Author: Annie Lowrey

On Friday, The Wall Street Journal revealed that major Wall Street banks regularly use repurchase-agreement, or repo, transactions to reduce their debt levels and leverage shortly before reporting their quarter-end data. The revelations came after the Valukas Report showed that failed investment bank Lehman Brothers used a type of repo transaction, the so-called Repo 105, to move billions in debt off of its books in the months before it collapsed. Lawyers have argued that Lehman Brothers’ transactions likely broke the law — but the other investment banks’ likely did not.

To help explain the legal issues — particularly in light of the upcoming push for regulatory reform in Congress — I spoke with Jennifer S. Taub, a lecturer at the Isenberg School of Management at the University of Massachusetts, Amherst, and a member of the Economists’ Committee for Stable, Accountable, Fair and Efficient Financial Reform. She formerly worked as an associate general counsel at Fidelity and as assistant vice president for the Fidelity Fixed Income Funds.

I lightly condensed and edited the interview for clarity.

So, on Friday, the Journal reported that a number of major Wall Street investment banks, including Goldman Sachs and Bank of America, are routinely using repo transactions to lower their debt and leverage levels before making their quarterly reports. And I think everyone’s question is: Isn’t that fraud?

That is the question. Thus far, it seems that this is lawful. However, we just don’t have enough facts about what they were actually doing. The SEC is in the midst of an investigation into repurchase agreement-financing transactions at these firms, and we haven’t seen the SEC report yet. These investment banks say that they were not performing any Repo 105 transactions — the kind Lehman Brothers was performing — and that they recorded their repo transactions on their books properly. It seems clear what was going on in Repo 105 is criminally actionable, for example, under the Sarbanes-Oxley Act, which requires that periodic reports fairly represent in all material respects the company’s financial condition. And the question at Lehman is whether this was fair reporting.

Right — looking as an outsider with not much understanding of securities law, looking at Wall Street from Main Street, it seems that even if this wasn’t fraud, it should have been.

Yes, it definitely seems off, even if it was legally OK. I think you can take two paths looking at these transactions. You can say: Is this criminal or not? We can’t determine that yet, we just don’t have enough facts. But then you can say: Even if it is perfectly legal, it still seems that this is an issue because there is the question whether investors were being misled and whether this business model threatens the entire financial system.

These transactions involve very short-term borrowing to finance long-term, illiquid assets. Even Lloyd Blankfein, the head of Goldman Sachs, has described this maturity mismatch as very dangerous. This is especially the case, where prior to the crisis, the investment banks were using short-term, often overnight loans to finance up to 50 percent of the assets they held.

That is why I think that we should not focus exclusively on the question of whether or not this was illegal, but on the point of fact that it is dangerous, because of the magnifying effect of leverage. This was the problem during the financial crisis. If any one firm loaning to you starts to get nervous that you aren’t creditworthy, they pull their financing, all of a sudden, you can’t get loans, you have to sell assets, then everyone is doing the same — you have the same death spiral that seized the credit markets.

To me, in the interest of fairness and deterrence, securing convictions is important. However, I don’t want us to get distracted by what’s criminal and ignore whether what’s “perfectly legal”  makes us unstable.

And you’ve done some work describing how these repo transactions came to be a systemic risk problem — describing their dramatic growth around 2005, as possibly due to a change in the U.S. bankruptcy code. Could you explain that?

This is a hypothesis, and I need to dig deeper. But, my initial sense is that there is a connection between a recent change in the bankruptcy law and the growth of repo transactions.

Say that you are on the investment side of a repo transaction — you’re the cash-rich investor who is going to loan money overnight or for a week to an investment bank, who will give you Treasuries or other collateral. If you’re the investor, you want to make sure that if the other side can’t give you back the cash the next morning or next week, you can keep the collateral. Investors are also concerned that even if they hold onto that collateral, if the bank goes into bankruptcy, they might not be able to keep it.

When a company files for bankruptcy, something called the “automatic stay” comes into effect. The trustee (or the debtor-in-possession) stops all transactions. He can freeze almost anything. But, that isn’t actually true for everybody. If you’re a “secured creditor,” the freeze does not apply to you. In addition, the ability for the trustee to claw back your collateral is prevented. And one way to be a secured is to be in possession of collateral whether directly or through a custodian bank. That means that investors who loan through repo are in a better position than other kinds of unsecured lenders.

But if I loaned to you through repo — say I gave you $1 billion in cash, and you gave me $1.01 billion in collateral — I get to keep that collateral. If you’re a secured creditor you feel comfortable lending, even in really bad circumstances. And repo transactions are secured.

But it wasn’t always like that? Something changed to make repo a secure way to lend?

Right. Before 2005, where the bankruptcy code covered repurchase financing, it was only clear that some kinds of repos, backed by a limited list of collateral types, were secured. Only Treasuries, agencies, and a few other types were. If I were going to loan to you overnight, and you gave me Treasuries, then the bankruptcy code said, “Yes, you’re secured and if your business goes under, you get to keep it.”

In 2005, the code expanded to list a whole bunch of other types of collateral such as mortgage loans and interests in mortgage-related securities were. This encouraged the purchase of these assets, because financing through the repo market was more available. That meant, if I have a lot of money to park overnight, I’m willing to take not just Treasuries but these other riskier assets as well. I am exploring whether there is a connection between this legal change and the growth of repo transactions from approximately $4.9 trillion in 2004 to $7 trillion by the first quarter of 2009. That’s a preliminary take, though. And I need to dig deeper.

Today, the Federal Reserve announced the retirement of Brian Madigan, a longtime Fed economist, an architect of many of the emergency lending programs during the worst of the Great Recession, and the current director of the division of monetary affairs. Replacing him is seasoned Fed economist William English. The role is structurally important. The monetary affairs division advises Fed Chair Ben Bernanke and the Federal Open Markets Committee on monetary policy, and the monetary affairs chief generally drafts the FOMC notes. But as a Fed economist, English’s public paper trail is rather short; he has not published any papers since 2003 or given any recent speeches.

In an opinion piece published in his home state, Sen. Chuck Grassley (R-Iowa) came out against the value-added tax, or VAT, a broad-based tax on consumption:

Those who advocate more government spending need to identify new revenue streams. Instead of cutting back on spending to tackle the looming debt crisis, unfunded entitlements and government bailouts, the White House and other Democratic leaders are looking for ways to capture more revenue by adding new layers of taxes. As suggested by former Federal Reserve Chairman Paul Volcker, the White House is entertaining the idea of the first-ever consumption tax in the United States.

To be fair, Volcker did not state that the White House is considering proposing the United States adopt a VAT — a regressive tax generally implemented along with cuts to the income tax for low- and middle-income persons. Rather, he described the VAT as “not as toxic” an idea as it had once been.

As demonstrated by Republicans themselves, in a budget proposal written by Rep. Paul Ryan (R-Wis.), the only way to solve the United States’ long-term deficit with spending cuts is to radically slash popular entitlement programs such as Medicare. (The idea of cutting foreign aid wouldn’t do a thing.) Realistically, the country needs to raise taxes, at some point, somehow. A VAT can be scaled to collect large sums without distorting the economy, hence its popularity in other OECD countries and among economists. Congressional Budget Office Director Doug Elmendorf has confirmed that his office is studying the tax and that several members of Congress have inquired about it. But Grassley’s opinion piece — punching at a tax that has not yet even been proposed by a deficit commission not yet even convened — demonstrates how tough the fight on deficit-reduction will be.

This morning, Wells Fargo released its weekly dispatch of economic and financial analysis, providing an outlook based on the latest jobs, consumer spending, housing and interest rate figures. The report confirmed the growing consensus that the worst is behind the U.S. economy and the chance of a double-dip recession is receding. Still, it seemed a bit queasy. ”A recovery not led by a rebound in housing and consumer durable spending and accompanied by high unemployment?” it says. “Such is the strange brew we appear to be making for this recovery.” It goes on to elaborate:

Mortgage rates are rising while many homeowners see flat prices and rising foreclosures. Unemployment rates are high and yet both monetary and fiscal policies are gearing up for moves to tighten policy. The structural excesses of too many houses and too many goods relative to demand persist as many low-skilled and semi-skilled workers see very little in their future. Indeed a very strange brew for this very atypical economic recovery.

A strange brew — but not necessarily a bad one. Indeed, to see a “typical” recovery would be worrisome, given the atypical economic fundamentals. The housing market remains fragile, with waves of foreclosures on the horizon and analysts such as Meredith Whitney predicting that prices might continue to decline. So too with consumer spending: The chance that it might “lead” the recovery should be low, given the rates of joblessness and underemployment. (And, as an aside, the United States might want to be wary of housing-led anything for some time. Robert Shiller and others have convincingly argued that the last housing-led recovery, after the dot-com bubble, was nothing but the beginning of the economically catastrophic debt-fueled housing bubble.)

If the Obama administration is betting on anything to lead the recovery, it is exports, which it hopes to double in the next five years even as international demand remains soft. But the economic fundamentals at least for now point to a nothing-led recovery, with slow, incremental gains across sectors and persistently high unemployment.

It ain’t over yet — at least officially.

This morning, the Business Cycle Dating Committee at the National Bureau of Economic Research — a nonprofit organization that, among other things, officially determines when recessions start and end — announced that “[a]lthough most indicators have turned up,” it has not yet decided to declare the recession through.

The report does not signal that the economy is necessarily still undergoing contraction rather than expansion — just that “indicators are quite preliminary” and “[t]he committee acts only on the basis of actual indicators and does not rely on forecasts.” (It describes how it determines peaks and troughs here.)

Harvard economist Jeffrey Frankel, a member of the Business Cycle Dating Committee, declared “[t]he recession is over” on his blog just last month, citing improvements in employment and real income. Most academic and governmental economists agree. But though gross domestic product starting rising more than half a year ago, the job market remains brutal, and several other indicators sluggish.

Martin Feldstein, the president of the committee and a Harvard professor, recently warned that there is “significant risk the economy could run out of steam sometime in 2010″ because economic stimulus “delivered much less” than it should have. A double-dip recession remains possible if not probable, hence the committee’s reticence.

Investors, rejoice! The Dow Jones Industrial Average has crossed the 11,000 mark for the first time since September 26, 2008. The news has caused much breathlessness in a financial blogosphere hungry for good news. But, to throw some cold water on the situation, the number 11,000 is no more meaningful than, say, 7 or 912,384. Rising stock prices make money for investors and bring new entrants into the stock market. But they have only a tangential relationship to macroeconomic fundamentals. And, soberingly, having the Dow at 11,000 puts us precisely where we were in May 1999.

With the Senate gearing up to consider unemployment insurance extension legislation next week, the National Employment Law Project has a useful chart breaking down the number of Americans losing their jobless benefits by month and by week, state by state. I took that data and Census Bureau state population data to determine the number of people per 10,000 who might lose their unemployment insurance in April if the Congress fails to act. (I lopped off the top half of the chart to make it readable, so only 25 states are depicted.)

The 10 states with proportionally the most people due to lose benefits are Indiana, South Carolina, Massachusetts, Wyoming, Michigan, Florida, Illinois, Arkansas, Georgia, and Ohio. (The state least affected? Montana.) Of these, two have elected senators who voted against extending unemployment insurance the first time around — Wyoming and South Carolina. That provision passed 78 to 19.

Click to enlarge:

Next week, Congress is back in session, and financial regulation will occupy much of the legislative calendar in and mental capacity of Washington for the next month or two. The proposed legislation imposes stronger capital requirements and creates a Consumer Financial Protection Agency, among other provisions. But it cannot stop the innovation of newer, more interconnected and frankly weirder financial products — and a brilliant new investigative report by Jesse Eisinger and Jake Bernstein at ProPublica shows just how new, interconnected and weird some of those products were.

The report shows how one hedge fund, Magnetar, originated mortgage-based investment instruments, backed them with the riskiest possible assets and then made massive bets against its own products. Every part of it was perfectly legal, and very little of it came under regulatory oversight.

According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations — CDOs. If housing prices kept rising, this would provide a solid return for many years. But that’s not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

The whole thing is worth a read.

Next week, the Senate returns from recess to a months-long battle over the extension of expiring programs providing benefits to millions of jobless Americans.

In March, the House passed a $9 billion bill to prevent benefit loss. The Senate rushed to pass the House version before the congressional recess started on March 26, but faced opposition from Sen. Tom Coburn (R-Okla.), who demanded that Democrats find a way to pay for the extension. Senate majority and minority leaders Harry Reid (D-Nev.) and Mitch McConnell (R-Ky.) started negotiations on the issue, but failed to reach a compromise before recess.

While senators were in their home states, on April 5, some Americans actually started to lose their benefits – at a rate of 200,000 a week, the National Employment Law Project estimates. Indeed, this month alone, up to 1 million people will lose aid if some extension bill does not pass.

Members of Congress from both parties have stressed that the jobless benefits are not stimulus so much as necessary aid. “We will have to do things like extend unemployment benefits,” Sen. Jon Kyl (R-Ariz.) told Fox News. “That’s not a job stimulator. … We will do those things to take care of the families that are suffering right now.”

Thus, the pressure is on for Congress to act. According to parliamentary procedure, it will take a bare minimum of four days for the Senate to pass the benefits extension — and likely longer. To provide benefits to those who have lost them since April 5 and to those who will before the bill’s passage, Senate Democrats plan to push through a provision making the extension of benefits retroactive.

Two Senate aides say that Republican senators will offer pay-go and possibly other amendments to the benefits extension. Those amendments will likely delay the passage of the bill — meaning more people will lose benefits, if only temporarily.

If and when the Senate passes this month-long extension, it will need to take the exact same issue up again by May 5 — a point annoying Senate Democrats, a Senate aide says. Therefore, Democratic leadership has placed a long-term jobless benefits extension into the Tax Extender’s Act, currently in the House. But Democrats are scrambling to find additional funding sources for those benefits.

Speaking to the Center for the Study of the Presidency and Congress last night, Federal Reserve Chairman Ben Bernanke went back to his academic roots. The longtime Princeton economic historian, who specializes in the study of the Great Depression, cited the “passivity” of policymakers during the 1930s as central to letting bank runs become a nationwide economic failure.

[P]olicymakers must respond forcefully, creatively, and decisively to severe financial crises. Early in the Depression, policymakers’ responses ran the gamut from passivity to timidity. They were insufficiently willing to challenge the orthodoxies of their day….A key turning point, in the United States, came with Franklin Roosevelt’s commitment to bold experimentation after his inauguration in 1933. Some of his experiments failed or were counterproductive, but [some decisions] helped arrest the descent of the U.S. financial system and set off a strong, albeit incomplete, recovery.

He argues that this crisis could have been as bad as the last one, were it not for advances in monetary policymaking. The statement reads not just as an appreciation of Roosevelt’s eventual decision to leave behind the gold standard, but as a counter today’s criticism of Bernanke’s more activist Fed. Senators such as Richard Shelby (R-Ala.) have hit Bernanke with withering criticism for failing to prevent the crisis before it occurred and to act until after the markets started seizing, being too generous in bailing out faltering banks, and then stretching the Federal Reserve’s mandate and policy operations far, far beyond their historical and possibly statutory limits.

But in this speech, Bernanke reinforces the point that — regardless of what he did not do before the markets went south — he acted with necessary strength and “creativity” once the crisis hit:

[O]ur traditional tools, developed in an earlier era, were of little use in addressing panic in the shadow banking system or in the money market mutual fund industry. So, we engaged in what I call “blue sky thinking” — generating many ideas. Most were discarded, but, crucially, some led to the development of new ways for the Federal Reserve to fulfill the traditional stabilization function of central banks.

Notably, Bernanke also addressed the repurchase agreement market in the news this morning:

In the shadow banking system, loans, instead of being held on the books of banks as was virtually always the case in the 1930s, were packaged together in complex ways and sold to investors. Many of these complex securities were held in off-balance-sheet vehicles financed by short-term funding. When the housing slump shook investors’ faith in the values of the loans underlying the securities, short-term funding dried up quickly, threatening the banks and other financial institutions that explicitly or implicitly stood behind the off-balance-sheet vehicles. This was a new type of run, analogous in many ways to the bank runs of the 1930s, but in a form which was not well anticipated by financial institutions or regulators.

That might read as a bit of financial gobbledygook, but the point is simple: Policymakers now understand the financial crisis as, essentially, an old-fashioned bank run in the under-regulated “shadow” banking system, comprised of financial institutions that are not registered as banks. And how those banks are monitored and regulated is crucial to financial stability now.

This morning, The Wall Street Journal breaks the unfortunate if unsurprising news that big Wall Street banks routinely lower their debt levels shortly before reporting their quarterly statements, making the banks seem less leveraged than they are.

A total of 18 banks, including Bank of America, Goldman Sachs and Citigroup, use the repurchase agreement, or repo, market to lower their debt temporarily. The repo market is, to simplify, a market banks and other big financial institutions use to exchange equity for cash for short periods of time and the market on which there was a kind of bank run during the crisis. (More on that later.)

The Wall Street Journal says the firms were reducing their debt levels more than 40 percent beyond their quarterly averages. What’s worse? “The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.”

The Securities and Exchange Commission — in the wake of the revelation last month that Lehman Brothers used such transactions to park billions of debt off its balance sheet shortly before its collapse — is investigating banks’ use of the tactic. In my mind, there is one dead simple way to preclude banks from skewing their debt and leverage levels using repo transactions (which are, I should note, common, important and perfectly legal): Require banks to report not just their debt levels at the time the reports come out, but their quarterly average debt levels, thus removing the incentive to alter them.

Testifying to the Financial Crisis Inquiry Commission, former Fed Chairman Alan Greenspan and former Citigroup executives Robert Rubin and Charles Prince passed the buck. Rubin and Prince said they could not have understood Citigroup’s extraordinary exposure to the housing market or recognized the risk the bubble posed any earlier. And Greenspan poured water on the idea that he could have done more to diminish the housing bubble, saying he was “quite active in pursuing consumer protections for mortgage borrowers.”

Diane E. Thompson, a lawyer with the National Consumer Law Center, begs to differ. As part of the Federal Reserve’s Consumer Advisory Council, she and other consumer advocates alerted him to the looming crisis in mortgages starting in the early 2000s. We spoke earlier today; the interview transcribed below is lightly edited for length and clarity.

Greenspan’s testimony seemed to contradict even the Fed’s own reports on the housing bubble.

I was surprised to read what he said, because he articulated a view that’s been thoroughly discredited over the past several years. There was no meaningful regulation [in housing by the Fed] between 2000 and 2008. Statements were issued, but they weren’t binding — they were advisory and worked around the edges of the problem. Plus, there weren’t even any such statements during the height of the crisis! When things were gathering steam and hens were coming home to roost, the Fed did nothing. And it did nothing despite the fact that many consumer advocates were warning about loans in the subprime market. He says that he believed the sub-prime market was so small it wouldn’t matter to the broader economy. But obviously it did.

I also found it interesting that he said the problem was the demand for those loans. To some extent I agree with him. There was demand for these loans, of course, but had there been meaningful restrictions in place, this would not have become the crisis it did. The Fed finally put those restrictions into place in 2008.

The other point that struck me was his description of how involved the Fed was. He has cited the Consumer Advisory Council, but it was created by statute. The Consumer Advisory Council doesn’t exist by the good of the Fed’s heart. The years I served on it, it was dominated by industry. The Fed governors would say, “We have all these meetings with the Consumer Advisory Council! We get an interchange of views!” But my experience was that it was difficult to get consumers heard.

And the crisis was easier to see from the end-user, consumer side of it than the banking side?

The problem was obvious to those of us who worked in the communities where the housing bubble originated, particularly the African-American and Latino communities that were just obliterated by subprime lending. I think that there was this understanding that this was a minority-community problem — deplorable, but not exportable to the rest of the economy. That was wrong.

How often and how strongly did the Consumer Advisory Council warn the Fed about the housing bubble?

The council meets three times a year, and I was on it for three years, in 2003, 2004, and 2005. I know that during my time on it, as well as before me and after me, there were consumer advocates who said, “There are problems in the subprime market, and they could impact the entire mortgage market and the entire economy.“

That isn’t to say — I will not claim to have predicted the financial meltdown. To be honest, I was shocked, because I assumed that investment bankers had a better grasp of risk management. But, I know for years before I came on, and for years after I went off, at least from 2001 to 2007, at every meeting, people said, “There are problems in the subprime market. These policies aren’t promoting home ownership. If anything, they’re going to end up doing the opposite.”

I have heard statements from Greenspan in the past two years that seem to me more reflective of the role the Fed played and more cognizant of the fact the Fed missed signs of the crisis, which he did not say here.

What else surprised you in the testimony?

I was surprised at the attack on the GSEs [government-sponsored enterprises, Fannie Mae and Freddie Mac]. I was particularly surprised that he said that the banks weren’t the problem, but that the GSEs were. They got into the subprime boom late — and they aren’t what is driving the current foreclosure crisis. They contributed to the volume for some bad loans, but so did the large banks.

And so ultimately, as a consumer advocate…

There’s an assumption that runs throughout his testimony that these toxic products were in fact affordable products that increased home ownership. That continues to be a popular view among bankers. If you get rid of these toxic products you will reduce homeownership; these products help increase homeownership. That is contrary to all of my experience. There is just a weird tautology in saying there wasn’t a problem in the origination of the loans, but the demand for them.

There’s tremendous demand for cocaine — it would be like saying the issue isn’t the sale of cocaine, but the fact that there’s tremendous demand for cocaine. It is just bizarre. Can you imagine our drug enforcement focusing exclusively on drug users rather than drug dealers?

This morning, the Financial Crisis Inquiry Commission heard from Robert Rubin and Charles Prince, the former heads of banking behemoth Citigroup.

Prince opened his remarks with regrets. “I’m sorry,” he said. “I’m sorry the financial crisis has had such a devastating impact for our country. I’m sorry about the millions of people, average Americans, who lost their homes. And I’m sorry that our management team, starting with me, like so many others could not see the unprecedented market collapse that lay before us.” (The apologia deviated from Prince’s prepared statement, which read: “I can only say that I am deeply sorry that our management, starting with me, was not more prescient and that we did not foresee what lay before us.”)

Such candor was unexpected and, at least judging the faces of the commissioners, welcome. But hours of rationalization, blame shifting, and evasion followed during questioning that at times became heated. Indeed, while Rubin and Prince expressed regret in general, they refused to classify their own or any of Citigroup’s actions as anything other than mistakes made in the run-up to an unforeseeable bust.

The commissioners’ questions focused on mortgage-backed securities, the housing bubble, derivatives regulation, Citigroup’s losses and the problem of too big to fail. “I personally do not think Citi was too big to manage,” Prince said, a sentiment Rubin echoed. Prince said the “broad, multifaceted and diversified nature” of Citigroup’s investments and liabilities did not “materially contribut[e] to our losses.”

That statement jarred with Rubin’s testimony; he cited the interconnectedness of financial firms and financial products, which undercut diversification, as particularly destructive during the financial crisis. Asked why he did not recognize the extent of Citigroup’s liabilities until too late, the former Treasury Secretary defensively noted that Citigroup managed “trillions” of dollars every day and the best risk management the company could perform was to put the “right people” in place. He also called Citigroup’s risk management “robust and proactive.”

FCIC Chair Phil Angelides later pointedly asked Rubin, “Do you bear central responsibility for the near-collapse, but for the government, of Citigroup?” He replied that Citigroup’s board, which he led, was not “a substantive part of the decision-making process” at the firm. “All of us in the industry failed to see the potential for this serious crisis. We failed to see the multiple factors at work.”

Today, an Economist/YouGov poll making the rounds shows that Americans would vastly prefer budget cuts to new taxes — by 62 percent to 5 percent. The poll goes on to ask Americans which government spending programs they would choose to cut: “If government spending is reduced in order to balance the budget, which of the following government programs should receive lower federal funding than they currently do?” (Respondents could pick more than one thing to axe.)

Here is how they responded:

The most expendable programs, according to poll takers, were mass transit, housing, agriculture, environment and foreign aid, the runaway winner at 71 percent. The problem? These programs together barely comprise 3 percent of the federal budget. Even if the programs were entirely eliminated, the cuts would do nothing to solve the United States’ long-term entitlement program.  Indeed, the responses had no obvious correlation with spending size.

The red bars in this graph indicate expenditures in the various areas:

The poll highlights the conundrum: Americans want to solve the long-term deficit program and want the federal government to run a balanced budget. They are willing to make budget cuts. But the government cannot cut enough from discretionary programs to bring the budget into check and ultimately to reduce the deficit. (Half of Americans still believe the government can.) Entitlement programs — Medicaid, Medicare, and Social Security — are at the heart of the problem, with spending growth in health care programs the single biggest culprit. The lone solution — save for politically improbable radical spending cuts to defense, health care programs and social security — is tax hikes. Most economists agree on the point, reiterated strongly by Fed Chair Ben Bernanke in a speech yesterday. But the promise of tax increases is hardly a savvy campaign platform, and it will be up to members of Congress to sell the necessity and prudence of tax hikes to an economically distressed citizenry.

This morning, the Labor Department announced that 460,000 Americans applied for unemployment benefits for the first time — up from the week before and something of a surprise to economists, who had estimated claims to be around 435,000. These initial applications came mostly from people whose employer-provided benefits have expired, which normally happens after 26 weeks. So what was going on six months ago? The economy was still shedding nearly 10,000 jobs a day, with the unemployment rate nearing 10 percent.

The figure throws some cold water on the otherwise improving macroeconomic figures. The country added 162,000 jobs in March, the most since 2007 — but that “jobless recovery”? Still here.

In some sense, the Financial Crisis Inquiry Commission is a lame duck. Headed by Phil Angelides and created in May 2009, the FCIC is not due to file its final report until December. Financial reform legislation will likely come up for a vote next month. The panel’s ultimate recommendations will come months too late to make it into the bill — the final details of which are currently being hammered out by Sen. Chris Dodd (D-Conn.) and others. Where the FCIC is most important is in its testimonies, dragging Wall Street titans and former Fed and Treasury officials to the podium and grilling them.

Yesterday, it heard from former Fed Chair Alan Greenspan. Today, the FCIC hears from former top Citi executives Chuck Prince and Robert Rubin, as well as the current and former comptrollers of the currency (responsible for regulating national banks); tomorrow, it hears from former Fannie Mae officials and Office of Federal Housing Enterprise Oversight executives.

What did Greenspan say of importance? Not much. (Here is a copy of his prepared remarks and a copy of his review of the boom and bust, titled “The Crisis,” prepared for the Brookings Institution and released last month.) Much of his testimony retread well-worn ground. But the “Maestro” did assert that he was correct 70 percent of the time during his Fed tenure. Angelides cannily asked him: “Would you put [the financial crisis] in the 30 percent category?” Greenspan replied, “I don’t know.”

He also said that banks had been undercapitalized for the past 40 to 50 years (a problem under the Fed’s purview) and argued that financial services might be too complicated for regulators to regulate. “It’s not a simple issue of, ‘Let’s regulate better. It’s a different world,” he said. “The complexity is awesome.” He hedged that statement by noting that banks’ counterparties — the firms on the other sides of their trades and loans — helped alert regulators.

This morning, Goldman Sachs, among the most lucrative of the Wall Street firms, released an eight-page shareholder note, a preface to its 2009 annual report, which will be out later this month.

Underscoring the extent to which taxpayers saved bankers during the crash, the words “Washington” and “government” and “conservative” crop up constantly in the way the word “profits” used to. The letter opens by praising the government’s extraordinary measures during the financial crisis.

“[W]e have embraced new realities pertaining to regulation and ensuring that our financial strength remains in line with our commitment to the long-term stability of our franchise and the overall markets,” it says. “We became a financial holding company, now regulated primarily by the Federal Reserve and subject to new capital and leverage tests.”

But it’s no mash note to Washington. Goldman spends nearly a third of the letter on defense – clarifying its positions on its relationship with bailed-out insurer AIG, its employees’ compensation and the notion that it stoked the market for mortgage-backed securities while betting against the housing market.

It says that Goldman Sachs never “bet against [its] clients” by shorting “residential mortgage-related products in 2007.” The note argues, “[the shorts] served to offset our long positions. Our goal was, and is, to be in a position to make markets for our clients while managing our risk within prescribed limits.”

“The firm did not generate enormous net revenues or profits by betting against residential mortgage-related products, as some have speculated,” chief executive officer Lloyd Blankfein and president Gary Cohn argue. “Rather, our relatively early risk reduction resulted in our losing less money than we otherwise would have when the residential housing.”

Yves Smith writes a good debunking of some of Goldman’s claims. My question: Why so defensive now? The note — addressed to shareholders — defends the firm’s actions from years ago against criticism it has incurred for more than 18 months.