naked capitalism

You have to love it. If the allegations prove true, it provides further evidence that the banksters cannot contain themselves. Here they get their bacon saved by the TARP (which was way too cheaply priced relative to the risk involved) and a host of hidden subsidies and supports. Yet the employees cannot stand to let an opportunity for personal enrichment go to waste, legal or not.

The Financial Times appears to have broken the story that the Office of the Special Inspector General is investigating reports of insider trading in connection with the TARP. And what makes this probe potentially serious (aside from the brazenness of it) is that the suspects include executives as well as foot soldiers:

Eight of the largest banks in the US received between $2bn and $25bn in October 2008 under a programme to prop up the financial system led by Hank Paulson, then Treasury secretary.

Dozens more institutions followed and Mr Barofsky, who examines the troubled asset relief programme, is looking into whether information improperly made its way to trading rooms during a feverish period in which the government and banks were frequently exchanging information.

“We have pending investigations looking into that – typically into insider trading,” he said. “Once upon a time getting Tarp funds actually meant your stock price would go up and we are looking at specific trading around Tarp announcements by insiders or looking at potential tips from insiders.”

Yves here. With the notable exception of the network surrounding , Raj Rajaratnam, nearly all insider trading scandals have involved junior employees as the ones leaking confidential information, usually on corporate mergers. While most M&A deals involve lots of junior level support, knowledge of pending TARP financings at a particular firm would presumably be limited to comparatively few people, and then largely the very top officers.

SIGTARP is also looking into possible gaming of the Public Private Investment Partnerships, a potential pitfall that had worried many commentators. Note he indicates here the trades he is questioning may have been permissible, reflecting weak controls and program design:

Mr Barofsky….said there remained substantial problems with the structure of the public-private investment programme, which is designed to encourage investors to buy troubled assets from banks to clean their balance sheets and stimulate lending.

He said there should be walls between fund managers taking part in PPIP, which co-invests government funds with those of the private sector, and managers at the same firm buying and selling similar securities.

An example of suspicious activity at an unnamed firm showed a manager selling a security from a non-PPIP fund and then buying it back at a slightly higher price with a taxpayer-supported PPIP fund minutes later.

“The rules are insufficient,” said Mr Barofsky. He said even if the behaviour, which Sig-Tarp is investigating, was found to be within the rules “it still creates this credibility issue, this reputational damage, this appearance of fund managers gaming the system”.

The Treasury said it had identified the suspicious behaviour and brought it to the attention of Sig-Tarp, showing that the system was transparent.

Yves here. Ahem, “bringing it to the attention” of SIGTARP falls well short of a remedy. And as we discussed at length, the PPIP made no sense unless it acquired securities at above current market prices (the whole point was to avoid having banks mark soured positions down to current market levels; had they been willing to do that, there would be no impediment to selling them). It will be interesting to see whether SIGTARP examines the contradictory claims made for the PPIP (that it was a good deal for the banks and taxpayers) and exposes what the structure was designed to hide, namely, the amount of the subsidies.

Apologies, no Links, I need to be up early to catch a flight and have not even started to pack.

Paul Volcker has an op-ed in the New York Times that made my stomach sink. I had considerable hopes for Volcker’s involvement in financial reform; he’s one of the few regulators with the stature (literally and figuratively) who can say things to bankers, the media, and government officials that are unpalatable yet need to be addressed.

For instance, I’ve been delighted with Volcker’s frontal challenge to the financial services industry continued insistence that it needs to be unfettered so it can continue to “innovate”. This looks like yet another bit of Orwellianism; innovation in the financial services is tantamount to “creation of complex products that let us extract fees and shed our risks in ways the customer won’t understand.” One thing to keep in mind: even a otherwise sound investment is no good if it is overpriced, and loading in hidden charges will to just that. The most recent innovation that Volcker approves of is the ATM. He gave made some disapproving remarks to a gobsmacked audience in Sussex late last year:

Echoing FSA chairman Lord Turner’s comments that banks are “socially useless”, Mr Volcker told delegates who had been discussing how to rebuild the financial system to “wake up”. He said credit default swaps and collateralised debt obligations had taken the economy “right to the brink of disaster” and added that the economy had grown at “greater rates of speed” during the 1960s without such products.

When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed “nothing at all”, he replied: “You can innovate as much as you like, but do it within a structure that doesn’t put the whole economy at risk.”

Yves here. So how can you not be a fan? Well, as much as Volcker’s is suitably skeptical of the 21st century version of financial services, his remedies would work for the industry circa 1990, but look anachronistic for the world we live in now.

Now admittedly, I am basing my views on Volcker’s recent remarks and his New York Times op-ed. Now that Tall Paul has been brought in from the wilderness and is the new face of Team Obama banking industry “reform”, his freedom to state his own views may be more circumscribed than before.

But regardless, in all his comments before, there is a scary failure to mention some critical aspects the modern world of finance. The big reason banks are too big to fail is that they control infrastructure which has become critical to commerce. Most important, they control the credit markets. And credit is essential to any economy beyond the barter stage.

One reason it is hard to make this notion as explicit as it ought to be is that “banks” covers a very wide range of firms, ranging from ones that look like traditional commercial banks (they take deposits and make commercial and residential loans), to ones with substantial asset management businesses (State Street) to ones heavily involved in transaction clearing (Chris Whalen contends that JP Morgan is a $76 trillion derivatives clearing operation with a $1.3 billion bank attached) to global capital markets players like Goldman, UBS, and Deutsche Bank.

The part that Volcker keeps skipping over in his various statements is the thorniest problem from a policy standpoint: what to do with global capital markets firms. We have had an over twenty-year shift in practice. By most measures, the amount of lending that winds up being held by banks has fallen by more than 50%. Geithner, in a 2007 speech on financial innovation, noted that US banks were responsible for a mere 15% of non-farm, non-financial debt outstandings. The rest takes place via what Geithner calls “market based credit” or what others call the “originate and distribute” model (although Geithner also clearly includes credit default swaps in his use of “market based credit”).

Now even assuming we wanted a partial reversal (more on balance sheet lending), this is not an quick process. It is costly (as in banks on average would have to have much bigger balance sheets, hence vastly more equity than they possess now. Think of what it would take to reduce the use of plastic by 50% because we now know plastic has nasty environmental consequences. Going back to considerably more on-balance sheet lending would be a similarly large undertaking).

The consequence of this system of “market based credit” is that those markets have significant scale economies (network effects, high minimum scale required to be competitive, etc.). The result is a comparatively small number of firms have made themselves crucial. The Bank of England in its April 2007 Financial Stability report noted the importance of certain firms it called “large complex financial institutions” and deemed them to be important not simply due to their size, but also their crucial position in certain markets. Its list then was:

ABN Amro, Bank of America, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman, HSBC, JP Morgan Chase, Lehman, Merrill, Morgan Stanley, RBS, Societe Generale, and UBS

Of course, that list is somewhat shorter now, but a bigger issue remains: if you tried breaking the capital markets operations of these dominant firms up, those businesses would tend to evolve back into a concentrated format. And it is these origination and trading operations that make them too indispensable to fail.

In reading Volcker’s op-ed, he completely ignores the 800 pound gorilla in the room, that this crisis extended a safety net under these global trading operations. More important, the industry recognizes full well how it is now situated. These origination and market-making operations will not be allowed to seize up. Before, they merely played with other people’s money. Now they play with other people’s money and a guarantee. Having the officialdom say it ain’t so or pretend it is working towards a solution when it does not yet have one does not fool anyone who understands the real issues.

If you read the Volcker piece, “How to Reform Our Financial System,” you see an utter failure to acknowledge the problem posed by OTC credit markets (and before you say, “Put them on exchanges,” instruments with low liquidity don’t work well on exchanges. I can give you the longer form argument, but this post is already getting long. A lot of financial products simply do not trade often enough for them to be suitable to exchange trading).

Volcker first talks about traditional banks:

…we need to recognize that the basic operations of commercial banks are integral to a well-functioning private financial system. It is those institutions, after all, that manage and protect the basic payments systems upon which we all depend. More broadly, they provide the essential intermediating function of matching the need for safe and readily available depositories for liquid funds with the need for reliable sources of credit for businesses, individuals and governments.

Yves here. No where in the article does he acknowledge that, as a result of policy, much of this activity has shifted to trading markets. We still get a traditional bank-centric view:

Instead, governments have long provided commercial banks with the public “safety net.” The implied moral hazard has been balanced by close regulation and supervision. Improved capital requirements and leverage restrictions are now also under consideration in international forums as a key element of reform.

Volcker then proceeds to act as if we have traditional banking versus proprietary trading of various sorts. He discusses the flawed distinction in his proposal, of customer trading versus proprietary trading, not to suggest that market making has become (like it or not) an integral component of our credit system:

The specific points at issue are ownership or sponsorship of hedge funds and private equity funds, and proprietary trading — that is, placing bank capital at risk in the search of speculative profit rather than in response to customer needs. Those activities are actively engaged in by only a handful of American mega-commercial banks, perhaps four or five. Only 25 or 30 may be significant internationally.

Apart from the risks inherent in these activities, they also present virtually insolvable conflicts of interest with customer relationships….the three activities at issue — which in themselves are legitimate and useful parts of our capital markets — are in no way dependent on commercial banks’ ownership. These days there are literally thousands of independent hedge funds and equity funds of widely varying size perfectly capable of maintaining innovative competitive markets. Individually, such independent capital market institutions, typically financed privately, are heavily dependent like other businesses upon commercial bank services, including in their case prime brokerage. Commercial bank ownership only tilts a “level playing field” without clear value added.

Yves here. Notice the gap and the slippery use of “capital markets’? Volcker talks about commercial banks, then talks about “independent funds…independent capital markets institutions.” Where are the trading desks that serve these funds and other investors? He at best alludes to it (”heavily dependent upon commercial bank services….including prime brokerage”). Then we get this:

Very few of those capital market institutions, both because of their typically more limited size and more stable sources of finance, could present a credible claim to be “too big” or “too interconnected” to fail….What we do need is protection against the outliers. There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption.

Yves here. Huh? What does he mean here? In context, is it not clear whether by “investment banks” he is referring to firms that engage only principal investing type activities, or referring players like Goldman and Morgan Stanley who are market-makers (as are Citi, Barclays, SocGen, etc.). And even if he does mean to include market-making (and it does appear he has switched gears) this bit does not inspire confidence:

The agency would assume control for the sole purpose of arranging an orderly liquidation or merger. Limited funds would be made available to maintain continuity of operations while preparing for the demise of the organization.

To help facilitate that process, the concept of a “living will” has been set forth by a number of governments. Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts.

Yves here. This idea is not politically viable, and it may not be operationally viable. AIG illustrates the difficulty of knowing how big these black holes will be when they open up, and further illustrates that they tend not to happen in isolation (as in a downdraft that can take out one systemically important player has probably imperiled others). It is not acceptable in a democracy to give the Treasury the near-unlimited check-writing authority to deal with systemic failures of highly-connected firms. While he mentions in passing the problems of connectedness, there is not enough focus on it here (and as we have discussed in earlier posts, the initial derivatives reform proposal did not do enough to address the real problem, credit default swaps, and its watered-down version looks certain to leave this product as hazardous as it was before).

And while Volcker does speak of the need for structural reform, which is absolutely necessary, his outline does not go anywhere near far enough to start defusing the bomb that financial services deregulation managed to create.

I believe this problem is solvable, but it requires even more intrusive measures than Volcker contemplates. The lesson of the Great Depression was that firms that benefitted from government guarantees had to be kept on a very short leash, and regulated in such a way that if they stayed within the rules and were competent, they would earn decent, but far from spectacular, profits.

The world has evolved so that many market making activities are now as essential to commerce as deposit gathering and lending. Those activities are de facto backstopped; there is simply no ready way back here (trust me, even if there were, it would take twenty years, and we’d still need an interim solution). We need to regulate those activities aggressively, including requiring much more capital to support them, and strict limits as to how much and what type of credit these firms can extend to hedge fund and other speculative investors.

The unintended message of Volcker’s op ed may be that even someone as tough-minded as he is may not recognize the magnitude of structural change needed to limit the extent of government guarantees to the financial sector and contain officially-backstopped risk-taking. It would be better if I were wrong, but we may need yet another crisis to produce the needed political will.

Reader John D sent a link to an Atlantic Monthly story that appeared in its December issue, “Did Christianity Cause the Crash?”. Although this piece is arguably dated, I though it was worthy of consideration. It makes an argument I haven’t seen made elsewhere; a quick search of the blogs to which I subscribe confirms it received far less attention that it deserved. One reason might be the headline; it overstates the article’s thesis. But as likely is that the article complicated the tidy narratives that many people seem to have constructed about subprime borrowers.

Whenever this blog has brought up the idea of mortgage mods or bankruptcy cramdowns, the response has tended to be wildly polarized. Some readers are pro some form of resolution regarding severely stressed borrowers, whether for reasons of efficiency (as banks used to do mods before the age of securitization; it can be a better economic outcome to restructure a debt than foreclose, not just for the borrower, but also for his neighbors) or the belief that a fair number of borrowers had bad luck (medical bankruptcy, job loss, etc.). Another set of readers is vociferously opposed, generally for reasons of fairness and morality (these readers themselves often consider themselves to be prudent; the arguments are sometimes personalized: “I saved to make a sizable downpayment, I’ve never missed a loan or credit card payment. Why should these people who lived beyond their means get a break?”).

But underlying these debates is generally (not always, but generally) the long-standing “deserving poor versus undeserving poor” thread, that the unfortunate should get help only under certain circumstances. But drawing that line may not always be so easy.

What happens when people seek out advice from people they trust or think are experts and are led astray? What if those people benefitted from their at best misguided, and often self-serving advice? And worse, what if some of those people were religious leaders?

This line of reasoning may seem like a stretch, but Hannah Rosin shows it operated in “prosperity churches” that came out of the Oral Roberts lineage:

In June, the Supreme Court ruled that state attorneys general had the authority to sue national banks for predatory lending. Even before that ruling, at least 17 lawsuits accusing various banks of treating racial minorities unfairly were already under way. (Bank of America’s Countrywide division—one of the companies Garay worked for—had earlier agreed to pay $8.4 billion in a multistate settlement.) One theme emerging in these suits is how banks teamed up with pastors to win over new customers for subprime loans.

Beth Jacobson is a star witness for the City of Baltimore’s recent suit against Wells Fargo. Jacobson was a top loan officer in the bank’s subprime division for nine years, closing as much as $55 million worth of loans a year. Like many subprime-loan officers, Jacobson had no bank experience before working for Wells Fargo. The subprime officers were drawn from “an utterly different background” than the professional bankers, she told me. She had been running a small paralegal business; her co-workers had been car salespeople, or had worked in telemarketing. They were prized for their ability to hustle on the ground and “look you in the eye when they shook your hand,” she surmised. As a reward for good performance, the bank would sometimes send a Hummer limo to pick up Jacobson for a celebration, she said. She’d arrive at a bar and find all her co-workers drunk and her boss “doing body shots off a waitress.”

The idea of reaching out to churches took off quickly, Jacobson recalls. The branch managers figured pastors had a lot of influence with their parishioners and could give the loan officers credibility and new customers. Jacobson remembers a conference call where sales managers discussed the new strategy. The plan was to send officers to guest-speak at church-sponsored “wealth-building seminars” like the ones Bowler attended, and dazzle the participants with the possibility of a new house. They would tell pastors that for every person who took out a mortgage, $350 would be donated to the church, or to a charity of the parishioner’s choice. “They wouldn’t say, ‘Hey, Mr. Minister. We want to give your people a bunch of subprime loans,” Jacobson told me. “They would say, ‘Your congregants will be homeowners! They will be able to live the American dream!’”

Rosin spends most of the article discussing one church in Charlottesville, VA, and some of its parishoners:

It can be hard to get used to how much [pastor] Garay talks about money ….Garay was preaching a variation on his usual theme, about how prosperity and abundance unerringly find true believers. “It doesn’t matter what country you’re from, what degree you have, or what money you have in the bank,” Garay said. “You don’t have to say, ‘God, bless my business. Bless my bank account.’ The blessings will come! The blessings are looking for you! God will take care of you. God will not let you be without a house!”…On the altar sat some anointing oils, alongside the keys to the Mercedes Benz.

Later, D’andry Then, a trim, pretty real-estate agent and one of the church founders, stood up to give her testimony. Business had not been good of late, and “you know, Monday I have to pay this, and Tuesday I have to pay that.” Then, just that morning, “Jesus gave me $1,000.” She didn’t explain whether the gift came in the form of a real-estate commission or a tax refund or a stuffed envelope left at her door. The story hung somewhere between metaphor and a literal image of barefoot Jesus handing her a pile of cash. No one in the church seemed the least bit surprised by the story, and certainly no one expressed doubt. “If you have financial pressure on you, and you don’t know where the next payment is coming from, don’t pay any attention to that!” she continued. “Don’t get discouraged! Jesus is the answer.”

And the areas worst hit by the subprime crisis were also ones where the prosperity churches were well represented:

Demographically, the growth of the prosperity gospel tracks fairly closely to the pattern of foreclosure hot spots. Both spread in two particular kinds of communities—the exurban middle class and the urban poor. Many newer prosperity churches popped up around fringe suburban developments built in the 1990s and 2000s, says Walton. These are precisely the kinds of neighborhoods that have been decimated by foreclosures, according to Eric Halperin, of the Center for Responsible Lending.

Now this does NOT mean that the prosperity churches were the main cause of the subprime crisis. But simple black and white narratives that overlook ugly nexuses of gullibility and greed can impede coming up with the best (or more likely, least bad) remedies.

You can find the entire article here.

Update: Independent Accountant e-mailed some supporting links:

3 Hebrew Boys’ Guilty In $82 Million Ponzi/Affinity Fraud Scheme

California Man Guilty In $62 Million Ponzi Scheme

Fraud trial begins for ex-execs of Baptist Foundation

He adds: “Yes, people do not want to brand religious leaders as fools or corrupt. About four or five times a year one of my clients will ask me about one of these programs. Invariably when I tell him it looks like a scam, he gets angry with me! What’s wrong with you that you are so unenlightened you can’t see the promoter has “God’s favor”?

“So far none of my clients has lost more than a few thousand dollars in any of these scams.”

Masculinity in a Spray Can New York Times

AIG exec’s big loan from Blankfein New York Post (hat tip Michael T)

Shoes may have changed how we run BBC

FCC’s Net Neutrality Plan Would Permit Blocking of BitTorrent Electronic Frontier Foundation (hat tip reader John D)

Australian Greens go Black p2pNet (hat tip reader John D)

Aliens can’t hear us, says astronomer Guardian

Most Parents Don’t Realize Their 4 Or 5-Year-Olds Are Overweight or Obese Science Daily (hat tip reader Michael T)

NY pols stunned to learn Obama administration opposes funding for 9/11 health bill Daily News (hat tip DoctoRx)

Bloomberg’s Reilly Wrecks the Lex on Fed/AIG Columbia Journalism Review

It’s All About Leverage Michael Schussele

A Growing Share of Americans’ Income Comes from the Government Michael Panzner

The Audacity of Populism Wall Street Journal

A Colossal Failure Of Governance: The Reappointment of Ben Bernanke Simon Johnson, Baseline Scenario. Today’s must read.

And a little note from Marshall Auerback re the 5.7% GDP growth release yesterday:

Even if you use the government’s own massaged data, it suggests that we’ve had barely any growth at all and curiously, a massive rally in the stock market. I was chatting to Frank Veneroso about this yesterday. He pointed out that the giant gains in the stock market (after an 86% fall from 1929-1932) were accompanied by the most explosive fundamentals ever. The years after 1932 saw the most rapid advance in industrial production in the entire history of the U.S. economy. The market rose starting mid-1932 with a 14% rise in industrial production in a mere four months. It soon deeply corrected as a result of a fall in industrial production into early 1933 that wiped out all those very sizeable but brief production gains. The stock market’s biggest surge came off that early 1933 low. It was coincident with a 62% rise in industrial production in a mere four months. That outsized gain in the stock market and the one that followed it were obviously driven by extraordinary fundamentals.

By contrast, the almost 70% rise in the S&P since last March has occurred amidst a modest five percentage point rise in manufacturing production off its cycle low. And, in fact, there has been only a 2.6% increase in industrial production so far relative to March when the stock market rally began.

So viewed relative to the fundamentals, there has never, ever, ever been a stock market rally as outsized as the one since March of last year.

Antidote du jour:

We have a President who, in his displays of pique against banksters, can work himself up to calling them “fat cats”. But immediately after that, um, display, he met with bank CEOs (well, the ones that didn’t stand him up) and was conciliatory, when the right move would be to show some steel. And when, after chewing out lobbyists in the State of the Union, which department in the Executive branch was the first out of the box to call lobbyists to set up private briefings? The Treasury.

It sure isn’t hard to discern the yawning chasm between word and deed and decide which to take seriously.

By contrast, the authorities in the UK are more united in their stance and are taking steps that show far more determination as far as reining in the financial services industry is concerned. Even if the bonus tax did not work as planned, it was a bold move, and at least showed seriousness of intent. And the UK regulators are pushing measures sure to elicit howls of pain from the banksters. The latest is that the head of the FSA, Lord Turner, has suggested a crackdown on currency carry trades. And more important, look at the basis of his argument: carry trades serve no useful social purpose. Lordie, if banks are restricted to doing things that are productive, just think of what it will do to profits and bonuses!

Similarly, can you imagine anyone of any stature in the US (well, save maybe Paul Volcker, who is currently in favor, but who knows how long that will last) having the kind of talk with bank top brass that Alistair Downing had. From the Guardian:

Alistair Darling told the City’s top bankers today to stop feeling sorry for themselves and instead work with the government to create a stronger financial system.

The chancellor held clear-the-air talks with eight UK and foreign-owned banks at the meeting of the World Economic Forum in Davos at which he urged faster international action to strengthen banking regulation.

“My message to the banks is that it is in their interests to get off the front pages,” Darling said at a press briefing ahead of the meeting.

“The banks should do what they are supposed to do, provide credit to the economy. They must know that changes are necessary. They can all see that the regulatory regime needs to be more robust and more intrusive.

“Don’t feel sorry for yourselves. Work with the government to see how you can improve the situation.”

Today’s meeting involved executives from Standard Chartered, HSBC, Barclays, Goldman Sachs, UBS, Morgan Stanley, JP Morgan and Citigroup.

The chancellor said he was frustrated that changes to bank regulations proposed by the G20 group of developed and developing nations were taking so long to be agreed by the Basle committee of central bank governors and international regulators.

“The Basle process can be quite tortuous,” Darling said. “We don’t have years to sort it out.”

He added that he was disturbed by reports that proposed reforms to the global financial system – originally expected this autumn – now looked as if they would be delayed until 2011.

“I would like to see the Basle regulations published this autumn,” Darling said. “I have heard it may slip into next year. That would be very, very bad.”

Is the modern version of “Beware of Greeks bearing gifts” “Beware of ‘reform’ proposals that bankers favor”?

The fact that banksters seem to be bowing to the inevitable, that they will have to submit to some changes in how they do business, should be a step in the right direction. But their inability to accept their central role in creating the worst economic disaster in modern times is stunning. The implosion almost certainly would have brought about a depression absent massively liquidity injections, and still appears like to leave us with years, if not a decade, of halting growth and dislocations for those whose savings were given a nasty haircut. And the lack of real reform means the odds of creating bigger bubbles with an even worse aftermath remains high.

And why should we be a little wary of this new found religion among our financial overlords? Consider this report from the Financial Times:

Support has been growing among regulators and politicians for an insurance levy as the best way to ensure that the burden of big bank collapses would not fall on taxpayers. But until now bankers have resisted the idea. They say the impetus for considering a global levy came from President Barack Obama’s $90bn balance sheet levy, which will tax banks in the US to recover the cost of an earlier bail-out programme.

Yves here. So why are the bankers rallying behind an Obama-type fee? Because the charge is too low, natch! The banks no doubt noticed what James Kwak figured out when the fee was announced (to howls, remember, even mutterings of Constitutional challenges?):

The best thing about the tax is that it helps level the playing field between large and small banks. From Q4 2008 through Q2 2009, large banks had a funding cost that was 78 basis points lower than that of small banks, up 49 basis points from 2000-2007. Closing that gap could lead some of those customers, faced with lower interest payments on deposits or higher fees, to take their money elsewhere. (Of course, they are already getting lower interest and paying higher fees, so there may not be much of an effect.)

But the tax isn’t nearly big enough! It’s being calculated as 15 basis points of uninsured liabilities, calculated as assets minus Tier 1 capital minus insured deposits. 15 basis points is a lot less than 78 basis points. And if the FDIC cost of funds data are based on all liabilities (not just uninsured liabilities),* then charging 15 basis points on uninsured liabilities only increases the overall cost of funds by about 7 basis points (at least in the administration’s example). This doesn’t come close to compensating for the TBTF subsidy.

Yves here. It gets even better:

Josef Ackermann, chief executive of Deutsche Bank, told the Financial Times on Friday : “To help solve the too-big-to-fail problem I’m advocating a European rescue and resolution fund for banks. Of course, the capital for this fund would have to come from banks to a large degree.”

Yves again. Ahem, to a large degree? How about in toto? Oh, because it might mess up precious bank economics. FDIC insurance is too cheap too; the FDIC did not have sufficient resources to handle the savings and loan crisis. Congress had to allot additional funds to create the Resolution Trust Corporation, which acquired the assets of dud thrifts.

And Team Obama is now considering exempting repos, one of the Street’s favored sources of cheap funding, so this won’t do much to solve the leverage problem either (yes, you can make a case for excluding Treasuries, but don’t expect any carve-outs to stop there).

So all this change of posture means is that some bank leaders have ascertained that some gestures that have modest costs attached to them would make for good PR. So expect theatrics and public declarations to make these measures sound more effective than they really are.

Update: The Wall Street Journal reports that top bankers got such a cold shoulder at Davos that it might finally be dawning on them that they not only screwed up big time, but also overplayed their hand in the year after the crisis. But I would not expect a wee bit of reality penetrating their well-developed defenses to lead to a change of heart, merely a change of tactics. And some organizations still appear to be beyond redemption:

….a senior London-based investment banker offered this wager: Lloyd Blankfein, CEO of Goldman Sachs, would be out within two years, he said, and he was prepared to back up his bet with millions of pounds…

Asked about the wager over Mr. Blankfein, Goldman spokesman Lucas van Praag said: “It is preposterous that The Wall Street Journal would even consider publishing such effluent.”

The vote on Bernanke’s confirmation produced 30 “no” votes, more than any previous vote on a Fed chairman, even exceeding those against Paul Volcker after he had driven the economy into the most severe post-recession downturn in his effort to wring inflation out of the economy.

But that was still a comfortable win, right, even if the finally tally showed considerable unhappiness with Bernanke? Not at all. This observation came from an informed Hill observer:

Despite the wide margin, they were genuinely shitting bricks last Thursday. He was on the brink of going down, but they rallied and won. It was definitely closer than it appeared…. It’s just that once he got the votes, the undecideds broke hard in his direction.

And one of the factors in Bernanke and the Administration prevailing is that progressives believe in fighting fair, which puts them at a considerable disadvantage. As we pointed out, the real vote on the Fed confirmation was the cloture vote (the vote to force an end to debate and move on to a vote), particularly with several senators having put a “hold” on the Bernanke vote (a threat to filibuster). Conservatives (many of whom had joined with progressives to oppose to Bernanke) will close ranks and use the filibuster (hence the importance of the loss of the Democrat’s 60 votes in the Senate with the election of Scott Brown in Mass. The 60 votes would matter less if the Republicans had some compuntions about using filibusters and other procedural measures to prevail).

As Ryan Grim explained at Huffington Post:

The seven senators who voted for cloture but against Bernanke included six Democrats and Florida Republican Sen. George Lemieux, who is retiring in 2010. Sen. Ted Kaufman (D-Del.) is also retiring. Senators on their way out often promise leadership they will “be there on cloture,” but are then freed to vote against final passage. Sen. Byron Dorgan (D-N.D.) is also retiring and voted yes on cloture but no on final passage.

Democratic Sens. Barbara Boxer (Calif.), Al Franken (Minn.), Tom Harkin (Iowa) and Sheldon Whitehouse (R.I.) also flipped their votes.

Whitehouse told HuffPost after the vote that it would have been hypocritical of him to filibuster the nominee, because he’d been critical of his colleagues who abused the filibuster in the past. “I’m for moving through cloture on this stuff. I’ve been annoyed by the Republican cloture blockades and I’ve been critical of members of my caucus who’ve denied the leader cloture. It would be highly inconsistent to vote against cloture,” he said. “I hope that my vote against him will help send a message to economic leadership that they need to pivot and they need to back off the record of, ‘Banks win every dispute with consumers and the public.’”

Franken expressed a similar sentiment. “While I voted for cloture because I believed this nomination deserved an up or down vote, I couldn’t in good conscience support it,” Franken said in a statement after the vote, after declining to talk to a HuffPost reporter in the hallway.

Franken said he opposed the nomination because he didn’t get the assurances he wanted about consumer protection. “A strong Consumer Financial Protection Agency and other consumer protections are essential to securing our economy for Main Street and the middle class,” Franken said. “I needed to know that a robust CFPA would be a part of financial regulatory reform in order to support Chairman Bernanke’s confirmation to a second term. As governor of the Federal Reserve and then Chairman of the Federal Reserve, Bernanke did almost nothing to protect consumers and when he did, it was too late. I needed the assurance that would improve. And I didn’t get that.”

“I wasn’t somebody who wanted to prevent a vote on it,” Dorgan said after the vote.

The lesson here: Centrist and conservative senators are willing to deny an up-or-down vote on policy they oppose, but progressive senators often are not. That dynamic tilts political power toward leadership and conservative priorities.

Bernanke’s opponents pointed to the relative success of their push against his confirmation, which was considered a virtual certainty two weeks ago but became an open question following the election of a Republican, Scott Brown, in the Massachusetts Senate election. “I think it’s important for him to note that he did have 30 votes-plus [sic] against him. I think the message is, take a look at Main Street, not just Wall Street,” Sen. Barbara Boxer (D-Calif.) said.

As the Israelis say, “Love your enemy, for you will become him.” Progressives seem not to have made that leap.

This via e-mail from reader Scott:

But as someone else on the thread remarked, “He thinks he needs a ‘decoder ring’ for that?”

Emotional signals cross cultures BBC

Neuron breakthrough offers hope on Alzheimer’s and Parkinson’s Times Online

EU signals last-resort backing for Greece Financial Times (hat tip Swedish Lex)

Bank Sues Victim To Avoid Replacing $200k In Stolen Funds Consumerist

Soros: ‘bleak outlook for UK’ Robert Peston (hat tip reader Tim C)

Bailout time Eurointelligence

A limited speech by a constrained president James Pethokoukis

Swiss halt deal with U.S. that IDs Americans with secret UBS bank accounts Washington Post (hat tip reader John D)

Radical Inequality Is Literally Killing Us Alternet (hat tip reader John D). It’s actually income inequality, and we posted about it in 2007, the FT was talking about this in 2002.

UK banks downgraded by credit rating agency Guardian

State of the (Cardboard) Box Outside the (Cardboard) Box

U.S. may exempt Treasuries from new bank tax -sources Reuters

March of the Peacocks Paul Krugman, New York Times

In the Packaging of Loans, a Bust With Precedent Floyd Norris, New York Times. This is intriguing.

Antidote du jour (FYI, I lived in the Upper Peninsula for three years when I was growing up). John Bougearel writes:

Look at this Moose!

By the length of his beard and the grey legs, I figure he must be over 10 years old. He looks to be well over 8 feet at the top of the shoulder hump, and with his head up the height to the top of his antler must be about 12 feet. This guy is king of the forest, no bear or pack of wolves would dare come after him when he has this rack……Considering that a dirt road can fit 1 1/2 cars across … this fellow is HUGE …THIS IS ONE BIG BOY!

The picture was taken in Elliot Lake, which is near Sault Ste. Marie in Michigan ’s Upper Peninsula.

Yes it is a regular size dirt road.