By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Neil Barofsky, inspector general of the Troubled Asset Relief Program, is making a name for himself with a misleading analysis of actions by the Federal Reserve and Treasury in combating the financial crisis.

A column in the New York Times called Barofsky "one of the few truth tellers in Washington" as it praised his recent report that questions the Fed's motives in preventing a bankruptcy of American International Group.

The failure of Lehman Brothers brought the U.S. financial system to its knees. Had AIG gone under as well, the system well could have collapsed.

Barofsky's report, which is logically flawed, uses loaded language to create the impression that saving the economy wasn't the Fed's goal at all. No, it was all about helping the central bank's friends on Wall Street.

"Questions have been raised as to whether the Federal Reserve intentionally structured the AIG counterparty payments to benefit AIG counterparties -- in other words that the AIG assistance was in effect a 'backdoor bailout' of AIG's counterparties," the report says.

Who are they? Why Goldman Sachs, Merrill Lynch, Wachovia, Bank of America and 11 foreign financial institutions, an obviously undeserving lot.

The report duly notes that Fed officials deny a backdoor bailout was their objective. But the next sentence suggests the officials must be lying.

"Irrespective of their stated intent, however, there is no question that the effect of the Federal Reserve Bank of New York's decisions -- indeed the very design of the federal assistance to AIG -- was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG's counterparties." (Emphasis in the original.)

Well, AIG had sold the counterparties a great many credit default swap contracts covering collateralized debt obligations secured by mortgages. Because of what had happened in the real estate and credit markets, under the contracts AIG owed the counterparties a whole pot full of money which it couldn't pay.

If AIG was to be kept out of bankruptcy, of course the very design of the federal assistance had to include funneling tens of billions of dollars to the institutions to which it was owed. There was no other way to avoid a bankruptcy that would have affected not just big financial institutions but thousands of municipalities, individual savers and other investors.

Coming on the heels of the Lehman collapse, an AIG failure could have brought on a 1930s style depression, Fed Chairman Ben Bernanke testified later.

But Barofsky ignores that concern. Instead, just to be sure everyone gets his point that the Fed was acting in the interests of big financial institutions and not the public, the report continues:

"Although the primary intent of the initial $85 billion loan to AIG may well have been to prevent the adverse systemic consequences of an AIG failure on the financial system and the economy as a whole, in carrying out that intent, it was fully contemplated that such funding would be used by AIG to make tens of billions of dollars of collateral payments to the AIG counterparties."

"May well have been"? The report does not offer an alternative way to avoid an AIG bankruptcy, and there wasn't one.

It does, however, suggest the Fed should have used its power as a banking regulator to force the AIG creditors to accept less than full payment of what they were owed.

The report acknowledges that the New York Fed tried to negotiate such a haircut and that one creditor, UBS, offered to knock off 2 percent if all the other creditors would as well. But the French banking regulator said it would be illegal for the two French institutions involved to take a haircut unless AIG was in formal bankruptcy, and the Fed said it had to treat all the banks the same way.

Nevertheless, Barofsky insists the Fed should have used its authority to force concessions. Unsaid, but implied: The Fed didn't do that because its goal was to help its Wall Street friends.

Barofsky is getting great press and kudos on Capitol Hill by pandering to the public anger at Wall Street. Pity he's not really a truth teller at all

The new shares will raise 13.5 billion pounds, of which 500 million pounds will disappear in the expenses of the offer. Much of this is paid to the banks which are guaranteeing that Lloyds gets its money, a reward for the risk they are taking that the shareholders will fail to take up their rights.

So just how big is this risk? Here’s one way to look at it. The rights price is 37 pence, and as long as the Lloyds share price remains above that, the risk is minimal. At 37 pence, engorged Lloyds, with 63,666,770,945 in issue, would be capitalised at 23.5 billion pounds, including the 13.5 billion pounds of new money. On Tuesday, the day the issue was priced, with Lloyds old shares at 91 pence, the business was valued at 23.5 billion pounds.

 In other words, for the underwriters to pay up, the value of old Lloyds would have to slump from 23.5 billion pounds to 10 billion pounds – and all by December 11, the day on which the new money is due.

 This is a grotesque parody of the role of underwriters. The risk is minimal, the rewards absurd. So who are these lucky businesses? Atop the document are those two fine investment banks, BofA Merrill Lynch and UBS. The usual suspects appear further down the notepaper.

 The Lloyds shareholders, as they cough up to keep their business out of the state’s intensive care, might recall that both these banks have themselves had hugely dilutive and expensive refinancings, and ask who benefits from this mutual back-scratching, since it’s clearly not the battered shareholders in UBS, BofA or Merrill Lynch.

 The answer, of course, is that this is how the bankers’ bonuses are generated. Bank A’s rescue gets underwritten by Bank B, and in turn Bank B underwrites Bank A. The costs, in each case, may not reach the 500 million pounds of the Lloyds issue, but enough will stick to the shovels wielded by those Masters of the Universe who organize the issues to pay eight-figure bonuses to the fortunate few.

 Of course any company is welcome to try and break the cartel, and see where it gets them. Just don’t expect a bank to try. Their bankers are worth every penny.

The downwardly revised 3rd quarter GDP certainly didn't shock economists who were expecting a softer reading than the initial 3.5 percent, but the 2.8 percent certainly isn't pretty especially considering the psychological blow of losing of the 3 handle. (Speaking of symbolic numbers, the FDIC also reported that its reserve fund is now in the red.) There's still one more revision ahead though, so maybe it will inch back to 3 percent.

Weaker consumer spending - up 2.9 percent versus the originally estimated 3.4 percent - isn't exactly encouraging since the recovery needs the nation's shoppers to quicken the pace a little if the economy has any hope of picking up steam. And remember, the "cash for clunkers" program was a big contributor to the gain. It's also no surprise that government expenditures helped at least partially offset the decline. Such spending increased 3.1% from the original estimate of 2.3%.

Alan Ruskin at RBS notes that at least corporate profits are strong at +10.6 percent. But, increased productivity is the cost. Companies are doing more with less, a phrase that those still holding their jobs detest and those without jobs dread.

Consumer confidence, meanwhile, ticked up slightly but still reflects a sour mood on Main Street.

Lynn Franco at the Conference Board, the group that compiled the survey released Tuesday, says it all.

Consumer Confidence posted a slight gain in November. The Present Situation Index, however, was virtually unchanged and remains at levels not seen in 26 years (Index 17.5, Feb. 1983). The moderate improvement in the short-term outlook was the result of a decrease in the percent of consumers expecting business and labor market conditions to worsen, as opposed to an increase in the percent of consumers expecting conditions to improve. Income expectations remain very pessimistic and consumers are entering the holiday season in a very frugal mood.

The Wall Street Journal's front page splash that 1 in 4 homeowners owe more than their homes are worth underscores the point that the U.S. households are still in bad shape and the rapid fire gains in the stock market aren't likely to offset fear of losing your job and house.

It's no wonder policy makers are starting to get nervous about pulling the plug on stimulus.

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Politics is trumping common sense in Congress as Republicans and Democrats keep heaping abuse on the Federal Reserve. As a result, they could end up adopting an unworkable, risky overhaul of financial market regulation. 

Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, is leading the parade with his plan to strip the central bank of virtually all its oversight of commercial banks.

  "I really want the Federal Reserve to get back to its core enterprises," Dodd said. In recent years, the Fed's regulation of bank holding companies and consumer lending "was an abysmal failure," he charged. 
 
No, the Fed didn't cover itself with glory in some of its regulation and supervision, but neither did any of the other financial regulatory agencies. Moreover, the most serious failures last year involved investment banks overseen by the Securities and Exchange Commission, not the Fed.

But there are three more important reasons to keep the Fed in a major role as a regulator of financial institutions.

First, whatever its earlier lapses, once the crisis hit, the central bank kept the U.S. economy from falling into a depression, at times almost single-handed. It did so by using every bit of authority it had to keep the financial system functioning, often over the objections of small-minded politicians who didn't understand what was at risk. For that alone, the Fed deserves far more praise than condemnation.

Second, it would be much more difficult for the Fed "to get back to its core enterprises" -- that is, fostering maximum sustainable employment and stable prices -- without the intimate knowledge that policymakers get about conditions in the banking system if the central bank is shut out of continuing oversight of banks. Another such core responsibility is the central bank's essential function of serving as the financial system's lender of last resort. Even in normal times, banks turn to the Fed to borrow money on occasion, and the Fed needs to know what shape an institution is in before it lends to it. Second-hand information from another regulator wouldn't cut it.

Third, Dodd wants to create a single bank regulator, combining the functions of the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the state-chartered bank supervisory functions of both the Federal Deposit Insurance Corp. and the Fed. The Fed's bank holding company responsibilities would go there too.

Good luck.

This new agency would have to absorb the bank examiners of all the existing agencies at a time the banking system is still under enormous stress. New lines of authority would have to be developed, and many employees would have to be transferred to new locations. Confusion is far more likely than better regulation and oversight, at least for several years.

If you would like a model, think Department of Homeland Security.

The Obama administration has proposed keeping the Fed in a key role in financial regulation, and the overhaul legislation under consideration in the House Financial Services Committee would preserve a much larger role for the Fed than Dodd's plan.

But Dodd is up for re-election next year and he is in trouble. So he has chosen the Fed as a whipping boy as seeks to take advantage of public anger over the bailouts of some large financial institutions, and in the process recast himself as a populist after years of defending banks.

Never mind what gets damaged in the process.

Everyone knows that Russia is corrupt, but did you know just how corrupt? The short answer is: more than any other country. That, at least, is the conclusion of a survey just published by PricewaterhouseCoopers, which examines the level of economic crime around the world.

PwC canvassed more than 3,000 companies in 55 countries, 89 of them in Russia. It asked them if they had been the victim of frauds such as embezzlement, bribery and crooked accounting. Russia topped the list, with 71% of respondents reporting at least one instance of fraud during the previous twelve months.

The PwC report makes alarming reading for potential investors. The extent of fraud in Russia is even worse than in Kenya (67%) or South Africa (62%), the next countries down the list. Russia’s score was also far above the global average (30%), as well as the averages for Central and Eastern Europe (34%) and BRIC countries (34%). What’s more, there has been a “shocking” rise in the prevelance of fraud in Russia since the last PwC survey in 2007. 

The report comes just a few days after Transparency International published its annual Corruption Perceptions Index, in which Russia scored lamentably in 146th place, level-pegging with Zimbabwe and Sierra Leone.

As if to ram home the point, the two reports also came the same week that Russian authorities reported an audacious attempt to embezzle $44 million from Russia’s Pensions Fund. (Unlike a similar swindle in March, this one was foiled at the last minute).

The recent surveys illustrate the huge gap that exists between official rhetoric and depressing reality in Russia. During his election campaign last year, President Medvedev made great play of his determination to fight what he called “legal nihilism”. He returned to this theme last week in his annual state-of-the-nation address, garnering rapturous applause with a promise “to sling [corrupt officials] into jail”.

But it's hardly surprising that these fine-sounding words are met with weary scepticism by both ordinary Russians and foreign investors. Although Medvedev has drafted a package of new laws designed to fight corruption, Russia already has many laws that look wonderful on paper, but are never properly enforced.

Medvedev’s crackdown will in any case remain superficial, unless he also links it with wider democratic reforms, aimed at bolstering independent civil and political institutions capable of keeping the authorities in check. For example, greater public disclosure of information will be useless, unless there is also a strong and independent media, willing to use such information to campaign energetically against bent officials.

That is hardly a description of modern Russia. Even when newspapers do report about corruption – often at great risk to their journalists – the political reaction is usually non-existent. Russia’s most important medium, television, is firmly under state control, ignoring news that might embarrass the authorities. So far, Medvedev has shown no great inclination to break with this tradition.

The second fundamental problem is that Russia’s law enforcement agencies are themselves among the most corrupt institutions in the country, frequently aiding and abetting corporate fraud. A powerful call for action is published today in The Moscow Times by Jamison Firestone, a colleague of the lawyer Sergei Magnitsky, whose death in police custody this week has sparked an international outcry.

The need for police reform has become more obvious than ever over recent weeks, after a wave of police whistleblowers took to Youtube. Although Medvedev has acknowledged that there are widespread problems in the law enforcement agencies, he has proposed no serious reforms, calling instead for rigorous “internal investigations”. Such a timid, hands-off approach explains why corruption in Russia is today more rampant than ever.

Why  is the Motorola Droid apparently gaining traction in the smartphone market, when Microsoft and Nokia are failing so miserably?

The Droid, built on Google's Android mobile operating system, sold 250,000 in its first week on the market. That's way behind the 1.6 million iPhone 3Gs sold in the first week after its launch, but it's still enough for Motorola to see possible salvation after years of decline and for Google to feel self-congratulatory about its venture into mobile.

Some of the success of the Droid, and the increasing number of Android-based phones available, can be ascribed to its clean and versatile operating system. Reviewers and users agree that Android still lags the iPhone, but the gap is closing. In contrast, Microsoft's Windows Mobile has stumbled through numerous iterations -- it's now on version 6.5 -- and endless renamings. No one has ever liked it.

 Nokia once ruled the roost with its Symbian-based smartphones, but its market share has been declining steadily. Nokia still sells more mobile phones than anyone else in the world, but Apple -- which sold 7 million phones versus 113 million for Nokia in Q3 -- astoundingly makes more profit, $1.6 billion on handsets in Q3 this year against $1.1 billion for Nokia.

The operating system alone, however, doesn't explain the Droid's initial success, or even the iPhone's ascendancy. What Apple has done so successfully is build a thriving ecosystem around its product. The various Android-based phones are following the same path. There are now more than 100,000 applications (dubbed apps) for the iPhone, with hundred more appearing every week. As the advertisements tell consumers, there's an app for that, whether it is timing your cooking for a complicated dinner party, using Facebook, tracking FedEx packages or getting snow reports from ski resorts.

As more apps are developed, there are more and more reasons to buy an iPhone rather than the competitor, the phenomenon economists call network effects. In contrast, there are about 10,000 apps available for Android-based phones. That probably covers the vast bulk of what most users want to do, but the perception is that the iPhone can do much more (hence the Droid's advertising slogan: Droid Does).

Apps, overwhelmingly built by third-party developers, are nothing new. Apple's innovative idea was to put an app store on its device, so users could browse, choose and buy apps casually and spontaneously. You didn't need to search for different vendors, or download apps to your computer for future syncing with your phone. So the ecosystem becomes the phone itself, the app store and the thousands of developers.

But there's a dilemma with such an ecosystem which is being exposed by the contrast between the iPhone and Android. The differing philosophies pose a choice companies in other fields seeking the benefits of an ecosystem around their products will need to weigh. True ecosystems grow organically, and the process can be messy. One reason why many companies have shied away from encouraging an ecosystem around their products is that coordination and control can be difficult. Apple and Android take radically different approaches.

Apple exercises severe control on what developers can do. Apps go through an opaque, lengthy and at times arbitrary review process before they are accepted into the App Store. Apps can be rejected without explanation. One developer, Rogue Amoeba, says that it took four months to get a bug fix approved for one of its apps. One of the most prominent app developers, Joe Hewitt, who created the Facebook app for the iPhone, recently announced that he was quitting developing for the platform because of Apple's review process. Another prominent developer, Justin Williams, also stopped his iPhone development, tweeting, "Baseless app rejections, an unsustainable pricing structure, piss-poor developer relations and a blackbox review system. Where do I sign up?"

Android, in contrast, is letting a thousand flowers bloom in its ecosystem. There is no approval system to put your app in the Android Market. That may sound a recipe for chaos and a steady stream of junk apps, but the web is a similarly open and unrestricted. No one can tell a web developer that they can't launch their new idea, which has led to extraordinary innovation (as well as plenty of junk).There are certainly problems for developers in the Android model, particularly that different handset manufacturers use different versions of the Android system, meaning it's hard to develop one app that can work across many phones. But the best developers relish the freedom Android provides.

For an ecosystem to succeed it will need the best developers. Apple's policy of near-tyrannical control ensures certain quality and standards, but it also risks scaring off the best talent.

The New York Fed reports that investors only requested financing for $72.2 million of new CMBS loans through its TALF program.  Since there's only been one, the $400 million offering from Developers Diversified, it raises an interesting question: would investors prefer to go it alone without perceived government strings attached rather than juice returns through leverage?

Though I'm still skeptical about what this means for the billions of loans that still need to be refinanced, this is a good sign for the CMBS market and one that issuers are sure to notice. Demand is out there whether there's nonrecourse loans or not.

Wall Street's response to public criticism has mainly been exercises in "never apologize, never explain."

Which makes today's mea culpa by Lloyd Blankfein all the more extraordinary. Bloomberg News reports:

“We participated in things that were clearly wrong and have reason to regret,” Blankfein, 55, said at a conference in New York hosted by the Directorship magazine. “We apologize.”

Such a simple and direct admission should have been made by a number of financial executives months ago, but it is to Blankfein's credit that he has made it even as the pressure on Wall Street from Washington seems to be diminishing.

Reining in bonus pay and doing more on the charitable front would go a long way toward improving the image of a firm that is still associated in the public's mind with a large vampire squid. But these words from Blankfein will be felt just as keenly.

Sure, Timothy Geithner led the negotiations with AIG counterparties when he headed the New York Fed last year, but TARP special inspector Neil Barofsky's audit is damning where it really hurts the Fed. It raises the question of whether the central bank is a tough enough regulator at a time when Senator Christopher Dodd is calling for the Fed to be stripped of such power over big banks.

Big Picture has posted the report in its entirety.

It's one thing to be a bad regulator during the boom years when, let's face it, there were bad regulators everywhere. But to shrink from tough negotiations with banks during the height of the crisis when those banks were already benefiting from billion of dollars in state aid will be harder to explain away, though the New York Fed has tried.

From the report:

FRBNY's decision to treat all counterparties equally (which FRBNY officials described as a "core value" of their organization), for example gave each of the major counterparties (including the French banks) effective veto power over the possibility of a concession from any other party...

It also arguably did not account for significant differences among counterparties, including that some of them had received very substantial benefits from FRBNY and other Government agencies through various other bailout programs (including billions of dollars of taxpayer funds through TARP), a benefit not available to some of the other counterparties (including French banks)...

...the refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely "voluntary," made the possibility of obtaining concessions from those counterparties extremely remote.

Sure, it's a fine line of when to use such leverage, but the report goes on to note that the Fed didn't shy away from using it when, for example, it and Treasury compelled banks to take TARP funds. Similarly, the government played hard core with General Motors and Chrysler creditors when the automakers barreled toward bankruptcy.

The conspiracy theorists are sure to jump on the below.

There is no question that the effect of the FRBNY's decisions - indeed, the very design of the federal assistance to AIG - was that tens of billions of Government money was funneled inexorably and directly to AIG's counterparties.

I don't think the Fed and Geithner set out intentionally to save AIG so banks would get paid,  but their unwillingness to play hardball is damning and undermines the argument that the Fed is tough enough to regulate the now even bigger, and more powerful Wall Street banks.

The Fed did an incredible job navigating the credit crisis. It may have come late to the game, but it moved quickly to soften the blow of the financial markets' implosion. But if it wants to continue being regulator-in-chief of the bank holding companies, it better show that it has the chops and fast.