Andy Kroll

Andy Kroll

Senior Reporter

Andy Kroll is Mother Jones' Dark Money reporter. He is based in the DC bureau. His work has also appeared at the Wall Street Journal, the Detroit News, the Guardian, the American Prospect, and TomDispatch.com, where he's an associate editor. Email him at akroll (at) motherjones (dot) com. He tweets at @AndrewKroll.

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Blanche Lincoln, Derivatives Crusader?

| Wed Apr. 14, 2010 12:49 PM EDT

Sen. Blanche Lincoln (D-Ark.) is generating plenty of buzz in financial circles for her new bill to regulate derivatives, those tricky financial products, whose value is linked to the price of commodities or interest rates, used to hedge risk and also make risky gambles. Lincoln's ambitious derivatives reform bill would require nearly all derivatives trades to take place on an exchange, where details on prices and the make-up of the deals would be transparent. (Right now, these deals take place essentially in the dark, between buyers, sellers, and brokers who privately negotiate the terms of the deal. That makes it practically impossible for, say, an airline company buying a contract to hedge against fuel price increases to look at similar deals done before and get a sense for what it should pay.)

As Felix Salmon pointed out, if derivatives will be exchange-traded, that means they'll be cleared, too, i.e., the risk of default on those deals will be distributed across the many members of the clearinghouse, instead of falling all on one counterparty. It essentially protects against another AIG-esque collapse, when billions in derivatives losses were absorbed by the global insurer leading to its near-demise.

Lincoln's bill would also call for swaps outfits to be cut out of big investment banks and essentially made into separate operations. This, of course, would prevent crippling losses on a swap desk from dragging down the rest of the firm—again, a la AIG's Financial Products division mortally wounding the entire company. Lincoln would also make a narrow exemption for specific end users of derivatives—the airlines and farmers and utility companies looking to legitimately hedge risk—without letting the speculators squeeze through that exemption.

So, that's all great, right? If you support tough new derivatives reform—like many Congressional Democrats; Gary Gensler, chair of the Commodity Futures Trading Commission and the top administration officlal overseeing derivatives; and reform advocates—then you're ecstatic. If you're Wall Street, then you're pissed. Don't be surprised to see the likes of Goldman Sachs and Morgan Stanley—whose profits would likely diminish with exchange trading and clearing (with price transparency and competition, they can't set prices to their liking and rip off clients)—lobby furiously to kneecap Lincoln's bill.

As tough as the bill is, realistically, it's even tougher to envision it surviving the gauntlet of special interests and GOP lawmakers. Here's Felix on it:

...it’s also pretty clear that none of this is going to happen. Never mind Republican support: this is going to have a hard time even getting Democratic support. It’s all a good idea, but it’s far too radical: while it might have had more of a chance if it had been introduced during the height of the crisis, at this point the banks have got their mojo working again and will quite easily be able to ensure that the beating heart of Lincoln’s proposals is surgically excised before it even gets anywhere near a vote.

That said, if Lincoln and her allies can at least preserve the exchange trading and clearing requirements, that'll amount to a major victory. Dragging these trades into the light of day is paramount because the OTC market is inherently stacked against end users. Right now, so many of these deals are opaque, and a whole host of costs bundled into the transactions aren't disclosed or well understood. If derivatives were traded in the open, however, you'd shed light on all that and compress what's called the bid-ask spread—the difference between the highest amount the buyer wants to pay and the lowest amount the seller will take to offload their product. That's good for companies using derivatives—it lowers the cost for them.

All told, there's no chance Lincoln's bill will emerge weeks or months down the road untouched. But it's laudable that she set the bar so high, and if she and her allies can preserve the transparency measures, that alone will be victory for financial reformers.

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WaMu's Gruesome Autopsy

| Tue Apr. 13, 2010 11:33 AM EDT

After a year-and-a-half long financial autopsy, the Senate investigations subcommittee today is exploring the demise of the Washington Mutual, once among the US' largest thrift banks with more than $330 billion in assets and the largest bank failure in American history. The hearing will include testimony from former WaMu executives like CEO Kerry Killinger, president Stephen Rotella, past risk officers, and the former president of the Home Loans division at the heart of WaMu's stunning meltdown.

The beginning of the end, as the Senate's investigation suggests, came in 1999, when WaMu snapped up a subprime lender named Long Beach Mortgage Company. Long Beach was a major player in the booming securitization business—the origination of loans to be bundled into bonds backed by those pools of loans. These mortgage-backed securities were then sold to Wall Street banks and the two government-sponsored housing corporations, Fannie Mae and Freddie Mac. In 2006, Long Beach injected a staggering $30 billion in subprime loans into the securitization machine, a sixfold increase from only three years before. And by churning out subprime loans to less qualified homeowners, Long Beach fit perfectly into WaMu CEO Killinger's goal, echoing that of executives like Citigroup's Sandy Weill, of making WaMu into a supermarket bank, a one-stop shop for customers of all stripes.

Another key date, as the Senate investigation shows, was 2005, when WaMu and Long Beach, as shown in an internal WaMu PowerPoint presentation, settled on a strategy called "gain on sale." That strategy essentially stressed how much more profit could be made on riskier loans as opposed to government-backed, fixed interest-rate loans, and that these riskier, more profitable products—home equity, subprime, and option adjustable-rate mortgages—could be a cash cow for WaMu.

This cutthroat, purely profit-driven philosophy meant WaMu and Long Beach increasingly pushed their employees, in the early 2000s, to focus more on volume than quality—selling more and more loans with little regard for the underwriting or potential success of those loans. "WaMu built its conveyor belt of toxic mortgages to feed Wall Street's appetite for mortgage backed securities," Levin said. "To keep the conveyor belt running and feed the securitization machine on Wall Street, Washington Mutual engaged in lending practices that created a mortgage time bomb."

Consumer Agency's Stock Climbs

| Mon Apr. 12, 2010 11:30 AM EDT

As Congress returns to action this week, with writing new financial regulation atop their to-do list, a new poll (pdf) released today by the Consumer Federation of America found that 62 percent of those polled supported a new consumer financial protection agency. That's a 5 percent increase from eight months ago. Opposition to the proposed agency decreased from 39 percent to 34 percent over that eight-month period, the poll found. This uptick in support is a boon for the proposed agency, which would protect consumers from predatory lending practices, unfair fees charged by credit card companies and banks, and toxic financial products like no-income-no-job-no-asset mortgage loans. Consumer advocates, like Elizabeth Warren, say the agency is one of the few parts of the Senate's bill that would directly help American families.

The political support for a tough consumer agency is far from assured, however. While liberal Democrats have favored creating an independent, standalone consumer agency, resembling something like the Environmental Protection Agency, more moderate and conservative lawmakers have sought to chip away at the agency's independence and limit its rule-writing power. Now back from recess, one of the Senate's main hurdles on the way to crafting a financial reform bill is deciding the consumer protection agency's fate. With the bill already passed out of committee, and now set to be debated in the full Senate, there's sure to be a flurry of amendments offered looking to strengthen or weaken the proposed agency, which, as the bill is now, would be independent but housed within the walls of the Federal Reserve.

Alan Grayson vs. the Whigs?

| Thu Apr. 8, 2010 12:15 PM EDT

Like Disneyworld and a Tallahassee flea market, Rep. Alan Grayson (D-FL) has quite the knack for attracting nutty characters. I'm specifically talking about Grayson's campaign for re-election this fall, and the latest challenger to emerge out of the woodwork: a Ocala, Florida, resident named Steve Gerritzen who's running as the lone candidate for (drumroll) the Whig Party. Yes, those Whigs, the ones who haven't had much clout in American politics since the 1850s. Apparently, Gerritzen, fed up with Democrats and Republicans, "wants to remake the American education system in the model of that of Iceland, which emphasizes high rates of literacy, early childhood education, and taxpayer-funded collegiate studies," the Ocala Star-Banner reports.

By day, Gerritzen, 39, is an electronics assembler, and struck a populist tone in what's presumably his coming-out interview with the Star-Banner. "A lot of people are talking about a revolution, but I'm calling for a revolution through the ballot box," Gerritzen told the newspaper. "Seventy percent of the people make less than $50,000 a year, and that's who I want to represent. I care about the people because I am the people. I am the working class."

In addition to the Whig resurrection, Grayson faces a challenge from the Tea Party's Peg Dunmire, whom Grayson called one of Sarah Palin's "undead minions." So rhetorically gifted is Dunmire, Grayson said, that she deserved a spot in the Guinness Book of World Records for "Most Consecutive Cliches." Dunmire's website says she want to eliminate most payroll taxes, repeal the Sarbanes-Oxley Act of 2002 (a landmark reform of financial accounting principles), and ramp up offshore drilling off Florida's coasts.

Florida's a bizarre enough state as it is, an off-kilter peninsular republic complete with hanging chads, Katherine Harris, Elian Gonzalez, and on and on. Thanks to Grayson and his cadre of challengers, it's only getting stranger.

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