This article was originally published by the Fiscal Times on Wednesday, May 5, 2010.
Efforts to regulate financial derivatives trigger memories of a failed effort during the Clinton administration to impose regulations.
By Katherine Reynolds Lewis
As the Senate negotiates sweeping changes to financial regulations, some policy experts are flashing back to the late 1990s, when a Clinton administration appointee named Brooksley Born explored oversight of complex financial contracts known as over-the-counter derivatives.
Born, an attorney, chaired the Commodity Futures Trading Commission. Her efforts to shed light on and regulate the opaque world of derivatives quickly died in the face of vehement opposition from then-Federal Reserve Board chairman Alan Greenspan, Treasury secretary Robert Rubin, powerful members of Congress, and Wall Street executives who opposed increased market regulation.
Now that credit default swaps and mortgage-based derivatives have been implicated in the near collapse of the international financial markets, it's only natural to wonder what the world would have looked like if Born and the CFTC had succeeded in bringing transparency to the $600 trillion derivatives market — or even imposing capital and margin requirements.
"It would've prevented the meltdown because there would've been too much information that would have countered the theory that housing prices would always go up," said Michael Greenberger, who was director of the division of trading and markets at Born's CFTC. "If regulators had seen the gambling, they would've seen that the risk was being repeated by multiple institutions."
Controversy Dogs Efforts to Regulate Derivatives
Senate Showdown Over Too Big to Fail
This article was originally published by the Fiscal Times on Sunday, April 18, 2010
Democrats and Republicans disagree on the methods to prevent future emergency bailouts.
By Katherine Reynolds Lewis
In the wake of a major government fraud case against Goldman Sachs, the Obama administration and Senate Democrats are poised to forge a consensus this week on a sweeping overhaul of financial regulations. Treasury Secretary Timothy F. Geithner declared yesterday on NBC's "Meet the Press" that Democrats and some Republicans "are very close on this," and suggested that the Securities and Exchange Commission's civil suit last week, charging Goldman Sachs with selling investors a subprime mortgage investment designed to lose value, might provide added impetus for the financial regulatory legislation.
As Senate leaders and the White House attempt to push legislation that responds to the lessons of the global financial crisis, perhaps the single most important question will be whether they can successfully address the potential damage from financial institutions deemed "too big to fail."
It was the collapse of Lehman Brothers and near-death of American International Group (AIG) and other major banks and institutions that prompted unprecedented government intervention in the financial markets in the fall of 2008. As Senate negotiators and the administration exchange ideas this week on the final shape of a financial regulatory reform package, Democrats and Republicans agree on the essential goal of preventing future emergency bailouts, but they disagree markedly on the methods.
The Return
This story was originally published by the Washington Post Magazine on Sunday, April 4, 2010, in conjunction with an online discussion.
A stay at home mom attempts to go back to work after nearly two decades. Can she revive her career?
By Katherine Reynolds Lewis
Amy Beckett put away her reading glasses and file folder and stood up.
It was time. It was almost past time.
She tossed the empty paper cup into the trash and swung open the door to leave the deli on Rhode Island Avenue NW. As Beckett walked into an upscale office lobby, her scarf slipped from around her neck and drifted to the ground. She scooped it up and shoved it into her shoulder bag. She didn't want to arrive late for the job interview.
She handed the security guard a photo ID. Once in the elevator, she looked up at the ceiling and exhaled noisily. "I'm never doing this again," she said, closing her jade-colored eyes for a moment. At the seventh floor, she opened the heavy wooden door to Suite 713, identified in gold lettering as the Law Offices of Stephen H. Marcus. The suite's unique double doors, parquet floor and crown molding signaled its former life as the ticket office for EL AL Airlines. The receptionist looked up from her desk with a smile. She took Beckett's business card and said it would be a few moments until Marcus finished with a client.
With her back straight in a modern brown chair by the door, Beckett folded her hands over the bag on her knees and waited. It was March of last year, three days after she had turned 52 and 17 years since she'd last held a job.
Sue the debt collector
This article was originally published by MSN Money, on Monday, March 29, 2010
Federal law sets clear limits on what debt collectors can do. If their tactics go beyond those limits, you can win money -- and it's a surprisingly easy process.
By Katherine Reynolds Lewis
If you're overdue on your bills, you may know all too well the headaches of phone calls, letters and threats from creditors.
Now some debtors are hitting back by suing when debt collectors violate their rights.
"People will take a lot of crap until it gets to the point where they're so desperate they feel they have nothing to lose by fighting back," said Steven Katz of Tucson, Ariz. Katz is the founder of Debtorboards, where consumers post their frustrations and successes with the collection industry.
Suing is a surprisingly easy process. Federal law lets individuals receive $1,000 for each abuse of their rights, plus any damages or attorney fees. Sometimes, a single phone call from a collector involves multiple violations.
Consumer Financial Protection Plan Divides Congress
This article was originally published by the Fiscal Times on Thursday, March 25, 2010.
Democrats want a watchdog to protect consumers from reckless practices, but Republicans say regulation would be costly and inefficient.
By Katherine Reynolds Lewis
When it comes to overhauling financial regulations, Democrats and Republicans have much to fight over: how best to rein in the derivatives market, establish bank takeover procedures, curb executive pay and end government bailouts of mismanaged institutions deemed "too big to fail."
But as the Senate prepares to debate a bill next month aimed at preventing the behavior that led to one of the worst financial crises in U.S. history, perhaps the most contentious measure is one that would create a regulator devoted to protecting consumers from unscrupulous or reckless practices.
President Obama and House and Senate Democratic leaders believe the proposal is a no-brainer. Unless an independent regulator is looking out for consumers, they say, any financial regulatory reform will fail to prevent the kind of risky behavior and predatory business practices that fostered the 2008 financial meltdown.
Treasury Nominee Languishes in the Senate
This article was originally published by the Fiscal Times on Thursday, March 4, 2010.
While he awaits Senate confirmation, acting Treasury assistant secretary for tax policy Michael Mundaca has seen his job dwindle from a meaty policy role to a more technical position.
By Katherine Reynolds Lewis
Last fall, President Obama picked Michael F. Mundaca, a talented legal mind and political pragmatist, as assistant treasury secretary for tax policy. Former colleagues praised him as a gifted team builder, and many assumed Mundaca would play a central role in overhauling the tax code.
"His skill set is right in the sweet spot of where the activity is going to be," said Mark Weinberger, global vice chairman at Ernst & Young, who held the same spot during the Bush administration and worked with Mundaca at Ernst & Young.
Yet five months later, Mundaca is still waiting for the Senate to confirm his nomination and the administration's agenda doesn't include broad tax reform.
While he serves as acting assistant secretary and a senior advisor on tax policy at the Treasury, his job has dwindled from the meaty policy role seen in previous administrations to a more technical position of defending and implementing policy decisions that are largely made in the White House, according to Treasury observers.
Greece Debt Concern Whipsaws U.S. Dollar
This article was originally published by the Fiscal Times on Friday, Feb. 19, 2010.
When European economies suffer turmoil, the dollar is considered the only safe haven
By Katherine Reynolds Lewis
As European policymakers scramble to resolve fiscal problems in Greece, the fast-changing news about the country's sovereign debt crisis has raised havoc on the value of the euro — and the dollar.
When the situation looked particularly grim, currency traders dumped euros and scooped up U.S. dollars. When things seemed to improve a little, traders bought euros and the U.S. currency weakened again, as was the case this week. Get used to this back and forth, experts say.
"Over the course of the year we're going to see phenomenal volatility," predicted TJ Marta, chief market strategist at Marta on the Markets, a research firm based in Scotch Plains, N.J.
But the ebbs and flows of markets can't obscure the underlying truth that while the United States is on a projected course of massive budget deficits for years to come, the dollar remains the reserve currency for the world. As much as Chinese and other investors may disapprove of U.S. fiscal policies, they don't have a lot of alternatives — either to dollars when it comes to a reserve currency or U.S. Treasury bonds when it comes to a safe investment.
Treasury Reaps Big Returns on TARP Investments
This article was originally published by the Fiscal Times on Thursday, Feb. 11, 2010.
The numbers quell criticism that the bailout would be too costly to taxpayers.
By Katherine Reynolds Lewis
The Treasury has recouped nearly a third of the $545 billion it invested to help rescue U.S. financial institutions and in some cases has reaped substantial returns on those investments.
The strong showing is preliminary, as much of the government’s investment in banks is still outstanding. But it contrasts sharply with widespread criticism that the government bailout of Wall Street was excessive and costly to taxpayers.
The Treasury, for example, made a nearly 24 percent return on its investment in American Express Co., 20 percent on its rescue of Goldman Sachs Group and nearly 17 percent from Morgan Stanley Group, according to an analysis of Treasury data prepared by Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette and an expert on the government’s response to the financial crisis.
Overall, the Treasury has realized more than $15 billion in dividends and equity growth in its investments in the once-troubled financial institutions, according to Treasury Department figures.
"The perception that most of the public had, that this was money poured down a rat hole, was always wrong," said Douglas J. Elliott, a fellow at the Brookings Institution. "We've gotten more back than we expected because the financial sector and even the economy turned around a lot faster than we thought."
The Troubled Asset Relief Program (TARP), enacted in 2008 at the height of the sub-prime mortgage financial crisis, allowed the government to intervene and stabilize many tottering banks and financial institutions by infusing cash when private capital markets dried up. Critics decried the government bailout as an excessive rescue of Wall Street fat cats at the expense of taxpayers and other sectors of the economy, and the Treasury's handling of the program remains a major point of contention on Capitol Hill.
To be sure, the government's $70 billion investment in American International Group (AIG) and the $85 billion spent to bail out General Motors Corp. and Chrysler Group LLC are unlikely ever to turn a profit, leaving the overall TARP program in the hole. Moreover, the healthiest banks repaid TARP first, so that bank investments that remain in the program aren't likely to be as profitable. The combination of an improving economy and limits on executive compensation for TARP recipients has encouraged banks to repay the funds as soon as they are financially able, even when it means taking a loss.
"The fact that we're talking about positive returns is a sign that things have stabilized more than people thought possible, particularly in late '08 or early '09," said David Min, associate director for financial markets policy at the Center for American Progress. "To do a victory lap now would be making the same mistake many banks made, which is focusing on the short term at the expense of long-term health."
The revenue flowing into the TARP program is so robust that President Barack Obama proposed using some funds to make small business loans. "I'm proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat," Obama said in his State of the Union address last month.
This scenario would have seemed unimaginable to many in the fall of 2008, when the world financial markets seemed one nervous trader away from collapse, and the government hurriedly put together the TARP program, initially estimated to cost $700 billion but more recently pegged by Treasury at $545 billion, thanks in part to faster-than-expected improvement in the financial sector.
Recent news reports highlighted the Federal Reserve's most profitable year ever in 2009, as the central bank earned $45 billion on its loans and trading of securities. The Treasury earnings are different, coming directly from the government rescue of the financial sector.
Currently, the bulk of the government's TARP investments falls into seven programs. In descending order of dollar value, they are the Capital Purchase Program (CPP), the auto industry financing program, the AIG bailout, the consumer and business lending initiative, the Home Affordable Modification Program, the Targeted Investment Program (TIP), which is now fully repaid, and the public-private investment program.
So far, Treasury has been repaid $161.9 billion of its initial investments through CPP and TIP, the two TARP vehicles for investing in banks. On top of that, the Treasury has received a return on bank investments of $11.3 billion in dividends and $4 billion in stock warrant proceeds, for a total of $15.3 billion, according to figures the Treasury makes available.
Under the CPP, Treasury bought $205 billion of preferred shares in more than 500 financial institutions, which pay a five percent dividend for the first five years and nine percent a year thereafter. The government also received warrants, which give Treasury the right to buy common stock at a set price. Thus, Treasury receives three forms of revenue from banks participating in this program: (1) repayment of the initial investment, (2) dividends and (3) proceeds from warrant auctions or stock sales, after first redeeming the warrants for stock.
Treasury received a 12 percent rate of return on an annualized basis from the 10 major financial institutions under CPP that have repaid the government and have no outstanding stock warrants, according to an analysis performed for The Fiscal Times by Wilson.
Treasury made 23.4 percent on American Express, 20 percent on Goldman Sachs, 16.8 percent on Morgan Stanley, 11.1 percent on Northern Trust Corp., 10.2 percent on Bank of New York Mellon Corp., 9.2 percent on State Street Corp., 8.8 percent on U.S. Bancorp, 7.8 percent on BB&T Corp., 6.7 percent on Capital One Financial Corp. and 6.4 percent on JP Morgan Chase & Co., according to Wilson’s analysis.
In December, Wells Fargo & Co. repaid its $25 billion CPP investment, on top of $2.7 billion in dividends, and Bank of America Corp. repaid the $45 billion it received through CPP and TIP, after paying $1.4 billion in dividends. Wells Fargo is likely to repurchase its warrants for roughly $910 million, and the Bank of America warrants should fetch approximately $1.3 billion at auction, Wilson estimated. Adding those estimates to the total proceeds would boost Treasury's profits to about $17.5 billion.
"We're doing better than expected because many of the banks repaid TARP sooner than expected," Wilson said. "Whenever anyone pays you back in full with interest, you're never going to lose money."
The Treasury has recouped nearly a third of the $545 billion it invested to help rescue U.S. financial institutions and in some cases has reaped substantial returns on those investments.
The strong showing is preliminary, as much of the government’s investment in banks is still outstanding. But it contrasts sharply with widespread criticism that the government bailout of Wall Street was excessive and costly to taxpayers.
The Treasury, for example, made a nearly 24 percent return on its investment in American Express Co., 20 percent on its rescue of Goldman Sachs Group and nearly 17 percent from Morgan Stanley Group, according to an analysis of Treasury data prepared by Linus Wilson, an assistant finance professor at the University of Louisiana at Lafayette and an expert on the government’s response to the financial crisis.
Overall, the Treasury has realized more than $15 billion in dividends and equity growth in its investments in the once-troubled financial institutions, according to Treasury Department figures.
"The perception that most of the public had, that this was money poured down a rat hole, was always wrong," said Douglas J. Elliott, a fellow at the Brookings Institution. "We've gotten more back than we expected because the financial sector and even the economy turned around a lot faster than we thought."
The Troubled Asset Relief Program (TARP), enacted in 2008 at the height of the sub-prime mortgage financial crisis, allowed the government to intervene and stabilize many tottering banks and financial institutions by infusing cash when private capital markets dried up. Critics decried the government bailout as an excessive rescue of Wall Street fat cats at the expense of taxpayers and other sectors of the economy, and the Treasury's handling of the program remains a major point of contention on Capitol Hill.
To be sure, the government's $70 billion investment in American International Group (AIG) and the $85 billion spent to bail out General Motors Corp. and Chrysler Group LLC are unlikely ever to turn a profit, leaving the overall TARP program in the hole. Moreover, the healthiest banks repaid TARP first, so that bank investments that remain in the program aren't likely to be as profitable. The combination of an improving economy and limits on executive compensation for TARP recipients has encouraged banks to repay the funds as soon as they are financially able, even when it means taking a loss.
"The fact that we're talking about positive returns is a sign that things have stabilized more than people thought possible, particularly in late '08 or early '09," said David Min, associate director for financial markets policy at the Center for American Progress. "To do a victory lap now would be making the same mistake many banks made, which is focusing on the short term at the expense of long-term health."
The revenue flowing into the TARP program is so robust that President Barack Obama proposed using some funds to make small business loans. "I'm proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat," Obama said in his State of the Union address last month.
This scenario would have seemed unimaginable to many in the fall of 2008, when the world financial markets seemed one nervous trader away from collapse, and the government hurriedly put together the TARP program, initially estimated to cost $700 billion but more recently pegged by Treasury at $545 billion, thanks in part to faster-than-expected improvement in the financial sector.
Recent news reports highlighted the Federal Reserve's most profitable year ever in 2009, as the central bank earned $45 billion on its loans and trading of securities. The Treasury earnings are different, coming directly from the government rescue of the financial sector.
Currently, the bulk of the government's TARP investments falls into seven programs. In descending order of dollar value, they are the Capital Purchase Program (CPP), the auto industry financing program, the AIG bailout, the consumer and business lending initiative, the Home Affordable Modification Program, the Targeted Investment Program (TIP), which is now fully repaid, and the public-private investment program.
So far, Treasury has been repaid $161.9 billion of its initial investments through CPP and TIP, the two TARP vehicles for investing in banks. On top of that, the Treasury has received a return on bank investments of $11.3 billion in dividends and $4 billion in stock warrant proceeds, for a total of $15.3 billion, according to figures the Treasury makes available.
Under the CPP, Treasury bought $205 billion of preferred shares in more than 500 financial institutions, which pay a five percent dividend for the first five years and nine percent a year thereafter. The government also received warrants, which give Treasury the right to buy common stock at a set price. Thus, Treasury receives three forms of revenue from banks participating in this program: (1) repayment of the initial investment, (2) dividends and (3) proceeds from warrant auctions or stock sales, after first redeeming the warrants for stock.
Treasury received a 12 percent rate of return on an annualized basis from the 10 major financial institutions under CPP that have repaid the government and have no outstanding stock warrants, according to an analysis performed for The Fiscal Times by Wilson.
Treasury made 23.4 percent on American Express, 20 percent on Goldman Sachs, 16.8 percent on Morgan Stanley, 11.1 percent on Northern Trust Corp., 10.2 percent on Bank of New York Mellon Corp., 9.2 percent on State Street Corp., 8.8 percent on U.S. Bancorp, 7.8 percent on BB&T Corp., 6.7 percent on Capital One Financial Corp. and 6.4 percent on JP Morgan Chase & Co., according to Wilson’s analysis.
In December, Wells Fargo & Co. repaid its $25 billion CPP investment, on top of $2.7 billion in dividends, and Bank of America Corp. repaid the $45 billion it received through CPP and TIP, after paying $1.4 billion in dividends. Wells Fargo is likely to repurchase its warrants for roughly $910 million, and the Bank of America warrants should fetch approximately $1.3 billion at auction, Wilson estimated. Adding those estimates to the total proceeds would boost Treasury's profits to about $17.5 billion.
"We're doing better than expected because many of the banks repaid TARP sooner than expected," Wilson said. "Whenever anyone pays you back in full with interest, you're never going to lose money."
Congress Takes a Knife to Obama's Budget
This article was originally published by the Fiscal Times on Thursday, Feb. 11, 2010.
By Katherine Reynolds Lewis and Elaine S. Povich
A week after President Barack Obama unveiled his $3.8 trillion budget, a deeply divided Congress is using the proposal's perceived weaknesses as a starting point for carving up and rewriting the document.
Cash a check, maybe go to jail
This article was originally published by MSN Money, on Friday, Dec. 11, 2009.
Did you get conned into joining a check-cashing scam? Even if authorities decide you're an innocent victim, you could find yourself owing a bank thousands of dollars.
By Katherine Reynolds Lewis
Cash a check, go to jail. Or at the very least, empty your own savings account and ruin your credit.
It's happened to hundreds of thousands of Americans who believed that banks don't make funds available unless the checks they've deposited are genuine.
It happened to Calvin Barnett, who could face 11 years in prison for doing what he said he thought was his work-at-home job.
As unemployment reaches its worst levels in generations, scammers are finding a growing pool of victims all too willing to deposit strangers' checks, then return part of the money by wire transfers.
"There's a knowledge gap that these scammers are clearly taking advantage of," said Susan Grant, the director of consumer protection for the Consumer Federation of America. "Under federal law here in the U.S., financial institutions have to give consumers access to the money from checks and money orders they deposit pretty quickly, usually within one to five business days. It can take much longer for counterfeits to be discovered, by which time the consumer has already sent the money."
"The problem is the con men are very persuasive," said Nessa Feddis, a vice president and senior counsel at the American Bankers Association, which is working with the Consumer Federation to educate consumers about check fraud. "People are desperate. They want to work. They want a job."
