SEC chief claims regret over short-selling ban

Posted on January 2nd, 2009 by bile
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Under fire for regulatory missteps, top U.S. securities regulator Christopher Cox defended his agency’s record but acknowledged some regrets over how he handled the worst financial crisis in decades.

The Securities and Exchange Commission has been lambasted by lawmakers and others for not doing enough to prevent the 2008 collapse of Bear Stearns and Lehman Brothers, interfering with markets and failing to detect the alleged $50 billion fraud at Wall Street financier Bernard Madoff’s firm.

Cox, a Republican and former California congressman, said the SEC’s focus has been customer protection and broker dealer regulation and that the agency “performed that traditional role superbly.”

However, Cox said he had some regrets over a drastic action the agency took as markets were hurtling downward in September. For a few weeks, the SEC stopped investors from making bearish bets on financial stocks like Morgan Stanley and Citigroup.

The SEC’s office of economic analysis is still evaluating data from the temporary ban on short-selling. Preliminary findings point to several unintended market consequences and side effects caused by the ban, he said.

“While the actual effects of this temporary action will not be fully understood for many more months, if not years, knowing what we know now, I believe on balance the commission would not do it again,” Cox told Reuters in a telephone interview from the SEC’s Los Angeles office late on Tuesday. “The costs appear to outweigh the benefits.”

The SEC imposed the temporary ban under intense pressure from the Federal Reserve and Treasury Department which insisted it was crucial to the short-term survival of these institutions, Cox said.

A few weeks after the temporary ban was lifted, global markets were again dropping precipitously, U.S. banks were begging the SEC to reinstate its short-sale ban and there was talk of shutting the markets down.

Cox said the chief executive of one major U.S. investment bank even urged suspension of normal trading rules across the entire U.S. market, likening the situation to how Abraham Lincoln suspended habeas corpus during the Civil War and Franklin Roosevelt sent Japanese-Americans to internment camps during World War Two.

The chief executive said, “that is how America made it through such crises, and we couldn’t be too focused on maintaining the rule of law,” Cox said. “That was advice we rejected.”

Wonderful. Comparing his their actions to that of outright tyrants. In one respect I agree. What was done was but a difference of degrees and not kind. But the level of degrees is so great it’s a bit of an insult to those who suffered as a result of Lincoln’s and FDR’s actions.

This was completely predicted by anyone with half an economic brain. The ban was obviously pushed for by John Mack of Morgan Stanley, Lloyd Blankfein of Goldman Sachs along with other major bank players. No net good can occur due to government interference. Only relative to the bad they caused prior.

Congress really is just for show

Posted on November 25th, 2008 by bile
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Writes Bob Higgs:

My source is Bloomberg.Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

I believe he said “the banking system is bankrupt.” That seems like an honest statement. And then he said “you try to keep it going.” Pretty cool, eh. Zombie banking system. Keep it going.

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

Note: the Treasury changed the law. The pretense that Congress makes the laws, with the president’s assent, has apparently been abandoned as unnecessary in a crisis. Besides, under the present emergency regime, the Treasury is the government, with assistance from the Fed and the FDIC. All the rest is mere window dressing.

Ron Paul on the Global Financial Crisis

Posted on September 18th, 2008 by bile
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Reid may not know what to do… but Paul does. Too bad no one listens.

Ron Paul on Fox News speaking about today’s recent market madness

Posted on September 17th, 2008 by bile
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Former Treasury counsel claims: “No one could have possibly imagined this a few months ago.”

Posted on September 17th, 2008 by bile
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AIG dropped 34 percent to $2.54 by 1:26 p.m. in Germany, after falling 80 percent in the past week in New York on concern the company would go bankrupt. The seizure in credit markets and more than $500 billion of losses related to subprime mortgages forced the government to take over Fannie Mae and Freddie Mac, which control about half of America’s $12 trillion in home loans, and drove Lehman Brothers Holdings Inc. out of business.

“I am floored,” said former Treasury counsel Peter Wallison in an interview. “No one could have possibly imagined this a few months ago. I can’t imagine why the Fed would do this unless they were sure AIG’s failure posed systemic risk.”

No one? Not a single person? Really, Mr. Wallison? I’m pretty sure the Austrians were. I’m pretty sure I recall Ron Paul talking about the bad things coming at presidential debates, TV interviews and written works.


Here is one on Fannie and Freddie from 2003:

Ironically, by transferring the risk of a widespread mortgage default, the government increases the likelihood of a painful crash in the housing market. This is because the special privileges granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital is diverted from its most productive use into housing. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s policy of diverting capital to other uses creates a short-term boom in housing. Like all artificially-created bubbles, the boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government policy not actively encouraged over-investment in housing.

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE debt and pumping liquidity into the housing market, but this cannot hold off the inevitable drop in the housing market forever. In fact, postponing the necessary, but painful market corrections will only deepen the inevitable fall. The more people invested in the market, the greater the effects across the economy when the bubble bursts.

AIG employee offers perspective on FED bailout

Posted on September 16th, 2008 by bile
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Within minutes of the FED announcing the rescue of the crumbling insurer, I had the luck of being able to chat with an AIG employee about the Government’s repsonse and AIG’s current financial situation:

AIG employee looks like the Fed will be bailing us out. take THAT, taxpayers!

xyz ugh. this is really sickening.

AIG employee bwahahahaha!!

xyz you do realize that youre part of that “tax payer” category, right?

AIG employee yeah but the money this will bring me personally is probably more than Ipaid in taxes in the past year or so. finally the government does something right for a change. yay Fed!

xyz i disagree

AIG employee No, if AIG bit the dust then I just would’ve been canned with everyone else. Now we’ll be offered buyouts. That’s a lot of money for me.

xyz you should have been canned, just like lehman brothers. AIG was bankrupt and deserved to fail

AIG employee No, AIG is solvent and I did not deserve to be canned. There is a liquidity due to the Financial Services arm of the company. liquidity *issue*. Anyway, the insurance part of the company (where I work) is healthy and we have $1 trn in assets worldwide.

xyz an $85 billion rescue plan is solvent?

AIG employee You’re talking about something you don’t know anything about. it’s a bridge loan. AIG has more than enough assets to cover its credit default swaps, but not enough to to capitalize themenough *time* to capitalize them

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