Month: August 2011

NY AG Schneiderman intervenes in BoA/BoNYM RMBS settlement

Originally posted at AMERICAblog

Gretchen Morgenson reports:

The New York attorney general is moving to block a proposed $8.5 billion settlement struck in June by Bank of New York Mellon and Bank of America over troubled loan pools issued by Countrywide. A lawsuit filed late Thursday accuses Bank of New York of fraud in its role as trustee overseeing the pools for investors.In papers filed in New York State Supreme Court, lawyers for Eric T. Schneiderman, the attorney general, contended that Bank of New York misled investors about its conduct as overseer of the securities. The bank also breached its duties to investors by agreeing to the deal with Bank of America, according to the complaint, because the trustee is conflicted and “stands to receive direct financial benefits” as a result of the agreement.

Questioning the fairness of the deal, the attorney general’s lawsuit said that it could “compromise investors’ claims in exchange for a payment representing a fraction of the losses” that have been suffered by investors.

David Dayen highlights some key takeaways:

This is a major allegation. Schneiderman is saying that the game-playing with securitizations, which has been well-documented, represent violations of securities law on the part of the trustee and the originator of the loans. They knowingly sold junk to investors and violated their own agreements. And now they’re trying to whitewash it through a settlement where the bank and the trustee are colluding with one another. As Schneiderman says, “the Trustee stands to receive direct financial benefits under the Proposed Settlement.”And here’s the real bombshell: Schneiderman alleges that Bank of New York Mellon was aware that Countrywide failed to transfer loans properly to the trust. This means they sold what amounted to non-mortgage backed securities to investors, who should then be granted the full value of these bonds back. The pooling and servicing agreements governing the loan transfers are very precise, and were violated in this case, according to the AG.

We’ll see how this plays out in the courts, but it’s clear that Eric Schneiderman is one of the few real cops on the beat policing Wall Street. His actions here could have serious consequences to the ongoing 50 state attorneys general negotiations being lead by Iowa AG Tom Miller, who has sought to immunize banks from the consequences of robosigning and foreclosure fraud in exchange for a small cash settlemen. While the Miller negotiations have sought to move past this lawlessness (look forward, not back!), Schneiderman’s actions demonstrate the impossibility of a global settlement being anything but a disservice to homeowners, investors, and the American public. There needs to be more investigation and real accountability. Schneiderman’s intervention in the Bank of New York/Bank of America settlement is a strong start.

Yves Smith at Naked Capitalism has more about what Schneiderman is doing and what the consequences of his actions should be.

Ari Melber on Super Congress

This is going up shortly at AMERICAblog

http://www.msnbc.msn.com/id/32545640

Visit msnbc.com for breaking news, world news, and news about the economy

Above is a rant by Ari Melber on the Super Congress that’s a big piece of the deficit deal that passed earlier this week. Here’s a snippet of the transcript:

I think that brings us to the last ingredient in this farce: the idea that these arbitrary cuts are magically going to result in equal pressure on both sides. …Well many Republicans opposed default too, but in practice you know and I know this GOP congress has proven itself willing to risk great harm in pursuit of its agenda.

There are other larger issues with the Super Congress, but the notion that it will work out of a fear of mutually assured destruction is bogus. For starters, it’s a central tenet of the modern Republican Party’s governing philosophy that the social support network should be removed and Americans should all be on their own. As we saw with the deficit hysteria, conservatives are anxious to use this narrative as a means of destroying the Big Three social programs and many smaller ones as well. While some Democrats have sought to reduce waste and Cold War era weapons systems from the Pentagon budget, reducing the size of the defense budget isn’t exactly a driving force of the Democratic Party. And since all of our many wars aren’t funded out of the Pentagon budget, this Super Congress isn’t affording liberals a mechanism to speed the end of the wars in Iraq, Afghanistan and Libya. Reducing defense spending is no Democratic holy grail. Dennis Kucinich and Mark Warner aren’t in the same place on it. Decreasing the raw Pentagon budget just isn’t a guiding star for the Democratic Party, particularly given the amount of Democrats who supported and funded the war in Iraq, the President’s escalation of the war in Afghanistan, and his initiation with little Democratic objection of a war congressionally irrelevant kinetic action in Libya.

And that’s just the Democratic Party’s tensions on defense spending. There’s a real tension in the Republican Party between war hawks and tax cutters. This is has the potential to undercut the Republican fear of the Super Congress not reaching a deal and snap cuts to defense. Since that fear, we are told, is critical to good-faith negotiation within the Super Congress, this is actually a pretty large structural problem with the mechanism for finding future spending cuts.

As Melber points out, the nut result is that there will be tremendous pressure on Democrats to block social spending cuts and some amount less pressure on Republicans to stop defense cuts, paired with rabid pursuit by conservatives of social spending cuts with some degree of understanding that defense should be cut some too coming from Democrats. This structural asymmetry seems destined to produce deeper social spending cuts that inflict more damage and more pain on working American families than will be felt by cuts to contracts with Halliburton, Raytheon, BAE Systems, and KBR.

“A Poverty of Imagination”

David Dayen:

What we have here is actually a poverty of imagination. There are plenty of things that the executive branch can do – power they’ve had since they came into office – to boost jobs. They have $80-$100 billion in unused TARP funds that could be put to productive use, including at least $40 billion dedicated for housing. They could use Fannie and Freddie much more aggressively than this renting idea, creating a kind of modern-day HOLC to buy up homes. They could use authorized programs like TALF to give aid to states or fund infrastructure projects. They could use monetary policy to force bank reserves into the lending sphere; at the very least they could fill the slots on the Federal Reserve Board of Governors, at least one of which has been vacant since the beginning of the Obama Presidency. They could get any of the $30 billion small business lending fund out into the economy. They could use Treasury to legitimately punish China for manipulating their currency. Put these all together, along with ones I haven’t thought of, and you have a “second stimulus” of equal or greater value than the first. And you don’t have to consult John Boehner at all.

Well either the administration just hasn’t thought of these things or has thought of them, but decided associated political costs are too high, or the administration just doesn’t want to actually do things that create jobs outside of getting Congress to pass tax cuts. Time will tell which bears the most evidence, but as Dayen points out, these are not recently available ideas for job creation.

The impact of the deficit deal on the economy and the pivot to jobs

Originally posted at AMERICAblog

http://embed.crooksandliars.com/v/MjEzODQtNDg1MTM?color=C93033

Yesterday I noted that while I strongly support and believe in the need for Democrats, particularly the White House, to shift their focus to job creation, the early signs from the Hill suggested that how Democrats were thinking and talking about this suggested that the pivot was likely to fail. A significant part of my fear stems from the recently completed deficit hysteria, which will make any sort of jobs creation program (either by government spending or tax cuts) a certain target for more deficit hysteria. Atrios captured this perfectly, describing the pivot to jobs as effectively saying, “We solved the deficit problem, now let’s add to the deficit.”

There’s another layer to the challenges created by the deficit deal – namely, prior to any other measures, what impact will it have on the economy and on job creation. As Paul Krugman keeps pointing out, Economics 101 suggests a massive cut in government spending will have an anti-stimulative effect on the economy. But via Digby, we see that Treasury Secretary Tim Geithner is not operating from the same textbook as Krugman and the rest of us:

Well, let’s start with what this deal does. The most important thing is it creates more room for the private sector to grow because although it locks in some very substantial long term savings, the near term cuts are very modest. So that– that was the really critical thing in making sure that this economy continue to grow and recover.

This comes directly in contradiction with JP Morgan’s economic team’s analysis of the economic impact of the deficit deal.

Impending fiscal drag for 2012 remains intact. The deal does nothing to extend the various stimulus measure which will expire next year: we continue to believe federal fiscal policy will subtract around 1.5%-points from GDP growth in 2012. Its possible the fiscal commission could do something to extend some measure such as the one-year 2% payroll tax holiday, though we think unlikely, as it would need to be paid for, which would be tough. If anything, the debt deal may add modestly to the fiscal drag we have penciled in for next year.

While I’m not one to reflexively prioritize the opinions of the titans of Wall Street over government officials, JP Morgan’s analysis is in line with Krugman and other followers of Econ 101 are saying.

Unfortunately Geithner’s spin about the magically positive impact of the deal doesn’t end at growing the economy, but extends to job creation as well.

GEORGE STEPHANOPOULOS: So this won’t cost us jobs?

TIM GEITHNER: No, it will not. Now … if we put this behind us then we can turn back to the important challenge of trying to find ways to make sure that we do everything we can to get more people back to work, strengthen our growth. And we’ll have more ability to do that now with people more confident and we can start to get our arms around the long-term problems.

But this just doesn’t align with what non-partisan experts are saying. The Economic Policy Institute predicts the deficit deal will cost the US 1.8 million jobs in 2012 alone.

Oh and just to be clear that the naive optimism that Republicans will behave like true gentlemen when Democrats pivot to job creation extends beyond anonymous Senate sources, Geithner is on the record making this prediction.

Well, because I think it’s going to be very hard for Republicans to — to prevent that from happening. I think it’s very hard for them to stand up and say that they’re going to try to block the extension of that tax cut that’s worth about $1,000 a year for the average American family. Untenable for them to block that.

As I pointed out yesterday, conservatives don’t care about the deficit, they care about tax cuts for rich people. As such, tax cuts could conceivably be exempted from deficit hysteria and not be offset with comparable cuts elsewhere. But I won’t assume that that is the case until conservatives actually say that they won’t exact their pound of flesh from federal social spending to continue the payroll tax cuts.

And before any Democrats start preaching about the unmitigated blessings of tax cuts as a vehicle for job creation, let’s remember that the Bush tax cuts lead to nothing more than an average of 11,000 jobs per month over the course of Bush’s presidency.

We desperately need to get people back to work in America. But it’s going to be impossible for this to happen when Democrats in the administration and on the Hill are dishonest about where we are and the consequences of their deficit hysteria. Things aren’t getting better on their own and yesterday the President signed a law that will almost certainly be significant drag on the economy. The response to this should be to do a real stimulus that focuses on job creation and infrastructure construction and keeping Americans in their homes, but Democrats now espouse a mindset that says government spending is functionally bad for the economy. The embrace of austerity and the refusal to make job creation a priority earlier mean that working and middle class Americans will continue to suffer, while no price is asked of wealthy elites and with the balance of power as it is, likely never will be asked of them.

Ezra’s World

What world does Ezra Klein live in?

To govern responsibly, Democrats cannot simply raise taxes on the rich and call it a day. That’s a world in which Republicans continuously force crises, refuse taxes, and extract deeper and deeper cuts. Already, Senate Minority Leader Mitch McConnell (R-Ky.) has called the GOP’s debt-ceiling brinksmanship “a new template” and promised that “in the future, any president, this one or another one, when they request us to raise the debt ceiling, it will not be clean anymore.”

Um, Ezra, that’s the world we already live in. Republicans continually force crises, refuse to raise taxes and extract deep and deeper cuts. So given that Republicans are already doing what Ezra fears they will do if Democrats suddenly and miraculously started believing in and realizing real tax hikes for the rich, why wouldn’t Democrats do this? Again, not for the reasons that Ezra says, because they are already realized. No, the real reason would be that Democratic elites, including most of the Senate, much of the House and the administration just don’t believe that the rich should have their taxes raised, for the rich are job creators and while a small jet tax here or a slight increase for oil companies there is okay, going back to Reagan’s 1986 top bracket rate of 50% would be class warfare. And today’s Democrats just don’t do class warfare against the rich – they’re too busy doing it against the poor, working, and middle classes of America.

The perils of pivoting to jobs

Originally posted at AMERICAblog

Though it sounded like spin to keep liberals quiet at the time, there was a lot of talk prior to this deficit deal that once it was passed, the administration and Democrats on the Hill would shift towards job creation efforts and a jobs narrative.

To the extent that Politico’s Mike Allen is a leading indicator that political insiders use to preview political work, it seems that the pivot to jobs is actually happening. Today’s Politico Playbook has an in-depth look at how the administration and congressional Democrats plan to switch the conversation to job creation and getting the economy back on track.

Before anything else, I think it’s important to say that I absolutely support the pursuit of job creation legislation. Lots of liberals who write online and lots of left-leaning institutions – from labor to MoveOn and other campaigning organizations – have been pleading for months for there to be a focus on job creation. A stronger economy built through the creation of good-quality, well-paying jobs is the cure for what ails America. It will reduce the suffering working and middle class Americans are going through now. It will keep more people in their homes. And a stronger economy driven by higher employment would dramatically increase tax receipts, reduce the deficit and at least from a purely economic standpoint, reduce the likelihood for social programs to be on the chopping block.

I just worry that there’s either (a) a lack of recognition of what just happened in the deficit debate and how the “deal” will impact all other legislation that requires money to work, and (b) a continued assumption that Republicans will be reasonable and good faith negotiators. To wit:

A Senate Democratic official tells Playbook: “There is nothing stimulative or jobs-based in this final deal that got struck. That’s unfortunate, but it also gives us an opening in September that we can say, ‘We’ve met you halfway and passed a huge, historic debt-reduction measure. Now it’s time to do something for jobs. The administration has been saying for weeks, ‘Once we get off this debt-ceiling thing, we’ll be able to get back to jobs.’ In the last 24 to 48 hours, one of their selling points of this deal has been that it resolves this thing so we can get back to jobs.
…
—Dems, hoping to actually pass something, plan to emphasize tax cuts, and spending measures that have been embraced by the U.S. Chamber of Commerce, giving them cross-party appeal. [Emphasis added]

Four of the seven measures Allen previews are tax cuts. If I had to put money down, I’d predict that if any jobs bill moves forward, it will consist of more than 50% tax cuts, and probably more likely, a four or five to one ratio of tax cuts to stimulative spending measures.

Two thoughts here.

First, the language from Democrats sounds disturbingly like the mindset of December 2010, where after the deal extending the Bush tax cuts it was taken on faith that the GOP would behave like grownups on the debt ceiling and not play games.   Regardless of why that analysis coming from the White House was wrong, it was devastatingly wrong.  Even if you never paid attention to how the modern Republican Party behaves prior to the last eight months, there’s zero reason any person who has followed recent events should think that the Republican Party is interested in anything close to responsible governance.

There will be no GOP concessions to reciprocate for what Democrats have given during the deficit deal negotiations. Expectations to the contrary should be rejected on their face, and anyone who posits them is at best stupid and at worst lying.

Second, the fight we just had was not about the debt ceiling. It was about the deficit, and everyone (well, other than the top 2%) is going to have to swallow some pretty bitter pills as a result.   I simply don’t know how the GOP is going to let through any new government spending to create jobs without at least equal cuts elsewhere.  Conservatives – and clearly we must count President Obama as one of them – have created a zero-sum game when it comes to the federal budget. The sole caveat here is that because conservatives don’t actually care about the deficit, I can easily see a scenario where tax cuts will be allowed without comparable spending cuts elsewhere. But that still puts Democrats in a position of adopting failed Republican policy solutions to try to fix the economy, while simultaneously stipulating that liberal ideas are not a viable solution to our weak economy and our high unemployment.

To put it differently, by operating in such a framework, the Democratic Party is actively destroying liberalism as a valid set of ideas to be considered by the American public.

I would love to be wrong, but right now I’m not optimistic about how the next few months will play out – whether it’s the supposed pivot to job creation, the budget fight, or the highway bill reauthorization (which includes the gas tax), there are ample opportunities for conservatives to grind things to a halt with deficit hysteria.

The GOP just learned that President Obama is an enthusiastic partner in this hysteria, and the Democrats on the Hill are equally willing to go along with “deficit panic.” This doesn’t mean that Democrats should not try to pass a stimulative jobs bill – given the anti-stimulative effect of the deficit deal it’s needed now more than ever. But the chances of a good bill, that doesn’t come at the continued cost of reducing other important social support programs, seem low, and will only be made lower if Democrats continue to expect conservatives to come to the table as good faith partners in job creation.

The Satan Sandwich

Lots of people are writing about how awful the deficit reduction plan agreed to by the President and congressional leadership is. I’m not sure that I want to go at it piece by piece, but I’m going to put out a few thoughts on the whole thing.

First and foremost, what we have is a plan which cuts spending at the worst possible time. The debt ceiling was and is a red herring – it was never a question on Bush or Reagan as to if it would be raised or not. Instead conservatives saw and successfully positioned it as a Big Deal. The President and Democratic conservatives accepted this framing because they too want to cut the size of government and cut entitlements.

The problem is not and has never been the deficit. It’s been jobs and strengthening the economy. What we are getting instead is something which is anti-stimulative and will likely cost jobs by reducing government spending. Mohamed El-Erian of Pimco talks about the devastating effects this deal will have on the economy broadly.

Last week brought the disconcerting news that the economy grew no faster than the population during the first six months of the year, in part because of spending cuts by state and local governments. Now the federal government is cutting, too.

“Unemployment will be higher than it would have been otherwise,” Mohamed El-Erian, chief executive of the bond investment firm Pimco, said Sunday on ABC. “Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.”

He added, “We have a very weak economy, so withdrawing more spending at this stage will make it even weaker.”

Jared Bernstein, formerly the chief economist for Vice President Biden and no enemy of the administration, gets at the specific impacts this plan will have on poor and working and middle class people.

What does it mean to cut $3 trillion in government spending? How will it affect retirement security? Education? Jobs in the short run and investment over the long run? Does it put us on a sustainable fiscal path.

We’re about to agree to cut $1 trillion from something called discretionary spending. That probably sounds great to some folks and bad to others. But what does it mean?

The President bragged on this very point last night, telling America that discretionary spending as a share of the economy will come down to its lowest level since Eisenhower. As if we’ve all been walking around thinking, “if only we could get this budget category down to Ike levels, everything would fall into place.”

In fact, these cuts will hurt our ability to pursue what I view as most positive aspects of the President’s economic agenda—investment in infrastructure, clean energy, research, education. They will pinch programs that are already budget constrained…programs that help low income people with child care, housing, and community services. (One piece to watch for here—defense spending is also in this category, and is supposed to account for about one-third of the cuts…that helps, of course, take pressure of these other parts.)

Then, in part two of the deal, we unleash the gang-of-twelve who are assigned to come up with $1.5 trillion more in deficit savings.

They’ll be hitting the entitlements—Social Security, Mcare, Mcaid—and more defense, but if they deadlock—a non-trivial probability—automatic cuts ensue.

Bernstein goes on to make a critically important and not widely made point: namely, if you’ve already cut $1 trillion in discretionary spending, how do you find another $1.2 trillion in discretionary spending to cut without either (a) eviscerating Medicare, Medicaid or Social Security or (b) basically destroying all other government programs. This is a horrible place to be in and one which will make life harder and more painful for huge swaths of America.

Over the weekend, Rep. Emanuel Cleaver called this deal “a sugar-coated Satan sandwich”. I’m not sure where the sugar-coating is, but the Satan sandwich part sounds right. It’s not a done deal yet, but I don’t expect it to get any better.

What’s particularly frustrating is that it’s not as if there isn’t ample, recent data about how austerity plans affect struggling economies. Britain implemented a 2:1 spending cuts to revenue increases last year and it has absolutely ground their economy to a halt, making things worse and causing tremendous pain for working people. When the President initially proposed a 3:1 plan, it seemed like an even worse idea that flew in the face of the British experience. That then fell to a 4:1 then a 6:1 ratio in various negotiations, reaching a point where it was clear that there was zero ideological difference between what Republicans wanted (all spending cuts) and what the President wanted (almost all spending cuts with the fig leaf of small tax increases on the rich). Given that, it isn’t shocking that we’ve ended up with a deal that amounts to all spending cuts, no new revenues, and while there are no immediate cuts to the big three social safety net programs, it’s near-certain that those cuts will come in the later stage of this deal. As El-Erian and Bernstein point out, this deal is going to have a hugely negative impact on the economy and it’s not like our economy was doing well to begin with.

Oh and to make this deal even more dangerous, the deal includes votes on the “balanced budget amendment.” While I doubt there are 20 Democratic votes in the Senate to reach the required two-thirds for a Constitutional amendment to pass, in this climate, you never know what sort of stupidity will rise out of the Hill. The “balanced budget amendment” is a recipe for destroying the social safety net, ensuring that government no longer works for the bottom 98% and survival in bad economic times will be totally dependent on how much money you have lying around. So basically if you’re not already rich, you’re screwed. Here’s the kicker: this is something Tea Party Republicans in the House want to have passed, but the inclusion of the “balanced budget amendment” in the deal doesn’t mean the Tea Party caucus is going to vote for the bill. Michele Bachmann is already out against it and Boehner is likely to lose scores of Tea Party Republicans on this vote. So I don’t even know what this gained, other than taking on the risk of it passing.

This thing is a Satan sandwich and we’re going to be the ones who eat it.