Brooksley Born, American hero

The “first priority”? Really?
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really.
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apparently, you haven’t been following the backstory — Greenwald appeared on the same edition of Bill Moyers Journal as did William Black — Black (who was heavily involved in the clean-up of the S&L scandal) very credibly accuses both Bush and Obama administration officials of deliberately ignoring the law regarding FDIC insured bank takeovers in order to cover-up the criminality of the Wall Street banksters who gave us the current mess. Black’s comments can be found in the show transcripts here
http://www.pbs.org/moyers/journal/04032009/transcript3.html

I know the back story, and I don’t find Black all that convincing. I would agree that both Bush and Obama administrations have not followed the FDIC prompt corrective action guidelines to the letter—but the law gives them leeway not to when they determine that there’s a ‘systemic risk.’ And it’s the fear of that systemic risk, whether misplaced or not, that mainly explains their behavior.

but the law gives them leeway not to when they determine that there’s a ‘systemic risk.’
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care to provide a citation for that claim? Here’s the text of the “Prompt Corrective Action” law — http://www.law.cornell.edu/uscode/12/usc_sec_12_00001831—o000-.html

I found nothing about “systemic risk”.

The only exception to the mandatory receivership provision is that the FDIC can “take such other action as the agency determines, with the concurrence of the Corporation, would better achieve the purpose of this section, after documenting why the action would better achieve that purpose.”

As Black notes, there is nothing which suggests that such “documentation” has ever taken place….

and here is that purpose

The purpose of this section is to resolve the problems of insured depository institutions at the least possible long-term loss to the Deposit Insurance Fund.

Systemic risk explains why it’s a good idea to avoid all negative consequences for the perpetrator’s of this mess?

In other words, after people got rich while gaming the system in a way that cost the nations trillions of dollars while experiencing no negative consequences personally, you believe our only challenge is “recapitalizing” the system?

You’re a smart fellow, but I find that idea amazing.

Many would suspect that the fact that only positive consequences have accrued to the perpatrators of this mess might be an incentive to them –and others — to do it again….For the most part, people do what the incentives encourage them to do.

Certainly, it would be hard to demonstrate that “the usual suspects” are overwhelmed by contrition.

Refer to the “Prisoner’s Dilemma.”

@tc: Yeppers. A few of them will go to jail as poster children, though almost certainly not the right ones. I get the Prisoner’s Dilemma reference (I did a masters thesis on it 25 years ago), but don’t believe it’s the correct one. Not at all sure how we can prevent this, or if we even should, despite the consequences.

@plukasiak: I can’t find it on that Cornell site either, but it’s definitely in FDICIA, the 1991 law that gave us prompt corrective action:
http://thomas.loc.gov/cgi-bin/query/F?c102:1:./temp/~c102HITspy:e122160:
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@tc125231: When did I ever say it’s a good idea to avoid negative consequences for the perpetrators of this mess? It was probably a not- horrible idea not to focus on those consequences in October and November, but I’m all for spending the next couple of years suing people, throwing them in jail, hauling them before Congressional committees, etc. Not so sure that should be the Treasury Secretary’s job, though.

I had to spend the last two hours crushing tennis balls being delivered at 95 mph every 15 seconds just to calm down.
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The context is simple. Our government has refused to regulate a market which lead to “SYSTEMIC RISK” and now, I find that the reason which Bush/Obama refuse to act is because of “SYSTEMIC RISK.” Stop me when I go off track.
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Geithner/Obama promised a new path and a new openess in government. But after reading the plan and hearing of the intentions of many large banks, I think one would be safe in saying we are getting neither. What exactly is it that is so wrong with banks and our economic system that we cannot flush the toxic assets from the system? Seriously, Justin, I just don’t get it. Is it that bad? Would it be the end of the world as we know it? These questions are not rhetorical. I, for the love of all that is good and holy in the world, do not know what in the heck our government is doing.
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We know that we are in a situation akin to Japan. And for Japan to recover, they had to come clean. I guess all that I am looking for is to be treated like an adult, and I’ll take our current situation like I take my Jameson whiskey- straight up…no need to water it down.

Curmudgeon –I understand that the “Prisoner’s Dilemma” is hardly exotic.

It may not be “exactly right”, as you say. Nonetheless, the “meta-point” applies. People will seek those returns that matter to them in the fashion that yields the highest “Expected Value” for theoutcome. As long as the incentives remain structurally what they are, people on Wall Street will seek short term gains for a small “elite” to which they belong at the expense of all other parties.

And, with all respect to Mr. Fox, I don’t think lawsuits and prosecutions will change things much. There are going to have to be structural changes to shake things up, and, hopefully, put more empphasis on long-term wealth creation than currently exists.

I don’t have the slightest idea what they those changes should be, but, as my mother used to say, the definition of insanity is doing the same thing the same way and expecting different results. I believe that is the point at which Simon Johnson has been driving.

Andrew Leonard has an amusing piece on Salon, regarding the role of Napoleon’s shake-up in subsequent European prosperity. While it’s not very practical, I think he is onto something. Things need to be shaken up, and if we can’t do it now, when will we?

http://www.salon.com/tech/htww/2009/04/08/napoleon_and_wall_street/

@plukasiak: I can’t find it on that Cornell site either, but it’s definitely in FDICIA, the 1991 law that gave us prompt corrective action:
http://thomas.loc.gov/cgi-bin/query/F?c102:1:./temp/~c102HITspy:e122160:
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while the words “systemic risk” does occur in the law once (in a relevant fashion), its clear that you didn’t bother to read the provisions, because had you done so you would realize that the provision does not absolve the FDIC from fulfilling its obligations under the Prompt Corrective Action law, but merely provides the FDIC with slightly more flexibility — while requiring that a whole bunch of other things be done in order to implement the “systemic risk” provisions — and there is no evidence that any of those actions were taken.
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here is the relevant text…
`(G) SYSTEMIC RISK-
`(i) EMERGENCY DETERMINATION BY SECRETARY OF THE TREASURY- Notwithstanding subparagraphs (A) and (E), if, upon the written recommendation of the Board of Directors (upon a vote of not less than two-thirds of the members of the Board of Directors) and the Board of Governors of the Federal Reserve System (upon a vote of not less than two-thirds of the members of such Board), the Secretary of the Treasury (in consultation with the President) determines that–
`(I) the Corporation’s compliance with subparagraphs (A) and (E) with respect to an insured depository institution would have serious adverse effects on economic conditions or financial stability; and
`(II) any action or assistance under this subparagraph would avoid or mitigate such adverse effects,
the Corporation may take other action or provide assistance under this section as necessary to avoid or mitigate such effects.
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basically, all this provision allows for is FDIC funds to be used in a way that is not the “least costly” to the fund — it does NOT allow the FDIC to ignore its other obligations…

@plukasiak: I’m pretty sure they made the formal systemic risk determination for Wamu, Wachovia and Citi.
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The issue, I think, is that prompt corrective action is supposed to kick in if banks are undercapitalized. By the letter of the law, most banks, even the big ones, more than meet their capital requirements right now. The Wamu takeover was somewhat controversial in part because the FDIC stepped in even though by regulatory standards the bank was adequately capitalized. I think there’s a realization that the capital requirements aren’t really all that good a measure of bank health, but nobody in the FDIC or Treasury is willing to address that directly in public right now, so they talk gobbledygook about it. Black is absolutely right to call them on that. I just don’t think it means their “first priority” is protecting wrongdoers.

I would agree that their first piority is NOT protecting malefactors. Their first priority is protecting the status quo.

These are people who have been richly rewarded by the current financial system. And they are not rebels. They really can’t conceive of it being turned on its ear. They hope things will be just fine if they can get things back to the way they were, but with a few more rules.

Three pretty serious figures doubt it –Stiglitz, Johnson, and Krugman. Others disagree. But ask yourself –what, in your experience of human behavior –makes you think that this will work?

Speaking of systemic risk…
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I think Colin and Andy are onto something here:
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http://money.cnn.com/2009/04/07/news/big.bang.fortune/index.htm?postversion=2009040803
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and here
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Embedded video from CNNMoney.com Video
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I still believe that we are doomed until we unwind all of these CDSs. We have absolutely no idea what sort of nasty surprises are in store at the end of this year. And if there is no recovery in 2010…we will be well on our way to a lost decade…a.k.a. Japan style.

Justin,
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You said, “The issue, I think, is that prompt corrective action is supposed to kick in if banks are undercapitalized. By the letter of the law, most banks, even the big ones, more than meet their capital requirements right now.”
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How does one square this with Geithner’s statement that he needs about $2 Trillion to capitalize the banks up? As Black said, if the banks are all fine, then additional capital would not be necessary, right? You don’t need $2 in additional capital let alone $2 Trillion if the banks are fully capitalized. Something is wrong here with your statement. I find it as unconvincing as you found Black earlier.

How does one square this with Geithner’s statement that he needs about $2 Trillion to capitalize the banks up? As Black said, if the banks are all fine, then additional capital would not be necessary, right? You don’t need $2 in additional capital let alone $2 Trillion if the banks are fully capitalized. Something is wrong here with your statement. I find it as unconvincing as you found Black earlier.
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which, of course, come back to Black’s claim that massive fraud occurred and continues. Institutions like WaMu and Citibank were “adequately capitalized” only to the extent that they were not writing down securities to reflect their actual market valume and fudging other numbers. Its the presence of the toxic assets in the bank portfolios that makes the big banks insolvent — and the fraudulent accounting in which those securities were not “marked to market” that allow them to appear to be adequately capitalized.
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And that’s Geithner wants to spend hundreds of billions buying up these securities for which there is no market — without the government creating a market for them using taxpayers dollars, the fraudulent nature of the whole thing is even more transparently obvious.
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basically, Geithner has decided that the US Taxpayers are going to form the base in the pyramid scheme involving these bogus securities… pyramid schemes are a form of fraud, and Geithner is engaging in fraud by transferring taxpayer dollars into these schemes…

I would agree that their first piority is NOT protecting malefactors. Their first priority is protecting the status quo.
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you’re makeing a distinction without an effective difference, insofar that protecting the status quo means protecting the malefactors.

Pluk,
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I would argue, in fact, that Justin has a self-interest here as well. Moyers has Greenwald and Goodman on to discuss just how complicit our media is in the entire sordid affair.
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See here:
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http://www.pbs.org/moyers/journal/04032009/watch2.html
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This idea of going along to get along must be stopped…I just wish I knew how beyond being a member of the 101st Keyboard Brigade. The USS Titanic Economy has just hit an iceberg and our media elites (CNBC, FOX, CNN, etc.) are running around rearranging deck chairs and trying not rock the boat. Madness, I tell. Pure madness.

I would agree that their first piority is NOT protecting malefactors. Their first priority is protecting the status quo.
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I don’t know if I’d call it self-interest so much as environmental bias — he’s someone who reports on the economy who lives in New York City….

No, I would call it self-interest. Self-interest- concern for your own interests and welfare. (Princeton Univ. 2003)
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Time Inc. is one of the largest content and media conglomerates in the world. As a significant part of the profitability of TimeWarner Inc. which sells common stock traded on the New York Stock Exchange under the symbol TWX. Justin is part of this organization.
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Further, I would reference Greenwald here:
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http://www.pbs.org/moyers/journal/04032009/watch2.html
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Minutes 11:30 through 12:35