Thursday, March 26, 2009

U.S., Mexico to Intensify Fight Against Violent Drug Gangs

Nothing will work unless the supply of guns going into Mexico from the U.S. and the supply of drugs coming into the U.S. are reduced dramatically. Hillary is right. It is the U.S. craving of drugs that fuels the cartels.

Secretary of State Hillary Rodham Clinton said Thursday that Mexico and the United States had agreed to develop a "checklist" of tasks for both sides to intensify the fight against Mexican drug gangs engaged in a bloody turf war.

Speaking near the end of a two-day visit, Clinton said the list would include timelines committing the United States to speed up delivery of drug-fighting aid and getting Mexico to move faster on reforming its judicial and law enforcement institutions.

[...]More than 7,000 people have been killed since January 2008 in attacks by traffickers on their competitors and security forces.

Clinton called on Mexicans to support their government's fight against the gangs and urged students to use the Internet to send tips on illegal activity to authorities.

Geithner, Bernanke Congressional Testimony: Transcript (3-24-09)

The Treasury Secretary Geithner, and Fed Chairman, Bernanke, were grilled during Congressional testimony Tuesday. Also includes comments by CNN pundits and reporters. Read the transcript. Excerpt below:

GEITHNER: Thank you, Mr. Chairman.

As we've seen with AIG, the stress at large complex financial institutions can pose risks as dangerous as those that led the United States to establish a full framework of tools for dealing with banks.

We need to extend those protections and authorities to cover the risks posed by our more diverse and complicated financial system today. And we are proposing legislation the provide those tools and look forward to working with this committee and the Congress to pass such legislation as quickly as possible.

The proposed resolution authority would allow the government to provide financial assistance to make loans to an institution, to purchase its obligations or assets, to assume or guarantee its liabilities, and purchase an equity interest.

U.S. government as conservator or receiver would have additional powers to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution's contracts, and prevent certain financial contracts with the institution from being terminated on account of conservatorship or receivership.

This proposed legislation would fill a significant void in the current financial services regulatory restructure in respect to these large complex institutions, and implementation would be modeled on the resolution authority that the FDIC has under current law with respect to banks.

This is an extraordinary time for our country, and your government has been forced to take extraordinary measures. We will do what is necessary to stabilize our financial system and, with the help of the Congress, develop the tools we need to make our economy more resistant -- more resilient and our financial system more stable and more just.

We need to work together to create an environment where it's safe to save and invest and where all Americans can trust the rules governing their financial decisions.

Thank you, Mr. Chairman.

FRANK: Mr. Bernanke?


Chairman Frank, Ranking Member Bachus and other members of the committee, I appreciate having this opportunity to discuss the Federal Reserve's involvement with AIG.

In my testimony, I will describe why supporting AIG was a difficult but necessary step to protect our economy and stabilize our financial system. I will also discuss issues related to compensation. I know of two matters raised by this experience that merit congressional attention.

We at the Federal Reserve, working closely with the Treasury, made our decision to lend to AIG on September 16th of last year. It was an extraordinary time. Global financial markets were experiencing unprecedented strains and a worldwide loss of confidence.

Fannie Mae and Freddie Mac had been placed into conservatorship only two weeks earlier, and Lehman Brothers had filed for bankruptcy the day before. We were very concerned about a number of other major firms that were under intense stress.

AIG's financial condition had been deteriorating for some time, caused by actual and expected losses on subprime mortgage-backed securities and on credit default swaps that AIG's financial products unit, AIG-FP had written on mortgage-related securities.

As confidence in the firm declined and with efforts to find a private sector solution unsuccessful, AIG faced severe liquidity pressures that threatened to force it imminently into bankruptcy. The Federal Reserve and the Treasury agreed that AIG's failure under the conditions set for failing...

FRANK: Please, with all -- no, you understood. You had the sign up. The next one that holds a sign -- it is distracting to people. I understand that there are some people for whom rational discussion is not an appropriate means of expressing themselves.

You are entitled to do that in general, but not in a way that interrupts those of us who are trying to have rational discussions. So the next one that holds a sign will be ejected.

I do not know how you think you advance any cause to which you might be attached by this kind of silliness.

Mr. Bernanke, please proceed.

BERNANKE: Thank you, Mr. Chairman.

The Federal Reserve and the Treasury agreed that AIG's failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy.

Some of AIG's insurance subsidiaries, which are among the largest in the United States and in the world, would have likely been put rehabilitation by their regulators, leaving policy holders facing considerable uncertainty about the status of their claims.

State and local government entities that had lent more than $10 billion to AIG would have suffered losses. Workers whose 401(k) plans had been purchased -- had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear.

Global banks and investment banks would have suffered losses on loans and lines of credit to AIG and on derivatives with AIG-FP The banks' combined exposure exceeded $50 billion. Money market mutual funds and others that held AIG's roughly $20 billion of commercial paper would also have taken losses.

In addition, AIG's insurance subsidiaries had substantial derivatives exposure to AIG-FP that could have weakened them in the event of the parent company's failure.

Moreover, as the Lehman case clearly demonstrates, focusing on the direct effects of a default on AIG's counterparties understates the risk to the financial system as a whole. Once begun, a financial crisis can spread unpredictably.

For example, Lehman's default on its commercial paper caused a prominent money market mutual fund to break the buck and suspend withdrawals, which in turn ignited a general run on prime money market mutual funds with resulting severe stresses in the commercial paper market.

As I mentioned, AIG had about $20 billion in commercial paper outstanding, so its failure would have exacerbated the problems of the money market mutual funds.

Another worrisome possibility was that uncertainties about the safety of insurance products could have led to a run on the broader insurance industry by policy holders and creditors.

Moreover, it was well known in the market that many major financial institutions had large exposures to AIG. Its failure would likely have led financial market participants to pull back even more from commercial and investment banks and those institutions perceived as weaker would have faced escalating pressure.

Recall that these events took place before the passage of the Emergency Economic Stabilization Act which provided the funds that the Treasury used to help stem a global banking panic in October.

Consequently, it is unlikely that the failure of additional major firms could have been prevented in the wake of a failure of AIG. At best, the consequences of AIG's failure would have been a significant intensification of an already severe financial crisis and a further worsening of global economic conditions.

Conceivably, its failure could have resulted in a 1930-style global financial and economic meltdown with catastrophic implications for production, income and jobs.

The decision by the Federal Reserve on September 16th, 2008 with the full support of the Treasury to lend up to $85 billion to AIG should be viewed with this background in mind.

At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG.

Unfortunately, federal bankruptcy laws do not sufficiently protect the public's strong interest in ensuring the orderly resolution of non-depository financial institutions when a failure could pose substantial systemic risks, which is why I have called on the Congress to develop new emergency resolution procedures.

However, the Federal Reserve did have the authority to lend on a fully secured basis, consistent with our emergency lending authority provided by the Congress and our responsibility as the central bank to maintain financial stability.

We took as collateral for our loan AIG's pledge of a substantial portion of its assets, including its ownership in its domestic and foreign insurance subsidiaries.

This decision bought time for subsequent actions by the Congress, the Treasury, the FDIC and the Federal Reserve that have avoided further failures of systemically important institutions and have supported improvements in key credit markets.

Having lent AIG money to avert the risk of a global financial meltdown, we found ourselves in the uncomfortable situation of overseeing both the preservation of its value and its dismantling, a role quite different from our usual activities.

We have devoted considerable resources to this effort and have engaged outside advisers.

Using our rights as creditor, we have worked with AIG's new management team to begin the difficult process of winding down AIG-FP and to oversee the company's restructuring and divestiture strategy.

Progress is being made on both fronts. However, financial turmoil and a worsening economy since September have contributed to large losses at the company, and the Federal Reserve has found it necessary to restructure and extend our support. In addition, under its troubled asset relief program, the Treasury injected capital into AIG in both November and March. Throughout this difficult period, our goals have remained unchanged -- to protect our economy and preserve financial stability and to position AIG to repay the Federal Reserve and return the Treasury's investment as quickly as possible.

In our role as creditor, we have made clear to AIG's management, beginning last fall, our deep concern surrounding compensation issues at AIG. We believe it is in the taxpayers' interest for AIG to retain qualified staff, to maintain the value of the businesses that must be sold to repay the government's assistance.

Root Cause of Financial Collapse: Maddow Transcript

The Maddow show for 3-25 describes what could be the root cause of the current financial crisis:

MADDOW: For a country pretty much unanimously focused on a single subject, it`s amazing that stuff we are forgetting, they were just not factoring into the equation about why we ended up with this chicken fried, petrified, run-and-hide economy. Apparently, we are supposed to think that nobody could have seen this coming.


RICHARD CHENEY, FMR. U.S. VICE PRESIDENT: I think some of the best financial minds in the country didn`t see it coming.

GEORGE W. BUSH, FMR. U.S. PRESIDENT: No, we didn`t see it coming.

SEN. JOHN MCCAIN, (R) ARIZONA: But I don`t really know of hardly anybody who exceptionally had said, "Wait a minute, this thing is getting completely out of hand."


MADDOW: Who could have possibly seen this coming? Nobody could have seen it. It was totally unforeseeable force majeure.


Join me now on a trip through the time machine, (INAUDIBLE), going back to 1999. All right, 10 years ago. The year the Gramm-Leach-Bliley Act was born. This bill was introduced by three Republicans: Gramm, Leach, Bliley, duh. And it removed a Great Depression era regulation that had said that banks, and investments banks and insurance companies all had to be separate.

Gramm-Leach-Bliley cleared the way for big financial companies to be all of those things wrapped into one. Big companies with huge internal incentives to take risks, companies that were so complicated they couldn`t really be regulated, and companies that were so big that the government felt that they could not be allowed to fail.

At the time, in 1999, when this was being debated, Democratic Senator Byron Dorgan from North Dakota saw it coming, like he should have a psychic show in Vegas-level saw it coming. On May 6th, 1999, on the Senate floor, Mr. Dorgan said, quote, "This bill will, in my judgment, raise the likelihood of future massive taxpayer bailouts." $1 trillion is massive, right?

Well, to the "New York Times" on November 5th, 1999, Senator Dorgan said, quote "I think we will look back in 10 years` time and say, we should not have done this, but we did because we forgot the lesson of the past, and that which is true in the 1930s is also true in 2010."

So here it is 2009, and I`m thinking -- dude, at the time we worried about Y2K.

Joining us now Cassandra, I mean, Democratic senator from North Dakota, Byron Dorgan.

Senator Dorgan, thank you so much for joining us.

SEN. BYRON DORGAN, (D) NORTH DAKOTA: Hi, Rachel. How are you?

MADDOW: Great. Thank you.

You`ve been getting accolades in the blog world and now on this show, for having been right in 1999 when you rang alarm bells over the deregulation. At that time, when you were saying, we are going to look back at this in 10 years and say this was a big mess, did you really foresee there would be a crisis this big?

DORGAN: Well, I`m not -- I`m not necessarily sure I saw this big a crisis. But I said at the time, the banks -- I said, if you want to gamble go to Las Vegas. I mean, this was not about a crystal ball. It was just common sense at that time.

You know, in the 1930s, we saw banks merge with, you know, real estate and security risks and the whole thing collapsed, `20s and `30s, and -- so, we put in place, I wasn`t here, but they put in place laws like Glass- Steagall to prevent all of that. And then, 1999, we were told, that`s so old fashioned. Let`s strip that away and allow big financial holding companies, one stop financial shopping.

And I thought it was nuts. I mean, how on earth could we forget the lessons that were so important that we learned so well and with such pain about seven decades prior?

MADDOW: Ten years ago, when Gramm-Leach-Bliley passed and gutted that important -- that essentially gutted Glass-Steagall, an important law that just described, Lawrence Summers was treasury secretary at the time. And he said when that deregulation bill passed, that it was historic legislation that would enable American companies to compete in the new economy.

DORGAN: Yes, well .

MADDOW: I have to ask you, if it sort of freaks you out that he`s now one of the main guys trying to get us of out of the mess that this deregulation caused?

DORGAN: Well, I sat across the table from him at the White House two days ago. You know, there is a culture. And the culture is that Wall Street knows best. You know, there were only eight of us in the United States Senate that voted no. This was a huge deal to repeal the protections that were put in place after the Great Depression, a huge deal. Eight of us voted no.

This allowed these huge financial holding companies, allowed to bring significant risk into the banks, and, you know, they just ran hog wild. And now, we`re in a situation in 2009 where we`ve seen this financial crisis and collapse, massive taxpayer bailouts. You know, now, the question is: How do we put this back together and get out of this deep hole?

MADDOW: That`s exactly right. And what`s coming next is the discussion of not just how to rescue us but how to put the financial system back together in a way that it doesn`t happen again and that these lessons are learned.

I was struck in looking at the "New York Times" coverage of Gramm- Leach-Bliley passing in 1999, Phil Gramm of Texas who wrote that bill said, "We have a new century coming, we have an opportunity to dominate that century the same way we dominated this century. Glass-Steagall came at a time when the thinking was that government was the answer. In this era of economic prosperity, we have decided that freedom is the answer."

That was what he said in 1999 when this passed. We know what the disastrous results of that were. Who is going to lead the cause, I think, of convincing the American people and really convincing Congress that we sort of need to believe sometimes that government is the answer? There is a philosophical status of this legislation .


MADDOW: . as well as just a strategic one.

DORGAN: Well, and the other thing, immediately after this legislation passed, it stripped away all those protections and allowed all the big banks to marry up and decide that they loved each other and want to get together and merge, immediately after that, George W. Bush came to town as a new president and he hired regulators who were willing to boast about being willfully blind. They didn`t want to regulate. They said, you know what, it`s a new day. There`s a new sheriff in town, the sheriff is not interested in watching what you do.

And the result is, we saw, you know, all of these credit default swaps and CDOs, all these exotic financial instruments, these derivatives -- you know, in 1996, I wrote the cover story for "Washington Monthly" magazine on the subject of derivatives and pointed out there were tens of trillions of dollars of derivatives out there. The title of my cover story for the "Washington Monthly" magazine was, "Very Risky Business."

And I had four different bills to try to regulate derivatives and hedge funds. I hope now, perhaps most people will understand in the Congress and, I think, the American people understand, we need regulation. It`s not a four-letter word. We need effective regulation.

MADDOW: I have this kooky idea that people who were right when everybody else was wrong and we did the wrong thing -- I have this kooky idea that the people who are right are the ones who should be allowed to decide what happens next time. So, could you like sort of being in charge of figuring out what regulations we need the next time around just when this comes up in the Senate a couple of times ?

DORGAN: I`d be happy to.

MADDOW: All right.

DORGAN: I`d be happy to. But let me tell you what else we need, we need a select committee in the United States Senate with subpoena power that gives us the narrative of what happens so that everybody understands what happened. We need a financial crimes prosecution task force down at the Justice Department right now, working on these issues, and we need to restore a portion of the Glass-Steagall Act to say to banks: You`re over here and the riskier things are over here and we are not going to bring you together again -- never again.