosperity for all. The much-touted New Economy – the amazing innovations that marked the latter half of the 20th century, including deregulation and financial engineering – was supposed to enable better risk management, bringing with it the end of the business cycle. If the combination of the New Economy and modern economics had not eliminated economic fluctuations, at least it was taming them. Or so we were told.

The Great Recession – clearly the worst downturn since the Great Depression 75 years earlier – has shattered these illusions. It is forcing us to rethink long-cherished views.

For a quarter century, certain free-market doctrines have prevailed: free and unfettered markets are efficient; if they make mistakes, they quickly correct them. The best government is a small government, and regulation only impedes innovation. Central banks should be independent and only focus on keeping inflation low.

Today, even the high priest of that ideology, Alan Greenspan, the chairman of the Federal Reserve Board during the period in which these views prevailed, has admitted that there was a flaw in this reasoning – but his confession came too late for the many who have suffered as a consequence.

In time, every crisis ends. But no crisis, especially one of this severity, passes without leaving a legacy. The legacy of 2008 will include new perspectives on the long-standing conflict over the kind of economic system most likely to deliver the greatest benefit.

I believe that markets lie at the heart of every successful economy but that markets do not work well on their own. In this sense, I'm in the tradition of the celebrated British economist John Maynard Keynes, whose influence towers over the study of modern economics.

Government needs to play a role, and not just in rescuing the economy when markets fail and in regulating markets to prevent the kinds of failures we have just experienced. Economies need a balance between the role of markets and the role of government – with important contributions by non-market and non-governmental institutions. In the last 25 years, America lost that balance, and it pushed its unbalanced perspective on countries around the world.

The current crisis has uncovered fundamental flaws in the capitalist system, or at least the peculiar version of capitalism that emerged in the latter part of the 20th century in the US (sometimes called American-style capitalism). It is not just a matter of flawed individuals or specific mistakes, nor is it a matter of fixing a few minor problems or tweaking a few policies.

It has been hard to see these flaws because we Americans wanted so much to believe in our economic system. "Our team" had done so much better than our arch enemy, the Soviet bloc.

Numbers reinforced our self-deception. After all, our economy was growing so much faster than almost everyone's, other than China's – and given the problems we thought we saw in the Chinese banking system, it was only a matter of time before it collapsed too.

Even now, many deny the magnitude of the problems facing our market economy. Once we are over our current travails – and every recession does come to an end – they look forward to a resumption of robust growth. But a closer look at the US economy suggests that there are some deeper problems: a society where even those in the middle have seen incomes stagnate for a decade, a society marked by increasing inequality; a country where, though there are dramatic exceptions, the statistical chances of a poor American making it to the top are lower than in "Old Europe".

It is said that a near-death experience forces one to re-evaluate priorities and values. The global economy has just had a near-death experience. The crisis exposed not only flaws in the prevailing economic model but also flaws in our society. Too many people had taken advantage of others. Almost every day has brought stories of bad behaviour by those in the financial sector – Ponzi schemes, insider trading, predatory lending, and a host of credit card schemes to extract as much from the hapless user as possible.

My book, Freefall, is focused, though, not on those who broke the law, but the legions of those who, within the law, had originated, packaged and repackaged, and sold toxic products and engaged in such reckless behavior that they threatened to bring down the entire financial and economic system. The system was saved, but at a cost that is still hard to believe.

We should take this moment as one of reckoning and reflection, of thinking about what kind of society we would like to have, and ask ourselves: are we creating an economy that is helping us achieve those aspirations?

We have gone far down an alternative path – creating a society in which materialism dominates moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together as a community to address our common needs, partly because rugged individualism and market fundamentalism have eroded any sense of community and have led to rampant exploitation of unwary and unprotected individuals and to an increasing social divide.

Economics, unintentionally, provided sustenance to this lack of moral responsibility. A naive reading of Adam Smith might have suggested that he had relieved market participants from having to think about issues of morality. After all, if the pursuit of self-interest leads, as if by an invisible hand, to societal well-being, all that one has to do is be sure to follow one's self-interest. And those in the financial sector seemingly did that. But clearly, the pursuit of self-interest – greed – did not lead to societal well-being.

The model of rugged individualism combined with market fundamentalism has altered not just how individuals think of themselves and their preferences but how they relate to each other. In a world of rugged individualism, there is little need for community and no need for trust. Government is a hindrance; it is the problem, not the solution.

But if externalities and market failures are pervasive, there is a need for collective action, and voluntary arrangements will typically not suffice (simply because there is no "enforcement").

But worse, rugged individualism combined with rampant materialism has led to an undermining of trust. Even in a market economy, trust is the grease that makes society function. Society can sometimes get by without trust – through resort to legal enforcement, say, of contracts – but it is a very second-best alternative.

In the current crisis, bankers lost our trust, and lost trust in each other. Economic historians have emphasized the role that trust played in the development of trade and banking. The reason why certain communities developed as global merchants and financiers was that the members of the community trusted each other. The big lesson of this crisis is that despite all the changes in the last few centuries, our complex financial sector was still dependent on trust. When trust broke down, our financial system froze.

It's easy to curtail excessive risk-taking: restrict it and incentivise banks against it. Not allowing banks to use incentive structures that encourage excessive
risk-taking, and forcing more transparency will go a long way. So too will requiring banks that engage in high-risk activities to put up much more capital and to pay high deposit insurance fees. But further reforms are needed: leverage needs to be much more limited and restrictions need to be placed on particularly risky products.

Given what the economy has been through, it is clear that the federal government should reinstitute some revised version of the Glass-Steagall Act. There is no choice: any institution that has the benefits of a commercial bank – including the government's safety nets – has to be severely restricted in its ability to take on risk.

There are simply too many conflicts of interest and too many problems to allow commingling of the activities of commercial and investment banks. The promised benefits of the repeal of Glass-Steagall proved illusory and the costs proved greater than even critics of the repeal imagined. The problems are especially acute with the too-big-to-fail banks.

The imperative of reinstating the Glass-Steagall Act quickly is suggested by recent behaviour of some investment banks, for whom trading has once again proved to be a major source of profits.

The alacrity with which all the major investment banks decided to become "commercial banks" in the fall of 2008 was alarming – they saw the gifts coming from the federal government, and evidently, they believed that their risk-taking behaviour would not be much circumscribed. They now had access to the Fed window, so they could borrow at almost a zero interest rate; they knew that they were protected by a new safety net; but they could continue their high-stakes trading unabated. This should be viewed as totally unacceptable.

There is an obvious solution to the too-big-to-fail banks: break them up. If they are too big to fail, they are too big to exist. The only justification for allowing these huge institutions to continue is if there were significant economies of scale or scope that otherwise would be lost. I have seen no evidence to that effect. Indeed, the evidence is to the contrary, that these too-big-to-fail, too-big-to-be-financially-resolved institutions are also too big to be managed. Their competitive advantage arises from their monopoly power and their implicit government subsidies.

This crisis has exposed fissures in our society, between Wall Street and Main Street, between America's rich and the rest of our society. While the top has been doing very well over the last three decades, incomes of most Americans have stagnated or fallen.

The consequences were papered over; those at the bottom – or even the middle – were told to continue to consume as if their incomes were rising; they were encouraged to live beyond their means, by borrowing; and the bubble made it possible. The consequences of being brought back to reality are simple – standards of living are going to have to fall.

Someone will have to pick up the tab for the bank bail-outs. Even a proportionate sharing would be disastrous for most Americans. With median household income already down some 4pc from 2000, there is no choice: if we are to preserve any sense of fairness, the brunt of the adjustment must come from those at the top who have garnered for themselves so much over the past three decades, and from the financial sector, which has imposed such high costs on the rest of society.

But the politics of this will not be easy. The financial sector is reluctant to own up to its failings. Part of moral behaviour and individual responsibility is to accept blame when it is due; all humans are fallible – including bankers. But as we have seen, they have repeatedly worked hard to shift blame to others – including to those they victimised.

America is not alone in facing hard adjustments ahead. The UK financial system was even more overblown than that of the US. The Royal Bank of Scotland, before it collapsed, was the largest bank in Europe and suffered the most losses of any bank in the world in 2008.

Like the United States, the United Kingdom had a real estate bubble that has now burst. Adjusting to the new reality may require a decrease in consumption by as much as 10pc.

I have argued that the problems our nation and the world face entail more than a small adjustment to the financial system. Some have argued that we had a minor problem in our plumbing. Our pipes got clogged. We called in the same plumbers who installed the plumbing – having created the mess, presumably only they knew how to straighten it out. Never mind if they overcharged us for the installation; never mind that they overcharged us for the repair. We should be grateful that the plumbing is working again, quietly pay the bills, and pray that they do a better job this time than the last.

But it is more than just a matter of "plumbing": the failures in our financial system are emblematic of broader failures in our economic system, and the failures of our economic system reflect deeper problems in our society. We began the bail-outs without a clear sense of what kind of financial system we wanted at the end, and the result has been shaped by the same political forces that got us into the mess. And yet, there was hope that change was possible. Not only possible, but necessary.

That there will be changes as a result of the crisis is certain. There is no going back to the world before the crisis. But the questions are, how deep and fundamental will the changes be? Will they even be in the right direction? In several critical areas, in the midst of the crisis, matters have already become worse. We have altered not only our institutions – encouraging ever increased concentration in finance – but the very rules of capitalism. We have announced that for favoured institutions there is to be little, or no, market discipline. We have created an ersatz capitalism with unclear rules – but with a predictable outcome: future crises; undue risk-taking at the public expense, no matter what the promise of a new regulatory regime; and greater inefficiency.

We have lectured about the importance of transparency, but we have given the banks greater scope for manipulating their books. In earlier crises, there was worry about moral hazard, the adverse incentives provided by bail-outs; but the magnitude of this crisis has given new meaning to the concept.

It has become a cliché to observe that the Chinese characters for crisis reflect "danger" and "opportunity". We have seen the danger. The question is, will we seize the opportunity to restore our sense of balance between the market and the state, between individualism and the community, between man and nature, between means and ends?

We now have the opportunity to create a new financial system that will do what human beings need a financial system to do; to create a new economic system that will create meaningful jobs, decent work for all those who want it, one in which the divide between the 'haves' and 'have-nots' is narrowing, rather than widening; and, most importantly of all, to create a new society in which each individual is able to fulfill his aspirations and live up to his potential, in which we have created citizens who live up to shared ideals and values, in which we have created a community that treats our planet with the respect that in the long run it will surely demand. These are the opportunities. The real danger now is that we will not seize them.

Extracted from FREEFALL: Free Markets and the Sinking of the Global Economy
by Joseph Stiglitz, published by
Allen Lane on January 28 at £25. Copyright © Joseph Stiglitz 2010.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7061058/Joseph-Stiglitz-Why-we-have-to-change-capitalism.html

[Stock Lobster]

UKT: UK rejects Barack Obama's bank reforms

(...but thanks Obama for the new business London would get as a result if US banks switching trading operations to the UK)

Lord Myners has ruled out Britain adopting President Barack Obama's radical banking reforms in what could amount to a fillip for the City of London.

By Louise Armitstead and Helia Ebrahimi
Published: 9:30PM GMT 22 Jan 2010

The City minister said he saw the President's proposals to break up the investment banks as solutions to "American issues" rather than "necessary actions" for the UK.

"President Obama came out with a solution to the idiosyncratic problems that he sees in the American banking system which is around investment banking in particular," he said. "It's worth remembering that proprietary trading, hedge funds, private equity, these were not at the heart of the difficulties that Northern Rock, or Royal Bank of Scotland or HBOS experienced."

Lord Myners added: "He's developing a solution to what he sees as the American issues, we've already taken the necessary action in the UK."

As banking shares dragged the FSTE 100 down 32 points to 5302.99, its lowest level this year, shadow chancellor George Osborne appeared to row back from his previous position backing Mr Obama.

Mr Osborne had suggested a Tory Government would introduce similar trading curbs for banks. However, on Friday he qualified his response saying: "We don't want to return to the crude Glass-Steagall separation of retail banking and investment banking."

Instead he argued that the Tories would still want to tackle the "riskiest end of investment banking.... when they're taking risks with the bank's own money".

Mr Osborne repeated the view that any changes needed to be part of an international agreement. Mr Obama's proposals, which need congressional approval, would prevent banks or financial institutions that own banks from investing in, owning or sponsoring a hedge fund or private equity fund. The proposed rules would also bar institutions from proprietary trading - investing to make a profit for themselves rather than on behalf of customers.

Analysts suggested the proposals could cut banks' 2011 earnings by 5pc–20pc – though there remains much uncertainty over what shape the reforms would actually take.

Angela Knight, chief executive of the British Bankers Association warned that Mr Obama's proposal to siphon off parts of banks would increase risks in the global market and fail to protect against future financial crises. "Fixing the global banking system cannot be done with headlines and political posturing and it won't be fixed just by chopping bits off," she said. Instead, she pointed to current work being carried out by regulators and the banking industry on capital adequacy requirements and recommendations already put forward by FSA chairman Lord Turner.

The BBA boss said although pure proprietary trading was a small business for UK banks, in general there had been a shift towards investment banking operations.

Bank shares fell for the second day running, with Barclays hardest hit, down 11.65 to 271.35p, as traders worried about the possible impact on its big American operations, swollen in 2008 through the acquisition of Lehman Brothers' US arm. Royal Bank of Scotland fell 0.64 to 34.68.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7056042/UK-rejects-Barack-Obamas-bank-reforms.html