STOCK MARKET WATCH -- Friday, 30 March 2012

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4. Bill Black on How the Jumpstart Obama’s Bucket Shops Act is Just Another in a Long Series of Fraud-P

Bill Black on How the Jumpstart Obama’s Bucket Shops Act is Just Another in a Long Series of Fraud-Promoting Legislation

http://www.nakedcapitalism.com/2012/03/bill-black-on-how-the-jumpstart-obamas-bucket-shops-act-is-just-another-in-a-long-series-of-fraud-promoting-legislation.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Cross posted from New Economic Perspectives.

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The imminent passage of the fraud-friendly JOBS Act caused me to reflect on the fact that the worst anti-regulatory travesties in the financial sphere have had broad, bipartisan support. The Garn-St Germain Act of 1982, which deregulated savings and loans (S&Ls) and helped drive the debacle, was passed with virtually no opposition. The Texas and California S&L deregulation acts – the two states that “won” the regulatory “race to the bottom” – passed with virtually no opposition. Texas S&L failures caused over 40% of total S&L losses and California failures caused roughly 25% of total losses. In 1984, a majority of the members of the House of Representatives, including Newt Gingrich and most of the leadership of both parties, co-sponsored a resolution calling on us to cease our reregulation of the S&L industry.

The Competitive Equality in Banking Act of 1987 (CEBA) was the product of two cynical political deals. The context was that the Reagan administration refused to allow the Federal Savings and Loan Insurance Corporation (FSLIC) to admit that there was a crisis requiring governmental funds and refused to allow FSLIC to draw any funds on its Treasury credit line. We had spent all but $500 million in the FSLIC fund closing some of the worst S&L control frauds. The S&L industry had over $1 trillion in liabilities and was deeply insolvent, so we were running the insurance fund on fumes and dreading a potential nationwide run. Treasury and FSLIC ginned up a convoluted means of FSLIC receiving the proceeds of a $15 billion (FICO) bond issuance. The repayment of the FICO bonds rested in large part on taking capital and future earnings from the Federal Home Loan Banks (FHLBs). The industry owned the FHLBs, so the S&Ls’ interest in the FHLBs’ capital was treated on their financial statements as an asset. Using the FHLBs’ capital to “defease” the FICO bonds refduced every S&L’s reported capital. The exceptionally powerful S&L trade association (the “League”) opposed the plan. It preferred that the government, rather than the healthier members of the industry, pay to resolve failed S&Ls. Trade associations also do not want to lose members through government closures.

The S&L control frauds saw the FSLIC recapitalization bill as an opportunity. They had disproportionate political power because political interference was their best guarantee of delaying our closure of their S&L. My contemporaneous joke was that the frauds’ always obtained their highest return on assets from their political contributions. The frauds’ priorities were to make it far harder for the regulators to take action against them and to get FSLIC to use its funds to bail out failed S&Ls rather than close them. A large FSLIC recapitalization could be a very good thing for the frauds if the funds were given to “their” S&Ls while they remained in control.

The first political deal was between the frauds and the League. It was called the “Faustian bargain.” The League agreed to support “forbearance” provisions drafted by the frauds’ lawyers that were cleverly designed to make it difficult for us to take enforcement actions and appoint receivers. The frauds agreed to stall passage of the bill and to support the League’s proposed reduction in FICO bond issuances to $5 billion. (The contemporaneous joke was that if we flew into DFW rented a car and drove towards downtown Dallas we would exhaust the $5 billion closing the failed S&L we passed en route before we made it to Dallas.) The S&L frauds in Texas had exceptional political power. The Faustian bargain worked. Speaker of the House James Wright held the FSLIC recapitalization bill “hostage” to extort regulatory favors for a series of Texas S&L frauds and a huge bankrupt borrower from the frauds. Charles Keating, who controlled Lincoln Savings, had already used Alan Greenspan as a lobbyist (plus large political contributions) to recruit the five Senators (Cranston, DeConcini, Glenn, McCain, and Riegle) who would become infamous as “the Keating Five.” They made a secret bipartisan effort in April 1987 to prevent the agency from taking enforcement action against Lincoln Savings’ massive, fatal violation of the rules restricting direct investments. (Speaker Wright later joined their effort.) Senator Cranston, at Keating’s behest, put a secret “hold” on the FSLIC recapitalization bill in 1986. The combined efforts of the frauds’ political cronies prevented passage of the bill in 1986.

The second cynical deal was struck in 1987 by the Reagan administration and Speaker Wright....MORE AT LINK