Is Financial Reform Simply Washington’s Latest Boondoggle?

23 04 2010

By Timothy D. Naegele[1]

When I arrived in Washington, D.C. after graduating from law school in California, I spent two years at the Pentagon working as an Army officer in intelligence and budgets.  It was a great experience, and I have the utmost respect for our military, which is the best of our government.  One lesson I learned was that if Congress was breathing down the Pentagon’s neck, the easiest way to deal with the issue was to “reorganize,” which would throw them off the track—and the “bloodhounds” would lose the scent.

Then I worked on Capitol Hill as a young attorney with the Senate Banking Committee, and realized that when there was a national policy issue that was “too hot to handle,” a presidential commission would be formed, not unlike reorganizations at the Pentagon.  Months and sometimes years would pass while people studied the issues ad nauseam; and in the interim, the monkey was off the politicians’ backs.  One of my first tasks on the Hill was to staff such a presidential commission.

Fast-forward to today, and no regulatory “overhaul” is going to make a tinker’s damn in preventing future economic crises or solving the present one.  By and large, the financial regulatory agencies (e.g., the Fed, the FDIC) do a fine job, often under very difficult circumstances.  There are career professionals who will keep doing their jobs, regardless of what Barack Obama or Congress propose or enact—which is high political theater and demagoguery, and not a whole lot more.

Recent reorganizations, such as in the intelligence community, have not produced better intelligence.  Similarly, changes to the financial regulatory structure will not prevent the economic meltdown that riveted the nation in 2008, and continues to this day.  It is a tsunami, and Man’s ability to stop or affect it is marginal at best.  Reorganizing the deck chairs on the Titanic, or closing the barn door after the horse is out, will never address future problems.  The flim-flam boys of Wall Street and other financial capitals will make sure of that.

Alan Greenspan unleashed the tsunami; and the words of Giulio Tremonti, Italy’s Minister of Economy and Finance, are true and cogent to this day:

Greenspan was considered a master.  Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most.[2]

No financial regulatory overhaul will prevent a Fed chairman like Greenspan, or some other government official from making mistakes that produce massive suffering domestically and globally.  Perhaps if Paul Volcker had been in charge of the Fed instead of Greenspan, the economic meltdown would have been avoided.  After all, Greenspan admitted in testimony before the House that he never saw the housing crisis coming.

Like the emperor with no clothes in Hans Christian Andersen’s fable, no one was willing to call Greenspan a buffoon who was over his head—until he had unleashed economic pain, the likes of which has not been seen since the Great Depression.  It will continue to the end of this decade, in all likelihood; and there is nothing that government can do to stem it.[3]

With respect to the existing financial regulatory agencies, it must be remembered that they and their affiliated agencies (e.g., the FSLIC, RTC) dealt effectively with the savings and loan crisis of the 1980s and 1990s.  In the process, almost 800 S&Ls failed, an enormous financial crisis was averted, and the ultimate cost to the taxpayers was less than expected.

Nonetheless, in 1999, Congress repealed the Glass–Steagall Act, which had controlled financial speculation since its enactment in 1933.[4] Under Glass–Steagall, there had been a separation between commercial banking and “investment banking”—or gambling by Wall Street.  Coupled with Greenspan’s mistakes and financial deregulation, which had been championed by him, a laissez faire attitude in Washington resulted in the massive problems of today.

Can greed on Wall Street and in other financial markets be stopped?  Never.  Can the SEC do a better job?  Can the existing financial regulatory agencies tighten up here and there, and do their jobs better with enhanced powers?  Sure, but the system is not perfect just as human beings are not perfect.  Utopia is not possible; and history repeats itself over and over again.  More government regulation will not prevent economic tsunamis and meltdowns from happening.  Anyone who says so might try to sell you a bridge in Brooklyn next—or ObamaCare.[5][6]

Yet, capitulation to political demogoguery and public anger is likely.[7] With the repeal of Glass–Steagall and financial deregulation, a blurring of the lines between commercial banking and investment banking took place; and now the chickens are coming home to roost.  The baby is in the process of being thrown out with the bath water; and the demogogues in Washington are strutting in full bloom.[8] A Wall Street Journal editorial states:

While the details matter a great deal, the essence of the exercise is to transfer more control over credit allocation and the financial industry to the federal government. The industry was heavily regulated before—not that it stopped the mania and panic—but if anything close to the current bills pass, the biggest banks will become the equivalent of utilities.

The irony is that this may, or may not, reduce the risk of future financial meltdowns and taxpayer bailouts.

. . .

As in health care, Democrats are intent on ramming this reform through Congress, and Republicans ought to summon the will to resist. Absent that, the only certain result is that Washington will be the new master of the financial universe.

Amen, and then some![9]

© 2010, Timothy D. Naegele

[1] Timothy D. Naegele was counsel to the U.S. Senate Banking Committee, and chief of staff to Presidential Medal of Freedom and Congressional Gold Medal recipient and former U.S. Senator Edward W. Brooke (R-Mass), the first black senator since Reconstruction after the U.S. Civil War.  He practices law in Washington, D.C. and Los Angeles with his firm, Timothy D. Naegele & Associates (  He has an undergraduate degree in economics from UCLA, as well as two law degrees from the School of Law (Boalt Hall), University of California, Berkeley, and from Georgetown University.  He is a member of the District of Columbia and California bars.  He served as a Captain in the U.S. Army, assigned to the Defense Intelligence Agency at the Pentagon, where he received the Joint Service Commendation Medal.  Mr. Naegele is an Independent politically; and he is listed in Who’s Who in America, Who’s Who in American Law, and Who’s Who in Finance and Business. He has written extensively over the years.  See,

[2] See

[3] See, e.g., and’s-legacy-more-suffering-to-come/; see also

[4] See, e.g.–Steagall_Act

[5] Harvard professor Niall Ferguson and Wall Street investor Ted Forstmann state in a Wall Street Journal article:

By all means let us regulate the derivatives market—beginning with a reform that makes it a real market. And let’s clamp down on excessive bank leverage. But let us not believe we can abolish both bailouts and depressions, other than by creating another layer of government regulation.


I agree with their conclusion.

[6] See also

[7] See, e.g.,; see also

[8] Real problems with the legislation may be considerable.  See, e.g.

[9] See



6 responses

24 04 2010

Clarification Regarding The Fed

One reader has raised the question as to how I could say that the Fed and FDIC “do a fine job, often under very difficult circumstances,” yet criticize Alan Greenspan and attribute the “Great Depression II” to his mistakes—just as Italy’s Minister of Economy and Finance, Giulio Tremonti, has done? Also, how could my praise of the Fed be true when so many problems have arisen?

First, the Fed has two very different and distinct responsibilities: (1) establishing this nation’s monetary policies; and (2) regulating financial institutions, in conjunction with the FDIC and other financial regulatory agencies. Greenspan erred with respect to monetary policy, which has produced enormous human suffering, both in the United States and globally.

The housing crisis, which he admits never foreseeing, spawned crises in other sectors of our economy and abroad, and exposed weaknesses and fraud in sectors where few people believed they existed. Examples of this include Bernie Madoff and his ponzi scheme, which might have continued indefinitely but for the economic downturn.

Also, those individuals and businesses that were overextended went belly up in many cases, with more yet to come. Examples of this are GM and Chrysler. Alan Mulally at Ford was smart, and he apparently saw economic meltdown coming, and took steps to put together a cash hoard of more than $20 billion, with which Ford could weather the storm, which it has.

Another area is government, at the state and local levels. California and Los Angeles are essentially bankrupt. There will be a wholesale end to state and local services nationwide (e.g., libraries, parks, museums) unless the federal government bails them out. Government entities are broke, and tax revenues have been falling and will fall even more.

Next, in economic downturns, loans and investments that appeared to be sound all of a sudden become bad when the underlying collateral declines in value (e.g., homes) and/or the borrowers cannot afford to make the payments (e.g., homeowners). This creates liquidity crises. Also, accounting treatments can hide problems, certainly for a while. There’s no magic to any of this. It has happened throughout history.

As we know, loans were packaged or “securitized” and sold abroad to investors (e.g., banks); and lo and behold, the buyers found that the loans were bad. Welcome to the real world. Another issue is that these bad loans still exist; and if the banks and other financial institutions that hold them were required to use “mark-to-market” accounting, they would be forced to write down the loans and take even greater losses. So the day of reckoning is being postponed, in the hopes that times will get better and the markets will improve.

Did the regulators (e.g., the Treasury) try to keep a lid on the problems, and hence make them worse? No doubt about it. However, no one knew how bad things would get; hence, they thought the “ship” would stop leaking water and right itself. If I am correct about the future, much worse is to come, inter alia, because Fed Chairman Ben Bernanke and his counterparts at central banks around the world have essentially run out of good options.

Lastly, on balance, I believe the Fed and FDIC have done a good job with respect to their regulation of financial institutions (e.g., commercial banks). This is why, when I wrote the Anti-Tying Provision of the Bank Holding Company Act, I chose the Fed as the financial regulatory agency to administer it.

See, e.g., and and


9 05 2010

The Crash Of All Crashes!

Arnaud de Borchgrave is one of the “deans” of Washington reporting, and his article is sobering beyond belief, but not surprising.

Hold on tight. It will not be pretty!



28 05 2010
Sharon Knapik

I replied to another post before reading this one. Looks like we are on the same page. Perhaps heirloom seeds, canned and dried food, and a few laying chickens will be the best investment going forward?

Bottom line is the derivatives cannot be unwound and like Iceland’s refusal to payout for banking losses, the US public will not be willing to bailout any further. They already object to the bailouts that have occurred.

Nothing in the regulation reigns in Fannie and Freddie. Raines’ cornering the carbon trading exchange mechanism does not look to be promising as folks just aren’t buying the anthropogenic CO2 myth, so there goes that cash transfer system.


28 05 2010

Thanks again, Sharon, for your comments.

Your other comments are set forth here, in the event that other readers wish to review them:

You added:

Looks like we are on the same page. Perhaps heirloom seeds, canned and dried food, and a few laying chickens will be the best investment going forward?

Perhaps so. 🙂

Next, you wrote:

Bottom line is the derivatives cannot be unwound and like Iceland’s refusal to payout for banking losses, the US public will not be willing to bailout any further. They already object to the bailouts that have occurred.

Despite the fact that Obama’s so-called “Stimulus Package” was a total boondoggle, it appears that he and his Democrat colleagues will be seeking another one, which is a travesty. Hopefully it never sees the light of day.


28 02 2011
Timothy D. Naegele

Bernie Madoff: The Market Is A Whole Rigged Job, And There’s No Chance That Investors Have In This Market

Convicted swindler and consummate narcissist Bernard Madoff is serving a 150-year sentence at the Federal Correctional Institution in Butner, North Carolina for his $65 billion Ponzi scheme. He was interviewed by New York Magazine, and its terrific article states in pertinent part:

From the beginning, Madoff . . . had a chip on his shoulder, along with a certain contempt for the industry he’d chosen. “It was always a business where you had to have an edge, and the little guy never got a break. The institutions controlled everything,” he said in a voice surprisingly thick with emotion. “I realized from a very early stage that the market is a whole rigged job. There’s no chance that investors have in this market.

. . .

At first, Madoff ground out a modest but steady income on the scraps of business tossed his way by Goldman Sachs and Bear Stearns, action that was too much trouble and too little profit for them. “I was perfectly happy to take the crumbs,” he said. Madoff was a market-maker, a middleman between those who wanted to buy and sell small quantities of mostly bonds—odd lots. “It was a riskless business,” he said. “You made the spread,” buying at one price and selling at a higher one, and in those days the spreads could be substantial, 50 or 75 cents or even a dollar a share. Madoff increased his profits by trading on the side.

. . .

Madoff wanted to grow his trading business, and a good way to do that was to expand his market-making business. But that meant going up against the New York Stock Exchange, the heart of the club. At the NYSE, a few firms controlled market-making, executing most large trades while getting rich on the spread. Madoff was one of the first to see that technology could match buyers and sellers more efficiently and cheaply than a human trader shouting orders amid a blizzard of paper on the floor of the exchange. By 1970, Madoff had hired his brother, Peter, who proved gifted at designing trading technology, and soon Madoff’s automated-trading systems began siphoning trading volume, and profits, from the NYSE.

. . .

[H]e became a criminal near the peak of his legitimate success. He’d always continued to trade with other people’s money, an activity that eventually fell under a separate investment-advisory business. His largest clients had invested with him for decades, records later showed. In the early days, Madoff mostly employed technical and fairly low-risk arbitrage techniques built around his market-making business. . . . By the late eighties, he had, he estimates, $3 billion to $4 billion under management.

. . .

Madoff started borrowing from his investors’ capital to pay out those solid returns. The returns, false though they were, were their own advertisement. New money started pouring in, saving him in the near term. And this was a different sort of money, the kind that came from bankers who wouldn’t have given Madoff the time of day earlier in his career. “The chairman of Banco Santander came down to see me, the chairman of Credit Suisse came down, chairman of UBS came down; I had all of these major banks. You know, [Edmond J.] Safra coming down and entertaining me and trying [to invest with Madoff]. It is a head trip.

. . .

So Madoff took the money. While he waited for the market to wake up, he parked their billions in treasuries earning 2 percent a year, while generating statements that maintained they were earning about 15 percent—fantastic money in a slow market. He couldn’t bring himself to tell them that he had failed. “I was too afraid,” he said.

But Madoff distributes the guilt. “Look,” he said, “these banks and these funds had to know there were problems.” Madoff told them absolutely nothing about how he made those returns. “I wouldn’t give them any facts, like how much volume I was doing. I was not willing to have them come up and do the due diligence that they wanted. I absolutely refused to do it. I said, ‘You don’t like it, take your money out,’ which of course they never did.”

. . .

Madoff insists that rather than the pursuer, he was usually the pursued. People begged him to take their money. Madoff says that he waved red flags, issued caveats that should have been obvious to even an unsophisticated investor. “They were all told by me, ‘Don’t invest any more money than you could afford to lose. This is the stock market. There’s always stuff that can happen. Brokerage firms can fail. I could go crazy and do something stupid. If you want a [safe thing], put your money in government bonds. So everybody understood this.

“Everyone was greedy,” he continues.

. . .

He has disdain not only for the industry but for the regulators. “The SEC,” he says, “looks terrible in this thing.” And he doesn’t see himself as the only guilty party on Wall Street. “It’s unbelievable, Goldman … no one has any criminal convictions. The whole new regulatory reform is a joke. The whole government is a Ponzi scheme.

See (emphasis added)

Madoff’s views are consistent with my own—especially about “technical traders,” and the fact that average Americans should not be in the stock market at all—which are discussed in an October 2009 interview:

Question: The stock market is up significantly since Obama took office. Would you buy stocks now?

Answer: No. I believe the stock market is a “fool’s paradise,” and I cannot explain the stock market rise—except for the old adage that what goes up comes down. I bought my first share of stock when I was about eight years old; and the Senate Banking Committee studied the stock market when I worked there. I drew two conclusions, which I believe to this day: (1) The only people who make money in the stock market and know the reasons why are (a) those who trade on inside information, which of course is illegal, and (b) those who are “technical traders” (e.g., with seats on exchanges, or who trade on “up-ticks”); and (2) average Americans should not be in the stock market at all, because it is gambling—much like going to Las Vegas or betting on the ponies at the nearest race track.

See’s-legacy-more-suffering-to-come and

As the economic tsunami continues to roll worldwide, other market fraud and vulnerabilities will be exposed, which might make Bernie Madoff’s machinations seem like child’s play.

See, e.g.,


15 03 2011
Timothy D. Naegele

Obama Does It Again . . .

. . . which is among the many reasons why he must be removed from the presidency as soon as humanly possible.

Acting through White House special assistant Elizabeth Warren, our narcissistic anti-business president is once again engaged in credit allocation and the distortion of credit markets and, yes, extortion from the banks. As the Wall Street Journal correctly stated in an editorial:

The new federal Consumer Financial Protection Bureau . . . is trying to extend its reach by extorting billions of dollars from private mortgage servicers, regulating their business by fiat, and stalling a U.S. housing market recovery.

This brouhaha started last year when mortgage servicers—J.P. Morgan Chase, Wells Fargo and other banks—were accused of mishandling foreclosure documentation. The feds have been investigating, and it turns out that most of the infractions were technical while very few borrowers lost their homes without cause. But state Attorneys General and White House special assistant Elizabeth Warren have spotted a political opening to smack the banks one more time and dole out $20 billion to potential voters in 2012.

They’ve sent a proposed 27-page “settlement” to the banks that would, among other things, force mortgage servicers to submit to the bureau’s permanent regulatory oversight; impose vast new reporting and administrative burdens; mandate the reduction of borrowers’ mortgage principal amounts in certain circumstances; and force servicers to perform “duties to communities,” such as preventing urban blight. We warned during the Dodd-Frank debate that the new consumer bureau would become a political tool for credit allocation, and here we already are.

The legal language is so vague, and the potential liabilities so vast, that no CEO could in good conscience sign the agreement as it stands. The settlement includes, for instance, “unfair and deceptive business practice” clauses that would expose servicers to lawsuits for any “material” violation of the agreement, whatever “material” means. Homeowners and bank shareholders will ultimately pay for the compliance burden and the $20 billion to reward delinquent borrowers, as servicers pass on the costs. Never mind that these banks didn’t originate many of those loans and typically don’t own them now.

. . .

[M]ore than half of all mortgages modified during this housing depression have redefaulted within a year. A 50% failure rate is bad even for government work. Meanwhile, the foreclosure overhang has kept the housing market from finding a bottom so prices can recover.

. . .

The proposed settlement will only prolong the pain. HSBC has already frozen foreclosures in the U.S. and other banks will likely follow suit. RealtyTrac, which follows the housing market, said last week that foreclosure activity has already dropped to a 36-month low “as allegations of improper foreclosure processing continued to dog the mortgage servicing industry and disrupt court dockets.” The securitization market will suffer too: Who will buy bonds backed by payment streams that are open to legal challenge?

This shakedown is so egregious that it is inviting a political backlash.

. . .

[B]ut the larger story here is the way Ms. Warren is already using the Consumer Financial Protection Bureau to tell banks how and to whom to lend money. She is doing so despite dodging a Senate confirmation that Dodd-Frank says is required for the person who runs the agency.



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