Author: Megan Carpentier

When pharmaceutical companies like Pfizer pay billion-dollar fines for illegal off-label marketing (promoting drugs for unapproved uses), prosecutors and the FDA often think that they’ve been punished sufficiently to deter future off-label marketing campaigns. But a story by David Evans in The Washington Post shows that by the time the government catches up with offenders, the fines it can impose are often far outweighed by the profits generated.

The $2.3 billion in fines and penalties Pfizer paid for marketing Bextra and three other drugs cited in the Sept. 2 plea agreement for off-label uses amount to just 14 percent of its $16.8 billion in revenue from selling those medicines from 2001 to 2008. The total of $2.75 billion Pfizer has paid in off-label penalties since 2004 is a little more than 1 percent of the company’s revenue of $245 billion from 2004 to 2008.

For pharmaceutical companies, the worst consequences of being caught are more than outweighed by the profits that they can generate through illegal activity, and in the absence of criminal penalties for individuals, one almost has to question what the incentives are for companies not to engage in illegal behavior.

And if it weren’t bad enough that pharmaceutical company fines often pale in comparison to profits, doctors face no penalties — or even regulatory oversight — for their off-label prescription use. But how do doctors come to determine what potential off-label benefits some drugs have? From their friendly pharmaceutical reps or drug companies, of course.

It wasn’t until 2004 that prosecutors began to take pharmaceutical companies’ illegal marketing of off-label uses for their drugs seriously — and, by that time, companies were often already awash in profits and unwilling to stop. Evans describes one instance of this:

In the January 2004 settlement negotiations with Loucks, Sullivan and two other prosecutors, Pfizer’s lawyers assured the U.S. Attorney’s Office that the company wouldn’t market drugs off-label.

“They asserted that the company understood the rules and had taken steps to assure corporate compliance with the law,” Loucks says. “We remember those promises.”

What Pfizer’s lawyers didn’t tell the prosecutors was that Pfizer was at that moment running an off-label marketing promotion using more than 100 salespeople who were pitching Bextra, according to a Pfizer sales manager who pleaded guilty to misbranding a drug in March 2009.

Bextra was eventually removed from the market for safety reasons.

Veteran prosecutors and judges agree that an unwillingness to pursue criminal sanctions and the relatively low dollar penalties that companies face if they are caught and prosecutors lead companies to believe that it is in their best interest to continue engaging in illegal practices in order to maximize profits. Evans notes that approximately $100 million for health care fraud enforcement is part of the health care reform bill that just passed — and if it doesn’t all go toward investigating Medicaid and Medicare fraud, it may assist in prosecuting companies in a more timely fashion, reducing their incentives to market drugs for off-label use.

Now that there are only a few banks left that haven’t repaid their TARP funds — and many did so to get out from under Pay Czar Ken Feinberg’s pay-restricting thumb — and bonus season has passed, Feinberg has just a little time on his hands. The Wall Street Journal reports that he’s going to use it to look back at bonuses paid to bailed-out bank executives before February 2009, when executive compensation limits went into effect and Congress required that the person in his position examine those bonuses.

Feinberg announced that 419 firms will be getting letters related to bonus pay for the top 25 executives at each firm. Feinberg, however, has no authority to demand those executives pay their bonuses back; he can only request that the banks work with him “renegotiate” their previous bonus payments. Although banks need not comply with his request, even some banks that returned to profitability in 2009 reformed their bonus structures or paid out less in response to public pressure. Thus, critics of executive compensation remain hopeful that Feinberg might be able to work out an arrangement with banks — particularly if they thought the bad publicity from refusing to comply would have a negative impact on their business. But with more than half of Republicans already under the impression that the banks had little to do with the recession and overall public anger slowly receding, it remains to be seen whether Feinberg’s mandatory investigation will actually result in any less money in executives’ retirement accounts.

A new ABC News poll asks what Americans have to say about the newest economic villains — banks — as they return to profitability well ahead of America’s burgeoning unemployed population. There are few surprises there: The vast majority of people don’t believe the banks have done enough to “make up” for their role in the economic meltdown — and Americans think the best way for them to help is to lower credit card interest rates, simplify their paperwork requirements and, to a lesser extent, hold off on foreclosures until the economy improves. Notably, only the last bit has been part of a government program to aid Americans during the crisis, and only to a very limited (and often paperwork-choked) degree.

More interesting than the fact that nearly 80 percent of Americans polled are angry about bonuses at banks that got bailed out is the political breakdown, at least insofar as the economic crisis is the stated reason to undertake the financial reforms that Republicans are opposing. Participants were asked whether it was “fair” that the bailed-out companies have started making money again even as non-bailed-out Americans are struggling. About 47 percent called it unfair and 48 percent called it fair — but Republicans and Democrats hardly agreed.

Republicans call the outcome fair by 55-39 percent; Democrats call it unfair by a narrower 54-44 percent. (Independents split down the middle.)

The differences appear throughout the questions asked in the survey: Republicans, as a rule, don’t assign as much blame or have as much anger at the banks as Democrats and independent voters, despite all the evidence that the meltdown was triggered by shady derivative trading, off-balance sheet transactions and, in the case of the housing collapse, outright fraud.

There also are partisan gaps in criticism of the banks more broadly – nearly two-thirds of Democrats and independents alike assign them significant blame for the recession, but just under half of Republicans agree. And there’s a similar gap in views of whether banks and related institutions have a responsibility to help Americans who are still struggling with the economy. Seventy-nine percent of Democrats say they do, and again nearly as many independents, 72 percent, agree. It’s also a majority among Republicans, but a much smaller one, 54 percent.

There is no indication from the poll on whom more than half of Republicans blame the recession, but any one of a number of pictures of Tea Party protesters from last weekend indicates there’s a chance that at least some of them just believe it’s President Obama personally.

The Lehman Brothers bankruptcy examiner’s report is the gift that just keeps on giving to critics of the administration, the bank bailout and the current efforts at financial market reform. Today, Ryan Grim of the Huffington Post reports that Tim Geithner, already under fire for encouraging Goldman Sachs not to disclose how much money it got from the government’s bailout of AIG, also tried to help out Lehman’s bottom line in ways that weren’t kosher. Writes Grim:

As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn’t sell in the market, according to a report from court-appointed examiner Anton R. Valukas.The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a “warehouse” for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.

In other words, while Geithner was head of the New York Fed, despite rules that the Fed can’t buy financial instruments that companies can’t sell in the marketplace, it was doing just that in an effort to keep Lehman Brothers solvent. Those bonds, which likely remain less than investment-grade, might well still be on the books.

Grim additionally notes that Geithner, in his position as Treasury Secretary, officially opposes a public audit of the Fed which would, not coincidentally, make public any and all worthless assets the Fed current owns or controls and what it does with its money.

Although the Fed told The New York Times earlier this month that a third party verified the market value of the bonds Lehman used as collateral for loans from the Fed, they did not specify who the third party was. Of course, Lehman’s auditors at Ernst & Young are already implicated in helping Lehman cook their books and fake the value of their derivatives, so the Fed may well have allowed a third party to determine the valuation but, as with the Goldman-AIG valuation debacle, not done a particularly good job at making sure that third party was at all independent.

According to Grim, Lehman’s own internal documents reflected the fact that, third-party valuations or not, the securities they signed over as collateral to the Fed were far from investment-grade.

In other words, the baskets of assets were created for the specific purpose of selling to the Fed for far more than they were worth.Lehman knew it too: “No intention to market” was scrawled on one of the internal presentations about the assets. A separate bank, Citigroup, later characterized the assets as “bottom of the barrel” and “junk” when Lehman tried to push them their way, according to the report.

So at least one third party thought the investments were junk.

Part of the proposed financial reform regulation would require investors to trade derivatives of the kind Lehman sold to the Fed on the open market in order to allow all investors, including the Fed, to have more information and assign them a real market-based value. It is, of course, one of the many provisions that financial companies are fighting tooth and nail, to allow them to continue marketing financial products and services they know full well are junk.

Bloomberg’s long-standing Freedom of Information Act request for a look at who in the financial system took part in the Fed’s now-secret $2 trillion loan program has been granted by a second court on the basis that there exists no exemption to FOIA rules for the continued economic health of private companies. The Fed is expected to continue its efforts to keep this basic information out of the hands of the Americans who paid for the bailout and the investors who might pull their funds from companies that would have otherwise bailed, in order to protect the companies that were saved from supposed imminent failure.

However, for what one assumes are less than coincidental reasons, several banks who also received publicly disclosed TARP funds joined the Fed in its quixotic quest to keep quiet about who took the Fed’s money too. That group includes ABN Amro Bank, Bank of America Corp., The Bank of New York Mellon Corp., Citigroup Inc., Deutsche Bank, HSBC, JPMorgan Chase, US Bancorp and Wells Fargo. If it seems to the average layperson that these banks have already basically disclosed that they are among the beneficiaries of the Fed’s largess and haven’t suffered any ill effect, that might underscore Bloomberg’s reasoning that the Fed simply doesn’t want to be subject to any oversight rather than that there are major business concerns with the disclosure.

In particular, the appeals court ruled today that the Fed and the banks who mysteriously don’t want the Fed to disclose the banks that accepted their loans during the financial crisis failed to meet the standard set forth by the FOIA for keeping such information secret.

In its opinion today, the appeals court said that the exception applies only if the agency can satisfy a three-part test. The information must be a trade secret or commercial or financial in character; must be obtained from a person; and must be privileged or confidential, according to the opinion.The court said that the information sought by Bloomberg was not “obtained from” the borrowing banks. It rejected an alternative argument the individual Federal Reserve Banks are “persons,” for purposes of the law because they would not suffer the kind of harm required under the “privileged and confidential” requirement of the exemption.

In other words, the Fed argued that the individual Federal Reserve Banks which comprise the Fed are people, not banks, and thus covered by the law. Unlike the Supreme Court in Citizens United v. FEC, the appeals court rejected the idea that the banks are people or that they would be harmed by disclosing to whom they lent money.

For an administration that once said that it would pay more attention to Main Street than Wall Street, the failure of the its signature initiative for Main Streeters — the mortgage modification program — should be a wake-up call that it’s far past time to pay attention to the problems facing the everyday Americans whose votes are up for grabs in November. The administration’s low-dollar block grant initiative aimed at the worst-hit states and its meager incentive program to encourage banks to take short sells will hardly mitigate the ongoing disasters in its mortgage modification program — and there’s nothing but bad news today.

1. Sign up for a mod to save your financial future, and you’ll ruin your credit.
Many people whose finances have taken a hit but who continued to pay their mortgages have applied for mortgage modifications in order to stay afloat. Everyone who enrolls in the program is subject to a three-month trial period, and most people have yet to qualify for a permanent modification — and, if the statistics to date are any guide, never will. What they will get is a 100-point hit to their credit score, which the administration thinks is just dandy because it’s not as much as the 150-point loss they’d see if their bank foreclosed on them. Even worse, for those lucky few whose temporary modifications become permanent, they’ll be able to improve their scores; for those who don’t qualify, the credit score reduction will blemish their scores, even if they never missed a payment or don’t go into foreclosure.

2. The government isn’t even going to spend all the money it promised.
Today’s CBO report says that the mortgage modification isn’t even going to be able to spend the promised $50 billion helping homeowners: It will only end up costing $20 billion, or 40 percent. That’s $5 billion less than the government loaned the auto companies and less than 3 percent of what it spent on the Troubled Asset Relief Program. Meanwhile, the banks are all doing great, and the housing market continues to spiral down the drain.

3. The program isn’t staving off very many foreclosures anyway.
Between banks “losing” everyone’s paperwork and failing to turn temporary modifications into permanent ones, only 170,000 people got permanent modifications since the program started. Meanwhile, 2.8 millions homes went into foreclosure in 2009 — a new record — which means that for every 100 homeowners foreclosed upon, the mortgage modification program saved six.

4. Modifications aren’t saving consumers very much money.
Some people have begun to point out that homeowners who receive temporary, and sometimes permanent, modifications often slide into default anyway. One reason: No one told the banks they had to modify people’s mortgages by very much. Stories are surfacing in which people saw their mortgage bills decline by too little to make any difference. One woman went through the whole process to get a reduction of only $20 a month — and she’s one of the 170,000 supposed successes.

5. California homeowners will have to pay taxes on their losses.
California is one of the states hit hardest by the housing crisis — it had the fourth highest foreclosure rate in the nation in February. But unlike federal tax laws, which temporarily don’t require that homeowners pay capital gains taxes when they sell short or when their foreclosure sales don’t cover the outstanding debt, California has no such provisions in place — and Gov. Arnold Schwarzenegger is threatening to veto legislation that would provide tax relief to people who lost their homes. His reason? Business groups are complaining about tax fraud penalties in a separate part of the bill.

Anyone who has seen the seminal Schoolhouse Rock video “How a Bill Becomes a Law” likely thinks that, when a bill is signed into law, the government can begin enforcing it. Anyone who’s worked in Washington, including former Fed chairman and Obama economic adviser Paul Volcker, knows that after the law comes the rule-making process — and another bite at the regulatory apple for industry lobbyists.

This week’s ruling that the SEC must– against its objections — continue to enforce rules set forth by a 2003 legal settlement that separates market analysts from investment bankers looking to profit off market reports also contained another great nugget:  A portion of the 2003 settlement obligated the SEC to issue rules, and it just decided not to. The decision not to promulgate a single rule in five years was what led to the lawsuit and to the partial win for financial services companies.

According to the Wall Street Journal:

It illustrates that the agency didn’t put in place broader rules to cover some key parts of the enforcement settlement, much of which was open to review after five years. It was that review process that led to the ruling by Judge Pauley.

The SEC argues that the binding lawsuit wasn’t meant to force the agency to issue rules covering all banks engaging in behavior everyone agreed was a conflict of interest; instead, they think the rules were only meant to apply to companies that we caught behaving that way in 2003. Of course, by not applying the rules to the entire industry, the SEC — by its own admission — opened the door to allowing companies who did engage in illegal behavior to get out from under those rules dictated by the settlement.

SEC spokesman John Nester said, “The settlement did not contemplate that all of its provisions would be applied industrywide to parties that had not engaged in alleged wrongdoing. In fact, the 2003 settlement explicitly states that it was the expectation of all the regulators that, after five years, the settling firms could seek modification of those provisions that were not applied industrywide.”

In other words, the settlement was intended to force the SEC to issue rules to regulate the overly cozy relationships between investment bankers and market analysts who work for the same company. But all the parties agreed that if the SEC didn’t issue any rules, the companies caught engaging in the behavior would not have to abide by the terms of the settlement. The SEC refuses to write the rules, the companies head into court and all the restrictions on corporate behavior that led to the tech bubble and caused massive economic losses to individuals investors and the economy are now legal again.

As a reminder, Paul Volcker argued to the House Financial Services Committee this week that it should codify in law the so-called Volcker rule, which would prohibit depository banks from investing depositors’ money for the banks’ own profit (one of the contributing causes of the widespread damage done by mortgage-backed derivatives). It would also prohibit banks from owning or investing in hedge funds and private equity firms, rather than waiting for an agency to go through the rule making process. Volcker’s reasoning: regulatory agencies aren’t keen to make rules.

For regulators, “there’s a lot of pressure not to do it,” Volcker told reporters during a break in the hearing. That’s why it needs to be in the legislation, specifically directing regulators to take action, he said. In a mocking tone, Volcker said the banks would tell regulators, “‘Don’t touch us’…’What did we do wrong?’… You know, ‘Leave us alone.’”

From the looks of the SEC, this is exactly what has been happening all along.

Despite the fact that the recession has spurred massive gains in productivity, as employees scrambled to keep their jobs and their companies afloat, those employees shouldn’t expect raises or big bonus packages this year — unless, of course, they are bank executives. The newest Wage Trend Indicator from the Bureau of National Affairs shows that wages probably still have further to fall. According to Michael Panzner at Daily Finance:

[The] Wage Trend Indicator fell to 97.14 during the first quarter of 2010, down from 97.42 in the last quarter of 2009. That’s the eighth straight decline and a record low for the WTI, which was inaugurated in the second quarter of 1976 with an initial value of 100.

The WTI is designed to predict accelerations and decelerations in the rate of wage increases based on inflation predictions, industrial production and the self-reported difficulty that employers have in filling jobs, among other factors. The lowest-ever score indicates that, by all indications, not only does growth continue to decelerate, but, since the predictions are looking at what wages will be in the fourth quarter of 2010, most Americans who are employed on Election Day won’t have seen and shouldn’t expect a raise for the third straight year.

Yesterday, New York State comptroller Thomas DiNapoli announced that New York will end its fiscal year at the end of March with a $2 billion budget shortfall. Concurrently, Governor David Paterson announced that he would delay paying New Yorkers’ tax refunds until after the start of the new fiscal year, saving the state $500 million in the short term.

DiNapoli’s announcement underscored the fact that the budget is flawed because of actions taken by the government:

“This year’s budget was seriously flawed,” Mr. DiNapoli said in a statement. “It was based on overly optimistic revenue assumptions and temporary revenue sources that pushed the problem into the future.”

Apparently, New York Attorney General and presumptive Democratic gubernatorial candidate Andrew Cuomo didn’t get the message. Today, in what can only be termed an ill-timed announcement, Cuomo unveiled an investigation into state workers’ overtime, suggesting that state workers in the twilight of their careers were taking on additional overtime to inflate their pensions.

As justification for his investigation, Cuomo cited a water department worker who was working 60 hour weeks and thus, with time and a half, earned $30,000 on top of his $40,000 a year salary, as well as a county animal control officer who, while working 55 hour weeks, earned his $38,000 salary and another $19,000 in overtime.

But Cuomo neglected to note in his announcement that the state has been under a hiring freeze since July 30, 2008 (though the legislature, courts and state university system are exempted). With the kind of overtime being pulled in by the water and animal control employees, it seems clear that the hiring freeze is costing the state dearly — but Cuomo won’t be investigating that.

As The Wall Street Journal notes, Cuomo’s pension investigation didn’t start out as a witch hunt against state workers putting in overtime in the midst of a two-year hiring freeze.

The new line of inquiry for Mr. Cuomo marks a shift in focus. His ongoing pay to play investigation has looked at potential abuses in the management of pensioners’ funds.

Going after the pensions of hard-working state employees in the midst of a recession surely isn’t better for Cuomo’s political aspirations than tracking down fat cat banker-types siphoning off pension funds with fees and bad investments. But with few other state Democrats in the running for their party’ nomination for governor, maybe it doesn’t matter.

Although the general election may have just gotten a little more interesting…

In testimony before the House Financial Services Committee yesterday, former Fed chairman and Obama economic adviser Paul Volcker said that Congress needed to pass legislation that sets forth rules for banks, rather than authorizing regulatory authorities to eventual develop rules, because “there’s a lot of pressure [for regulators] not to do it.” The SEC had already decided to prove Volcker’s point, by joining 12 banks it was supposed to regulate in court to ask not to have to regulate them anymore.

The Securities and Exchange Commission joined 12 Wall Street firms in seeking to scrap a key portion of a landmark 2003 deal that put strict curbs on stock analysts…

Those curbs were put into effect after the tech boom went bust and the public discovered that stock market analysts employed by the investment banks (including Goldman Sachs, Morgan Stanley and Merrill Lynch) were issuing overly optimistic analysis at the behest of investment bankers working to get business from the subjects of the analysis. The rules were developed as part of a $1.4 billion settlement.

The 2003 pact included a complete separation of research and banking staffs, budgets and chains of command—and a physical separation of the two operations. Analysts were prohibited under the settlement from even speaking to investment bankers unless someone from the firm’s compliance department was present. The firewalls were aimed at prohibiting improper communications.The settlement allows the firms and SEC to seek a judge’s approval to change the agreement under certain circumstances.

Amusingly, the lawyer for the companies who didn’t want to have to abide by the rules that kept them from losing even more money in stockholder lawsuits and the SEC claimed that it was no longer important to separate stock analysis from investment banking sales strategies because the banker-funded Financial Industry Regulatory Authority was watching over them. The FINRA is the same agency exposed for such lax regulatory and oversight functions that it allowed the Madoff Ponzi scheme to go undetected and lost billions on its own investments. Its immediate past chair is SEC Chair Mary Schapiro — the architect of the botched Bank of America settlement that was laughed out of court.

The judge in this case also rejected Schapiro’s arguments.

“The parties’ proposed modification would deconstruct the firewall between research analysts and investment bankers erected by the parties when they settled these actions,” Judge Pauley wrote in his ruling. Approving the request by the SEC and securities firms “would be inconsistent with” the settlement “and contrary to the public interest.”

When a judge needs to remind a regulatory agency that it’s there to serve the public’s interests, and not solely the interests of the parties it regulates, Volcker is right: Regulators obviously need to be forced to regulate, or else they’ll spend their time cuddling up to the companies from which they’re supposed to be protecting consumers.

It is a simple (and poll-tested) fact: Most people like the government services they themselves consume, and they’re less than keen on taxes. When governments stop mending potholes, or the police or fire department takes 20 minutes to answer a call, elected officials start to get voted out of office; when taxes go up — and particularly when they go up to pay for services the taxees aren’t consuming — people protest.

George W. Bush found a way to split the difference: He lowered taxes while spending more on services (the Medicare prescription drug benefit, the transportation bill, agricultural subsidy increases) than ever before. David Leonhardt of The New York Times reports that taxes as a percentage of GDP fell from 21 to 18 percent of GDP between 2001 and 2008 and to 15.1 percent in 2009 — partly because of two recessions and partly because of Bush’s tax cuts — while spending increased dramatically.

But only 10 percent of $2 trillion swing into deficit is due to Obama policies; the rest, about 53 percent of the new deficit, is attributed to Bush’s tax cuts and spending increases (including the extensions. Nonetheless, by 2020, spending will equal 26 percent of GDP because of Social Security — that Bush promised to but never did reform — and Medicare — to which he added benefits — while taxes will bring in only 19 percent of GDP.

Fiscally conservative Republicans often pursue economically detrimental tax cuts under the theory that they can “starve the beast” of government spending; yet, while in office, Republicans often give into pressure to continue popular government programs while still cutting taxes. Does anyone really imagine that, were the Republicans in charge of the Senate, Paul Ryan’s push to eliminate Medicare (that is, health insurance for the elderly) for everyone born after 1955 would actually be on the table?

Obama’s deficit reduction commission is expected to release some politically palatable ways to reduce the deficit through cuts to spending programs and increases in taxes, but what is politically palatable to most people? Leonhardt suggests that Social Security become means tested, meaning that some wealthy people would pay into the system but get little or nothing in return, and that its annual cost-of-living adjustment be more of a realistic (i.e., lower) calculation of the cost of living. Neither of those ideas will get particularly far with the nation’s elderly. He also suggests eliminating some corporate and agricultural subsidies, reversing 25 years of legislative movement in the other direction. And he suggests adding a consumption (also known as a VAT) tax or reducing some major tax loopholes, like the mortgage interest deduction that subsidizes home ownership. That these are the ideas that are considered remotely politically palatable shows how far even Republicans have come from the days that they believed starving the beast would win them elections. Nowadays, most Republicans politicians are in favor of using borrowed funds to feed the beast fois gras.

One can hardly wander around the White House or the Treasury Department without bumping into someone who worked for Goldman Sachs. A short list:

• The director of the National Economic Council, Larry Summers, paid lucrative visits to Goldman
• Treasury Secretary Tim Geithner’s chief of staff Mark Patterson was a Goldman lobbyist
• Geithner’s mentor Robert Rubin was a Goldman guy (and now serves at Citigroup)
• Commodities Futures Trading Commission chair Gary Gensler was co-head of finance at Goldman
• The National Economic Council’s deputy director Dianna Farrell did time at Goldman
• Federal Reserve Bank of New York Chairman William Dudley was Goldman’s chief economist for a decade

But one of the most prominent Goldman alumni in Europe today is Mario Draghi, currently the governor of Italy’s Central Bank — and perhaps a key player in Goldman’s backroom deals to hide Greece’s debt.

Draghi is poised to become the president of the European Central Bank, the entity in charge of the Eurozone’s common monetary policy. Despite the fact that he has denied any involvement in the 2000 and 2001 currency trades that hid enough of Greece’s debt to allow it to join the Eurozone, economist Simon Johnson reports that Draghi was, in fact, at Goldman and working on Greek issues in 2002, when Goldman helped sell Greek bonds without informing customers that Greece was hiding its debts.

Will these revelations scuttle Draghi’s chances of ascending to the chairmanship of Europe’s Central Bank? Goldman, and its derivatives, are increasingly unpopular in Europe. But Draghi should take heart: European voters don’t get to decide who heads the Central Bank — and he’ll have plenty of company atop the international banking scene. The head of Canada’s central bank, Mark Carney, is a Goldman alum too.

The extraordinarily comprehensive bankruptcy examiner’s report on Lehman Brothers is the gift that keeps on giving to financial reform advocates, above and beyond even the revelations that Lehman was cooking its books and no one noticed for years. According to Yves Smith at Naked Capitalism, the report is a damning portrait of how the patchwork regulatory oversight, much of which probably won’t get resolved by Sen. Chris Dodd’s (D-Conn.) Senate bill, contributed to the Lehman collapse.

1. The SEC had no actual authority to directly police Lehman because of Gramm‐Leach‐Bliley.
If that sounds crazy, it should. In fact, Gramm-Leach-Bliley created a situation in which no agency was explicitly given the power to regulate large investment bank holding companies, so no one did. The SEC had “voluntary” authority, which means it could suggest to Lehman that it ought to do things, but it had no authority to require Lehman to do anything or impose penalties.

2. The SEC’s only way into regulating Lehman was because a Lehman collapse might hurt SEC-regulated enterprises.
In fact, the only authority the SEC had over Lehman was to force it to remain a viable enterprise (something at which the SEC obviously failed) in order to keep SEC-regulated financial firms, like banks and broker-dealers. According to Smith:

While the SEC can supervise the holding company and unregulated entities, its scope of action is limited to preserving the health of regulated entities only.

That means that Lehman could only be indirectly regulated: It couldn’t cause harm to entities that the SEC could regulate — but how could the SEC determine if Lehman was in a position to harm other players in the financial system if the SEC couldn’t provide any direct oversight of Lehman, let alone enforce any actions it took?

3. The SEC weakened its requirements to get companies to submit to its voluntary authority.
Since the SEC had no direct authority, it had to induce investment banks like Lehman to cooperate with regulation and oversight — never an enviable or smart position for a regulatory agency to be in. The way that the SEC accomplished this in the case of Lehman was to lower its capital requirements — in effect, it allowed Lehman to bet more heavily on the market than other banks in order to be allowed a peek at the books. Smith says:

In keeping, to induce the US LIBHCs to participate in an toothless regulatory scheme, the SEC weakened net capital requirements, an action that many experts see as having played a direct role in the crisis (as it is allowed investment banks to attain higher levels of leverage).

So, what little direct authority the SEC might have had — over how much money Lehman had to have around in case the market went south — it conceded in order to look at Lehman’s books to try to indirectly regulate Lehman’s potential negative effects on the market.

4. Congress specifically prevented the SEC from providing further oversight.
As if the SEC’s hands weren’t tied enough when it came to overseeing and regulating investment banks like Lehman, Congress — during the tenure of Clinton SEC chair Arthur Levitt (1993-2001) — repeatedly scaled back the SEC’s enforcement ability through statutory actions and budget threats. According to Smith:

Congress has repeatedly limited SEC enforcement capabilities, starting with Arthur Levitt’s tenure as SEC chief. The SEC is the only major financial regulator which does not keep the fees it collects, but instead turns them over to the government and in turn gets an allowance, um, budget, that is considerably lower. But more important, when Levitt wanted to step up enforcement on the retail front (much less controversial and resource intensive than on the institutional investor side) he was not merely blocked by Congress, but actively threatened with budget cuts.

It appears that the financial sector’s lobby was nearly as influential then as it is now.

5. The Fed and the SEC failed to share information in their ongoing turf war.
One of the main criticisms of the current financial oversight system is that regulatory functions are split between too many agencies to be effective. In the case of Lehman’s collapse, both the Fed and the SEC were involved, but neither was talking to the other and, like a kid working between two fighting parents, Lehman made the most of that. Lehman required the cooperation of commercial banks to clear their transactions and stay in business but the commercial banks — more concerned than the government that Lehman would fail — required Lehman to put up more than the usual amount of collateral to continue doing business with them. In the mean time, the SEC was pressuring Lehman — though not requiring, because it had no statutory authority to do that — to keep more capital free to cover losses. So Lehman didn’t tell the SEC about the collateral requirements and left the money on its balance sheets; but it told the Fed, which didn’t know about the SEC’s liquidity demands. Smith says:

Oh, and by the way, the Fed was aware of at least some of these collateral tie-ups (p. 1514), yet didn’t inform the SEC even though the two bodies had a memorandum of understanding in place (the report makes clear both sides were not sharing all information with each other).

This exact problem is the one consolidating authority is expected to ameliorate, and the consolidation of authority is what financial services companies would like to stop.

Of course, it goes without saying that that the board of Lehman assumed that they, like other banks, would be deemed “too big to fail” and thus be bailed out — in other words, they acted with moral hazard, assuming that there was no real risk of failure because the government was so involved in the rescue process. Whoops.

Today, Treasury Secretary Tim Geithner called the unemployment rate in the United States “unacceptable by any metric.” Of course, he then warned that it would likely go up before it goes down, so it’s unacceptable, but it will continue to occur. But the real question for many unemployed Americans — or Americans entering the workforce — is when unemployment might be back down to pre-recession levels. Geithner didn’t answer that, but we can do the math.

To date, 8.4 million jobs have been lost due to the recession. About 15 million people are unemployed; an additional 8.8 million people are employed part-time because they can’t find full-time work; and 2.5 million are considered “marginally attached” to the labor market but not officially unemployed because they’ve looked for work in the last year but not the last four months, indicating that they wanted to work but have given up trying to find any. The government considers the labor market to include 153.5 million people — counting those who are part-time employed but not those who are marginally attached — so a more accurate reflection of the overall un- and underemployment rate is about 16.8 percent.

The average U.S. unemployment rate before the economic crisis (not including the last recession) was about 4.5 percent (about 7 million people) — though, if you add in those who were involuntarily employed part time (4.2 million) and those marginally attached (1.5 million), the overall underemployment rate was about 8.2 percent. To get back to this number of employed people, you’d need to get 13.7 million Americans back to work in full-time jobs.

Geithner said today that he expects the economy to create an average of 100,000 jobs a month this year, 200,000 a month next year and 250,000 a month in 2012. But, as we know, about 100,000 new people enter the workforce each month, meaning that job creation this year will only match the number of new people needing jobs. Geithner expects the economy to create a 100,000-jobs-a-month surplus in 2011, adding 1.2 million jobs to the economy, and a 150,000 job a month surplus in 2012, or 1.8 million jobs. That means the economy, by the 2012 elections, will have added back three million jobs to the economy beyond what is needed to account for new market entrants — despite the loss of 8.4 million jobs to date and the need to get 13.7 million Americans back to work.

Even if one assumes that 100,000 new job seekers a month will be offset by 100,000 retirees a month — not an easy thing for people to afford to do with the stock market’s effect on retirement accounts and Social Security not offering a cost of living adjustment this year — the best-case scenario is that the economy adds 6.6 million new jobs by 2012, which is two million shy of the number of jobs that disappeared during the recession and less than half the number of Americans that need to get back to work full-time to bring unemployment down to pre-crash levels.

In other words, if “it’s the economy, stupid,” 2012 is going to be a bad year for Obama to face re-election.

Over and over again, the Greek government has stated that the currency trades that Goldman Sachs arranged to allow the Greek government to hide a portion of its debt were perfectly legal at the time, and that appears to be the case. But economist Simon Johnson has uncovered some information about to whom Goldman sold Greek securities that might, indeed, make Goldman criminally liable in the United States.

In 2002, Goldman Sachs was listed as one of the managers of 3.5 billion of bonds issued by the Greek government. Between 2000 and 2001, according to testimony in the UK by a Goldman executive, Goldman Sachs helped the Greek government arrange a number of off-balance sheet transactions that made Greece’s debt appear lower than it really was. While Goldman terms the amount “small but significant,” Johnson notes that the amount of debt Goldman helped Greece hide from the EU, investors and Greek taxpayers was 1.6 percent of Greece’s GDP.

The problem for Goldman is that it knew that Greece’s overall debt was significantly higher than it appeared, which is of material importance to the investors to whom Goldman was selling the Greek bonds. Johnson explains.

The April 2002 offering circular did not disclose the debt swaps. There may have been other documentation available to investors that did reveal true Greek debt numbers – and perhaps these were discussed in the relevant road shows. We are not here taking a position on what was and was not disclosed; this is a matter for a proper official investigation. We also do not know what the other involved banks knew and when they knew it.

If it were the case that Greece’s true debt levels were known and not disclosed by the investment bankers involved, any reasonable investor – or the sovereign debt experts with whom we have discussed this matter – would regard this as withholding adverse material information.

Withholding adverse material information is not a crime, apparently, in Greece, and the bonds were not registered in the United States, which would normally mean Goldman was free and clear.

But there’s one exception to that rule: Bonds sold to Qualified Institutional Buyers do require material adverse disclosures, regardless of where they were issued or whether they are registered in the United States — and analysts believe that at least 10 percent of the 2002 bonds were sold to such buyers, possibly by Goldman.

However, if any of these bonds were sold in the US to “qualified institutional buyers” (QIBs) under rule 144A (an exemption to registration requirements under the 1933 Securities Act), there is a potential legal issue (here I’m just rewording what Senator Kaufman said). Rule 10b-5, under the 1934 Securities Exchange Act, definitely applies to securities sold under 144A – i.e., selling securities to anyone in the United States while deliberately withholding material adverse information is not allowed.

Johnson allows that investors are unlikely to sue Goldman unless the bond defaults — and avoiding that is the purpose of the European Union bailing out Greece — and the statute of limitations might have expired for a criminal investigation.

On the other hand, it might not have, and no one will find out without an investigation. Perhaps if New York Attorney General Andrew Cuomo isn’t too busy investigating the governor he’d like to replace, he will get around to making a name for himself by taking on the universally despised Goldman.

A new report from the Treasury Department — the last of its kind — shows that despite all the regulation-avoiding PR campaigns, new loans at the nine largest banks that still owe bailout funds to the government dropped by 35 percent in January.

The nine banks are: Citigroup Inc., Comerica Inc., Fifth Third Bancorp, Hartford Financial Services Group Inc., KeyCorp, Marshall & Ilsley Corp., PNC Financial Services Group Inc., Regions Financial Corp. and Suntrust Banks Inc.Increasing lending to consumers and small businesses was one of Congress’ stated goals when it passed the $700 billion financial bailout in October 2008.

That, however, has not been the result of the bailout. Despite the need, particularly among small businesses, for credit to keep businesses afloat or open new ones, opening the government coffers has yet to result in banks opening up their vaults to small business customers. In fact, six weeks after Obama called the 12 largest banks to the carpet about their small business practices, loan originations are down 35 percent. It’s like the banks don’t even care who is watching their behavior, as they already have what they want (the bailout) and didn’t have to do anything for it.

As part of its report, the Treasury Department announced it would no longer create a summary document to explain to people who don’t want to dig through spreadsheets what’s going on in the lending market. They called the reports “no longer meaningful.” What they may have meant was they don’t feel the need to make it easy for reporters to understand how little the banks are doing in terms of lending.

A new ABC News poll shows that 45 percent of Americans consider themselves middle class, a significant difference from other polls that find when asked unprompted, 80 percent of Americans self-identify as middle class. The difference: ABC asked people to identify as middle, working or upper-middle class.

What’s the difference between “working class” and “low-income Americans”? It can be pretty significant. “Working class” often conjures up images of those who engage in physical labor for an hourly wage as opposed to office workers and service industry staffers; and yet, due to unionization and collective bargaining, the former often earn far more than the latter. For instance, a brickmason would probably proudly identify as “working class” instead of “middle class” if given the option, but the mean salary for a brickmason is $47,000 — certainly in the middle-income quintile (and pretty close to the median income). A worker assembling aircraft makes an average of $43,000 a year — also in the middle quintile.

By comparison, a teacher’s assistant — a more “middle-class” job, if the distinction between working and middle class is physical labor and physical setting — makes an average salary of $23,000. A laboratory technician makes an average of $37,000 a year. An optician makes a mean salary of $35,000 a year. A bookkeeping, accounting or auditing clerk will pull in an average of $33,800 a year. All of those jobs require some amount of postsecondary education, don’t involve physical labor and place the people in them in the “lower-middle-class” income quintile. Very few of them would, however, likely identify as “working class” when “middle class” was offered as an option.

The problem with “working class” is that it denotes a class of labor and a particular social grouping, rather than a class of income, while middle and upper middle class — though obviously imprecise in the vernacular — connote a comparative income. The use of “working class” as a category, while obviously designed to overcome the questionable utility of a system by which 80 percent of Americans self-identify as middle class, creates a whole new host of problems for surveys that attempt to determine how income affects people’s perceptions — so much so that, in the middle of its own analysis, ABC News switches to using income-based definitions of the middle/working-class divide to tease out how concerned people are about the economy.

Interestingly, after people self-identify as working class, ABC’s survey stops caring about their opinions. Even though the survey designers are obviously aware that the middle/working-class divide is not about income — since they stop using it halfway through the survey — they still disregard the opinions of those who identify as working class. No wonder those who identify as working class think there’s some conspiracy among the “elites.”

Although Sen. Chris Dodd (D-Conn.) is getting grief for all that he doesn’t plan on doing with his financial regulation reform bill, one thing that is in the bill is some regulation of over-the-counter derivatives that forces them onto exchanges. While Republicans like Sen. Richard Shelby (R-Ala.) are already arguing that the derivatives regulations in the bill go too far, last week’s report by the bankruptcy examiner on the Lehman Brothers failure shows exactly why derivatives trades should be done on an open exchange for the health of the companies using them.

Frank Partnoy at Naked Capitalism dug really, really far into the massive report, but, unlike most journalists who focused on the fictional balance sheets at Lehman, he looked at the section on valuation and found some conclusions he deems “utterly terrifying reading.” He discovered that Lehman’s own people had no way of determining the market value of their derivatives — the very thing putting derivatives on an exchange would do. Their lack of knowledge of the value — and therefore risk — of their securities was one major reason they weren’t able to balance their risk.

The report cites extensive evidence of valuation problems. Check out page 577, where the report concludes that Lehman’s high credit default swap valuations were reasonable because Citigroup’s marks were ONLY 8% lower than Lehman’s. 8%? And since when are Citigroup’s valuations the objective benchmark?Or page 547, where the report describes how Lehman’s so-called “Product Control Group” acted like Keystone Kops: the group used third-party prices for only 10% of Lehman’s CDO positions, and deferred to the traders’ models, saying “We’re not quants.”

Partnoy notes that the people in charge of leveraging the risk often didn’t understand, or accepted at face value, the pricing developed by the people who took on the risk in the first place. Sometimes, by the examiner’s pricing models, they were 30 times off the real market value. Again, were derivatives trading on an exchange, derivatives valuations would be as easy to asses as stock or futures prices.

Although the examiner said that Lehman’s derivatives valuation problems weren’t necessarily that bad, Partnoy finds fault with that conclusion.

Ultimately, the examiner concluded that these problems related to only a small portion of Lehman’s overall portfolio. But that conclusion was due in part to the fact that the examiner did not have the time or resources to examine many of Lehman’s positions in detail (Lehman had 900,000 derivative positions in 2008, and the examiner did not even try to value Lehman’s numerous corporate debt and equity holdings).

In other words, having found some problems, the examiner simply highlighted them and moved on.

Partnoy draws one major conclusion from the valuations report:

It shows that, even eighteen months after Lehman’s collapse, no one – not the bankruptcy examiner, not Lehman’s internal valuation experts, not Ernst and Young, and certainly not the regulators – could figure out what many of Lehman’s assets and liabilities were worth.

Although Shelby is unlikely to change his mind, as are the lobbyists who have his ear, Partnoy’s analysis of the Lehman report is a strong argument in favor of making derivatives trading far more public than Republicans want it to be.

China, where, as a matter of policy, the yuan is deliberately undervalued in order to keep Chinese exports cheap, is now attacking the U.S. for its weak currency. Is there a translation for “the pot calling the kettle black?” In better news, at least the Chinese finally acknowledged that currency manipulation is a form of trade protectionism.

Premier Wen Jiabao aimed sharp words at Washington on Sunday, ceding little ground on China’s currency policy and suggesting that U.S. efforts to boost its exports by weakening the dollar amounted to “a kind of trade protectionism.”

Perhaps now Treasury Secretary Tim Geithner can certify that they are manipulating their currency and Commerce Secretary Gary Locke will impose economy-wide sanctions? Don’t hold your breath. The Treasury Department declined to comment on Wen’s statement, and the State Department referred all questions on the yuan to the Treasury Department.

Even more shockingly, Wen denied that the Chinese currency was undervalued at all.

“First of all, I do not think the renminbi is undervalued,” Mr. Wen said, using the Chinese currency’s official name. “We are opposed to countries pointing fingers at each other or taking strong measures to force other countries to appreciate their currencies. To do this is not beneficial to reform of the renminbi exchange-rate regime.”

Wen’s comments come despite the fact that the yuan is pegged to the dollar but is only allowed to float within a defined band below the dollar, in order to encourage exports. The Wall Street Journal notes that earlier this month, Chinese officials even acknowledged that.

He didn’t repeat the language used this month by central bank Gov. Zhou Xiaochuan, who had said the yuan’s de facto peg to the U.S. dollar is a “special” measure that will eventually end. But Mr. Wen repeated previous statements that reforms to the currency system will continue. While he didn’t rule out the possibility that the yuan could rise against the dollar, he argued that it doesn’t need to.

Need is, of course, a matter of perspectives. U.S. exporters have been arguing for years that the yuan needs to be revalued in order to establish a fair trade system.

Wen, however, continued with his somewhat ironic pronouncements.

“I can understand that some countries want to increase their share of exports,” Mr. Wen said, in an apparent reference to the Obama administration’s goal. “What I don’t understand is the practice of depreciating one’s own currency and attempting to press other countries to appreciate their own currencies solely for the purpose of increasing one’s own exports,” he added. “This kind of practice I think is a kind of trade protectionism.”

In other words, China has an explicit policy by which it keeps the yuan weak in order to increase its exports and has constantly resisted pressure from the U.S. and EU to float its currency, which everyone (including China) believes would reduce its exports. Yet when the dollar is weak due to an economic crisis and low interest rates designed to stave off collapse — as opposed to massive monetary interventions, which would be reflected in higher rates of inflation, which the U.S. doesn’t have — Chinese leaders accuse other countries of engaging in the same trade-distorting monetary practices that China uses in order to pressure them to allow their currency to appreciate.

One of the major components of the post-Enron accounting reforms, and laughable so, was a provision requiring that all CEOs sign off on their company’s financial statements. It was supposed to prevent CEOs from willfully looking the other way while subordinates cooked the company books (i.e., deny them plausible deniability) and inculcate in American corporate culture a sense of responsibility. It was laughable then, and, as yesterday’s report on the book-cooking that went on at Lehman Brothers proves, it’s laughable today.

The provision was based on the assumption that when CEOs admitted they didn’t know about accounting “errors” that caused collapses and massive disruptions, that they were telling the truth and that, if they had to be personally responsible, they might look into accounting irregularities and stop mischievous underlings from ruining companies. It’s surprising now to think that Congress was that gullible, or thought the American people were.

In the case of Lehman CEO Richard Fuld, he’s been found “grossly negligent” for certifying accounting statements he made no effort to look into, just as you might think. According to Michael de la Merced and Andrew Sorkin, Lehman shifted $50 billion off its books with fraudulent accounting tricks in the months before its collapse. They’d been engaging in the transaction since 2001, and there wasn’t a thing that the post-Enron regulations did to stop it.

Richard S. Fuld Jr., Lehman’s former chief executive, certified the misleading accounts, the report said.

“Unbeknownst to the investing public, rating agencies, government regulators, and Lehman’s board of directors, Lehman reverse engineered the firm’s net leverage ratio for public consumption,” Mr. Valukas wrote.

Mr. Fuld was “at least grossly negligent,” the report states, adding that Henry M. Paulson Jr., who was then the Treasury secretary, warned Mr. Fuld that Lehman might fail unless it stabilized its finances or found a buyer.

But there’s more: Mike Spector, Susanne Craig and Peter Lattman at The Wall Street Journal report that a senior executive flagged the transactions for management and the auditors as fraudulent — but was, of course, ignored.

In one instance from May 2008, a Lehman senior vice president alerted management to potential accounting irregularities, a warning the report says was ignored by Lehman auditors Ernst & Young and never raised with the firm’s board.

Of course, Fuld swore in 2009 that he knew nothing about it, but his employees say otherwise.

Lehman’s own global financial controller, Martin Kelly, told the examiner that “the only purpose or motive for the transactions was reduction in balance sheet” and “there was no substance to the transactions.” Mr. Kelly said he warned former Lehman finance chiefs Erin Callan and Ian Lowitt about the maneuver, saying the transactions posed “reputational risk” to Lehman if their use became publicly known.

In an interview with the examiner, senior Lehman Chief Operating Officer Bart McDade said he had detailed discussions with Mr. Fuld about the transactions and that Mr. Fuld knew about the accounting treatment.

Nonetheless, Fuld is hiding behind plausible deniability, like his predecessors did before and just as the new rules were supposed to stop.

In a statement, Mr. Fuld’s lawyer, Patricia Hynes, said, “Mr. Fuld did not know what those transactions were—he didn’t structure or negotiate them, nor was he aware of their accounting treatment.”

You can order a CEO to be more responsible for his company, but you’ll never get his lawyer to admit that he was when called for comment after he sends it into bankruptcy by countenancing accounting gimmicks to maintain the value of his stock options.