Los Angeles Personal Injury Lawyer - chris cox

"The Four" Who Helped Usher in the Economic Crisis

Paul Kiesel — Mon, 13 Oct 2008 18:48:50 GMT

There were those that predicted the current economic, foreclosure, housing, and mortgage crisis (Paul Krugman, who incidentally just won the Nobel prize in economics, Robert Shiller, Dr. Nouriel Roubini) and then there were those other figures -- politicians, economists and conservative pundits -- who recklessly enabled or promoted the economic situation the U.S. faces today (see below).

Alan Greenspan (former Fed Chairman)

We now know that stronger regulation of derivatives would have done much to stem the current financial crisis, but Greenspan argued against that philosophy:

"What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn't be taking it to those who are willing to and are capable of doing so," Mr. Greenspan told the Senate Banking Committee in 2003. "We think it would be a mistake" to more deeply regulate the contracts, he added. (New York Times, 10/8/08)

Phil Gramm (former Texas senator and economic adviser to John McCain)

From the New York Times: For more than two decades in Congress he argued that the forces of the market had to be freed from government interference. Just a year after the passage of Gramm- Leach-Bliley, he was largely responsible for another bill -- the Commodity Futures Modernization Act -- that clearly did contribute to the current crisis. That law unleashed the derivatives market and paved the way for banks to become more aggressive about investing in mortgages. As recently as this summer, he was still saying that the biggest problem facing the American economy was excessive regulation.

Chris Cox (Head of the SEC)

Cox, who is the current head of the SEC, helped put greater deregulation into effect, and as of last March, was saying the following:

"We have a good deal of comfort about the capital cushions at these firms at the moment."

Henry Paulson (Treasury Secretary)

"I have great confidence in our capital markets and in our financial institutions. Our financial institutions, banks and investment banks, are strong. Our capital markets are resilient. They're efficient. They're flexible." -- Treasury Secretary Henry Paulson on March 16, 2008

"There is little public policymakers can, or should, do to compensate for untenable financial decisions." -- Treasury Secretary Henry Paulson on July 8, 2008

From the New York Times: They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.

Originally posted at InjuryBoard by Paul Kiesel

SEC Chairman Chris Cox: "Market Ripe for Fraud and Manipulation"

Paul Kiesel — Tue, 23 Sep 2008 14:15:15 GMT

SEC Chairman Chris Cox testified this morning at the Senate Banking Committee hearing in regards to the potential Wall Street Bailout plan that was proposed over the weekend. Cox said that his agency has more than 50 investigations open on subprime mortgage cases. However, Cox said that he's also trying to "ascertain" if anything illegal went on in the risky-mortgage market that contributed to the current crisis.

If Chris Cox was truly uncertain as to whether any illegal activity and lending was going on amongst Wall Street firms and mortgage lenders that led the way to the financial crisis, then why would he later say in his testimony, "This market is regulated by absolutely no one [. . .] It is a market ripe for fraud and manipulation."

The only thing that's left to ascertain is to pinpoint where this type of "illegal activity" originated, and why it was allowed to spiral as out of control as it did.

Interestingly, Cox does mention credit-default swaps (CDS). CDSs are unusual or creative financial instruments where the risk of default on credit is passed among lenders and investors, much like the game Hot Potato. This type of creative financial packaging became popular after the Gramm-Leach-Bliley bill gutted Glass-Steagall and the subsequent passage of the Commodity Futures Modernization Act. Cox believes, and is most certainly correct, that CDSs allowed a forum for the shorting of corporate debt without the oversight imposed on cash markets.

Unfortunately, Cox doesn't mention fraud or manipulation in mortgage documents like TILA forms or the presence of both in the Alt-A/Option ARM loan market. Fraudulent claims and ambiguous language were littered throughout Truth in Lending documents. For instance, whenever a loan failed to state that it was a negative amortizing loan -- when it was that type of loan -- it was in explicit violation of the Truth in Lending Act.

The reality is that the fraud and manipulation Cox is aware of, suspects, and/or turned his head away from could have been prevented: A Republican-led Congress chose in 2000 not to extend regulation to OTC derivatives markets. One of the most influential proponents of not regulating OTC derivatives was Alan Greenspan, then chairman of the Federal Reserve. Greenspan said, "OTC transactions in financial derivatives are not susceptible to - that is, easily influenced by - manipulation.” Nobody questioned Greenspan when he made this claim. Nobody questioned Greenspan when he said on October 9, 2006 that the housing market would soon rebound from its slight slump, "I suspect that we are coming to the end of this downtrend, as applications for new mortgages, the most important series, have flattened out [. . .] There is a good chance of coming out of this in good shape, but average housing prices are likely to be down this year relative to 2005. I don’t know, but I think the worst of this may well be over."

Without proper oversight, the people responsible for this mess were able to do and say whatever they felt looked and sounded good, whether their claims were accurate or a series of mistruths.

I think it's safe to say that the next time broad claims like Greenspan's, Ben Bernanke's, Hank Paulson's or anybody pushing a heavily deregulated industry goes unquestioned, consequences are likely to follow again.

Originally posted at InjuryBoard by Paul Kiesel

What's Missing From Bush's Bailout Plan? For Starters, the Word Bailout...

Paul Kiesel — Fri, 19 Sep 2008 19:36:27 GMT

It's finally happened. The federal government, much to the chagrin and support of Congressional leaders, stepped in this morning and has written a blank check for Wall Street's blunders.

In his speech, President Bush did not use the word "bailout" once to describe a plan that is nothing short of a bailout. Treasury Secretary Paulson, Fed Chairman Bernanke and SEC Chairman Cox briefed leaders on Capital Hill, and urged Congress to pass legislation approving the federal government's purchase of illiquid assets, such as troubled mortgages (bad loans, like subprime and option ARM loans; the latter loans are about to reset early next year and cause more financial tumult, but now it will be at the expense of taxpayers instead of Wall Street CEOs and investors), from banks and other financial institutions.

CNBC has reported that, "The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion-dollars (this figure does not include the more than $200 billion already at stake from Bear Stearns, IndyMac, Fannie Mae, Freddie Mac, etc., etc.) and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official.

The copious amount of illiquid assets (which is likely to be a buzz word for sometime) on many of these firms' balance sheets -- firms that will benefit and not be held responsible BECAUSE of Bush's bailout -- was due to the practice of lending mortgages with ambiguous, misleading and fraudulent language in the Truth in Lending forms. The problem is that these types of loans are still out in the market, they will have interest rate resets (ballooned payments on loans that were negatively amortizing) and cause borrowers much financial stress in the coming months, and now the government will assume the responsibility of them (illiquid assets), while Wall Street, without any regulation reform passed by Congress, will be able to go back out and lend some more.

What about homeowners? What about Main Street in general? Just because Wall Street's trash was being carried out to the curb by the Treasury and Fed, doesn't mean "Bush's Bailout" automatically smells good for the rest of America. Why wasn't mortgage modification for troubled borrowers a provision added to the bailout? Then, lenders would have had to modify mortgages (that had no business being written in the first place) in order to dump their garbage assets onto the government. Bush wasn't vague about this issue, he just omitted it all together.

Bush said today, "[M]y administration looks forward to working with Congress on measures to bring greater long-term transparency and reliability to the financial system, including those in the regulatory blueprint submitted by Secretary Paulson earlier this year."

One has to be dubious of the president's claim of restoring transparency. Not only was it Republican-led legislation (Phil Gramm: Commodity Futures Modernization Act of 2000 and Gramm-Leach-Bliley Act, which repealed part of the Glass-Steagall Act, allowing commercial and investment banks to consolidate) that enabled today's bailout, but the fact that Bush doesn't even use the word bailout is troublesome and lacks transparency.

Again, as I've said in many other blogs, we'll have to wait for the next administration to come in and do its best to try and straighten out the last eight years of missed opportunities. Not extending an olive branch to average citizens, as Obama suggested today, is another missed opportunity by the Bush Administration.

Originally posted at InjuryBoard by Paul Kiesel