“As every student of American history knows, this country’s core founding principles included nonpunitive taxation, constitutionally guaranteed protections against persecution of the minority and an inexorable right of self-determination,” [one hedge fund manager] wrote. “Washington has taken actions over the past months, like the Goldman suit that seem designed to fracture the populace by pulling capital and power from the hands of some and putting it in the hands of others.” [...]

Mr. Loeb isn’t the first Wall Streeter to turn on the president. Steven A. Cohen, founder of the hedge fund SAC Capital Advisors and a supporter of the Obama campaign, recently held a meeting with Republican candidates in his home in Greenwich, Conn., to strategize about the midterm elections, according to Absolute Return magazine.

Other onetime supporters, like Jamie Dimon, chief executive of JPMorgan Chase, also feel burned by the Obama administration, people close to him say.

From The Huffington Post this afternoon:

Bank profits jumped 21 percent last quarter to nearly $22 billion, the highest level in three years, as banks put away less money to cover future losses, fewer borrowers fell behind on payments and lenders paid the least for their funds in perhaps 50 years, a government report released Tuesday shows.

Lending also dropped by about $96 billion, or 1.3 percent, as borrowers continue to remain skittish about the “slow recovery,” Federal Deposit Insurance Corporation Chairman Sheila Bair told reporters Tuesday in Washington. “Consumers and businesses need to have confidence in the recovery before they will start making decisions on credit,” Bair said, according to a transcript of her remarks.

“I’m a purist,” Cantwell said, in response to a question regarding whether she supported the Volcker Rule (a proposal by former Federal Reserve Chairman Paul Volcker to ban “proprietary trading,” effectively banning any bank with federal backing from speculating with its own money). “If you want to take fuel out of the fire, I would also personally say that you should break up the big banks and not have investing and commercial banking in the same bucket. I will offer that amendment on the floor.”

The portions on derivatives trading offer a more specific iteration of that same idea. Section 106 of Lincoln’s derivatives reform proposal bans banks from receiving “federal assistance (including federal deposit insurance, and access to the Federal Reserve discount window)” if they contain desks that trade swaps, one currently unregulated type of derivative.

Cantwell, who did not clarify when asked a follow-up, seemed to indicate that her amendment hopes to go further — preventing banks from forgoing federal backing if they deal not only in swaps, but in any sort of speculative trading. This winter, Cantwell and Sen. John McCain (R-Ariz.) were due to propose a return to the Glass-Steagall rules, rescinded in 1999, that prevented combined commercial and investment banks. But that provision has not made it into the final bill.

The ad:

The Treasury Secretary went on to say that the what’s being requested is merely “the authority to wind them [failed companies] down.”

What he didn’t mention is that the winding down will require taxpayer dollars, at least in the early phases of a takeover.Those losses are designed to be recovered within 60 months by tapping shareholders and creditors, and if necessary by imposing an after-the-fact tax on other large and solvent institutions. Yet the provision also allows the government to extend that 60-month recovery window indefinitely.

“It could be 60 years,” said Rep. Brad Sherman (D-Calif.), in response to Geithner.

“Further,” Sherman said in a statement yesterday, “it is difficult to see how any tax on financial institutions would provide hundreds of Billions of revenue, which might be needed to repay a large bailout.”

House Democrats introduced legislation Tuesday granting the White House broad new authority to bail out investment houses and other non-banks when their potential collapse is a threat to the larger financial system. But while the bill goes far beyond a similar White House proposal in terms of protecting taxpayers, Rep. Brad Sherman isn’t impressed. The California Democrat, who said the White House proposal represents “TARP on steroids,” issued a statement last night claiming that the House bill is little better.

“The new resolution authority,” Sherman said, “provides permanent, unlimited bailout authority” granting “unprecedented powers for the executive to decide spending and taxes, without congressional approval.”

Under the House bill, sponsored by Financial Services Committee Chairman Barney Frank (D-Mass.), the White House would have the power to swoop in and dismantle failing Wall Street institutions in order to mitigate the negative effects on the finance system as a whole — a model designed after the authority of the Federal Deposit Insurance Corporation to intervene when commercial banks are poised to topple. To protect taxpayers, Frank’s bill attempts to force the tab ultimately on failed-company shareholders, as well as on other large Wall Street institutions that would presumably benefit from the general stability created by the government intervention.

Frank said his proposal would “ensure that the industry and shareholders absorb the risk and cost of failure, not taxpayers.”

But Sherman doesn’t see it playing out that way.

The taxpayer losses are supposed to be recovered from a new tax imposed on large and medium-large financial institutions.  The statute requires the Executive Branch to recoup taxpayer funds within 60 months, but then, allows them to extend this period for as long as they want. (§1609(o)(1)).  Further, it is difficult to see how any tax on financial institutions would provide hundreds of Billions of revenue, which might be needed to repay a large bailout.

And it’s not only trouble companies that could receive help under the House bill. Indeed, it would allow the president to loan solvent institutions unlimited funds “if necessary to prevent financial instability.”

When bailout funds are lent to a solvent financial institution under §1109, the executives and shareholders lose nothing.  Executives keep their jobs and their compensation packages; shareholders retain all their rights.  In contrast, when a troubled institution receives a bailout under §1604, some executives lose their jobs, and shareholders have to stand behind taxpayers.

That creates a moral hazard problem, Sherman argues, “allow[ing] those institutions which are clearly systematically important (the top 10 to 25) to borrow at a lower cost. This will help the largest institutions get bigger, so they can pose a greater systemic risk.”

The Financial Services Committee is holding a hearing on the bill this morning, with Treasury Secretary Tim Geithner testifying. There’s been no love lost between Sherman and Geithner in the past. Should be a good show.

Although Obama called for all kinds of sweeping changes in the nation’s regulatory system, it’s the Consumer Finance Protection Agency that’s drawing the most fire, The Washington Post reports.

Opposition is piling up with particular speed against the idea of a new agency with broad powers to protect borrowers and other customers of financial firms, setting up a high-stakes contest between the industry and the White House for the loyalty of a few moderate senators who increasingly hold the balance of power.

Yep, those Blue Dog Democrats again. As predatory lending expert Alan White told TWI recently, the Blue Dogs have been strong advocates for the banking industry, frustrating the efforts of more consumer-minded Democrats. It’s looking more like they’ll hold sway over the Consumer Financial Protection Agency, as well.

The Post reports that the American Bankers Association, in particular, has come out strongly against the consumer agency. House Minority Leader John Boehner (R-Ohio) also came out swinging, telling “Good Morning America” that the government will end up regulating the interest rates on credit cards and other financial products, and already has “too big a foot” in the struggling financial industry.

Could we stop for a moment of reality here? Where were people like Boehner, the American Bankers Association, and the rest of the financial industry when lenders were giving mortgages to anyone with a pulse? Where were these concerned voices when minority neighborhoods were targeted for high-rate loans? Why were the howls of outrage missing when mortgage brokers were steering borrowers into more expensive loans, even when they qualified for lower-rate mortgages?

The finance industry and its friends can complain all they want about government activism. They can attack Harvard professor and Troubled Asset Relief Program watchdog Elizabeth Warren, who first proposed the idea of such an agency. They can drag out the old arguments about how government meddling will lead to fewer or more expensive choices for consumers.

But in the end, the lending industry has no one to blame but itself for the hammer finally coming down. If banks had done anything to rein in their own excesses, the government wouldn’t be going anywhere near it. The same holds true for the deregulatory zealots in Congress who clung tightly to their ideology while lenders marketed and sold products like “Liar’s Loans,” which defied simple common sense by not requiring any documentation of a borrower’s income or assets.

Now the finance industry is trying to make the government the villain again, complaining about a more aggressive approach to consumer protection. Many conservatives will agree, saying the lending industry can’t be blamed for consumers making poor choices.

Certainly, borrowers have a responsibility to make good financial decisions — and they clearly have paid the price when they didn’t. On the lending industry side, here’s the lesson: If you don’t want the government to create an agency to protect consumers, then don’t put consumers in a position where they need someone to step in and put a stop to business practices that can only be described as predatory, abusive and wrong.

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The Federal Reserve will get more powers to oversee big financial institutions, large firms will have to raise more capital and meet higher liquidity standards, hedge funds will face higher scrutiny, and a new agency will be set up to protect consumers and small investors.

As soon as his plan is out, though, the president will have the Goldilocks problem. Some will think his proposals too hot, some too cold. Only some will think them just right.

The controversy going forward is which groups will have the clout to make things go their way. As The New York Times reports today, financial industry representatives and consumer groups have been lobbying hard over the past few weeks for their interests, which already has affected the scope of the proposals.

Although it would strikingly reorganize the regulatory architecture, the president’s plan results from many compromises with industry executives and lawmakers, and is not as bold as some had hoped.

And that’s even before Congress gets its hands on the proposal.

At the end of the Goldilocks story, she gets caught and runs away. It will be worth watching to see if Obama can prevent this story from ending the same way.

Among them:

Can the President bring himself to state in public the obvious: The extent of political influence in the hands of our financial system – large banks in particular, but small banks also in some instances – is out of control and dangerous?  Where is the administration’s reform agenda on this crucial point?  To those of us who frequent Capitol Hill, it looks very much like business as usual, albeit with higher political market share for the big banks that remain in business.

That’s an excellent point. As TWI noted, Congress has already stalled on overhauling mortgage lending, despite the predatory practices that led to the crisis. What assurances do we have that Obama’s agenda has a chance of passage, without being totally watered down?

Here’s more:

Does he state plainly and unequivocally that the way the financial system has been run – and continues to be run – has damaged the national interest of the United States and pushed millions of people, both here and around the world, closer to poverty?

That’s a point few in Congress or the administration have addressed — the global effect of the U.S. meltdown. I doubt they’ll pick up on it at this point, however. The global poverty argument often doesn’t play all that well at home. People are more wrapped up in their own financial crises. Still, it’s worth thinking about, if only to understand the reach of this crisis and the need for reform.

And finally, there’s this concern, which I just raised:

Most important, does the President stress the need to protect consumers from the financial industry going forward, specifically with a strong Financial Products Safety Commission.  Messrs. Geithner and Summers seem, at best, lukewarm to this idea – in fact, we have no clear indication that they buy into the idea of consumer protection at all.  The President’s position on this issue will be decisive.

It’s not just making the announcement of the overhaul that’s important — it’s how, exactly, the announcement is made. Look to see whether Obama addresses these kinds of concerns, to decide how serious the administration will be about regulatory reform.

For what it’s worth, I’d say that having a single bank regulator is long overdue.  The current structure not only doesn’t make sense, but allows banks to shop around for the most lenient regulator they can find, prompting a race to the regulatory bottom.  It’s also a problem for big banks, which end up under the regulatory authority of multiple agencies.

According to The Post, the new regulator would replace the patchwork of agencies that now regulate financial institutions.

The agency would be a key element in the administration’s sweeping overhaul of financial regulation, which officials hope to unveil in coming weeks, including the creation of a new authority to police risks to the financial system as well as a new agency to protect consumers, according to three people familiar with the matter. Most of the proposals would require legislation.

Drum finds himself slightly leery of the systemic risk regulator, saying he’s not sure such an authority would have done anything to head off the current crisis. He’d also like to see more specifics on the guiding principles behind regulatory changes, not just new rules. I’ve got other concerns.

The fact that most of the proposals require legislation should be cause for concern, given the way Congress caved in to the banks on mortgage cramdown legislation that should have been a slam dunk. Do not underestimate the financial industry’s lobbying clout and the survival instincts of agencies likely to be targeted for elimination, such as the Office of Thrift Supervision.

And speaking of the OTS … this little nugget mostly got overlooked last week, and it’s worth a mention. The inspector general for the Treasury Department found evidence of improper backdating at six thrifts, including failed subprime lender IndyMac. From Reuters:

High-level bank regulators were aware that thrifts were inappropriately backdating capital contributions, allowing the institutions to appear healthier, and in one case directed a thrift to engage in the practice, according to a government watchdog report released Thursday.

The inspector general’s report called the practice “alarming.” I’d go beyond that and question whether it’s criminal — isn’t this sort of thing blatant accounting fraud?

So what does this all have to do with regulatory reform? Plenty. As we’ve noted, insurance companies recently partnered with the OTS to buy troubled thrifts, which allowed them to qualify for TARP funds. Here’s how we’ve described this little arrangement:

Banking analyst Bert Ely told TWI that the insurers actually were teaming up with the Office of Thrift Supervision, which found them troubled thrifts to buy.  That way, insurers could get a chance at TARP money – and avoid stricter federal oversight. Buying thrifts instead of banks would allow the insurers to be regulated by the Office of Thrift Supervision, which is well-known for its lax oversight.

Ely also told us he once thought OTS would go down in flames after several failures of the institutions the agency was supposed to be overseeing, like IndyMac and Washington Mutual. But with the insurers involved, he said, the picture has changed. The OTS now has powerful friends with a vested interest in seeing it survive, and who will be likely to lobby for its survival.

That’s one reason why I’m not counting on the creation of a single regulator or any other good idea to become a reality. Already, according to American Banker, former OTS director John Reich, a deregulatory zealot if there ever was one, is coming out swinging to defend his former agency’s practices. I guess it’s the financial industry’s version of the debate over the Bush administration’s policies on torture.

Except the financial industry’s people have very deep pockets, and Congress often ends up on their side.

Until this move by Gutierrez, whose top contributor to his 2008 campaign was a payday lender, consumer advocates fighting the industry were on a roll. They were regularly convincing state legislators that had once bent over backward for the industry  to change course, limiting the interest rates payday lenders could charge and banning some of the industry’s more abusive practices. The change of heart came about as states like Ohio found themselves inundated with payday lending stores on every block, and as the economic downturn put a focus on the plight of borrowers with payday loans. During a hotly contested battle in Ohio to limit payday lending, it even turned out that some lawmakers from hard-hit rural areas had themselves resorted to payday loans, experiencing the industry’s abusive practices first hand. Not surprisingly, the payday lenders lost that battle.

It’s hard to argue in favor of any industry that charges almost 400 percent interest and traps consumers with additional fees and repeated loans. But you can always count on the payday lending industry to offer outrages even beyond that, which makes the dishonesty of sudden apologists like Gutierrez even more breathtaking.

For example, The Wall Street Journal reported last year on how payday lenders specifically seek out customers among society’s most vulnerable: the elderly and disabled.

(Payday) lenders are increasingly targeting recipients of Social Security and other government benefits, including disability and veteran’s benefits. “These people always get paid, rain or shine,” says William Harrod, a former manager of payday loan stores in suburban Virginia and Washington, D.C. Government beneficiaries “will always have money, every 30 days.”

The law bars the government from sending a recipient’s benefits directly to lenders. But many of these lenders are forging relationships with banks and arranging for prospective borrowers to have their benefits checks deposited directly into bank accounts. The banks immediately transfer government funds to the lenders. The lender then subtracts debt repayments, plus fees and interest, before giving the recipients a dime.

As a result, these lenders, which pitch loans with effective annual interest as high as 400% or more, can gain almost total control over Social Security recipients’ finances.

Despite this, the industry lives to fight another day, as the Gutierrez about-face attests. It really is about the money, after all, and payday lenders always have been extremely generous with their largess. Watch the clip Mike refers to in his story, showing Gutierrez posturing in front of Jean Ann Fox, a longtime and well-respected consumer advocate who closely follows the payday lending industry. Gutierrez tries to put on a show of “reforming” the industry with his bill — but don’t believe a word of it. That’s an old tactic payday lenders use in the states as well, proposing measures they tout as “reforms” that are so filled with loopholes as to be meaningless. Their reforms are intended to draw support away from measures to limit them to charging 36 percent interest, which payday lenders contend would put them out of business.

Gutierrez should of course be ashamed of himself, but this isn’t just about him. If an industry that sinks as low as some payday lenders regularly have can gain enough respect in Congress to have Gutierrez spout such nonsense, imagine the fate of other reforms of the financial services world. Treasury Secretary Timothy Geithner talks a tough game when he envisions a sweeping expansion of the regulatory system. But as the Gutierrez debacle shows, even the bottom feeders of the financial industry still have enough sway to sometimes get lawmakers on their side. The disappointing comeback of payday lenders only proves that when it comes to cleaning up abusive and predatory lending, it’s far too early to get your hopes up for something real.