Agency’s ’04 Rule Let Banks Pile Up New Debt

Christopher Cox, left, chairman of the Securities and Exchange Commission, and Roel C. Campos at a House hearing in 2007. Mr. Campos was on the commission in 2004 when a decision was made to change the net capital rule for big investment banks.
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.
One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.
“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”
Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.
Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.
“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”
The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.
After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed.
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.
The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.
But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.

Obama to call McCain 'erratic in crisis'

Branding his opponent as “erratic in a crisis,” Sen. Barack Obama (D-Ill.) is preempting plans by Sen. John McCain (R-Ariz.) to portray him as having sinister connections to controversial Chicagoans.
Obama officials call it political jujitsu – turning the attacks back on the attacker.
McCain officials had said early in the weekend that they plan to begin advertising after Tuesday’s debate that will tie Obama to convicted money launderer Tony Rezko and former Weathermen radical William Ayers.
But Obama isn’t waiting to respond. His campaign is going up Monday on national cable stations with a scathing ad saying: “Three quarters of a million jobs lost this year. Our financial system in turmoil. And John McCain? Erratic in a crisis. Out of touch on the economy. No wonder his campaign wants to change the subject.
“Turn the page on the financial crisis by launching dishonorable, dishonest ‘assaults’ against Barack Obama. Struggling families can't turn the page on this economy, and we can't afford another president who is this out of touch.”
Then Obama says: “I'm Barack Obama and I approved this message.”
McCain officials told the press that the new offensive is likely to focus on Rezko and Ayers. The officials said the campaign will not bring up the Rev. Jeremiah Wright, Obama’s former pastor, because McCain has forbade them from using that as a weapon. Without being specific, the officials said outside groups may focus on Wright.
When word of the planned attacks leaked Saturday, Obama officials said within hours that it was an attempt by McCain to distract voters from the economy.
“We think the McCain campaign made a huge error by telling the press that their strategy was to distract from the most important issue facing voters,” a senior Obama official said. “Every attack going forward will be easy to characterize for what it is – an attempt to distract from the Bush-McCain economic record."
McCain spokesman Tucker Bounds hinted at the tough new line Saturday on “Fox & Friends.”
“There are associations that are important to who Barack Obama is as a candidate, who he’d be as president,” Bounds said.
Obama-Biden communications director Dan Pfeiffer said about the new ads: “If John McCain thinks he can ‘turn the page’ on the economic crisis facing American families, he is even more out of touch than we imagined. Now there may be no good answers for John McCain due to his erratic response to the financial crisis, but his desire to avoid discussing the economy is something we will remind voters of everyday for the next month.”

Dems could hit 60 Senate seats

The possibility that Democrats will build a muscular, 60-seat Senate majority is looking increasing plausible, with new polls showing a powerful surge for the party’s candidates in Minnesota, Kentucky and other states.
A poll out Friday shows Sen. Norm Coleman could now easily lose his Minnesota seat to comedian-turned-candidate Al Franken. A Colorado race that initially looked like a nail-biter has now broken decisively for the Democrats. A top official in the McCain camp told us Sen. Elizabeth Dole is virtually certain to lose in conservative North Carolina.
Senate Minority Leader Mitch McConnell of Kentucky has seen his race tighten dangerously close over the past week — and Democrats are considering moving more money into the state very soon. And there is even talk that Republican Sen. Saxby Chambliss is beatable in conservative Georgia after backing the economic bailout package opposed by many voters.
“Before the economic crisis, we had a number of races moving our way,” said Matthew Miller, communications director of the Democratic Senatorial Campaign Committee. “But now we’re seeing Republican numbers plummet.” GOP officials largely agree.
Senate races don’t grab national attention like the White House battle does. But if these trends hold, the Senate outcome could be almost as important to Washington governance as the presidential winner will be. It takes 60 votes to pass anything through the slow-moving Senate. So the closer the Democrats get to the number, the more power they will have next year to put their stamp on the country.
Democrats say their candidates are benefiting from the wipeout on Wall Street with a single message in every region of the country: “These are the Bush policies coming home to roost.” Senator Charles E. Schumer of New York, chairman of the Democratic Senatorial Campaign Committee, told Politico: “Americans know that in economically difficult times, we need a change from George Bush’s policies. And incumbents who have voted for six years with Bush, up and down the line, are having a difficult time trying to convince the electorate that they’ve changed their spots."
The trends reflect the growing fear of among top Republicans that their prospects could crater on Nov. 4, with Sen. John McCain (R-Ariz.) running weakly at the top of the ticket, President Bush as unpopular as ever and the economic crisis serving as a last-minute propellant for the change message of Sen. Barack Obama (D-Ill.).

With Republicans fearing the loss of 17 to 21 House seats, January 2009 could bring Democrats a dominance over Washington that neither party has experienced since the Reagan years.

Another Bird and Fortune: "Washington Diplomat"

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How did these comedians see it coming in 2007 when financial reporters did not?

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Obama and ‘60s Bomber: A Look Into Crossed Paths

At a tumultuous meeting of anti-Vietnam War militants at the Chicago Coliseum in 1969, Bill Ayers helped found the radical Weathermen, launching a campaign of bombings that would target the Pentagon and United States Capitol.
Twenty-six years later, at a lunchtime meeting about school reform in a Chicago skyscraper, Barack Obama met Mr. Ayers, by then an education professor. Their paths have crossed sporadically since then, at a coffee Mr. Ayers hosted for Mr. Obama’s first run for office, on the schools project and a charitable board, and in casual encounters as Hyde Park neighbors.
Their relationship has become a touchstone for opponents of Mr. Obama, the Democratic senator, in his bid for the presidency. Video clips on YouTube, including a new advertisement that was broadcast on Friday, juxtapose Mr. Obama’s face with the young Mr. Ayers or grainy shots of the bombings.
In a televised interview last spring, Senator John McCain, Mr. Obama’s Republican rival, asked, “How can you countenance someone who was engaged in bombings that could have or did kill innocent people?”
More recently, conservative critics who accuse Mr. Obama of a stealth radical agenda have asserted that he has misleadingly minimized his relationship with Mr. Ayers, whom the candidate has dismissed as “a guy who lives in my neighborhood” and “somebody who worked on education issues in Chicago that I know.”
A review of records of the schools project and interviews with a dozen people who know both men, suggest that Mr. Obama, 47, has played down his contacts with Mr. Ayers, 63. But the two men do not appear to have been close. Nor has Mr. Obama ever expressed sympathy for the radical views and actions of Mr. Ayers, whom he has called “somebody who engaged in detestable acts 40 years ago, when I was 8.”
Obama campaign aides said the Ayers relationship had been greatly exaggerated by opponents to smear the candidate.
“The suggestion that Ayers was a political adviser to Obama or someone who shaped his political views is patently false,” said Ben LaBolt, a campaign spokesman. Mr. LaBolt said the men first met in 1995 through the education project, the Chicago Annenberg Challenge, and have encountered each other occasionally in public life or in the neighborhood. He said they have not spoken by phone or exchanged e-mail messages since Mr. Obama began serving in the United States Senate in January 2005 and last met more than a year ago when they bumped into each other on the street in Hyde Park.
In the stark presentation of a 30-second advertisement or a television clip, Mr. Obama’s connections with a man who once bombed buildings and who is unapologetic about it may seem puzzling. But in Chicago, Mr. Ayers has largely been rehabilitated.
Federal riot and bombing conspiracy charges against him were dropped in 1974 because of illegal wiretaps and other prosecutorial misconduct, and he was welcomed back after years in hiding by his large and prominent family. His father, Thomas G. Ayers, had served as chief executive of Commonwealth Edison, the local power company.
Since earning a doctorate in education at Columbia in 1987, Mr. Ayers has been a professor of education at the University of Illinois at Chicago, the author or editor of 15 books, and an advocate of school reform.
“He’s done a lot of good in this city and nationally,” Mayor Richard M. Daley said in an interview this week, explaining that he has long consulted Mr. Ayers on school issues. Mr. Daley, whose father was Chicago’s mayor during the street violence accompanying the 1968 Democratic National Convention and the so-called Days of Rage the following year, said he saw the bombings of that time in the context of a polarized and turbulent era.
“This is 2008,” Mr. Daley said. “People make mistakes. You judge a person by his whole life.”
That attitude is widely shared in Chicago, but it is not universal. Steve Chapman, a columnist for The Chicago Tribune, defended Mr. Obama’s relationship with the Rev. Jeremiah A. Wright Jr., his longtime pastor, whose black liberation theology and “God damn America” sermon became notorious last spring. But he denounced Mr. Obama for associating with Mr. Ayers, whom he said the University of Illinois should never have hired.
“I don’t think there’s a statute of limitations on terrorist bombings,” Mr. Chapman said in an interview, speaking not of the law but of political and moral implications.
“If you’re in public life, you ought to say, ‘I don’t want to be associated with this guy,’ ” Mr. Chapman said. “If John McCain had a long association with a guy who’d bombed abortion clinics, I don’t think people would say, ‘That’s ancient history.’ ”
Mr. Ayers and his wife, Bernardine Dohrn, a clinical associate professor at Northwestern University Law School who was also a Weather Underground founder, did not respond to multiple requests for comment.
The Schools Project
The Ayers-Obama connection first came to public attention last spring, when both Senator Hilary Rodham Clinton, Mr. Obama’s Democratic primary rival, and Mr. McCain brought it up. It became the subject of a television advertisement in August by the anti-Obama American Issues Project and drew new attention recently on The Wall Street Journal’s op-ed page and elsewhere as the archives of the Chicago Annenberg Challenge at the University of Illinois were opened to researchers.
That project was part of a national school reform effort financed with $500 million from Walter H. Annenberg, the billionaire publisher and philanthropist and President Richard M. Nixon’s ambassador to the United Kingdom. Many cities applied for the Annenberg money, and Mr. Ayers joined two other local education activists to lead a broad, citywide effort that won nearly $50 million for Chicago.
In March 1995, Mr. Obama became chairman of the six-member board that oversaw the distribution of grants in Chicago. Some bloggers have recently speculated that Mr. Ayers had engineered that post for him.
In fact, according to several people involved, Mr. Ayers played no role in Mr. Obama’s appointment. Instead, it was suggested by Deborah Leff, then president of the Joyce Foundation, a Chicago-based group whose board Mr. Obama, a young lawyer, had joined the previous year. At a lunch with two other foundation heads, Patricia A. Graham of the Spencer Foundation and Adele Simmons of the MacArthur Foundation, Ms. Leff suggested that Mr. Obama would make a good board chairman, she said in an interview. Mr. Ayers was not present and had not suggested Mr. Obama, she said.
Ms. Graham said she invited Mr. Obama to dinner at an Italian restaurant in Chicago and was impressed.
“At the end of the dinner I said, ‘I really want you to be chairman.’ He said, ‘I’ll do it if you’ll be vice chairman,’ ” Ms. Graham recalled, and she agreed.

Archives of the Chicago Annenberg project, which funneled the money to networks of schools from 1995 to 2000, show both men attended six board meetings early in the project — Mr. Obama as chairman, Mr. Ayers to brief members on school issues.
It was later in 1995 that Mr. Ayers and Ms. Dohrn hosted the gathering, in their town house three blocks from Mr. Obama’s home, at which State Senator Alice J. Palmer, who planned to run for Congress, introduced Mr. Obama to a few Democratic friends as her chosen successor. That was one of several such neighborhood events as Mr. Obama prepared to run, said A. J. Wolf, the 84-year-old emeritus rabbi of KAM Isaiah Israel Synagogue, across the street from Mr. Obama’s current house.
“If you ask my wife, we had the first coffee for Barack,” Rabbi Wolf said. He said he had known Mr. Ayers for decades but added, “Bill’s mad at me because I told a reporter he’s a toothless ex-radical.”
“It was kind of a nasty shot,” Mr. Wolf said. “But it’s true. For God’s sake, he’s a professor.”
Other Connections
In 1997, after Mr. Obama took office, the new state senator was asked what he was reading by The Chicago Tribune. He praised a book by Mr. Ayers, “A Kind and Just Parent: The Children of Juvenile Court,” which Mr. Obama called “a searing and timely account of the juvenile court system.” In 2001, Mr. Ayers donated $200 to Mr. Obama’s re-election campaign.
In addition, from 2000 to 2002, the two men also overlapped on the seven-member board of the Woods Fund, a Chicago charity that had supported Mr. Obama’s first work as a community organizer in the 1980s. Officials there said the board met about a dozen times during those three years but declined to make public the minutes, saying they wanted members to be candid in assessing people and organizations applying for grants.
A board member at the time, R. Eden Martin, a corporate lawyer and president of the Commercial Club of Chicago, described both men as conscientious in examining proposed community projects but could recall nothing remarkable about their dealings with each other. “You had people who were liberal and some who were pretty conservative, but we usually reached a consensus,” Mr. Martin said of the panel.
Since 2002, there is little public evidence of their relationship.
If by then the ambitious politician was trying to keep his distance, it would not be a surprise. In an article that by chance was published on Sept. 11, 2001, The New York Times wrote about Mr. Ayers and his just-published memoir, “Fugitive Days,” opening with a quotation from the author: “I don’t regret setting bombs. I feel we didn’t do enough.”

Three days after the Qaeda attacks, Mr. Ayers wrote a reply posted on his Web site to clarify his quoted remarks, saying the meaning had been distorted.
“My memoir is from start to finish a condemnation of terrorism, of the indiscriminate murder of human beings, whether driven by fanaticism or official policy,” he wrote. But he added that the Weathermen had “showed remarkable restraint” given the nature of the American bombing campaign in Vietnam that they were trying to stop.
Most of the bombs the Weathermen were blamed for had been placed to do only property damage, a fact Mr. Ayers emphasizes in his memoir. But a 1970 pipe bomb in San Francisco attributed to the group killed one police officer and severely hurt another. An accidental 1970 explosion in a Greenwich Village town house basement killed three radicals; survivors later said they had been making nail bombs to detonate at a military dance at Fort Dix in New Jersey. And in 1981, in an armed robbery of a Brinks armored truck in Nanuet, N.Y., that involved Weather Underground members including Kathy Boudin and David Gilbert, two police officers and a Brinks guard were killed.
In his memoir, Mr. Ayers was evasive as to which bombings he had a hand in, writing that “some details cannot be told.” By the time of the Brinks robbery, he and Ms. Dohrn had emerged from underground to raise their two children, then Chesa Boudin, whose parents were imprisoned for their role in the heist.
Little Influence Seen
Mr. Obama’s friends said that history was utterly irrelevant to judging the candidate, because Mr. Ayers was never a significant influence on him. Even some conservatives who know Mr. Obama said that if he was drawn to Ayers-style radicalism, he hid it well.
“I saw no evidence of a radical streak, either overt or covert, when we were together at Harvard Law School,” said Bradford A. Berenson, who worked on the Harvard Law Review with Mr. Obama and who served as associate White House counsel under President Bush. Mr. Berenson, who is backing Mr. McCain, described his fellow student as “a pragmatic liberal” whose moderation frustrated others at the law review whose views were much farther to the left.
Some 15 years later, left-leaning backers of Mr. Obama have the same complaint. “We’re fully for Obama, but we disagree with some of his stands,” said Tom Hayden, the 1960s activist and former California legislator, who helped organize Progressives for Obama. His group opposes the candidate’s call for sending more troops to Afghanistan, for instance, “because we think it’s a quagmire just like Iraq,” he said. “A lot of our work is trying to win over progressives who think Obama is too conservative.”
Mr. Hayden, 68, said he has known Mr. Ayers for 45 years and was on the other side of the split in the radical antiwar movement that led Mr. Ayers and others to form the Weathermen. But Mr. Hayden said he saw attempts to link Mr. Obama with bombings and radicalism as “typical campaign shenanigans.”
“If Barack Obama says he’s willing to talk to foreign leaders without preconditions,” Mr. Hayden said, “I can imagine he’d be willing to talk to Bill Ayers about schools. But I think that’s about as far as their relationship goes.”

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Palin says cause of global warming “doesn’t matter”

In an interview with CBS Evening News anchor Katie Couric that aired Tuesday, Republican vice presidential candidate Sarah Palin said that it “kinda doesn’t matter at this point” if human activity is responsible for climate change.
You can see a video of the interview.



The topic of global warming comes up about four and a half minutes in:

Couric: What’s your position on global warming? Do you believe it’s manmade or not?
Palin: Well, we’re the only Arctic state, of course, Alaska. So we feel the impacts more than any other state, up there, with the changes in climates. And, and certainly it is apparent. We have erosion issues, and we have melting sea ice, of course. So, what I’ve done up there is form a sub-cabinet to focus solely on climate change. Understanding that it is real, and …
Couric: Is it man-made, though in your view?
Palin: You know there are – there are man’s activities that can be contributed [sic] to the issues that we’re dealing with now, with these impacts. I’m not going to solely blame all of man’s activities on changes in climate. Because the world’s weather patterns are cyclical. And over history we have seen changes there. But it kinda doesn’t matter at this point, as we debate what caused it. The point is: it’s real; we need to do something about it.

Gov. Palin’s response is similar to the one she gave last month when ABC News’s Charlie Gibson asked her the same question. Mr. Gibson pressed the issue harder than Ms. Couric did. Here’s how that exchange went:

Palin: I believe that man’s activities certainly can be contributing to the issue of global warming, climate change. Here in Alaska, the only Arctic state in our Union, of course, we see the effects of climate change more so than any other area, with ice pack melting. Regardless, though, of the reason for climate change – whether it’s entirely, wholly caused by man’s activities or is part of the cyclical nature of our planet, the warming and the cooling trends – regardless of that, John McCain and I agree that we got to do something about it, and we have to make sure that we’re doing all we can to cut down on pollution.
Gibson: But it’s a critical point, as to whether this is manmade. He says it is. You have said in the past it’s not.
Palin: The debate on that even really has evolved into, “OK, here’s where we are now: Scientists do show us that there are changes in climate. Things are getting warmer. Now, what do we do about it?” John McCain and I are going to be working on what we do.
Gibson: Yes, but isn’t it critical as to whether or not it’s manmade? Because what you do about it depends on whether it’s manmade.
Palin: That’s why I’m attributing some of man’s activities to potentially causing some of the changes in the climate right now.

Gibson’s point – that humanity’s response to global warming should be informed by its cause – is a valid one. If greenhouse gas emissions are changing the earth’s climate, then efforts to protect ourselves from the effects of climate change should include curbing these emissions. If global warming is caused only by natural cycles, then curbing emissions will do nothing and humanity should focus on adaptation.
Alaska’s Climate Change Sub-Cabinet, which Palin established in September 2007, does take up issues of mitigation, but most of its focus is on adaptation – such as how to help remote Inuit communities deal with coastal erosiion.
A story last week in the Washington Post indicates that the Alaska governor is well aware of global warming’s effects on her state, but has dodged the question of its causes:

Palin does not minimize the consequences. When she established her climate sub-cabinet last September, she said in a news release that Alaskans “are already seeing the effects” of warming: “Coastal erosion, thawing permafrost, retreating sea ice and record forest fires affect our communities and our infrastructure.”

But when environmentalists urged the governor to include language attributing global warming to humans and suggested that the state set a target for limiting greenhouse gas emissions, Palin hedged. Instead, she issued an executive order saying the state needed to develop a strategy that would “guide its efforts in evaluating and addressing known or suspected causes of climate change. Alaska’s climate change strategy must be built on sound science and the best available facts and must recognize Alaska’s interest in economic growth and the development of its resources.”

Before being selected as John McCain’s running mate, Palin took a stronger stance against the notion that humans are to blame for global warming. When Newsmax asked for the Alaska governor’s “take on global warming” this summer, she said, “A changing environment will affect Alaska more than any other state, because of our location. I’m not one though who would attribute it to being manmade.”
According to the Associated Press, in December 2007, Palin said to the Fairbanks (Alaska) Daily News-Miner, “I’m not an Al Gore, doom-and-gloom environmentalist blaming the changes in our climate on human activity.”
Palin’s current position, that the causes of climate change are unimportant but that we should take action to protect ourselves from it, is somewhat undercut by the Climate Change Sub-Cabinet’s website. The section called “What Is Alaska Already Doing,” has only two words: “coming soon.”