Journalism in the Public Interest

New Financial Overseer Looks for Advice in All the Wrong Places

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The financial industry is obsessed with President Obama's second-term regulatory appointments. Who will be Treasury secretary? Who could head the Federal Housing Finance Administration? But hardly anyone is paying much attention to the Office of Financial Research.

This entity was created by the Dodd-Frank Act to conduct independent research on the sweeping risks to the financial system. Ah, right, another group of Washington wonks who will issue reports carrying vague warnings of risks looming sometime in the uncertain future. Yawn. I hadn't paid much attention either.

But then I spoke to Ross Levine, an economist and specialist in regulation at Haas School of Business at the University of California, Berkeley, and I finally got it. The Office of Financial Research is a great idea. And as I grasped it, I felt a minor sense of horror, as when you see a precious ring slip off a finger in slow motion and go down the drain while you are powerless to stop it.

The office is looking as if it will be a tool of the financial services industry, instead of a check on it. Its main role is to serve the Financial Stability Oversight Council, providing the systemic risk overseer with data and analysis of where the nukes are buried.

But the Office of Financial Research was hobbled from the get-go by a poor design. It is housed in the Treasury Department, while ostensibly being independent of it. It has a small budget. And it has to report to the very regulators it is supposed to report on.

This month, it announced its advisory committee. Thirty big names charged with giving the fledgling operation direction and gravitas. But these same people have also compromised it.

By my count, 19 of the 30 committee members work directly in financial services or for private sector entities that are dependent on the industry. There are academics, but many of them have lucrative ties to the financial services industry. I noted only one financial industry critic: Damon A. Silvers, the policy director for the A.F.L.-C.I.O.

"Academics with a history of challenging regulators are not there," said Anat R. Admati, a finance professor at Stanford and the co-author, with Martin Hellwig, of the forthcoming call to arms, "The Banker's New Clothes" (Princeton University Press). She was among several prominent banking critics who had applied but didn't make the cut.

The Treasury Department sees it differently.

"We were not looking for critics or proponents. That wasn't the goal," said Neal S. Wolin, the Treasury deputy secretary. "We were looking for people with a range of perspectives who understand keenly the systemic risks in the financial system."

Mr. Wolin said that the office would be independent despite its home. The argument for being housed in the Treasury Department is that if it were all by its lonesome, brand new and small, it would be much easier to be squashed like a bug.

Maybe. But it's not as if there isn't a precedent for creating a better advisory council: Sheila Bair did it for another regulator, the Federal Deposit Insurance Corporation. That panel, the Systemic Resolution Advisory Committee, has Professor Admati; Paul A. Volcker; John S. Reed, the former co-chief executive of Citigroup and now a prominent banking apostate; and Simon Johnson, the former head economist for the International Monetary Fund and outspoken banking nemesis.

Perhaps Professor Admati and Mr. Johnson and Mr. Volcker were busy. The world is teeming with expert critics of Big Banking; they just aren't heard from much in the halls of Washington. The Federal Reserve Banks of Kansas City and Dallas have candidates. The economist Joseph Stiglitz would make a good choice. The Bank of England houses two prominent banking critics, Andy Haldane and Robert Jenkins. Outfits like Better Markets or Demos could nominate people who would give Jamie Dimon some indigestion.

Certainly, financiers are not a monolithic lot. Investors often have differing interests from those of banks, and investment banks from commercial banks, and the small from the large. Even in big institutions, there are secret sharers of anti-Wall Street sentiment. And obviously, an advisory committee requires a certain number of experts with real-world experience.

Clearly, there is a place for finance professionals. But shouldn't the balance of the committee be tilted in the opposite direction and give greater voice to the critics and the banking skeptics? This is a panel that is supposed to identify giant risks in the system that bankers ignore in their pursuit of profit and bonuses and to spot flaws in regulations that could cost the public and economy trillions.

It's not as if the poor bankers don't have a voice in Washington, after all. The bankers have the resources. And they are focused. Bankers are in the trenches all day, fighting regulation. The public only glances at these battles.

So why does yet another Washington advisory panel of worthies matter? Mr. Levine has a subtle and fascinating answer. He starts by pointing to the mystery of the home-team advantage in sports, which has long puzzled researchers.

It turns out that umpires are biased toward the home team not out of conscious or recognizable bias. Rather, they subconsciously gravitate toward their immediate "community" — in this case, the home-field crowd, especially at crucial moments in a game. (Researchers will next study how this appears to have no effect whatsoever on the New York Jets.)

To minimize the bias, you can tell the umpires that they are being monitored. Introduce instant replay. With that, you have expanded the community that is watching the umpires to an audience far beyond the home crowd.

Mr. Levine believes that the Office of Financial Research could do the same for regulators. If it independently examined and publicized not just systemic risks, but — crucially — the flaws in how the regulators were approaching those risks, that could have the effect of expanding the regulators' community. Regulators, he said, "operate within financial services industry. They are surrounded by it."

"That means that the home-field crowd is the financial services industry," he said. "The public, if it has a ticket at all, is way up in bleachers, and its voice can't be heard."

The Office of Financial Research is well on its way to barring the gate.

Before the crisis, the consensus was that the Office of Thrift Supervision was the regulator most in the pocket of Big Banking. For its efforts, it got shut down as part of the postcrisis regulatory overhaul.

"Now, the title of ‘Most Captured' is up for grabs," Mr. Johnson said. "And I think we have a contender."

clarence swinney

Nov. 28, 2012, 1:38 p.m.

1% got 37.6%
5% got 48.3%
20% got 68.5%
Bottom 60% got 16.4%

I don’t know… I’ve read Dodd-Frank, and I think you have some of your facts wrong. I don’t know how it’s working out in practice, but according to the law, The Office of Financial Research sets its own budget and is funded separately from the Treasury Department. Also, the laws says that once it has its own Director confirmed, The Office of Financial Research is not subject to oversight from the Treasury Department, and the law goes so far as to say that the Treasury Department can’t review the Annual Report to Congress of The Office of Financial Research. It’s all right there in the law, so I don’t know how you’re saying that The Office of Financial Research has to “report” to the regulators in any way that matters.

Maybe this Advisory Council is really important, I don’t know. But I wonder how much time this Advisory Council is actually going to spend checking in on this agency? Aren’t these people on the Advisory Council really busy anyway?

I guess maybe you want The Office of Financial Research to be something different than what it is and that’s why you’re mad? I think other countries do it different, like how Canada and the UK have one big regulator that is responsible for everything so if something goes boom you know whose fault it is. So maybe they should have done that here but the UK has problems too you know.

Horrors! A regulator designed to protect us got co-opted?

Obviously, the answer is better regulators and more of them, right? Just need to re-engineer humans.

This is a panel that is supposed to identify giant risks in the system that bankers ignore in their pursuit of profit and bonuses and to spot flaws in regulations that could cost the public and economy trillions.

Oh, fear not.  It will do exactly that, I guarantee.  But, it’ll do it in the service of the big banks.

Remember, the OCC blocked Eliot Spitzer from investigating the bad loans getting handed out.  This isn’t a new idea, just a new chair for pro-finance people to sit in whenever the music stops.

clarence swinney

Nov. 29, 2012, 11:12 a.m.

Yes! Crazy. Crazy not to inform the people on his many successes
but insists on playing defense countering the attacks by Republicans.
Grover Nutquist on Fox said “We just elected a president who
does not want spending restraint.”

President Obama signed into law a spending cut of $1500 Billion
2013 thru 2023. These discretionary cuts will shrink non-defense discretionary spending
to lowest level in history as a percent of gdp (per

President Obama formed the Efficient Spending in Government Program.
Each Department is expected to reduce cost via efficiency changes. The Secretary Of Energy has produced information on savings in that department but this President refuses to brag -boast-promo successes.

President Obama will have,  over four years, increased Spending at lowest percent change since Hoover. No Braggo. I do it for him. Bush last fiscal year spend 3520 Billion. Obama fourth fiscal year is budgeted to spend 3800 Billion. 3800-3500=8.6% increase in four years or average of 2.15% per year.

Why not compare? Reagan increased spending by 80% and Bush by 90%.

I cannot read his character/personality! If he will not boast why not turn loose all Cabinet Heads to boast on their achievements?? There is a long list at Obama achievements. org or The Peoples Choice. com/achievements list.  a confused/tar heel

E Henry Schoenberger

Nov. 30, 2012, 11:13 a.m.

Posted at:
Dodd-Frank is a sham transaction, a charade, a hoax; because Wall Street is inexorably opposed to reform – and the SEC is in charge.
Bigness is a crucial and lethal problem; yet Obama has shied away from explaining that the ostensible promise of Dodd-Frank “reform” has been soiled beyond repair by Wall Street Lobbyists and 2,000 pages of rules which cannot be effectively administered. If you understand the history of the SEC – which is a litany of prone/non intervention, and a history of not enforcing existing regulations which would have rendered the collateralized mortgage obligations illegal – it is impossible to grasp how geometrically disingenuous it was to make the SEC responsible for the administration and enforcement of Dodd-Frank. Was reform really the goal, or was it to play charades?
From How We Got Swindled By Wall Street Godfathers, Greed & Financial Darwinism:

“Mary Schapiro, the Chairman (person) of the Securities and Exchange
Commission said, in Congressional Testimony the week of June 26th 2009, “Derivatives allow parties to hedge and manage risk, which in itself can promote capital formation.”  Did anyone ask how this promotes capital formation?  How about asking her to explain how this helps manage risk, or ask questions regarding any supporting realities for our Chairman’s reasons for derivatives. In September of 2011 Schapiro’s self-expressed mission on the SEC Website:  “to reinvigorate regulations.” (Where in the hell has she been – sorry,  what a load!  I have been licensed since 1968 and have heard a lot
of BS, but Schapiro has only reinvigorated the meaning of hypocrite.)

Richard Bookstaber, one of the pioneers of financial engineering on Wall Street told Congress, “Derivatives are the weapon of choice for gaming the system.”  Richard went on to testify that, “derivatives provide a means for obtaining a leveraged position without explicit financing or capital outlay for taking risk off balance sheet, where it is not readily observed and not monitored.”  So derivatives enable institutions to avoid taxes and accounting rules. …

A leading Scottish economist, John Kay, pointed out that – derivatives
allow risks to be transferred to be shifted from those who understand it a little to those who do not understand it at all. …

Mary Schapiro committed perjury when she testified before Congress:  “Derivatives allow parties to hedge and manage risk, which in itself can promote capital formation.”  This is the lie she picked up without any critical thought from Alan Greenspan who said in April 2005:  “By far the most significant event in finance during the past decade had been the extraordinary development and expansion of financial derivatives. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it – a process that has undoubtedly improved national productivity growth and standards of living.” 

To have put the SEC in charge is the primary fallacy behind the masquerade called reform.  Wall Street now occupies the land of Mega Bank Holding Companies.  Therefore, Wall Street has become an inexorable part of the too big to fail arena because the risk has been shifted to our government – us.  So we the people are underwriting the risk of all the egregious leverage used to create net worth to feed sociopathic greed.  We the people are the inadvertent and unwitting sponsors of all the reckless financial behavior which does not care about real investment to create capital formation and jobs.  And we have the Fed to thank for allowing the investment banks to become Bank Holding Companies.


Adapted from an article in the Law Library – New York Times, Wednesday, October 17, 2012:

The Glass-Steagall Act, also known as the Banking Act of 1933 (48 Stat. 162), was passed by Congress in 1933 and prohibits commercial banks from engaging in the investment business.

It was enacted as an emergency response to the failure of nearly 5,000 banks during the Great Depression. The act was originally part of President Franklin D. Roosevelt’s New Deal program and became a permanent measure in 1945. It gave tighter regulation of national banks to the Federal Reserve System; prohibited bank sales of securities; and created the Federal Deposit Insurance Corporation (FDIC), which insures bank deposits with a pool of money appropriated from banks.
Dodd is supposed to make derivative markets transparent. There is a distinction between making something transparent and whether it should be made.
Dodd-Frank, including the Volker Rule, has carefully navigated around, and avoided the controlling issue: $7OO TRILLION DERIVATES add no value to any sector of our economy except for fees going to the Godfathers who run the Wall Street Banks, and the minions who serve their sociopathic greed.

Derivatives must be outlawed, because there is no other way to control the systemic risk of unfettered sociopathic narcissistic greed.  It is manifestly apparent the derivative “market” (casino) is nothing but a bunch of people standing around a craps table.  If you make a craps table or a huge casino transparent – does this lessen the risk?  Does a casino create capital formation - or allow glitzy hotels to be built as monuments to all the suckers who enjoy the masochistic thrill of losing money, because the name of the game is betting.

Consider the SEC’s lack of dedication to enforce currently existing significant regulations. Don’t forget that the total lack of any meaningful collateral behind Collateralized Bonds was not disclosed.  Inadequate disclosure constitutes a grave violation of securities law. Additionally this results in the omission of significant information – which constitutes fraud.  Be aware of the following SEC Regulations which should be addressed:

Section 10(b) of the 1934 Securities Exchange Act makes it “unlawful for any person…to use or employ, in connection with the purchase of sale of any security.., any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the SEC may prescribe.”  15 U.S. C. sec.78j.  Rule 10b-5, which implements this provision, forbids the use, “in connection with the purchase or sale of any security, “of any device, scheme, or artifice to defraud” or any other “act, practice, or course of business” that “operates…as a fraud or deceit.” 17 CFR sec. 240. 10b-5 (2000) One of Congress’ primary objectives in passing the act was “to insure honest securities markets and thereby promote investor confidence” after the market crash of 1929. United States v. O’Hagan, 521 U.S. C. 642, 658 (1997) Further Congress wanted “ ‘to substitute a philosophy of full disclosure for the philosophy of caveat emptor and thus achieve a high standard of business ethics in the securities industry.’ “

The SEC has no problem with Credit Default Swaps that were originally designed to provide the illusion that the financial risk of complex investments could be insured against failure.  Of course, Wall Street wants to take and place bets on anything that has a vector, a direction, so the derivative market was born.
The Commodity Futures Modernization Act, drafted by lobbyists and Wall Street lawyers for Phil Graham, used the word Credit Default Swap in lieu of the word insurance.  The term, CDS was specifically designed to avoid being regulated by state insurance commissioners – who would have disallowed Swaps called because insurance requires meaningful reserves.  Therefore, CDSs were sham “contracts” called insurance which implicitly provided collateral, i.e., “swap backed.”  Everyone knows that CDSs are referred to as insuring against some kind of financial risk.

A Vice President of FINRA in charge of one of the districts, when we discussed Swaps several years ago, rhetorically asked – “how can nothing be shorted?”  And with remorse added, “There is no FINRA policy or mandate to stop the madness.”

Dodd-Frank intends to provide transparency.  So if markets selling/trading derivatives which are too complex to explain become transparent – so what.  Derivatives will remain a mystery to the buyers – and will remain “unlawful based on a specific Fed Bank Holding Company Regulation which holds that, “complex investments must be explained well enough to be understood!” 

Sellers (Wall Street Banks) promote the necessity of maintaining their ability to make markets for liquidity for derivatives.  Liquidity is the goal!  Liquidity for stuff, for “malarkey” which defies an explanation!  The Street’s real goal: to continue to sell and trade derivates for the huge velocity of fees generated by their casino.  Sociopaths do not care about the risk shifted to we the people.

Occupy the SEC (Wall Street’s Stalking Horse) at the beginning of this year produced a 325 page footnoted, legal appearing document to ostensibly provide comments to improve the Volker Rule.  Comments about the importance of maintaining markets for liquidity.  How naïve is it to accept this?  As former broker-dealer, with several friends who are still officers at the SEC, I discussed the 325 pages of “footnoted comments” with the two individuals I have known since 1989.  Both assured me that the SEC is well aware the “325 pages are a lobbyist’s position paper.”  Awareness does not mean enforcement.

The Volker Rule will not work, because it does not stop markets that exist to only to provide liquidity for derivatives and fees to the contrivers; although now you have learned it is illegal to contrive.  Nothing in Dodd stops the fabrication of derivatives without any foundational value.  Where is the disclosure of the toxic risk of the unknown complexities? 

Dodd-Frank will not stop the too complex to explain. Because rapacious sociopathic was deregulated – and Wall Street Banks will continue to play high-stakes poker with structured investments as their chips.  At least you can throw a chip on a pile of other chips in Vegas and hear a click. 

The hollow echo coming from all the derivatives is:  the distinction between making something transparent and whether it should be made. 

Dodd-Frank and the Volker Rule have missed the real point – derivatives add no value to any sector of our economy except for fees going to the Godfathers who run the Wall Street Banks and the minions who serve their sociopathic greed.  And greed belongs in a cage.

It is generally acknowledged there are SEVEN HUNDRED TRILLION DOLLARS OF DERIVATIVES or more.  And this amount of geometric egregious leveraged phantom stuff to bet on is like a Hydrogen Bomb sized financial plague looming over us.  So what happens when it is no longer possible to lay off all the bets, when they go in the wrong direction?  What happens when liquidity falls apart?  Think about: 2008, Lehman, Corzine, the JPMorgan $10 billion oops, and much worse – think about how our financial system is living under a guillotine held up by a frayed string – called market liquidity!

Underlying the myth of transparency is the ludicrous notion that Volker Rule will empower the SEC to strengthen compliance, and tighten risk measurement (based on the irrational concept that qualitative risk can be measured by the quantitative.)  And if the past is prologue – strengthening compliance is a bizarre form of insanity considering all the vast empirical evidence to the contrary.  This is Dodd-Frank in action:

CME Group Inc. (CME) filed a lawsuit to block new federal requirements around the reporting of swap transactions, one component of the wide-ranging Dodd-Frank financial law.
Such rules, which would hit CME as the operator of a clearinghouse for derivatives trades, “would impose costly, cumbersome and duplicative requirements” on clearinghouses, CME the Chicago-based futures charged in the lawsuit filed Thursday. The exchange operator objected to a rule forcing derivatives clearing facilities, such as the one operated by CME, to issue reports on swap deals to newly created “swap data repositories.” These repositories are essentially databases for the trades primarily aimed at helping regulators keep closer tabs on the derivatives market. …

The Chicago-based futures exchange operator objected to a rule forcing derivatives clearing facilities, such as the one operated by CME, to issue reports on swap deals to newly created “swap data repositories.” These repositories are essentially databases for the trades primarily aimed at helping regulators keep closer tabs on the derivatives market. …

Swap data repositories for keeping tabs?  Swaps used for hedging without any logical explanation of how a hedge can somehow mitigate or reduce risk. A hedge in your backyard can be used as a screen to hide something unsightly. Maybe Swaps are Hedges contrived by faith based creationists, which then would be based on the word of God.  Insurance policies inform us that all natural disasters are caused by God, so when Swaps fail, will this be an “act of God?”

If regulators want to keep a closer tab on the derivatives market, they ought to take more trips on LSD. (Of course, government paid.)
There has been no cogent discussion about the fact of the SECs historical failure to have enforced existing regulations - only the incessant parsing of Dodd-Frank and the Volker Rule.  Pundits parsing thousands of pages of so-called rules stemming from thousands of pages of comments disingenuously promulgated by Wall Street bank lobbyists under the guise of helping the SEC formulate final rules – rules that are too complex to administer! 

How selfless it is that Wall Street’s comments have been freely offered to the SEC to help the SEC in its heroic struggle to formulate a maze of rules based on Wall Street propaganda that it is vital to maintain markets for liquidity.  Markets for hot potatoes!

The past is prologue.  It is self evident the SEC will only administer as it always has, for the Wall Street Godfathers – who are market makers - the wolves dressed in sheep’s clothing (from Brioni Sheep carefully bred in Italy for Godfathers). The Godfathers are the former colleagues and friends of the people in charge of the SEC (and the Fed); so the only logical way forward is to separate the banks from the investment banks. And revisit the 1956 Bank Holding Company Act to make BHCs smaller.

Dodd-Frank could not add air to a flat tire or correct the one waiting to explode.


Nice to see thoughtful and informed additions to the discussion from Mr. Schoenberger. The big sadness here is that the the purveyors of the financial system madness are gradually destroying our economic system. They, individually and collectively, will pass along a wasteland to their successors, while the population suffers mightily, and they characteristically will claim that nothing was their fault. Alan Greespan, I suspect, still has no clue that he was just a pawn in the latest big game.

clarence swinney

Nov. 30, 2012, 7:09 p.m.

Credit Default Swaps
2000=900 Billion
2008=30,000 Billion
Buy house insurance then bet house will burn
Courtesy:Casino Derivative of America
World’s largest gambling house.

Cool, use public funding to do research to give advance information to financial entities, who clearly won’t use the insider info to profit.

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)