by David Sirota
When a city is forced to spend more on Wall Street fees than on basic public services, it is the sign of trouble. When that city is one of America's biggest population centers, it is the sign of a burgeoning crisis.
That's the key takeaway from a recent report looking at what has been happening in Los Angeles over the last few years. Published by the union-backed Fix LA Coalition, the report details how the city has slashed its spending in the wake of revenue losses from the Wall Street-engineered financial crisis. Yet, as the analysis shows, the city is nonetheless still being crushed by Wall Street — in this specific case, it is being forced to spend $300 million a year on financial fees. For some context, that's more than the city spends each year maintaining all of its roads.
So what specifically are these fees? According to the data, roughly $200 million worth of fees go to Wall Street money managers who oversee some of the city's pension investments. Yet, that's only a conservative estimate gleaned from analyzing documents that are publicly available. Because there's no one central accounting of the fees, and because other fees may be secret, the report notes that, just like in most locales, "neither the boards nor the investment staff employed by the boards know (exactly) how much they pay in total fees."
Moving forward, Los Angeles is now on the hook for $65.8 million worth of new fees in the next 14 years, thanks to a 2006 interest-rate swap deal.
"(Those) deals were sold on the assumption that they would save L.A. taxpayers money," notes the report. "But after the banks crashed the economy, the federal government drove down interest rates as part of the bank bailout, and now the banks are reaping a windfall at taxpayers' expense."
If this latter part of the story sounds familiar, that's because it is all too common.
Indeed, as my PandoDaily colleague Nathaniel Mott and I reported this week, this particular scheme has plagued cities across the country.
For instance, a recent study by former Goldman Sachs investment banker Wallace Turbeville documented how an interest-rate swap deal was a big driver of Detroit's fiscal crisis. In his report documenting Wall Street's demands for "upwards of $250-350 million in swap termination payments," Turbeville concluded that "a strong case can be made that the banks that sold these swaps may have breached their ethical, and possibly legal, obligations to the city in executing these deals."
Likewise, Rolling Stone's Matt Taibbi documented how interest-rate swaps in connection with a water treatment plant were at the heart of Jefferson County, Alabama's infamous bankruptcy.
Meanwhile, a front-page New York Times story in 2010 showed how a swap deal in Denver orchestrated by then-superintendent Michael Bennet blew a hole in the city's school budget. In 2013, Bloomberg News reported that "Wall Street banks collected $215.6 million that Denver's public schools paid to unwind swaps and sell bonds" — a sum that "is about two-thirds of annual teaching expenses."
Recounting all of this is enough to depress anyone, but there is at least some sliver of good news. As of this week, Los Angeles city councilor Paul Koretz is proposing to exclude the banks at the center of the interest-rate scheme from any future business with the city unless those banks renegotiate the terms of their rapacious deal.
While this may not be a comprehensive solution, and while it may not work perfectly, it is a start. Indeed, the proposal shows that there are still ways for cities to start combating Wall Street's most destructive schemes. The fight is certainly long overdue, but better late than never.
A political fight in Chicago could determine the future of pensions and public services.
At issue is whether public employee pension benefits should be slashed. Mayor Emanuel claims that, "If we make no reforms at all across our pension funds, we would have to raise City property taxes by 150%.... Businesses and families would flee, not just from our city but from our state." By 2017, he claims the city will have to pay $2.4 billion a year into the pension fund.
The public employee unions and community activists contend that city's fiscal problems could be solved easily through a small sales tax on financial trades on the Chicago Mercantile Exchange and the Chicago Board Options Exchange.
The outcome may determine the health and well-being of pension funds as well as public services all across the country.
Wall Street buys a Mayor?
When Rahm Emanuel worked as a presidential assistant in the Clinton administration, he earned $118,000 a year. After he left his White House job in 1998, he got a raise, making over $18 millionin the next two and a half years working for the "boutique" investment banking firm of Wasserstein Perella. Emanuel had no previous banking experience.
Ken Griffin, the CEO of the Chicago-based Citadel hedge fund and "his wife Anne Dias Griffin, donated more than $200,000 to Mayor Emanuel’s campaign for Mayor in 2011," report David Sirota and Ben Joravsky in Pandodaily. "Griffin describes the mayor as his 'good friend'. Other Citadel employees have donated about $178,000 to Emanuel’s campaign."
The 45-year-old Griffin's income for 2013 was $900 million (or about $492,632 an hour).
Apparently a good deal of his income comes from high-frequency trading (see my summary) that runs through the two Chicago financial exchanges. "His Citadel LLC returned more than 300 percent in a fund started as a high-frequency strategy," according to Bloomberg News.
Griffin, alone, could fund all of Chicago's pension liabilities for the current year (estimated at $692 million) and still have $208 million left to scrap by on. Yet Griffin is terribly worried that the mayor is being too soft on retirees. He "castigated Chicago and Illinois politicians for not making 'tough choices,' blaming Democrats who control city, county and state government for not fixing pension, education and crime problems," reports Crain's.
"On March 5," report Sirota and Joravsky, "Chicago’s city council overwhelmingly voted to approve Mayor Rahm Emanuel’s proposal to divert $55 million of taxpayer resources into a new privately run hotel in the city’s south loop." The Marriot was selected to run "one of America’s largest hotels next to America’s largest convention center—and doing so with massive taxpayer subsidies, but without having to pay to construct the hotel and without having to pay property taxes."
As luck would have it, Griffin is likely to make a great deal of money on this deal: "In the months before the development deal was announced, Griffin’s hedge fund was buying up large blocs of Marriott stock." What a coincidence!
Why Does a Millionaire Mayor and a Billionaire Hedge Fund CEO Team Up to Attack Public Pensions?
Because that's where the money is, and lots of it. Mayors and governors want to reduce pension fund contributions so that they can continue to lavish tax breaks and subsidies on their corporate patrons and still balance their budgets. In Chicago, the yearly cost of those corporate tax subsidies is already higher than the yearly costs of Chicago's pension fund outlays, according to an analysis by Goods Jobs First.
Hedge funds and other financial firms join the attack, and perhaps instigate it in the first place, because they want the lucrative business of advising and investing all those pension dollars. In New Jersey, Governor Christie's administration awarded a $300 million pension management contract to a controversial hedge fund thatalso is major contributor to Christie's re-election campaign.
The Wall Street-trained treasurer of Rhode Island, Gina Raimondo, rammed through severe cuts to public pension funds, while her hedge fund allies lined up at the trough. As Matt Taibbi reports, Rhode Island's "strategy for saving money involved handing more than $1 billion—14 percent of the state fund—to hedge funds, including a trio of well-known New York-based funds: Dan Loeb's Third Point Capital was given $66 million, Ken Garschina's Mason Capital got $64 million and $70 million went to Paul Singer's Elliott Management."
The amazing irony is there would be no talk of a pension "crisis" at all were it not for the fact that Wall Street crashed the economy. The hedge funds that covet pension fund reform and pension fund contracts were full partners in the reckless gambling spree that took down the economy and destroyed 8 million jobs in a matter of months. As economist Dean Baker shows the pension shortfall is primarily the result of the 2007-'08 crash in the financial markets. "If pension funds had earned returns just equal to the interest rate on 30-year Treasury bonds in the three years since 2007, their assets would be more than $850 billion greater than they are today."
The lesson learned should be this: If you use hedge funds to run your pension funds, you'll get fleeced come the next crisis.
Why Are the Financialists Getting Away With It?
Rahm Emanuel, Chris Christie and hundreds of other politicians are able to attack public pension funds with impunity because defined benefit pensions in the private sector are an endangered species. One demagogic question is all they need to ask and they ask it again and again:
"Why should you pay taxes for public employee benefits that you don't have?"
Such an attack only works because Wall Street already has systematically destroyed private sector defined benefit pension funds—which are funds that provide retirees with a set payment for life (and sometimes beyond for spouses). Employers can reduce their costs by switching from defined benefit pensions to defined contribution 401ks. Better yet they might be able to eliminate the employer contributions altogether. Employees usually benefit more from defined benefit pensions and are very reluctant to see them altered. (For more about defined pension funds see here.)
As the chart below demonstrates less than 15 percent of private sector employees now have defined benefit pension programs, down from nearly 40% in 1979. Meanwhile, 401ks have grown from 16% to over 42%. This didn't happen by accident.
Wall Street Strip-Mines Private Pension Funds
Defined pension funds are disappearing for two overlapping reasons. The first is that unions, the main driver of defined-benefit pensions, are in decline. Today, union's represent less than 7 percent of the private sector workforce, down from 35% in 1955. But that's only part of the story.
The most crucial cause is the deregulation of the financial sector which started in the late 1970s. Once freed from their New Deal shackles, corporate raiders (now called private equity firms, hedge funds and investment firms) strip-mined thousands of corporations using borrowed money. Those debts were (and still are) placed on the books of the target company and its cash flow is used to pay the interest on the debts as well as pay huge sums to the raiders, their investment advisors, their bankers, and the compliant top managers of the target company.
How does the target firm pay for all these new costs? The raiders, of course, claim that through their own entrepreneurial genius, they "unlock" hidden value. In reality, they milk the company in every way imaginable. They sell off product lines, shut down facilities, move work off-shore, slash R&D, and raid the pension fund, claiming it was "overfunded." Often the target company also tries to discontinue the pensions entirely or shift to 401ks forcing the employees to kick in most of the money. Many corporations become so loaded up with debt that they go into bankruptcy, through which they can further whittle away employee benefits and reduce or discontinue pensions.
As the financial strip-mining proceeds through thousands upon thousands of corporations, the average worker loses his or her benefits, and the financial strip-miners become filthy rich. As the chart below shows, in 1970 the top 100 CEO earned $45 for each $1 earned by the average worker. By 2006, the ratio jumped to 1,723 to one.
A Tax on Financial Strip Mining?
The financial transaction tax (sometimes called a financial speculation tax or Robin Hood Tax) is designed to retrieve some of the money that is being siphoned away from our wages, benefits and tax dollars. Because the super-rich, their hedge funds and their corporations have a myriad of ways to avoid income taxes, especially by shifting money offshore, the financial transaction tax hits them where they live—buying and selling financial assets on the markets, especially on the Chicago exchanges where derivatives and futures contracts are sold.
It is estimated that a minuscule tax ($1 dollar on both the buyer and on the seller of future contracts, and $2 on derivatives contracts) would generate $12 billion a year for Illinois. That would be $9.6 billion more than $2.4 billion pension shortfall Mayor Emanuel claims Chicago will face in 2017. That still leaves more than enough money to dramatically improve education and even make higher education tuition free in Illinois (thereby cutting into Wall Street's predatory student loan business).
While such a tax could easily fulfill the promises made to public employees, it might also be prudent and just to use some of the financial tax to create a statewide defined benefit pension fund for private sector as well as public employees. That should put an end to the divide-and-conquer tactics opportunistic politicians and their hedge fund cronies use to enrich themselves and their political ambitions.
Can the financial transaction tax become reality?
Let's take heart from what Rahm Emanuel infamously said when serving as President Obama's chief of staff at the height of the financial crisis:
"You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before."
Les Leopold is the director of the Labor Institute. His most recent book is "How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning of America's Wealth (Wiley, 2013)." His next book project will focus on why the richest country on earth is so poor.
April 26, 2014 from Sky Valley Chronicle
News & Opinion by Ellen Brown
(NATIONAL) -- Sixteen of the world’s largest banks have been caught colluding to rig global interest rates. Why are we doing business with a corrupt global banking cartel?
United States Attorney General Eric Holder has declared that the too-big-to-fail Wall Street banks are too big to prosecute. But an outraged California jury might have different ideas. As noted in the California legal newspaper The Daily Journal:
California juries are not bashful – they have been known to render massive punitive damages awards that dwarf the award of compensatory (actual) damages.For example, in one securities fraud case jurors awarded $5.7 million in compensatory damages and $165 million in punitive damages. . . . And in a tobacco case with $5.5 million in compensatory damages, the jury awarded $3 billion in punitive damages . . . .
The question, then, is how to get Wall Street banks before a California jury. How about charging them with common law fraud and breach of contract? That’s what the FDIC just did in its massive 24-count civil suit for damages for LIBOR manipulation, filed in March 2014 against sixteen of the world’s largest banks, including the three largest US banks – JP Morgan Chase, Bank of America and Citigroup.
LIBOR (the London Interbank Offering Rate) is the benchmark rate at which banks themselves can borrow. It is a crucial rate involved in over $400 trillion in derivatives called interest-rate swaps, and it is set by the sixteen private megabanks behind closed doors.
The biggest victims of interest-rate swaps have been local governments, universities, pension funds, and other public entities. The banks have made renegotiating these deals prohibitively expensive, and renegotiation itself is an inadequate remedy. It is the equivalent of the grocer giving you an extra potato when you catch him cheating on the scales. A legal action for fraud is a more fitting and effective remedy. Fraud is grounds both for rescission (calling off the deal) as well as restitution (damages), and in appropriate cases punitive damages.
Trapped in a Fraud
Nationally, municipalities and other large non-profits are thought to have as much as $300 billion in outstanding swap contracts based on LIBOR, deals in which they are trapped due to prohibitive termination fees. According to a 2010 report by the SEIU (Service Employees International Union):
The overall effect is staggering. Banks are estimated to have collected as much as $28 billion in termination fees alone from state and local governments over the past two years. This does not even begin to account for the outsized net payments that state and local governments are now making to the banks. . . .
While the press have reported numerous stories of cities like Detroit, caught with high termination payments, the reality is there are hundreds (maybe even thousands) more cities, counties, utility districts, school districts and state governments with swap agreements [that] are causing cash strapped local and city governments to pay millions of dollars in unneeded fees directly to Wall Street.
All of these entities could have damage claims for fraud, breach of contract and rescission; and that is true whether or not they negotiated directly with one of the LIBOR-rigging banks.
To understand why, it is necessary to understand how swaps work. As explained in my last article here, interest-rate swaps are sold to parties who have taken out loans at variable interest rates, as insurance against rising rates. The most common swap is one where counterparty A (a university, municipal government, etc.) pays a fixed rate to counterparty B (the bank), while receiving from B a floating rate indexed to a reference rate such as LIBOR. If interest rates go up, the municipality gets paid more on the swap contract, offsetting its rising borrowing costs. If interest rates go down, the municipality owes money to the bank on the swap, but that extra charge is offset by the falling interest rate on its variable rate loan. The result is to fix borrowing costs at the lower variable rate.
At least, that is how they are supposed to work. The catch is that the swap is a separate financial agreement – essentially an ongoing bet on interest rates. The borrower owes both the interest onits variable rate loan and what it must pay on its separate swap deal. And the benchmarks for the two rates don’t necessarily track each other. The rate owed on the debt is based on something called the SIFMA municipal bond index. The rate owed by the bank is based on the privately-fixed LIBOR rate.
As noted by Stephen Gandel on CNNMoney, when the rate-setting banks started manipulating LIBOR, the two rates decoupled, sometimes radically. Public entities wound up paying substantially more than the fixed rate they had bargained for – a failure of consideration constituting breach of contract. Breach of contract is grounds for rescission and damages.
Pain and Suffering in California
The SEIU report noted that no one has yet completely categorized all the outstanding swap deals entered into by local and state governments. But in a sampling of swaps within California, involving ten cities and counties (San Francisco, Corcoran, Los Angeles, Menlo Park, Oakland, Oxnard, Pittsburgh, Richmond, Riverside, and Sacramento), one community college district, one utility district, one transportation authority, and the state itself, the collective tab was $365 million in swap payments annually, with total termination fees exceeding $1 billion.
Omitted from the sample was the University of California system, which alone is reported to have lost tens of millions of dollars on interest-rate swaps. According to an article in the Orange County Register on February 24, 2014, the swaps now cost the university system an estimated $6 million a year. University accountants estimate that the 10-campus system will lose as much as $136 million over the next 34 years if it remains locked into the deals, losses that would be reduced only if interest rates started to rise. According to the article:
Already officials have been forced to unwind a contract at UC Davis, requiring the university to pay $9 million in termination fees and other costs to several banks. That sum would have covered the tuition and fees of 682 undergraduates for a year.
The university is facing the losses at a time when it is under tremendous financial stress. Administrators have tripled the cost of tuition and fees in the past 10 years, but still can’t cover escalating expenses. Class sizes have increased. Families have been angered by the rising price of attending the university, which has left students in deeper debt.
Peter Taylor, the university’s Chief Financial Officer, defended the swaps, saying he was confident that interest rates would rise in coming years, reversing what the deals have lost. But for that to be true, rates would have to rise by multiples that would drive interest on the soaring federal debt to prohibitive levels, something the Federal Reserve is not likely to allow.
The Revolving Door
The UC’s dilemma is explored in a report titled “Swapping Our Future: How Students and Taxpayers Are Funding Risky UC Borrowing and Wall Street Profits.” The authors, a group called Public Sociologists of Berkeley, say that two factors were responsible for the precipitous decline in interest rates that drove up UC’s relative borrowing costs. One was the move by the Federal Reserve to push interest rates to record lows in order to stabilize the largest banks. The other was the illegal effort by major banks to manipulate LIBOR, which indexes interest rates on most bonds issued by UC.
Why, asked the authors, has UC’s management not tried to renegotiate the deals? They pointed to the revolving door between management and Wall Street. Unlike in earlier years, current and former business and finance executives now play a prominent role on the UC Board of Regents.
They include Chief Financial Officer Taylor, who walked through the revolving door from Lehman Brothers, where he was a top banker in Lehman’s municipal finance business in 2007. That was when the bank sold the university a swap related to debt at UCLA that has now become the source of its biggest swap losses. The university hired Taylor for his $400,000-a-year position in 2009, and he has continued to sign contracts for swaps on its behalf since.
Investigative reporter Peter Byrne notes that the UC regent’s investment committee controls $53 billion in Wall Street investments, and that historically it has been plagued by self-dealing. Byrne writes:
Several very wealthy, politically powerful men are fixtures on the regent’s investment committee, including Richard C. Blum (Wall Streeter, war contractor, and husband of U.S. Senator Dianne Feinstein), and Paul Wachter (Gov. Arnold Schwarzenegger’s long-time business partner and financial advisor). The probability of conflicts of interest inside this committee—as it moves billions of dollars between public and private companies and investment banks—is enormous.
Blum’s firm Blum Capital is also an adviser to CalPERS, the California Public Employees’ Retirement System, which also got caught in the LIBOR-rigging scandal. “Once again,” said CalPERS Chief Investment Officer Joseph Dear of the LIBOR-rigging, “the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.” If the financial services industry cannot be trusted, it needs to be replaced with something that can be.
The Public Sociologists of Berkeley recommend renegotiation of the onerous interest rate swaps, which could save up to $200 million for the UC system; and evaluation of the university’s legal options concerning the manipulation of LIBOR. As demonstrated in the new FDIC suit, those options include not just renegotiating on better terms but rescission and damages for fraud and breach of contract. These are remedies that could be sought by local governments and public entities across the state and the nation.
The larger question is why our state and local governments continue to do business with a corrupt global banking cartel. There is an alternative. They could set up their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. Fraud could be avoided, profits could be recaptured, and interest could become a much-needed source of public revenue. Credit could become a public utility, dispensed as needed to benefit local residents and local economies.
Ellen Brown is an attorney, founder of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books, including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.
by Robert Reich
How can bad news on Main Street (only 113,000 jobs were created in January, on top of a meager 74,000 in December) cause good news on Wall Street?
Because investors assume:
(1) The Fed will now continue to keep interest rates low. Yes, it has announced its intention of tapering off its so-called “quantitative easing” by buying fewer long-term bonds in the months ahead. But it will likely slow down the tapering. Instead of going down to $55 billion a month of bond-buying by April, it will stay at around $60 billion to $70 billion.
(2) The slowdown in the Fed’s tapering will continue to make buying shares of stock a better deal than buying bonds – thereby pushing investors toward the stock market.
(3) Continued low interest rates will also continue to make it profitable for big investors (including corporations) to borrow money to buy back their own shares of stock, thereby pushing up their values. Apple and other companies that used to spend their spare cash and whatever they could borrow on new inventions are now focusing on short-term stock performance.
(4) With the job situation so poor, most workers will be so desperate to keep their jobs, or land one, that they will work for even less. This will keep profits high, make balance sheets look good, fuel higher stock prices.
But what’s bad for Main Street and good for Wall Street in the short term is bad for both in the long term. The American economy is at a crawl. Median household incomes are dropping. The American middle class doesn’t have the purchasing power to keep the economy going. And as companies focus ever more on short-term share prices at the expense of long-term growth, we’re in for years of sluggish performance.
When, if ever, will Wall Street learn?
by John Lawrence from the San Diego Free Press
When states and municipalities set up public banks, money and hence energy is withdrawn from Wall Street creating the perfect revolution with the result that the husk of Wall Street shrivels up and dies like a plant deprived of nutrients ... without a shot being fired.
Nothing could be less radical than a public bank because the state of North Dakota already has one and it has been working successfully for the citizens of North Dakota. No one would accuse North Dakotans of being socialists or would they? No new ground to break here! Instead of money leaving the state and going to Wall Street, money stays in the state where it is lent out in the form of student and business loans with the profits being shared by the citizens of North Dakota instead of going into the pockets of private bankers in New York.
The Bank of North Dakota (BND) administers lending programs that promote agriculture, commerce and industry. Financing economic development is the thrust of Bank of North Dakota’s efforts. The Bank is authorized by the legislature to assist financial institutions in the state by providing lending programs with economic development opportunities. A portion of the Bank’s profits are returned to the citizens of North Dakota through legislative appropriation and economic development programs. Alternatively, a public bank's profits could be used to cover state budget deficits and even to reduce state income taxes, something that states like California could benefit from.
But you say public banking is socialism. Capitalism demands and even dictates that banking should be in the private sector. Ellen Brown responds in her book, "The Public Bank Solution, From Austerity to Prosperity" as follows:
Not at all. Socialism is government ownership of the means of production - factories, farms, businesses and land. Public banking is not about government ownership of property but about government oversight of the system of debits and credits that undergirds a functioning economy ensuring that the system operates efficiently, fairly, securely, and to the benefit of all. Banking, money and credit are not market goods but are economic infrastructure, just as roads and bridges are physical infrastructure. Banking and credit need to be public utilities for a capitalist market economy to run properly. By providing inexpensive, accessible financing to the free enterprise sector of the economy, public banks make commerce more vital and stable.
Exactly. Capitalism is nothing more than a set of rules, a set of rules that has been heavily lobbied to benefit the richest and most powerful. To purists capitalism is the laissez faire system of supply and demand with no interference from government. Well, when have we had that? Only in some libertarians' wet dreams. Was capitalism what we had before we had the Glass-Steagall rule separating commercial and investment banking or was it in the time period that Glass-Steagall was in effect (1933-1999) or was it after Glass-Steagall was abolished which produced the crash of 2008 or is it today with the new Dodd-Frank banking rules?
Basically capitalism is whatever the government says it is. Today the free enterprise system is rigged by central banks and other large institutions. One guy, Ben Bernanke at the Federal Reserve, sets interest rates. Other interest rates like the Libor rate are rigged by the banking system itself. There is no pure price discovery by the law of supply and demand. For pure capitalism to be in effect interest rates would have to be set by the markets not government bureaucrats.
The fact that the US central bank, the Federal Reserve is printing money at the rate of $85 billion a month (quantitative easing) and giving it to the big Wall Street banks represents, if nothing else, a departure from pure capitalism. And that money doesn't go to economic development the way money deposited in the Bank of North Dakota does. That money goes into the casino economy. Ben Bernanke has no plans to "taper," that is raise interest rates even modestly or stop giving $85 billion a month to Wall Street because the bond market would flip out bringing the whole unstable edifice of present day US and Western capitalism crashing down as it did in 2008.
Ellen Brown gives a fair description of the state of US capitalism circa 2013:
The Western banking system today has all the earmarks of a giant Ponzi scheme on the verge of collapse: a global credit crisis extorting massive bailouts from the taxpayers; a derivatives casino with a US notional (or nominal) exposure of $300 trillion; governments refusing further bank bailouts; "bail in" policies in which the largest banks are being instructed to confiscate their depositors' funds if necessary [as happened in Cyprus], in a last-ditch effort to keep their doors open. "Systemically risky" hardly describes the condition of the giant derivative banks, which are like a house of cards waiting for a strong wind. Fortunately, there is a safer, more sustainable way to design a banking system.
The point is that public banking has been the salvage of other countries and jurisdictions when the Wall Street private banking system in collusion with the Federal Reserve has come crashing down. For instance, North Dakota with its public banking system survived the crash of 2008 quite nicely, thank you very much. North Dakota is the only state to escape the recent credit crisis with a budget surplus every year since 2008. It has the lowest unemployment rate in the country, the lowest credit card default rate and no state government debt at all. But North Dakota is not the only example of a well functioning public banking system, one that evaded the stategems of Wall Street which caused municipal bankruptcies throughout the western world, for instance in Birmingham, AL and San Bernardino, CA, not to mention Milan, Italy.
Internationally, publicly owned banks are quite common and countries with strong public banking systems generally have strong, stable economies. According to an Inter-American Development Bank paper presented in 2005, the percentage of state ownership in the banking industry globally was over 40% by the mid-1990s. As might be expected, these public banks are largely found in the BRIC countries - Brazil, Russia, India and China - which have made the greatest strides in the world economy in the last decade. Publicly owned banks comprise about 60% of the banks in Russia, 75% in India, more than 69% in China and 45% in Brazil. On a currency adjusted basis the economies of the BRICs are already larger than the US and the UK combined.
According to a May 2010 article in The Economist, the BRICs sailed through the banking crisis of 2008 largely because of their strong and stable publicly owned banks. And the BRICS are forming their own alliances challenging the International Monetary Fund and the World Bank as the dominant global financial institutions. They had their first formal meeting in Yekaterinburg, Russia in 2009. They represent an alternative to western style financial institutions. They have asked South Africa to join with them forming "BRICS." At their 2013 meeting in Durban, South Africa, they formally declared their intention to start a BRICS Development Bank to underwrite infrastructure projects within their own nations. This will soak up excess labor and keep unemployment low, something that the US dominated economic sphere has failed to do.
The BRICS are also calling for an alternative to the dollar as the world's reserve currency. The BRICS account for around three quarters of the world's currency reserves, have few serious fiscal issues and are net government creditors. They are coming on like gangbusters driven by their strong public banking sectors. While the US and the City of London are speculating in trillions of dollars worth of derivatives, the BRICS are engaging their public banking sectors in real economic growth and infrastructure development.
In Brazil, Lula da Silva ("Lula") became President in 2003. He rescued his largely insolvent country by enlisting its public National Economic and Social Development Bank (BNDES) to direct a fire hose of credit towards a whole host of infrastructure development projects such as road construction, dam building, bridge building, museum refurbishing etc. The BNDES was largely responsible for turning the economy around. It is the main source of long term loans in Brazil's economy. In 2009 the BNDES gave out more than $57 billion in loans, more than the World Bank which totaled only $47 billion. And because of this extension of credit, Brazil was not that affected by the global economic downturn known as the Great Recession of 2008.
What Lula accomplished in Brazil was similar to and in fact modeled on the Reconstruction Finance Corporation, one of the New Deal entities put into effect by President Franklin D Roosevelt. While the central banks of the Western world are focused on backstopping the world's private banks (the US Fed gave out over $7 trillion to them in 2008), development banks like the BNDES direct credit to the real producing economy. Brazil has wisely put its pension fund in the BNDES where, rather than being invested on Wall Street in derivatives and other speculative ventures, it was invested in the infrastructure needed to rebuild Brazil.
To be continued ... Check out Part 1 and Part 2
by John Lawrence from the San Diego Free Press
California Could Solve Its Budget Problems by Starting a Public Bank Like North Dakota Did
The most solvent state in the US is North Dakota which has low unemployment, no budget deficit and a burgeoning economy. The main reason is that the state has a public bank (BND) in which state revenues and pension funds can be invested making it unnecessary to send the money out of the state to Wall Street. All state revenues are deposited in the BND by law. Instead of Wall Street making the profits on North Dakota's money, North Dakota is making the profits.
Instead of paying interest on debt bonds, North Dakota is reinvesting the interest its public bank makes on infrastructure improvements and lowering state income taxes among other things. Whereas private banks are required by law to extract as much in debt service as the market will bear, a public bank can pass on the lower interest rates it has access to to its customers such as public agencies, local businesses and residents. Infrastructure projects are effectively interest free since the bank returns interest on its loans to the state treasury in the form of an annual dividend.
The BND's revenues have been a major boost to the state budget. In the first decade of this century the BND contributed over $300 million to state coffers, a substantial sum for a state with a population one-fifteenth the size of Los Angeles County. In April 2011 the BND reported annual profits of over $62 million. These profits belong to North Dakota's citizens and they are generated without state income taxes. In fact the BND added nearly as much to the state's general fund from 2007 to 2009 as oil and gas tax revenues did.
As mentioned in Part 1, California could follow North Dakota's lead and start a public bank. The Public Bank of California (PBC) could reap the interest on California's immense pension funds instead of paying interest to Wall Street. The California Public Employees’ Retirement System, or CalPERS, is the nation’s largest pension fund for government workers. CalSTRS is the pension fund that provides retirement benefits for California's teachers. Together these funds have $400 billion in assets, a huge pot of money which they have been farming out to Wall Street in the hopes of growing this prodigious sum even more. Echoing former New York Mayor Ed Koch, we might ask 'how is Wall Street doing?'
Ellen Brown in her book The Public Bank Solution responds this way:
"Every year from the 2008 banking crisis up through 2012, the BND has reported a return on investment of between 17 percent and 26 percent. Compare that to California's pension funds - CalPERS and CalSTRS - the largest pension funds in the world. From a peak of $260 billion in 2007, CalPERS fell to $160 billion in March 2009, a 37% decline. CalSTRS peaked at $180 billion in October 2007 and dropped to $112 billion in the same period, a 34% decline. They did better in 2011 and 2012, but they are still way below where they were before the crisis. For their questionable performance in managing the CalPERS portfolio, Wall Street firms reported earning $1.1 billion in 2010."
Many pension funds, not just California's, have lost money on Wall Street investing in fancy derivatives. Many cities have gone bankrupt investing in interest rate swaps. Take San Bernadino and Stockton, for example. Their bankruptcies have let them off the hook for their contributions to CalPERS making that pension fund even worse off. All of this could have been prevented if, instead of farming California municipal and state revenues out to Wall Street, those same revenues could have been invested by a public bank, whether at the state or municipal level. Monies thus invested would not have had to leave the state, would have been earmarked for the benefit of Californians and not subjected to the profit imperatives of Wall Street.
A California public bank could use its power to create credit in many ways. It would have the same power of fractional reserve banking as any other bank. That is it could take in deposits and loan out ten times the amount of those deposits using the deposits as collateral. Instead of paying bond interest to Wall Street, the California public bank (PBC) could use collected interest to pay down its budget deficit. In November 2010 the state of California had outstanding general obligation bonds and revenue bonds of $158 billion. Of that $70 billion was owed just for interest! If California had been funding its debt through its own public bank, the state could have saved that $70 billion which would have been enough to pay its budget deficit several times over. By depositing its revenues and investing its capital on Wall Street, the state is effectively giving this money away to line the pockets of Jamie Dimon, CEO of JP Morgan Chase, and Lloyd Blankfein, CEO of Goldman Sachs.
As a recent example of the fleecing of California by Wall Street consider the new San Francisco-Oakland Bay Bridge which just opened recently. The price tag for the new east span jumped from an estimated $1.3 billion in 1996 to $6.3 billion in 2009 to an estimated final price of over $12 billion. due largely to interest on bond debt and other Wall Street finance charges. Commuters will be paying this debt off until at least 2049. Tolls have shot up to $6 during rush hours for regular vehicles and $35 for some trucks. Debt servicing now eats up 55.2% of toll revenue. With a PBC this debt service would be plowed right back into public coffers for the benefit of taxpayers and no toll might be required at all.
Public banking is now under consideration by at least 20 states. Among the states now considering the establishment of a public bank is Pennsylvania. You can check out their website here. This is from their website: "Through partnerships with community banks, credit unions, savings and loans and municipal authorities, public banks inject sustainable and affordable credit into local economies: for business start up and expansion, farmers, students, home buyers and home builders, economic development, infrastructure, assistance to municipalities and jobs."
It is not just states that can establish public banks. They can be set up by cities and municipalities as well. The City of San Diego could start one. If it did, there might be funds available for such things as improving neighborhoods, fixing potholes, keeping libraries open longer hours, fixing infrastructure such as water lines which burst frequently, more parks and recreation, building adequate facilities for the homeless and many other items. Too bad we just lost a Mayor who might have been interested.
by Robert Reich
Five years ago this September, Lehman Brothers went bankrupt, and the Street hurtled toward the worst financial crisis in eighty years. Yet the biggest Wall Street banks are far larger now than they were then. And the Dodd-Frank rules designed to stop them from betting with the insured deposits of ordinary savers are still on the drawing boards — courtesy of the banks’ lobbying prowess. The so-called Volcker Rule has yet to see the light of day.
To be sure, the banks’ balance sheets are better than they were five years ago. The banks have raised lots of capital and written off many bad loans. (Their risk-weighted capital ratio is now about 60 percent higher than before the crisis.)
But they’re back to too many of their old habits.
Consider JPMorgan Chase, the largest of the bunch. Last year it lost $6.2 billion by betting on credit default swaps tied to corporate debt — and then lied about it. Evidence shows the bank paid bribes to get certain counties to buy the swaps. The Justice Department is investigating the bank over improper energy trading. That follows the news that the anti-bribery unit of the Security and Exchange Commission is looking into whether JPMorgan hired the children of Chinese officials to help win business. The bank has also allegedly committed fraud in collecting credit card debt, used false and misleading means of foreclosing on mortgages, and misled credit-card customers in seeking to sell them identity-theft products. The list goes on.
JPMorgan’s most recent quarterly report lists its current legal imbroglios in nine pages of small print, and estimates resolving them all may cost as much as $6.8 billion. That’s not much more than a pittance for a company with total assets of $2.4 trillion and shareholder equity of $209 billion.
Which is precisely the point. No company, least of all a giant Wall Street bank, will eschew a chance to make a tidy profit unless the probability of getting caught and prosecuted, multiplied times the amount of any potential penalty, is greater than the expected profits.
Have we learned nothing since September, 2008? Five years ago this month Wall Street almost went under. We bailed it out. Millions of Americans are still suffering the consequences of the Street’s excesses. Yet the Street’s top guns and fat cats are still treating the economy as their own private casino, and raking in even more than before.
The fact is, the giant Wall Street banks are ungovernable — too big to fail, too big to jail, too big to curtail. They should be split up, and their size capped. There’s no need to wait for Congress to do it; the nation’s antitrust laws are adequate to the job. There is ample precedent. In 1911 we split up Standard Oil. In 1982 we split up Ma Bell. The Federal Reserve has authority to do it on its own in any event. (Would Larry Summers take such an initiative?)
Legislation is needed, however, to resurrect the Glass-Steagall Act that once separated commercial banking from casino capitalism. But don’t hold your breath.
Happy fifth anniversary, Wall Street.
Giant bank holding companies now own airports, toll roads, and ports; control power plants; and store and hoard vast quantities of commodities of all sorts. They are systematically buying up or gaining control of the essential lifelines of the economy. How have they pulled this off, and where have they gotten the money?
In a letter to Federal Reserve Chairman Ben Bernanke dated June 27, 2013, US Representative Alan Grayson and three co-signers expressed concern about the expansion of large banks into what have traditionally been non-financial commercial spheres. Specifically:
[W]e are concerned about how large banks have recently expanded their businesses into such fields as electric power production, oil refining and distribution, owning and operating of public assets such as ports and airports, and even uranium mining.
After listing some disturbing examples, they observed:
According to legal scholar Saule Omarova, over the past five years, there has been a “quiet transformation of U.S. financial holding companies.” These financial services companies have become global merchants that seek to extract rent from any commercial or financial business activity within their reach. They have used legal authority in Graham-Leach-Bliley to subvert the “foundational principle of separation of banking from commerce”. . . .
It seems like there is a significant macro-economic risk in having a massive entity like, say JP Morgan, both issuing credit cards and mortgages, managing municipal bond offerings, selling gasoline and electric power, running large oil tankers, trading derivatives, and owning and operating airports, in multiple countries.
A “macro” risk indeed – not just to our economy but to our democracy and our individual and national sovereignty. Giant banks are buying up our country’s infrastructure – the power and supply chains that are vital to the economy. Aren’t there rules against that? And where are the banks getting the money?
How Banks Launder Money Through the Repo Market
In an illuminating series of articles on Seeking Alpha titled “ Repoed!”, Colin Lokey argues that the investment arms of large Wall Street banks are using their “excess” deposits – the excess of deposits over loans – as collateral for borrowing in the repo market. Repos, or “repurchase agreements,” are used to raise short-term capital. Securities are sold to investors overnight and repurchased the next day, usually day after day.
The deposit-to-loan gap for all US banks is now about $2 trillion, and nearly half of this gap is in Bank of America, JP Morgan Chase, and Wells Fargo alone. It seems that the largest banks are using the majority of their deposits (along with the Federal Reserve’s quantitative easing dollars) not to back loans to individuals and businesses but to borrow for their own trading. Buying assets with borrowed money is called a “leveraged buyout.” The banks are leveraging our money to buy up ports, airports, toll roads, power, and massive stores of commodities.
Using these excess deposits directly for their own speculative trading would be blatantly illegal, but the banks have been able to avoid the appearance of impropriety by borrowing from the repo market. (See my earlier article here.) The banks’ excess deposits are first used to purchase Treasury bonds, agency securities, and other highly liquid, “safe” securities. These liquid assets are then pledged as collateral in repo transactions, allowing the banks to get “clean” cash to invest as they please. They can channel this laundered money into risky assets such as derivatives, corporate bonds, and equities (stock).
That means they can buy up companies. Lokey writes, “It is common knowledge that prop [proprietary] trading desks at banks can and do invest in a variety of assets, including stocks.” Prop trading desks invest for the banks’ own accounts. This was something that depository banks were forbidden to do by the New Deal-era Glass-Steagall Act but that was allowed in 1999 by the Gramm-Leach-Bliley Act, which repealed those portions of Glass-Steagall.
The result has been a massively risky $700-plus trillion speculative derivatives bubble. Lokey quotes from an article by Bill Frezza in the January 2013 Huffington Post titled “Too-Big-To-Fail Banks Gamble With Bernanke Bucks”:
If you think [the cash cushion from excess deposits] makes the banks less vulnerable to shock, think again. Much of this balance sheet cash has been hypothecated in the repo market, laundered through the off-the-books shadow banking system. This allows the proprietary trading desks at these “banks” to use that cash as collateral to take out loans to gamble with. In a process called hyper-hypothecation this pledged collateral gets pyramided, creating a ticking time bomb ready to go kablooey when the next panic comes around.
That Explains the Mountain of Excess Reserves
Historically, banks have attempted to maintain a loan-to-deposit ratio of close to 100%, meaning they were “fully loaned up” and making money on their deposits. Today, however, that ratio is only 72% on average; and for the big derivative banks, it is much lower. For JPMorgan, it is only 31%. The unlent portion represents the “excess deposits” available to be tapped as collateral for the repo market.
The Fed’s quantitative easing contributes to this collateral pool by converting less-liquid mortgage-backed securities into cash in the banks’ reserve accounts. This cash is not something the banks can spend for their own proprietary trading, but they can invest it in “safe” securities – Treasuries and similar securities that are also the sort of collateral acceptable in the repo market. Using this repo collateral, the banks can then acquire the laundered cash with which they can invest or speculate for their own accounts.
Lokey notes that US Treasuries are now being bought by banks in record quantities. These bonds stay on the banks’ books for Fed supervision purposes, even as they are being pledged to other parties to get cash via repo. The fact that such pledging is going on can be determined from the banks’ balance sheets, but it takes some detective work. Explaining the intricacies of this process, the evidence that it is being done, and how it is hidden in plain sight takes Lokey three articles, to which the reader is referred. Suffice it to say here that he makes a compelling case.
Can They Do That?
Countering the argument that “banks can’t really do anything with their excess reserves” and that “there is no evidence that they are being rehypothecated,” Lokey points to data coming to light in conjunction with JPMorgan’s $6 billion “London Whale” fiasco. He calls it “clear-cut proof that banks trade stocks (and virtually everything else) with excess deposits.” JPM’s London-based Chief Investment Office [CIO] reported:
JPMorgan’s businesses take in more in deposits that they make in loans and, as a result, the Firm has excess cash that must be invested to meet future liquidity needs and provide a reasonable return. The primary reponsibility of CIO, working with JPMorgan’s Treasury, is to manage this excess cash. CIO invests the bulk of JPMorgan’s excess cash in high credit quality, fixed income securities, such as municipal bonds, whole loans, and asset-backed securities, mortgage backed securities, corporate securities, sovereign securities, and collateralized loan obligations.
That passage is unequivocal—it is as unambiguous as it could possibly be. JPMorgan invests excess deposits in a variety of assets for its own account and as the above clearly indicates, there isn’t much they won’t invest those deposits in. Sure, the first things mentioned are “high quality fixed income securities,” but by the end of the list, deposits are being invested in corporate securities [stock] and CLOs [collateralized loan obligations]. . . . [T]he idea that deposits are invested only in Treasury bonds, agencies, or derivatives related to such “risk free” securities is patently false.
[I]t is no coincidence that stocks have rallied as the Fed has pumped money into the coffers of the primary dealers while ICI data shows retail investors have pulled nearly a half trillion from U.S. equity funds over the same period. It is the banks that are propping stocks.
Another Argument for Public Banking
All this helps explain why the largest Wall Street banks have radically scaled back their lending to the local economy. It appears that JPMorgan’s loan-to-deposit ratio is only 31% not because the bank could find no creditworthy borrowers for the other 69% but because it can profit more from buying airports and commodities through its prop trading desk than from making loans to small local businesses.
Small and medium-sized businesses are responsible for creating most of the jobs in the economy, and they are struggling today to get the credit they need to operate. That is one of many reasons that banking needs to be a public utility. Publicly-owned banks can direct credit where it is needed in the local economy; can protect public funds from confiscation through “bail-ins”resulting from bad gambling in by big derivative banks; and can augment public coffers with banking revenues, allowing local governments to cut taxes, add services, and salvage public assets from fire-sale privatization. Publicly-owned banks have a long and successful history, and recent studies have found them to be the safest in the world.
As Representative Grayson and co-signers observed in their letter to Chairman Bernanke, the banking system is now dominated by “global merchants that seek to extract rent from any commercial or financial business activity within their reach.” They represent a return to a feudal landlord economy of unearned profits from rent-seeking. We need a banking system that focuses not on casino profiteering or feudal rent-seeking but on promoting economic and social well-being; and that is the mandate of the public banking sector globally.
by John Lawrence from the San Diego Free Press
States, Cities and Pension Funds Have Gone into Debt to Wall Street When They Could Have Started a Public Bank and Paid Interest to Themselves
Public banks plow their revenues back into community needs like infrastructure, education, health facilities, local enterprises and other public banks. When municipalities, cities, states, countries and even smaller jurisdictions like school districts fund their deficits with Wall Street, the profits go into the pockets of executives and investors. Currently, only the state of North Dakota has a public bank. As a consequence North Dakota suffered very little from the Great Recession of 2008, has a robust economy and no budget deficit. California on the other hand struggles every year with its budget because it pays a lot of interest on its loans to Wall Street. If California had a public bank similar to North Dakota's, it would have no budget deficit at all and could fund its infrastructure needs out of its own revenues.
Many pension funds have gone bust lately because the cities funding them have gone bankrupt. Take Detroit for example. In bankruptcy court investors will be given priority and pensioners will be screwed. If Detroit had had a public bank instead of going into debt with Wall Street, this needn't have happened.
How do public banks differ from private banks? First, they are nothing new. Public banking has been around for centuries. All banks, both public and private, with the exception of central banks like the Federal Reserve, create money by what is know as 'fractional reserve banking.' They take in deposits and based on those deposits as collateral they loan out a multiple of those deposits, typically ten times the amount of their deposits. The general rationale is that not everyone will want their money back at the same time. If they do, that constitutes a run on the bank, and the bank is in trouble.
The Fed and other central banks simply create money out of thin air. The Fed prints money via a few keystrokes on a computer. Currently, the Fed is buying $85 billion worth of US government securities every month, a phenomenon known as 'quantitative easing'. Since by law the Fed cannot purchase US Treasury bonds directly, it uses Wall Street banks as a middleman. Wall Street then makes a nice cut simply by buying the Treasuries in order to sell them to the Fed. The money created for the bonds goes onto the Fed's balance sheet where it can stay ad infinitum because nobody or no government is going to go after the Fed to pay it back.
European countries like Greece and Cyprus have gotten themselves into trouble because they have given up their national currencies and adopted the euro. Since only the European Central Bank can print euros, these countries have borrowed money to offset their deficits from Wall Street. As they get deeper in debt, Wall Street raises the interest rate they have to pay and it becomes a downwards spiral from which they are unlikely to recover. If they had maintained their national currencies, their central banks could simply print the money needed to offset their deficits like the US does. Instead Wall Street has them in a death grip. Many European cities have also been bankrupted this way especially if they have bought fancy derivatives from Wall Street like interest rate swaps.
Take Milan for example. Milan, Italy’s second-biggest city, is one of dozens of Italian municipalities that undertook swaps — contracts in which a fixed interest rate is exchanged for a floating one — in the hopes of saving on interest payments. Instead, they ended up getting screwed as interest rates went up. They essentially placed a bet that interest rates would not go up and when they did, they ended up owing more to the Wall Street banks than they would have if they had just paid straight interest in the first place. The same thing happened to Detroit, and that's what got it and other US bankrupted cities like Birmingham, Alabama in trouble. The banks are secured creditors that will be paid in bankruptcy court before the pensioners will. There probably won't be much left for the pensioners after the banks take their cut.
What does this have to do with public banking? It turns out a lot. Ellen Brown is the leading advocate of public banking. In her books Web of Debt and The Public Bank Solution, she explains what a public bank is, how it differs from private banking and all the advantages it offers, the main advantage being that the profits flow into public coffers instead of into private pockets. The wealth so created goes to the people that the public bank serves - whether that is a state, a municipality, a country or even a hospital district - instead of to Wall Street. For example, the public state Bank of North Dakota uses its profits to reduce state income taxes among other things.
Ellen Brown states:
"A functioning economy needs bank credit to flow freely. What impairs this flow is that the spigots are under private control. Private banks use that control to their own advantage rather than to serve business, industry, and societal needs. They can turn credit on and off at will, direct it to their cronies [like hedge funds], or speculate with it; and they collect the interest on loans as middlemen. This is not just a modest service fee. Interest has been calculated to compose a third of everything we buy.
"Anyone with money has a right to lend it, of course, and any group with money can pool it and lend it; but the ability to create money-as-credit ex nihilo (out of nothing), backed by the "full faith and credit" of the government and the people, is properly a public function, and the proceeds should properly return to the public. The virtues of an expandable credit system can be retained while avoiding the parasitic exploitation to which private banks are prone, by establishing a network of public banks that serve the people because they are owned by the people."
For instance, monies collected as interest on loans by the Bank of North Dakota (BND), a public bank, are not shipped off to Wall Street but remain in the state. They can be used for student loans at reasonable rates without predatory fees for defaults. The BND website states: "The Dakota Education Alternative Loan (DEAL) is one of the most competitive alternative loans in the nation. North Dakota students or those who attend school in ND pay zero fees, have the option of a fixed interest rate of 5.70% APR or a variable interest rate of 1.78% APR effective July 1 and can count on quality local customer service. Variable rates can change quarterly and may increase. Rate will never exceed 10%." And the bank lets you consolidate other loans, something private banks won't let you do. Deferment and forbearance options are available, something private banks are much less user friendly about. The state of Oregon is considering a similar alternative for student loans.
This article has just scratched the surface of public banking. Follow on articles will get more in depth. The public banking option can exist at all levels from central banks of entire nations to banks devoted, for instance, to just one hospital district. The main thing to keep in mind is that with public banking the profits stay local where they can be devoted to solving local problems. They don't need to be shipped off to Wall Street where they will support a debt based economy controlled by Wall Street for Wall Street's benefit.
The share of our national income which goes to corporate profit is the highest it’s been since they started tracking it in 1929, while the share going to people – as salary and wages – is the lowest. And the percentage of that corporate profit which goes to Wall Street is also the highest on record.
We’re becoming a financialized economy. Never before has the manipulation of money counted for so much and the real-world economy of people and consumer goods counted for so little.
And none of it is an accident.
When Wall Street catches a cold …
The Wall Street Journal reported this Thursday that “Stock and bond prices tumbled after stronger-than-expected economic data …”
Why would good news about the economy cause the stock market to fall? The sentences continues: “… raised investor anxiety about a pullback next month in central-bank support for financial markets …”
Investors had been relying on the Federal Reserve to keep pumping up the stock market’s record run, but some mildly favorable economic reports raised fears were raised that the Fed’s market-friendly interventions might come to an end.
“We’re getting another knee-jerk reaction to fears of tapering,” a market analyst told the Journal, referring to the Fed’s monthly purchase of $85 billion in bonds. As Reuters reported last month, “Many on Wall Street believe the Federal Reserve’s monetary policy is behind record corporate earnings and the stock market’s surge to all-time highs this year.”
When Wall Street catches a cold – when it even might catch a cold — the economy catches pneumonia.
Meanwhile, the “real” economy – the one where people live, and work, and buy things – has suffered even as Wall Street and the stock market have boomed. That trend continued this week, too, Wal-Mart announced disappointing sales and lowered its projections. Its Chief Financial Officer observed that “The retail environment remains challenging in the U.S. and our international markets, as customers are cautious in their spending.”
Cisco also lowered its sales expectations. As the Journal article notes, these announcements added to the fear that the Fed’s interventions might wind down.
This stock market story illustrates the gulf between a stock-market economy increasingly driven by the banking industry – an economy which has been booming, today’s news notwithstanding – and a human economy wracked by consumer fears, falling wages, joblessness, and low-level jobs for a growing number of people who are working.
The gulf between these two economies drove this morning’s stock market story. It’s also driving the long-term depression-like misery which holds millions of Americans in its grip.
This is not the playing out of some divinely-decreed order. The financialization of the US economy is the result of very deliberate governmental choices. Unless different choices are made going forward, we will continue to become a “Bankistan” whose wealth and economic fate is increasingly hijacked by Wall Street.
The Federal Reserve’s data on corporate profits were helpfully compiled by a contributor to the investment site The Motley Fool, who notes that financial profits were 11 percent of total corporate profits in the US back in 1947, the first year these numbers were compiled.
These profits soared in the first decade of the 21st Century. After taking a hit in the crisis of 2008 – a crisis which the banking industry caused – they rose again and are now at record highs. Their share of total corporate profits has risen from 11 percent to 42 percent, as of the latest report, and the Fed expects them to keep rising.
Here’s how that looks:
The money nowadays isn’t in manufacturing, or retail, or any of the other traditionally jobs-producing industries. The money now is in money.
How did this happen?
A series of policy decisions enabled this explosive growth, including the deregulation of Wall Street; the repeal of Glass-Steagall, which separated bank customers’ money from money which the bank could invest for its own profit; runaway banker salaries and bonuses, which prompted the “best and the brightest” to flock to Wall Street and apply their ingenuity to flouting the rules; and government’s increasing unwillingness to indict bankers for criminal behavior.
And then, when banker criminality and incompetence created the crisis of 2008, they were rescued by the government without being held financially or legally accountable for their wrongdoing.
The Federal Reserve continues to pursue stimulus policies that moderately help the economy as a whole, but which emphasize the economic health of banks and publicly-traded corporations over that of companies that hire workers – and therefore increase the consumption of consumer goods.
Profit by the slice …
Banks have a bigger share of the corporate-profit pie – and that pie’s bigger than ever. As Floyd Norris notes in the New York Times, the government’s revised estimate of wage and salary income is 42.6 percent of GDP, which matches the 2010 figure as the lowest percentage since this data was first captured in 1929.
Using the latest revisions to the national income and product account (NIPA) data produced by the Bureau of Economic Analysis, Norris also notes that corporate profits are now 9.6 percent of GDP. That’s the highest since these figures were first captured.
As Norris also notes, corporate taxes rose slightly in 2012 as a percentage of GDP but are still well below their historical averages. That’s not an accident either.
Meanwhile, as this chart shows, unemployment remains horrendous:
Wages actually fell for most people after the 2008 crisis, as high-income individuals (the top 1 percent) captured all of the economic gains created by the government-sponsored recovery – and even enlarged their share, capturing 121 percent of the recovery as the rest of the country fell behind.
You might think that financial institutions feel indebted to the public for rescuing them. But the opposite is true: We’re indebted to them. According to the latest report from the New York Federal Reserve, auto loan balances increased by $20 billion over the previous quarter while credit card balances and student loan debt increased by $8 billion each.
The falling rates of mortgage debt, driven by range of factors which included falling housing values and foreclosures, resulted in an overall decline in total indebtedness. But these figures show that our household debt in many key areas continues to rise.
As wages and salaries decline, people are struggling to keep up with the way of life they once know. So they fall deeper in debt – a debt which allows them, and the banks, to delay the day of reckoning once again.
Fixing a Hole
These figures paint the picture of an economy that has become seriously unbalanced in favor of the banks – “financialized,” as observers increasingly describe it. How can the economy be rebalanced?
Many solutions are well-known to bank reformers and well-informed voters: Reinstate Glass-Steagall, or something very much like it. Insist on strong regulatory oversight of the banking sector, and give regulators the authority to do their jobs. End “too big to fail” banks, instead of encouraging their consolidation (as the government has done in recent years). Prosecute criminal bankers.
Other solutions are equally important. The interbank database and shell company called MERS must be ended, so that financial institutions can’t collude against consumers and the states. The Federal Reserve must demand that banks perform their central economic function – responsible lending to consumers and job-creating businesses – rather than reward them for speculation and other forms of non-productive profiteering.
(That’s why the choice of Federal Reserve head is so important.)
Genuine shareholder reform is also needed, so bankers don’t overpay themselves at shareholder expense or use the bank’s coffers as a “get out of jail” card for massive settlements caused by their own misdeeds.
Lastly, no comprehensive solution can be found until banks and other corporations are once again taxed at reasonable levels and the revenues are used to create well-paying jobs for the American middle class.
A healthy economy needs banks that lend, and consumers with the money to buy. Until that happens we’ll be living in a highly-financialized “Bankistan” that excludes most of its citizens from sharing in the American dream.
Underwater Homeowners Press Conference in front of Richmond City Hall (Photo: ACCE)Using the authority of state government to actually help people has Wall Street bankers in a panic, spurring threats of aggressive legal retaliation against the town of Richmond, California simply for trying to help some of its struggling homeowners.
'Eminent domain' has long been a dirty term for housing justice advocates who have seen municipalities invoke public seizure laws to displace residents and communities to make way for highways, shopping malls, and other big dollar projects.
But in Richmond, city officials are using eminent domain to force big banks to stop foreclosing on people's homes in an innovative new strategy known as 'Principle Reduction' aimed at addressing California's burgeoning housing crisis.
Richmond became the first California city last week to move forward on a plan that has been floated by other California municipalities to ask big bank lenders to sell underwater mortgage loans at a discount to the city (if the owner consents), and seize those homes through eminent domain if the banks refuse. The city has committed to refinancing these homes for owners at their current value, not what is owed.
City officials launched this process by sending letters in late July to 32 banks and other mortgage owners offering to buy 624 underwater mortgages at the price the homes are worth, not what the owners owe.
"After years of waiting on the banks to offer up a more comprehensive fix or the federal government, we're stepping into the void to make it happen ourselves," Mayor Gayle McLaughlin said in late July.
Wall Street is furious at the plan and has vowed to sue the municipality, a threat that did not stop Richmond but did slow other California cities in adopting the strategy.
Big banks have been slammed for their damaging mortgage loan policies that target poor and working class people and communities of color with high risk loans, policies that have had a profound impact on Richmond, which has large latino, African American, and low-income communities.
Eminent domain laws also have a painful history in Richmond, but housing justice advocates are hopeful about this new twist on the seizure law.
"For years we have seen cases where eminent domain was used in a harmful way, and it really hurts low-income communities of color," David Sharples, local director for Contra Costa Alliance of Californians for Community Empowerment, told Common Dreams. "People here in Richmond talk about when they built the big 580 Freeway, and people had their houses taken and were displaced."
"But we see this as a way eminent domain is finally being used to help keep families in their homes," he added. "It is finally a way for it to be used in a good way."
BY DAVID DAYEN
from the New Republic, August 6, 2013
Why wasn't Goldman Sachs on trial alongside Fabrice Tourre?
Last week, a jury in New York City convicted former Goldman Sachs trader Fabrice Tourre on six civil counts of securities fraud, for selling a toxic mortgage-backed bond to investors without disclosing that an architect of the deal, hedge fund Paulson & Co., also bet on its failure. This victory for the Securities and Exchange Commission signifies a long-awaited measure of justice for the unbridled greed and dirty dealing that sparked the financial crisis, but an exceedingly small one. Tourre was a young, mid-level employee (he was listed as a “vice president,” but so are hundreds of people at Goldman), not a decision-maker in executive suites throughout Wall Street. The conviction means he’ll pay a fine and probably get barred from the securities industry, an industry he’s already left to pursue a doctorate. This is hardly the level of accountability that practically the entire country demanded to see, especially when you consider that it represents the sum total of legitimate crisis-related convictions, and a non-criminal one at that.
“The SEC must stop chasing minnows while letting the whales of Wall Street go free,” noted Dennis Kelleher of the public interest group Better Markets.
Despite this, the Tourre case matters. It should lead Washington to rethink the conventional wisdom that financial regulators and Justice Department officials have spread about these cases: that they’re impossible to prosecute. It’s not just critical for how we remember the last crisis; it also shapes how we should think about the next one, whenever it comes to pass.
If you look at all the excuses for the total absence of prosecutions of major bank executives for their roles in nearly crashing the global economy, you find two major themes. First, the financial industry’s conduct was perhaps unethical but not technically illegal, especially since the peculiarities of securities law ensure that well-heeled bank executives will find some loophole to exculpate themselves from guilt. Second, juries will not be able to understand the hopelessly complex intricacies of the law, and will simply punt before agreeing beyond a reasonable doubt on the guilt of the bankers.
The Tourre case proves these both wrong. “To say [the case] discredits a silly argument gives that argument too much weight,” said Neil Barofsky, former Special Inspector General of TARP and a frequent critic of the lack of fraud prosecutions. He pointed to the numerous convictions of accounting fraud in the Enron and WorldCom era, in cases that were at least as complex as the 2008 crisis. “Ultimately fraud is fraud,” Barofsky said. “Complex issues may surround the case, but juries are more sophisticated than people give them credit for. They take their job seriously.”
That appears to be the result of the trial of Fabrice Tourre. The jury, which has been interviewed extensively, fully understood that Tourre was something of a scapegoat and not the central decision-maker at the firm. They recognized that senior executives at Goldman Sachs approved the deal, known as Abacus. And they generally discounted the damning emails from Tourre, who nicknamed himself “Fabulous Fab,” bragging about selling the toxic bonds to “widows and orphans.”
Instead, they bore down into the details, asking simple questions about whether Tourre’s lack of disclosure to investors about the designed-to-fail quality of Abacus represented securities fraud. They saw through the allegation that the industry generally did not disclose the participation of hedge funds like Paulson in derivatives deals, and focused on whether that constituted a material misrepresentation. And Tourre’s participation in the scheme, not his place on the totem pole at Goldman, was the determinative factor. The Rev. Beth Glover, a juror and a priest, summed it up: “They portrayed him as a cog, but in the end a machine is made up of cogs and he was a willing part of that.” While Toure faced civil charges with a lower burden of proof, these core insights from the jury could have been employed even in criminal financial fraud cases.
The media widely expected the jury to get bored or confused, or dismiss laying down the hammer of the law on a junior employee, and deliver a not guilty verdict. The defense must have agreed, given that they didn’t call a single witness in the case (Tourre did testify, but was called by the SEC). Everyone underestimated the jury as much as the Justice Department underestimated their authorities in the aftermath of the crisis. The truth is that there was lots of prosecutable conduct here, and the jury saw through the smokescreens and found the fraud. Replicate this dynamic for everyone involved in deals like this, which were ubiquitous on Wall Street, and you’d have enough guilty traders to fill several high-rises.
“This is the most basic thing, you win some and you lose some,” said Neil Barofsky. “If you lose one and declare you will lose them all, you will have no significant cases.” And the truth is that there were significant cases to be made against executives. At the very least, Justice could have tried to flip people like Fab Tourre, to get at their bosses. This is how you would treat any criminal syndicate, which certainly resembles Wall Street circa 2008. “These cases do have complexity, and prosecuting wealthy and powerful Wall Street bankers is a lot to chew off,” said Brandon Rees of the AFL-CIO’s Office of Investment. “But it’s vital to changing the way Wall Street operates.”
I should note here that this is largely a theoretical argument now. With the last of these dodgy deals occurring in 2007, the statute of limitations for prosecutions has largely expired. The vaunted Financial Fraud Enforcement Task Force, reinvigorated when New York Attorney General Eric Schneiderman was named to a working group to investigate mortgage securities fraud, has yielded not one criminal subpoena and few civil cases. In fact, the executive director of the task force, Michael Bresnick, abruptly resigned last week, giving one day’s notice, to become a partner at a DC law firm specializing in “white collar criminal defense.”
Without vigorous efforts, including criminal charges, to hold Wall Street firms accountable, you get an industry that predictably pursues exactly the same kinds of behavior with relative impunity. The risk-chasing structure of the financial system continues to encourage and even incentivize fraud, especially given the lack of punishment.
However, there’s a chance we can look back on the Fab Tourre saga as a turning point, not for this past crisis, but for the next one. Somewhere along the line, we’re going to have another mass crime wave on Wall Street, if it’s not happening already. And it will be good at that point for regulators like the SEC to believe that they can try a case and win. Under new Chairwoman and former federal prosecutor Mary Jo White, the SEC has rejected “neither admit nor deny settlements” where the subject doesn’t have to agree that they committed wrongdoing. The Tourre case “should embolden the SEC not to worry about complexity,” said Neil Barofsky. “It gives them more credibility with their new policy and a bit more confidence that they can pull it off.”
We don’t have a legal system that is incapable of holding banks accountable. Until now, we’ve had a regulatory and political system with a complete lack of will to carry things through. Maybe the conviction of Fabulous Fab will begin to change that.
We cautiously ascend the staircase, the pitch black of the boarded-up house pierced only by my companion’s tiny circle of light. At the top of the landing, the flashlight beam dances in a corner as Quafin, who offered only her first name, points out the furnace. She is giddy; this house -- unlike most of the other bank-owned buildings on the block -- isn’t completely uninhabitable.
It had been vacated, sealed, and winterized in June 2010, according to a notice on the wall posted by BAC Field Services Corporation, a division of Bank of America. It warned: “entry by unauthorized persons is strictly prohibited.” But Bank of America has clearly forgotten about the house and its requirement to provide the “maintenance and security” that would ensure the property could soon be reoccupied. The basement door is ajar, the plumbing has been torn out of the walls, and the carpet is stained with water. The last family to live here bought the home for $175,000 in 2002; eight years later, the bank claimed an improbable $286,100 in past-due balances and repossessed it.
It’s May 2012 and we’re in Woodlawn, a largely African American neighborhood on the South Side of Chicago. The crew Quafin is a part of dubbed themselves the HIT Squad, short for Housing Identification and Target. Their goal is to map blighted, bank-owned homes with overdue property taxes and neighbors angry enough about the destruction of their neighborhood to consider supporting a plan to repossess on the repossessors.
“Anything I can do,” one woman tells the group after being briefed on its plan to rehab bank-owned homes and move in families without houses. She points across the street to a sagging, boarded-up place adorned with a worn banner -- “Grandma’s House Child Care: Register Now!” -- and a disconnected number. There are 20 banked-owned homes like it in a five-block radius. Records showed that at least five of them were years past due on their property taxes.
Where exterior walls once were, some houses sport charred holes from fires lit by people trying to stay warm. In 2011, two Chicago firefighters died trying to extinguish such a fire at a vacant foreclosed building. Now, houses across the South Side are pockmarked with red Xs, indicating places the fire department believes to be structurally unsound. In other states -- Wisconsin, Minnesota, and New York, to name recent examples -- foreclosed houses have taken to exploding after bank contractors forgot to turn off the gas.
Most of the occupied homes in the neighborhood we’re visiting display small signs: “Don’t shoot,” they read in lettering superimposed on a child’s face, “I want to grow up.” On the bank-owned houses, such signs have been replaced by heavy-duty steel window guards. (“We work with all types of servicers, receivers, property management, and bank asset managers, enabling you to quickly and easily secure your building so you can move on,” boasts Door and Window Guard Systems, a leading company in the burgeoning “building security industry.”)
The dangerous houses are the ones left unsecured, littered with trash and empty Cobra vodka bottles. We approach one that reeks of rancid tuna fish and attempt to push open the basement door, held closed only by a flimsy wire. The next-door neighbor, returning home, asks: “Did you know they killed someone in that backyard just this morning?”
The Equivalent of the Population of Michigan Foreclosed
Since 2007, the foreclosure crisis has displaced at least 10 million people from more than four million homes across the country. Families have been evicted from colonials and bungalows, A-frames and two-family brownstones, trailers and ranches, apartment buildings and the prefabricated cookie-cutters that sprang up after World War II. The displaced are young and old, rich and poor, and of every race, ethnicity, and religion. They add up to approximately the entire population of Michigan.
However, African American neighborhoods were targeted more aggressively than others for the sort of predatory loans that led to mass evictions after the economic meltdown of 2007-2008. At the height of the rapacious lending boom, nearly 50% of all loans given to African American families were deemed “subprime.” The New York Times described these contracts as “a financial time-bomb.”
Over the last year and a half, I traveled through many of these neighborhoods, reporting on the grassroots movements of resistance to foreclosure and displacement that have been springing up in the wake of the explosion. These community efforts have proven creative, inspiring, and often effective -- but in too many cities and towns, the landscape that forms the backdrop to such a movement of hope is one of almost overwhelming destruction. Lots filled with “Cheap Bank-Owned!” trailers line highways. Cities hire contractors dubbed “Blackwater Bailiffs” to keep pace with the dizzying eviction rate.
In recent years, the foreclosure crisis has been turning many African American communities into conflict zones, torn between a market hell-bent on commodifying life itself and communities organizing to protect their neighborhoods. The more I ventured into such areas, the more I came to realize that the clash of values going on isn’t just theoretical or metaphorical.
“Internal displacement causes conflict,” explained J.R. Fleming, the chairman of the Chicago Anti-Eviction Campaign. “And there’s no other country in the world that would force so much internal displacement and pretend that it’s something else.”
Less than ten years ago, if a Wall Street trader wanted to find a sucker to buy bad mortgages, he knew where to find him: often, sitting in an office in a German landesbank in a small city, looking for a risky bets that would make him a killing.
The German network of savings and loans – 2,000 state-backed banks, fattened over time by Germans saving around 12% of their income a year – were designed to make loans to local businesses. But starting around 2004, they started following the same dangerous path as the tiny US savings and loans companies in the 1990s, which gorged on mortgage lending.
The investment managers at the German landesbanks, usually unsophisticated compared to their sharper cousins in London and New York, became reliable buyers for risky, complicated mortgage derivatives. In fact, the Germans landesbanks and other foreign investors wanted to gobble up so many mortgage-backed securities that the American banks bundling the mortgages started pandering to them: many adjustable-rate mortgages in the US, designed for overseas buyers, newly had their interest rates set to Libor, the European interest rate, as that made it easier for the European buyers of the bundled US mortgages.
The rest, you know.
The US banks packaged the mortgage derivatives faster and faster to feed the appetite for these mortgages from Germany and elsewhere. That led to lower loan standards to speed up the process of packaging the loans. By 2007, the subprime bubble burst. Foreign buyers had grabbed so many mortgages that they choked.
US banks needed bailouts. The German banks needed bailouts. European banks needed bailouts. Lawsuits funneled through the courts on two continents. We're still living the consequences.
All of which is to say, the financial system is global. There are no such things as borders in the world of finance; it's an integrated whole. A fellow sitting in an office in Hamburg or London is as likely to change our financial world as the guy sitting in a trading room on Wall Street.
That's why it's so baffling that the House of Representatives came down, this week, on the side of ignoring abuses of US-made derivatives – known as swaps – as soon as they're wired overseas. These swaps were at the heart of the London Whale trading debacle, which lost $6bn for JP Morgan Chase. The bank was otherwise sound, and survived the stupid move easily. But not every bank is JP Morgan, and the next stupid swap deal could come at a cost to taxpayers if another bank needs a bailout or government support.
The House voted overwhelmingly to let the measure – labeled the London Whale Loophole Act by critics – pass. It's one of several measures that the House has taken to weaken oversight of derivatives; the other two will come up for debate soon.
It will surprise no cynic that there is a financial connection between the members of Congress who approve these measures and the industry they are supposed to regulate. According to MapLight:
"On average, House agriculture committee members voting for HR 992 [one of the derivatives bills] have received 7.8 times as much money from the top four banks as House agriculture committee members voting against the bill."
It's no surprise, of course – given the well-known influence of Wall Street in writing and influencing the bills that regulate Wall Street. Citigroup lobbyists infamously drafted 70 lines of an 85-line amendment that protected a large acreage of derivatives from regulation.
There is more to add. Gary Gensler, the current head of the Commodity Futures Trading Commission, was part of the financial industry before he was named, and he was hip to its tricks. He has been, largely, a headache for Wall Street firms who just want to get regulators out of the way. He has been a boon, however, to Americans who want to see Wall Street held accountable.
Wall Street is keenly interested in weak regulation and weak regulators. Enter Amanda Renteria, the potential nominee to take Gensler's place. A capable congressional staffer, Renteria has minimal financial experience: a couple of years at Goldman Sachs after college, and then a life in government. She didn't play a significant role in drafting Dodd-Frank legislation, according to the Huffington Post.
Think of derivatives – these complex securities that render ignorant and bewildered even the CEOs of the finance firms that engineer them – and think about whether a newcomer has a chance against the slick bankers and lobbyists armed with intimidating jargon. No matter how strong the personality, knowledge matters, and it takes years to understand the Wall Street fast-talking game. The CFTC is going to lose an immense source of knowledge when Gensler leaves. It looks like it won't be replaced.
All of this is part of the process of killing off the one flailing, pathetic attempt at financial reform: the Dodd-Frank Act. Dodd-Frank, bloated and vague from the beginning, was never a threat to Wall Street. Big banks thought they could wait out the outrage, then start undermining the intent of the law.
They were right, this time. But when they're wrong – and when those derivatives cause another crisis – it'll be Americans who pay the price.
by Frank Thomas and John Lawrence
Was the Congress, Fed, and Treasury Rescue of AIG the Right Decision in 2008?
Frank Thomas says "Yes." John Lawrence says "No."
David Stockman: “We Should Have Let The Market RIP, AIG Fall … and Lived With The Consequences”
In his book, The Great Deformation, David Stockman presents a broad “no prisoners taken” indictment of our systemic social-financial-political maladies or ‘deformations.’ I share his view we have descended to a gamed, distorted system where almost “nothing is working” coherently that can save it from the next Boom-Bubble-Bust implosion unless there is fundamental change.
Stockman’s Austrian libertarian advice is that government should stop governing. Back to the pre-Roosevelt Carter Glass era of financial discipline under the gold standard and the Fed operating as a passive banker’s bank, making loans and accepting deposits. Bad government and pernicious Keynesian economics are core causes of our present ills that justify a turnabout to self-correcting “unfettered market capitalism” of Hoover, Coolidge and everyone before them … this is farfetched, to put it mildly.
Stockman’s brave new world of a self-policing system of unfettered market policies free of government interventions and strict financial regulations – a radical idea with no hard numbers on the human costs, job losses, business failures – is ironic. This is just what we have had a good taste of over the last thirty years! And all it has brought us is a world of energized greedy forces and financial wizards who can burn the house down and make a fortune at it!
Given Stockman’s deep anti-government, anti-Keynesian mindset, it’s no surprise he favored letting AIG and major banks fall. In his words: “despite creating lots of job losses and lots of pain lasting for a generation … this action would create lessons, it would create discipline … new firms would grow out of the remnants of AIG, Goldman Sachs, Morgan Stanley, etc. … bank bailouts were unnecessary … the Main Street banking system was never in serious jeopardy ... the money market industry wasn’t imploding.”
These presumed ‘gospel truths’ need to be viewed against what actually took place in financial markets during the bubble crisis times of 2006-08. I shall leave it to the reader to decide whether the Congress, Fed, and Treasury acted appropriately in bailing out AIG at a point in time the economy was entering a mini-depression and the worldwide financial industry was under exceptional strains from many directions.
Why Did The Fed Recommend Rescuing AIG?
Ben Bernanke gave a ‘right to-the-point’ answer to this question on CBS TV March 10, 2009 – the essence of which he repeated to the Committee on Financial Services, House of Representatives March 24, 2009.
“Of all the events and all the things that we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with AIG. … Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a – we had a situation where the failure of that company would have brought down the financial system. … In deciding to rescue AIG, the government worried that if it did not bail out the company, its collapse could lead to a cascading chain reaction of losses, jeopardizing the stability of the worldwide financial system .” (note: wrong says Stockman as regular bankruptcy would have worked for all the mega financial institutions … we didn’t need Goldman Sachs, Morgan Stanley, Bear Stearns because Main Street banks didn’t own toxic assets like securitized mortgages (CDOs) and credit default swaps (CDSs).In the 2nd half of 2008, global markets were experiencing unprecedented, multi-dimensioned financial pressures and a worldwide loss of confidence. In Bernanke’s words to the Committee on Financial Services March 24, 2009:
“I will describe why supporting AIG was a difficult but necessary step to protect our economy and stabilize our financial system. … The Federal Reserve and the Treasury agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global finance system and for our economy” (note: wrong says Stockman who casually dismisses as extreme fears the catastrophic implications and global ‘contagion’ from an AIG failure in 2008 – “There will be lots of pain … but let the market rip and live with the consequences”).
What were the extraordinary financial risks that had been building up during 2005-08?
Now that the boom times have returned for Wall Street with consecutive days of record market highs, the time for excuses must end, and the Obama administration and Congress should join with the other world markets in adopting a Robin Hood tax on financial speculation.
The signs could not be more clear. The New York Times, March 3, calls this a “golden age for corporate profits,” and the financial sector is leading the gold rush. Just last year the top six U.S. banks raked in $63 billion – with Bank of America pulling in more than Walt Disney and McDonalds combined.
But it remains a different story in Main Street communities across America, a new pauper’s age would be a more apt label.
“How is this recovery if only Wall Street, but not our families and communities, are on the upswing?” asks Amanda Devecka-Rinear of National People's Action and the Robin Hood campaign.
"It has always been true that Wall Street can clearly afford to bail out Main Street with enough money to build homes, strengthen education, end the AIDS pandemic, fight global climate change and create jobs. Here is just further proof," notes Jennifer Flynn, managing director of Health GAP and the Robin Hood campaign.
Just ask the banksters and high rollers themselves.
“What’s amazing about this bull market is that people still don’t think it’s real,” said Richard Bernstein, chief executive of Richard Bernstein Advisors, a money management firm to the New York Times March 5. “We think this could be the biggest bull market of our careers.”
“The momentum is clearly in the upward direction," Brian Lazorishak, portfolio manager and quantitative analyst at Chase Investment Counsel told the Wall Street Journal March 6.
“So far in this recovery, corporations have captured an unusually high share of the income gains,” Ethan Harris, co-head of global economics at Bank of America Merrill Lynch told the New York Times on March 3. “The U.S. corporate sector is in a lot better health than the overall economy. And until we get a full recovery in the labor market, this will persist.”
So will Wall Street share their good fortune voluntarily with those harmed by the economy they wrecked with their reckless gambling with our homes, our savings, and our futures?
Apparently no time soon. “Right now, C.E.O.’s are saying, ‘I don’t really need to hire because of the productivity gains of the last few years,’ ” said Robert E. Moritz, chairman of the accounting giant PricewaterhouseCoopers to the New York Times March 3.
With all the pain the economic crash has inflicted, the bill for Wall Street is due.
A major step forward is within sight.
The Inclusive Prosperity Act, introduced by Rep. Keith Ellison, could raise up to $350 billion every year with a minimal tax of just 50 cents on every $100 of stock trades, and lesser percentages on trading of bonds, currencies, derivatives and other financial instruments.
Most other major markets have already figured this out, including 11 European Union nations, among them the big economies of France, Germany, Italy, and Spain. Major financial centers, including London, Switzerland, Hong Kong and Singapore, also have financial transactions taxes on their stock exchanges.
Are we just slow learners or does Wall Street throw around too much clout in Washington?
As to claims by the Wall Street opponents of a financial transaction tax that the impact would mostly fall on “ordinary investors,” a video distributed this week by Mother Jones, “The Great American Inequality Video,” tells a different story.
The video notes that:
Let’s get off the dime and act now.
The President’s “sequester” offer slashes non-defense spending by $830 billion over the next ten years. That happens to be the precise amount we’re implicitly giving Wall Street’s biggest banks over the same time period.
We’re collecting nothing from the big banks in return for our generosity. Instead we’re demanding sacrifice from the elderly, the disabled, the poor, the young, the middle class – pretty much everybody, in fact, who isn’t “too big to fail.”
That’s injustice on a medieval scale, served up with a medieval caste-privilege flavor. The only difference is that nowadays injustices are presented with spreadsheets and PowerPoints, rather than with scrolls and trumpets and kingly proclamations.
And remember: The White House represents the liberal side of these negotiations.
The $83 billion ‘subsidy’ for America’s ten biggest banks first appeared in an editorial from Bloomberg News – which, as the creation of New York’s billionaire mayor Michael Bloomberg, is hardly a lefty outfit. That editorial drew upon sound economic analyses to estimate the value of the US government’s implicit promise to bail these banks out.
Then it showed that, without that advantage, these banks would not be making a profit at all.
That means that all of those banks’ CEOs, men (they’re all men) who preen and strut before the cameras and lecture Washington on its profligacy, would not only have lost their jobs and fortunes in 2008 because of their incompetence – they would probably lose their jobs again today.
Tell that to Jamie Dimon of JPMorgan Chase, or Lloyd Blankfein of Goldman Sachs, both of whom have told us it’s imperative that we cut social programs for the elderly and disabled to “save our economy.” The elderly and disabled have paid for those programs – just as they paid to rescue Jamie Dimon and Lloyd Blankfein, and just as they implicitly continue to pay for that rescue today.
Dimon, Blankfein and their peers are like the grandees of imperial Spain and Portugal. They’ve been given great wealth and great power over others, not through native ability but by the largesse of the Throne.
Lords of Disorder
Just yesterday, in a rare burst of candor, Dimon said this to investors on a quarterly earnings call: “This bank is anti-fragile, we actually benefit from downturns.”
It’s true, of course. Other corporations – in fact, everybody else – has to survive or fail in real-world conditions. But Dimon and his peers are wrapped in a protective force field which was created by the people, of the people, and for … well, for Dimon and his peers.
The term “antifragile” was coined by maverick financier and analyst Nassim Taleb, whose book of the same name is subtitled “Things That Gain From Disorder.” That’s a good description of JPMorgan Chase and the nation’s other megabanks.
Dimon’s comment was another way of saying that his bank, and everything it represents, is The Shock Doctrine made manifest. The nation’s megabanks are arbitraging their own failures, and the economic crises that flow from those failures.
These institutions are designed to prey off economic misery. They suppress genuine market forces in order to thrive, and they couldn’t do it without our ongoing help. The Treasury Department and the Federal Reserve are making it happen.
We who have made these banks “antifragile” have crowned their leaders our Lords of Disorder.
Once Dimon told reporters that he explained to his seven-year-old daughter what a financial crisis is – “something that happens … every five to seven years,” which “we need to do a better job” managing.
Thanks to fat political contributions, Dimon manages them well. So do his peers. Misery is the business model. And by Dimon’s reckoning another shock’s coming any day now.
Money For Nothing
Bloomberg’s use of the word ‘subsidy’ in this instance can be slightly misleading. Public institutions don’t issue $83 billion in checks to Wall Street’s biggest banks every year. But they didn’t let them fail as they should have – through an orderly liquidation – after they created the crisis of 2008 through fraud and chicanery. Instead it allowed them to prosper from it, creating that $83 billion implicit guarantee.
As we detailed in 2011, the TARP program didn’t “make money,” either. Banks received a free and easy trillion-plus dollars from our public institution, on terms that amounted to a gift worth tens of billions, and possibly hundreds of billions.
That gift prevented them from failing. In private enterprise, this kind of rescue is only given in return for part ownership or other financial concessions. But our government asked for nothing of the kind.
Breaking up the big banks would have protected the public from more harm at their hands. That didn’t happen.
Government institutions could have imposed a financial transaction tax, whose revenue could be used to repair the harm the banks caused while at the same time discouraging runaway gambling. They still could.
They could have imposed fees on the largest banks to offset the $83 billion per year advantage we’ve given them. They still could.
But they haven’t. This one-sided giveaway is the equivalent of an $83 billion gift for Wall Street each and every year.
Cut and Paste
$83 billion per year: Our current budget debate is framed in ten-year cycles, which means that’s $830 billion in Sequester Speak. You’d think our deficit-obsessed capital would be trying to collect that very reasonable amount from Wall Street. Instead the White House is proposing $130 billion in Social Security cuts, $400 in Medicare reductions, $200 billion in “non-health mandatory savings,” and $100 billion in non-defense discretionary cuts.
That adds up to exactly $830 billion.
No doubt there is genuine waste that could be cut. But $830 billion, or some portion of it, could be used to grow our economy and brings tens of millions of Americans out of the ongoing recession that is their daily reality, even as the Lords of Disorder continue to prosper. It could be used for educating our young people and helping them find work, for reducing the escalating number of people in poverty, for addressing our crumbling infrastructure, for giving people decent jobs.
It’s going to Wall Street instead.
The right word for that is tribute. As in, “a payment by one ruler or nation to another in acknowledgment of submission …” or “an excessive tax, rental, or tariff imposed by a government, sovereign, lord, or landlord … an exorbitant charge levied by a person or group having the power of coercion.” (Courtesy Merriam-Webster)
In this case the tribute is made possible, not by military occupation, but by the hijacking of our political process by the corrupting force of corporate contributions.
The fruits of that victory are rich: Bank profits are at near-record highs. Most of the country is still struggling to dig out from the wreckage they created but, as Demos’ Policy Shop puts it, “for the banks it’s 2006 all over again.”
On Bended Knee
“Millions for defense,” they said in John Adams’ day, “but not one cent for tribute.”
Today we’re paying for both. That doesn’t leave much for the elderly, the disabled, the impoverished, the children, or anybody else who doesn’t “benefit from disorder.” Nobody’s fighting for them in this budget battle.
That leaves the public with a clear choice: Demand solutions that are more just and democratic – or submit willingly to the Lords of Disorder.
The unemployment rate is 7.8%. Both parties agree that this is too high, but they propose totally different solutions to create more jobs. The Republican solution is to give more tax breaks and other advantages to the rich and to corporations because they are the job creators. Really? Then why haven't they created more jobs in the last 30 years. This historical experiment of "trickle down" economics has been tried since the time of Ronald Reagan and it has proven to be an abject failure. Yet Republicans are still pushing it as the solution to all our problems.
Esteemed Nobel laureate and Princeton professor Paul Krugman wants to take the traditional Keynesian approach and do deficit spending to improve the economy. He says there's no reason to worry about the deficit since the US can borrow money at extremely low rates. Not to worry. He sides with Dick Cheney who famously said, "Deficits don't matter." He and Bush then went on to add trillions to the national debt by fighting two unpaid for wars, tax breaks for the rich and an unpaid for prescription drug benefit for seniors that was in reality a giveaway to the pharmaceutical companies. But now that a Democratic President is in office, Republicans are all worried about deficits. They should have been worried when George W Bush was doing the profligate spending.
However, I disagree with both Cheney and Krugman. Deficits do matter and here's why. Sure the government can borrow a lot of money, as much as it wants to, at extremely low rates. But the government has to pay interest on the national debt and that is a growing part of the budget. Interest on the debt is the fourth largest government expenditure after Defense, Medicare and Medicaid. In 2011 Federal, state and local governments spent $454,393,280,417.03 on interest. It actually came down dramatically in 2012 to $359,796,008,919.49. That's still a lot of money. The Federal government alone spent around $220 billion in net interest on its debt in 2012, and is predicted to spend over a trillion dollars in interest by 2020. That's $1 trillion we can't spend to educate our kids or to replace our badly worn-out infrastructure.
And there's no guarantee that interest rates will continue to remain at historical lows. They are being held there right now by the Federal Reserve's policy of quantitative easing. The Fed is printing money at the rate of $85 billion a month. This money is being essentially given to the large Wall Street banks. Theoretically it's being loaned, but if someone loans you money at a zero interest rate, why would you ever pay it back? It's foolish to think that interest rates will always remain this low and that foreign nations and individuals will continue to loan us money ad infinitum.
The Fed's policy of printing money and then giving it to the big banks relies on the theory that low interest rates will get the economy moving again. The theory goes that people will be attracted to the low interest rates, borrow money and consume. It assumes that banks will actually loan out the money. Since consumption is 70% of the US economy, GDP will increase and that will create more jobs. In other words the Fed is exercising the same trickle down theory of economic growth made famous by Ronald Reagan and that has been tried for the last 30 years and failed. The Fed is essentially devaluing American currency in the hopes that this will create jobs. And it has been a big failure insofar as job creation is concerned but it has kept the US government's borrowing rates low.
So if both deficit reduction and job creation are important, how do you do both. Put simply the US government has to walk and chew gum at the same time. The Republican emphasis on cutting spending, especially spending on social programs, would lead to austerity and that would contract the economy even more. So that isn't the solution. To be fair President Obama has not been on the side of deficit spending as a way to get the economy out of the doldrums. He has been for a balanced approach of stimulating the economy and paying down the deficit. But Paul Krugman and many Democratic theorists like Robert Reich have.
The trick is to note that government spending does not have to be deficit spending. Government spending can increase without incurring greater deficits by increasing government revenues. And there are different varieties of government spending. Republicans favor just giving government money to private corporations and having them do the job. Their policy is to let the government just be a money conduit from taxpayers to corporations. Alternatively, government can spend money directly on jobs programs like rebuilding infrastructure. Instead of using the indirect approach which amounts to pushing on a string which is what the Fed is doing and which Republicans advocate, the government can actually create jobs directly in the public sector. If you want to create jobs, why not just create jobs directly instead of trying to get the private sector to create jobs. President Obama should just get up and say, "We've tried various policies to get the private sector to create jobs; they haven't worked so now the government, the public sector, is going to create jobs directly."
But here's where Democrats and President Obama have a problem. Instead of calling for more revenue by taxing the rich and corporations and government direct spending instead of spending to fund private corporations to rebuild infrastructure, Obama is reticent because he is afraid of being labeled a socialist. No worries, he's already been labeled a socialist despite his administration's being the most pro-business administration in years. And beware of the public/private partnership which is just another variation of the privatization of functions which the government can do more efficiently. We don't want to replace the military-industrial complex with an infrastructure-industrial complex replete with lobbyists, cost plus contracts and highly paid CEOs. There's no need for Wall Street to get involved.
Well, where is the money going to come from? Senator Bernie Sanders has an answer: End Offshore Tax Havens. One out of four profitable corporations pays nothing in taxes. Tax rates on profits are the lowest since 1972. Last year Facebook paid nothing despite having a billion dollars in profits. Government revenue as a percentage of GDP is lower than at any time in history. Corporate contributions to tax revenue are the lowest of any major country on earth. It is absurd for major corporations to stash huge amounts of money in countries like the Cayman Islands which have a zero tax rate.
Bernie Sanders and Jan Schakowsky have introduced the Corporate Tax Fairness Act. The bill will raise $590 billion over the next decade. The bill will also stop giving tax breaks to corporations for shipping jobs overseas. Their bill would prevent oil companies from disguising royalty payments to foreign countries as taxes in order to reduce their taxes in the US among other things. And it has a snowball's chance in hell of passing. A financial transaction tax would bring in as much as $100 billion annually. We used to have one; Europe just recently enacted one. Let's end the "carried interest" loophole for hedge and private equity funds. Wall Street needs to start paying its fair share.
Corporations have been getting away with murder in not paying their fair share of taxes. This is from an article by Bernie Sanders:
"In 2010, Bank of America set up more than 200 subsidiaries in the Cayman Islands (which has a corporate tax rate of 0.0 percent) to avoid paying U.S. taxes. It worked. Not only did Bank of America pay nothing in federal income taxes, but it received a rebate from the IRS worth $1.9 billion that year. They are not alone. In 2010, JP Morgan Chase operated 83 subsidiaries incorporated in offshore tax havens to avoid paying some $4.9 billion in U.S. taxes. That same year Goldman Sachs operated 39 subsidiaries in offshore tax havens to avoid an estimated $3.3 billion in U.S. taxes. Citigroup has paid no federal income taxes for the last four years after receiving a total of $2.5 trillion in financial assistance from the Federal Reserve during the financial crisis."
The sad fact is that the private sector is not in the process of creating jobs but of destroying jobs through automation and robotics. Almost anything a human being might have done in a job is now being done by robots. Some say that this creates jobs for "knowledge workers." Sure if you're among the upper 1% in knowledge talent. Companies like Microsoft, Google, Apple and Facebook are not looking for the average college graduate. They're looking for the upper 1% of college graduates. Together they employ less than 200,000 people in the US. The top talent in every field are making good money. Everyone else is going downhill if they're employed at all. 50% of college graduates are either unemployed or underemployed in terms of their qualifications. In the 2009-2010 recovery, 93% of the gains in income went to the top 1%.
Why should the private sector create jobs if they can get a robot to do the work 24 hours a day at a cost of less than $5.00 an hour? If the private sector will not create jobs, that leaves the government to create jobs directly. Instead of pushing on a string with policies that are supposed to create jobs indirectly by encouraging the private sector to do so, government should get more involved. More government revenues plus direct job creation rebuilding infrastructure could result in growing the economy, providing good middle class jobs and paying down the debt.
Chrystia Freeman in her book Plutocracy explains this phenomenon which results in the divergence of jobs and income, creating a well to do upper 1% class and everybody else:
"This is what ecomomists call the "superstar" effect - the tendency of both technological change and globalization to create winner-take-all economic tournaments in many sectors and companies, where being the most successful in your field delivers huge rewards, but coming in second place, and certainly in fifth or tenth, has much less economic value."
We are seeing the effects of a meritocracy where the top 1% of talent merges with the top 1% in terms of income and wealth. This is great for the top 1% of graduates from elite colleges but not so much for the average graduates of average colleges with $100,000. in student loan debt and a job at Starbucks instead of a career type job in their field. In every field the chasm between the superstars and everyone else is getting bigger and bigger. Inequality increases with the acceleration of meritocracy. Meritocracy and plutocracy converge creating a democratic dystopia.
That's why the government has to step in to regulate this runaway dystopia. Taxes on corporations and the rich need to be increased in order to tamp down inequality. This revenue needs to be redistributed to the former middle class in terms of job programs. It could be redistributed in terms of welfare and unemployment insurance, but this creates a class of dependents. It would be much better to create a middle class of workers rebuilding infrastructure. And this is not a trivial job. The American Society of Civil Engineers estimates that there is $2 trillion worth of work that needs to be done just to bring roads, bridges and other basic infrastructure up to par. But there is more to infrastructure than just that. When you consider all that needs to be done to prevent and combat the changes due to global warming, there is enough potential work out there to fully employ US workers for generations. Utilities need to be hardened and undergrounded. Fossil fuel powered electric plants need to be converted to solar and wind. Buildings need to be made less energy consuming. High speed rail needs to be implemented. Housing needs to be moved back from the shorelines.
There is no lack of work that needs to be done, and this is work the private sector not only won't do but in many cases it is work that the private sector is lobbying against doing. They profit from using the atmosphere as a dump. It's crucial that the government prevent runaway wealth maldistribution, create jobs that the private sector has no incentive to create and save the planet from ecological disaster.
Posted by John on February 25, 2013 at 08:26 AM in John Lawrence, Paul Krugman, Robert Reich, Austerity, Climate Change, Corporations, Economics, Education, Careers, Jobs, Employment, Global Warming, Inequality, Infrastructure, Jobs, Middle Class, Obama Presidency, Offshore Bank Accounts, Taxes, The Budget, The Economy, The Environment, The Federal Reserve, The Role of Government, Unemployment, Wall Street, Wealth, Weather Disasters | Permalink
The deal was announced quietly, just before the holidays, almost like the government was hoping people were too busy hanging stockings by the fireplace to notice. Flooring politicians, lawyers and investigators all over the world, the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they issued a fine – $1.9 billion, or about five weeks' profit – but they didn't extract so much as one dollar or one day in jail from any individual, despite a decade of stupefying abuses.
People may have outrage fatigue about Wall Street, and more stories about billionaire greedheads getting away with more stealing often cease to amaze. But the HSBC case went miles beyond the usual paper-pushing, keypad-punching sort-of crime, committed by geeks in ties, normally associated with Wall Street. In this case, the bank literally got away with murder – well, aiding and abetting it, anyway.
For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico's Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that "they make the guys on Wall Street look good." The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.
"They violated every goddamn law in the book," says Jack Blum, an attorney and former Senate investigator who headed a major bribery investigation against Lockheed in the 1970s that led to the passage of the Foreign Corrupt Practices Act. "They took every imaginable form of illegal and illicit business."
That nobody from the bank went to jail or paid a dollar in individual fines is nothing new in this era of financial crisis. What is different about this settlement is that the Justice Department, for the first time, admitted why it decided to go soft on this particular kind of criminal. It was worried that anything more than a wrist slap for HSBC might undermine the world economy. "Had the U.S. authorities decided to press criminal charges," said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, "HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized."
It was the dawn of a new era. In the years just after 9/11, even being breathed on by a suspected terrorist could land you in extralegal detention for the rest of your life. But now, when you're Too Big to Jail, you can cop to laundering terrorist cash and violating the Trading With the Enemy Act, and not only will you not be prosecuted for it, but the government will go out of its way to make sure you won't lose your license. Some on the Hill put it to me this way: OK, fine, no jail time, but they can't even pull their charter? Are you kidding?
But the Justice Department wasn't finished handing out Christmas goodies. A little over a week later, Breuer was back in front of the press, giving a cushy deal to another huge international firm, the Swiss bank UBS, which had just admitted to a key role in perhaps the biggest antitrust/price-fixing case in history, the so-called LIBOR scandal, a massive interest-raterigging conspiracy involving hundreds of trillions ("trillions," with a "t") of dollars in financial products. While two minor players did face charges, Breuer and the Justice Department worried aloud about global stability as they explained why no criminal charges were being filed against the parent company.
"Our goal here," Breuer said, "is not to destroy a major financial institution."
A reporter at the UBS presser pointed out to Breuer that UBS had already been busted in 2009 in a major tax-evasion case, and asked a sensible question. "This is a bank that has broken the law before," the reporter said. "So why not be tougher?"
"I don't know what tougher means," answered the assistant attorney general.
Also known as the Hong Kong and Shanghai Banking Corporation, HSBC has always been associated with drugs. Founded in 1865, HSBC became the major commercial bank in colonial China after the conclusion of the Second Opium War. If you're rusty in your history of Britain's various wars of Imperial Rape, the Second Opium War was the one where Britain and other European powers basically slaughtered lots of Chinese people until they agreed to legalize the dope trade (much like they had done in the First Opium War, which ended in 1842).
A century and a half later, it appears not much has changed. With its strong on-the-ground presence in many of the various ex-colonial territories in Asia and Africa, and its rich history of cross-cultural moral flexibility, HSBC has a very different international footprint than other Too Big to Fail banks like Wells Fargo or Bank of America. While the American banking behemoths mainly gorged themselves on the toxic residential-mortgage trade that caused the 2008 financial bubble, HSBC took a slightly different path, turning itself into the destination bank for domestic and international scoundrels of every possible persuasion.
Three-time losers doing life in California prisons for street felonies might be surprised to learn that the no-jail settlement Lanny Breuer worked out for HSBC was already the bank's third strike. In fact, as a mortifying 334-page report issued by the Senate Permanent Subcommittee on Investigations last summer made plain, HSBC ignored a truly awesome quantity of official warnings.
In April 2003, with 9/11 still fresh in the minds of American regulators, the Federal Reserve sent HSBC's American subsidiary a cease-and-desist letter, ordering it to clean up its act and make a better effort to keep criminals and terrorists from opening accounts at its bank. One of the bank's bigger customers, for instance, was Saudi Arabia's Al Rajhi bank, which had been linked by the CIA and other government agencies to terrorism. According to a document cited in a Senate report, one of the bank's founders, Sulaiman bin Abdul Aziz Al Rajhi, was among 20 early financiers of Al Qaeda, a member of what Osama bin Laden himself apparently called the "Golden Chain." In 2003, the CIA wrote a confidential report about the bank, describing Al Rajhi as a "conduit for extremist finance." In the report, details of which leaked to the public by 2007, the agency noted that Sulaiman Al Rajhi consciously worked to help Islamic "charities" hide their true nature, ordering the bank's board to "explore financial instruments that would allow the bank's charitable contributions to avoid official Saudi scrutiny." (The bank has denied any role in financing extremists.)
After the financial meltdown of 2008, the Bush administration shoveled tons of money into Wall Street as did the Federal Reserve. TARP, the Troubed Asset Relief Program, was a $700 billion carte blanche gift to Wall Street to prevent an imminent meltdown. This was engineered by Henry Paulson, Bush's Treasury Secretary. But that was miniscule compared to what the Fed ponied up. A lawsuit by Bloomberg News forced the Fed to reveal that it had given $7.7 trillion to banks all over the world to prevent the looming crisis. And the Fed is still at it with its policy of Quantitative Easing (QE). But while the banks have been bailed out and are still being given monthly money cards, they have not been held to account for the behavior that caused the financial crisis in the first place. No banker has gone to jail despite the massive fraud and corruption that they perpetrated and in fact are still perpetrating.
The main, if not the only, cause of the 2008 meltdown was the mortgage market. Mortgages were being given to anyone who could fog a mirror. Waitresses were stating their incomes at $12,000. a month in order to get a mortgage on a $650,000. McMansion. These mortgages were then packaged into securities (CDOs or Collateralized Debt Obligations) by Wall Street and sold to unwary investors like pension funds. When people defaulted on these mortgages, the whole house of cards started to collapse. Everywhere along the chain of events there was corruption. For instance, the mortgage originators like Countrywide were paid a loan origination fee. The more loans they originated the more money they made. Countrywide then sold off portfolios of mortgages to Wall Street so they had no skin in the game if the mortgages failed. But, you might ask, why did Wall Street buy such toxic crap? Didn't they do due diligence on these portfolios? They actually subcontracted the due diligence out to due diligence underwriters who vouched for the soundness of these portfolios. Why would they do that? Because they had a financial incentive to process and approve as many portfolios as possible. This is one of the schemes that makes it hard to prosecute the bankers. At each step of the way there was no central character responsible for the whole shenanigan. It was parceled out to different subcontractors and entities along the way.
Wall Street can claim that it was the due diligence underwriters' fault for not doing proper due diligence. Not only that but these mortgage portfolios were then evaluated by the rating agencies: Standard and Poor's, Moody's and Fitch Group. These rating agencies gave the portfolios triple A ratings even though many of them verged on worthlessness. Again Wall Street can claim that it was the rating agencies' fault. The rating agencies got paid by Wall Street itself so they had every incentive to rate them highly. If they didn't, Wall Street wouldn't have been able to attract investors, and the rating agency that didn't play along would lose business. They were only too happy to play along. Since the fraud and corruption existed on so many levels, it is hard for the US Justice Department to go after any particular banker.
Lloyd Blankfein, CEO of Goldman Sachs, was hauled before a Congressional committee to explain why Goldman had peddled worthless triple A rated crap to unwary pension funds while betting that these portfolios would fail. Goldman ended up making money playing both ends against the middle. The standard answer was that Goldman was a "market maker" and added "liquidity" to the market. So this gave Goldman the right supposedly to have one department peddling worthless CDOs while another department was betting against those same portfolios. But the fact of the matter is that it's hard to hold Lloyd Blankfein accountable since the laws have been so deregulated that hardly any banking activity is illegal these days. The Financial Services Modernization Act of 1999 removed any barriers among investment banks, commercial banks and insurance companies allowing one Wall Street firm to mix and match all three. The Commodity Futures Modernization Act of 2000 allowed the deregulation of derivatives so that casino betting in the financial arena held full sway.
The big banks have been engaged in money laundering, rate rigging, bid rigging and other forms of heinous behavior. Billions of dollars were skimmed from cities all across America by colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. Banks involved in the bid rigging scheme included Bank of America, JPMorgan Chase, Wells Fargo and UBS. These banks have already paid a total of $673 million in restitution after agreeing to cooperate in the government’s case. In addition many municipalities across America and Europe have been bankrupted by interest rate swaps, another Wall Street invention.
In December 2012 UBS agreed to pay about $1.5 billion to settle charges in the LIBOR interest rate rigging scandal. The Wall Street Journal reported:
"Regulators described the alleged illegality as 'epic in scale,' with dozens of traders and managers in a UBS-led ring of banks and brokers conspiring to skew interest rates to make money on trades. The six-year effort 'seriously compromised' the integrity of financial markets, said the U.S. Commodity Futures Trading Commission."
Traders boasted about their ability to move the rates up or down at will for personal profit. "Think of me when yur on your yacht in Monaco" a trader electronically chatted. Another trader emailed: "Dude. I owe you big time! Come over one day after work and I’m opening a bottle of Bollinger."
But UBS will not face any criminal prosecution. Justice Department officials said they decided not to charge the Zurich-based company, fearing such a move could endanger its stability. It seems that, after pouring trillions of dollars into "saving" the banking system and the world wide capitalist economy, why would you want to go and piss it all down the drain by prosecuting these same banks for criminal activity? So they get a fine in civil court that just represents the cost of doing business, a few days profits, and then they go on engaging in the same criminal behavior.
But that's not all folks. There is even more overt criminal activity going on. In December 2012, HSBC was fined $1.9 billion for laundering drug money out of Mexico. It's getting harder to fight the War on Drugs if the banks are in cahoots with the drug kings themselves. But no bankers will go to jail. Jail is reserved for young black men primarily who get caught with an ounce of marijuana in their possession. HSBC has also laundered money for Iran and Libya. It seems that even terrorists need a banker and HSBC was only too willing to comply taking in suitcases of cash through specially designed windows built just for that purpose. In return for overt criminal activity, HSBC gets a slap on the wrist and no criminal prosecution because Eric Holder and the US Justice Department are a bunch of wimps treading on eggshells lest they upset the worldwide criminal capitalist banking system and bring on the collapse of the world economy.
"Shame on the Department of Justice. Shame on them," said Jimmy Gurulé, a former federal prosecutor who teaches law at the University of Notre Dame. "These are actions that facilitated major international drug cartels to continue their operations," he said. "Now, if that doesn't justify criminal prosecution, I can't imagine a case that would."
CPA Practical Advisor reports:
"Since 2009, several European banks have paid heavy settlements related to allegations they moved money for people or companies on the U.S. sanctions list: Switzerland's Credit Suisse, $536 million; British bank Barclays, $298 million; British bank Lloyds, $350 million; Dutch bank ING, $619 million; and the Royal Bank of Scotland, $500 million for alleged money laundering at Dutch bank ABN Amro.
"While those cases involved deals with such countries as Iran, Libya, Cuba and Sudan, the HSBC case was notable for the government's allegation that it also helped launder $881 million in drug-trafficking proceeds for Mexican drug cartels."
In the Savings & Loan scandal of the 1980s, over 1000 bankers went to jail. But the Saving and Loan deal was a paltry undertaking compared to the worldwide criminal enterprise that the global capitalist banking system represents. At the heart of the whole thing are the world's central banks each of which is printing money like crazy trying to debase their currencies. The US Fed's goal is to drive up inflation. What? That encourages people to buy now instead of waiting for later when the prices might go up. The Fed indulges in all sorts of convoluted thinking of this sort. They are giving $85 billion a month in QE (Quantitative Easing) to the big banks in an effort to keep the economy from going into the tank.
The theory is that by keeping interest rates low, people will borrow more money and buy more stuff. A side effect is that the US is able to keep its interest payments on the national debt low. Another side effect is, that because savers are getting practically no interest on their savings accounts, they will invest in the stock market. Hello! The stock market is at all time highs! Since consumption is 70% of GDP, the Fed and the US government desperately need people to keep buying stuff. This will supposedly create jobs and lower the unemployment rate (one of the Fed's mandates) which is still very high by historic standards. But printing money cheapens the value of the dollar.
The cheapening of the dollar will also make US exports more attractive. But since other countries are engaged in the same strategems, the overall denouement is that the world is degenerating into a currency war. The problem is that QE only amounts to another round of gift giving to the big banks. The money isn't trickling down to the average person. If the Fed really wanted to boost the American economy, it would inject money into the bottom of the economy (example, paying off people's mortgages thereby freeing up money for consumption) and let it trickle up instead of the opposite which is not working, but it is against the law to do that. Capitalist rules prevent that from happening. And although the Fed is encouaging them do do it, intelligent consumers are not going to borrow money and go into debt just to purchase a lot of cheap crap made in China in order to keep the economy going. What if consumers revolt? Then the economy goes into the tank.
The state of New York has filed suit against JP Morgan Chase for fraud related to the sale of mortgage backed securities. Eric Schneiderman, the state's attorney general, seeks an unspecified amount of damages related to billions of dollars in investor losses. The state maintains that JP Morgan's Bear Stearns division should have known that the stuff it was selling was crap. Bank of America agreed recently to pay $2.43 billion to settle claims it misled investors about the acquisition of Merrill Lynch & Co., in the largest shareholder class-action settlement tied to the meltdown. BofA didn't admit wrongdoing.
And homeowners foreclosed on illegally are also filing lawsuits. Many were told that in order to have their mortgages modified they would have to adhere to certain conditions including continuing to make mortgage payments albeit at a reduced rate. After complying with all conditions, many had their homes foreclosed on anyway. The banks had a two track strategy: one department pursued modification while another concurrently pursued foreclosure. The foreclosure guys usually won out because it was more profitable to foreclose than to modify.
States are filing lawsuits against banks because of MERS, the Mortgage Electronic Registration System, claiming that they have been defrauded out of registration fees and that mortgages transferred through MERS are illegal. Louisiana’s lawsuit is being brought under RICO, alleging wire and mail fraud and a scheme to defraud the parishes of their recording fees.
And the beat goes on. Little piddly civil lawsuits with no criminal prosecution instead of one gigantic criminal lawsuit by the US Justice Department. That means no bankers in orange jumpsuits pulling KP duty any time soon. They are free to continue their fraud and corruption because to discontinue it would bring down the whole international banking system.
Well the New Year is upon us, and it's time to take stock and see if I can make any sense out of the goings on of the last year and the interaction of reality with my own mind. This is my crack at it.
1. I believe that gun ownership should be a privilege and not a right. The 2nd Amendment was constucted to be similar to the Swiss model in which citizens formed a militia for national defense. There was no standing army. That was the original intent of the framers of the Constitution for exactly the same reason: there was no standing army. Today that rationale is not relevant. Even Switzerland has moved the guns from homes to depots to prevent what little gun violence takes place there.
I don't believe background checks and a database of those with mental problems will solve much. In almost every mass murder, the perpetrators had no prior record of mental health problems although in retrospect everyone agrees that there were mental health problems. In almost every case, the guns were obtained legally. That tells you something which is that it is the proliferation of military type weapons with high capacity magazines that is the problem. These guns should not only be made illegal, but they should be taken off the streets, that is, confiscated or gotten rid of with buyback programs.
Terrorists have only been able to kill 17 people in the US since 9/11, but 88,000 Americans have died in gun violence from 2003 to 2010. Britain, which has very strict gun laws, had 41 gun murders in 2010 while the US had around 10,000. 6,626 Americans have died in the wars in Iraq and Afghanistan. About 3000 died in the tragedy of 9/11. The cost of the wars in Iraq and Afghanistan so far is around $4 trillion. At the same time zero dollars have been spent on the war on gun violence in the US in which about the same number of people die every year as died on 9/11 plus Iraq and Afghanistan (Americans, that is). Does this make any sense? As Pogo said, "We have met the enemy and the enemy is us."
2. I believe there should be a floor on poverty and a ceiling on wealth. For most of the last decade, the percentage of Americans living below the poverty line increased each year, from 12.3 percent in 2006 to 15.1 percent in 2010. In 2011 the official poverty rate was 15 percent, meaning that 46.2 million people live below the poverty line. The Walton family has more wealth than the lower 40% of the American population combined while workers at Wal-Mart subsist on wages so low that they need to supplement their incomes with food stamps and other social services driving up the cost of government.
Much of the wealth that the upper 1% possesses is used to distrort the political system and was gained fraudulently by those in the financial sector. I wrote this in 2010 on Will Blog For Food:
"Hedge Fund manager John Paulson helped to design the Abacus fund for Goldman Sachs and filled it with a bunch of garbage. This fund was then peddled to unwary investors while Paulson shorted it. As a result, when the garbage in the fund went south, the investors lost $1 billion and Paulson's gamble netted him $3.7 billion. But that isn't even the worst of it. Taxpayers who bailed out the system actually paid Paulson the $3.7 billion - as if he needed it."
John Paulson hasn't been prosecuted for this fraudulent investment scheme and paid taxes on his income at the "carried interest" rate of 15% just like his fellow private equity fund manager, Mitt Romney. He has used some of his ill gotten gains to contribute to conservative causes as has billionaire Sheldon Adelson who has made his money off of seniors gambling away their social security checks.
I don't think anyone needs an income of more than $10 million a year, and a family of four needs an income of at least $40 thousand. These would be my recommended limits, for what they're worth, for the ceiling on wealth and the floor on poverty. Remember anyone earning an income of $10 million is going to store much of that as accumulated wealth which is going to provide a certain percentage return on investment (ROI in plutocrat speak) as unearned income each following year in addition to the $10 million earned (yeah, sure) income.
3. I believe that global warming is happening right now and is a result of human beings polluting the atmosphere with carbon emissions. As the saying goes "Don't shit where you eat" and we are shitting on Mother Earth. Future generations are going to have to eat and breathe here. Europeans and native Americans settled this continent without sending massive amounts of carbon into the atmosphere. We're going to have to relearn how to do the same, and there is not much time to waste without suffering the consequences that we're already starting to suffer.
As the number of billion dollar weather events starts to pile up, we will soon run out of money. We need to divert money from the bloated and wasteful military-industrial complex and spend it on infrastructure redevelopment in order to counteract and protect ourselves from the devastating aftermaths of extreme weather events like SuperStorm Sandy and SuperTyphoon Bopha. As I previously said, we have spent trillions to avenge the deaths of approximately 3000 people while spending hardly anything on gun control or infrastructure hardening. Both of the latter are bigger threats to American security than are the handful of self-proclaimed Al-Quaeda terrorists who have done a trivial amount of damage to the US since 9/11. Yet we spend trillions of dollars on them which mainly goes into the coffers of corrupt politicians and defense contractors. Not to mention the millions of civilians we have killed in Iraq and Afghanistan which guarantees a future generation of terrorists bent on avenging those deaths.
4. I don't believe that good middle class jobs are coming back as we recover from the Great Recession. They were disappearing long before the Great Recession hit. The combination of automating and computerizing manufacturing processes combined with the outsourcing of menial labor combined with the deunionization of the country means that we shouldn't sit around and hold our collective breaths expecting that everyone who has lost a good middle class job is going to get one back as we recover from recession and the unemployment rate gets down to 5%. The jobs that are being created are for the most part minimum wage service sector jobs. Even so-called full employment, if we achieve it, will consist in large part of those kinds of jobs. So what good is full employment as a measure of anything or a goal?
The so-called job creators are really job destroyers and they know that. They are just laughing up their sleeves as they automate and outsource thereby slashing the cost of production and increasing profits while at the same time calling for lower taxes on themselves on the grounds that they are job creators. This makes Wall Street very happy and top management is handsomely rewarded for doing this. As CEO pay soars, jobs are either outsourced or subcontracted to temp agencies who hire non-full time workers at minimal wages to do the heavy lifting. By this means the major corporations take no responsibility for low wages. It's somebody else, a sub-contractor, that's paying the low wages, not them. And a college education is no panacea. Middle aged college degreed folks are being let go, laid off and downsized never to be rehired again. A good job right out of college is no guarantee of continued employment as you become technologically obsolete in about 10 years.
What's the solution? I believe that self-employment is a big part of it. When you are employed by a corporation, you are vulnerable to being laid off for any reason at any time. When you're self employed, you can never be laid off. It may be too late for a lot of people, but young people coming up in school, even those college bound, should learn a trade while in high school that they can fall back on if need be. Most trades that serve the local community cannot and will not be outsourced and are amenable to self employment. The college educated crowd needs to think about what occupations and professions allow them to be self employed and which only allow them to be employees of some corporation. And most corporations don't want you if you've been laid off after the age of 50 when you are most vulnerable and desperately need a job.
I also believe that government has to be the employer of last resort. Corporations are in the business of outsourcing and creating temp jobs. Even startups usually only need employees until they really get rolling, go public and get obsessed with their stock price which means they need to reduce the cost of labor. At that point the job creators seek to creatively destroy American jobs and pocket increased profits.
Well, folks, there you have it in a nutshell. These are some of the topics I will be writing about in 2013. I also like to bring in the San Diego connection as what's happening in the wider world is also very definitely happening here as well. As far as our political system is concerned, my prediction is that Republicans in Congress will obstruct any meaningful legislation whatsoever and put a halt to any initiative President Obama wants to make. Better hope that 2014 brings a return to majorities in both the House and Senate for Democrats and that Obama can manage to get something constructive done for the good of the country in his last two years in office.
Happy New Year to All.
Published: August 14, 2012 by the New York Times
Standard Chartered, the British bank, has agreed to pay New York’s top banking regulator $340 million to settle claims that it laundered hundreds of billions of dollars in tainted money for Iran and lied to regulators.
Peter Sands, the chief executive of Standard Chartered, flew to New York to negotiate over the weekend with state regulators.
Some federal authorities worry the deal has the potential to undercut a sweeping settlement between the bank and federal regulators, including the Federal Reserve and the Treasury Department. They are also investigating Standard Chartered, a 150-year-old bank based in London with operations across the globe.
The $340 million deal is a huge amount for a single state regulator, and it falls near the middle of the collective settlements that the Justice Department and the Manhattan district attorney have reached with other global banks in recent years over money laundering charges, from $619 million with ING bank in June to $298 million with Barclays in 2010.
Standard Chartered has maintained that only $14 million of the $250 billion in transactions violated federal regulations. In a statement announcing the settlement, Mr. Lawsky said, “The parties have agreed that the conduct at issue involved transactions of at least $250 billion.”
The bank said in a regulatory filing Tuesday that “a formal agreement containing the detailed terms of the settlement is expected to be concluded shortly.” Standard Chartered “continues to engage constructively with the other relevant U.S. authorities. The timing of any resolution will be communicated in due course,” the filing said.
After frantic negotiations with Mr. Lawsky’s office, which threatened to revoke the bank’s state license at a hearing scheduled for Wednesday, Standard Chartered made a calculation to settle, in part, to resolve the public relations headache, according to people briefed on the matter.
The agreement ends a weeklong international drama that thrust the upstart regulator into the spotlight and pitted Mr. Lawsky against federal authorities who thought he was overstepping his bounds and British authorities who accused him of tarnishing the reputation of their banks.
The size of the settlement is puzzling to some federal officials, including the Justice Department, because there is still widespread disagreement about the extent of the bank’s wrongdoing, according to regulators briefed on the matter.
In the weeks leading up to Mr. Lawsky’s move against the bank, the Justice Department was on the brink of deciding not to pursue criminal charges, after concluding that virtually all of the transactions with Iran had complied with United States law, current and former authorities said.
Until 2008, federal law allowed foreign banks to transfer money for Iranian clients through their American subsidiaries to another foreign institution. Mr. Lawsky claimed the 60,000 transactions occurred from January 2001 through 2007, as United States authorities suspected Iranians of using their banks to finance terrorism and nuclear weapons development.
Standard Chartered maintains that “99.9 percent” of the transactions under scrutiny involved legitimate Iranian banks and corporations and that none of the payments had anything to do with supporting terrorist activities. Because the bank did not properly report the transactions that had been routed through its New York branch, Mr. Lawsky’s office has said it was impossible to know how the money was used by the Iranians.
Mr. Lawsky based his case, in large part, on claims that the bank had violated state law by masking the identities of its Iranian clients, lying to regulators and thwarting American efforts to detect money laundering.
Particularly difficult for the bank, people with knowledge of the settlement talks said, was a trove of e-mails and memos detailing an elaborate strategy devised by the bank’s executives. An e-mail from a lawyer to bank executives in 2001 said that payment instructions for Iranian clients “should not identify the client or the purpose of the payment,” according Mr. Lawsky’s order.
One Iranian client was told to use “NO NAME GIVEN” in paperwork to transfer money, to escape scrutiny and “not appear to N.Y. to have come from an Iranian bank,” according to a 2003 e-mail from a bank official cited in the order.
In 2006, according to the order, the bank’s chief executive for the Americas wrote his bosses in London that the transactions with Iran had “the potential to cause very serious or even catastrophic reputational damage to the group.”
While violating the spirit of the law, the stripping of data that identified Iranian clients was not typically illegal until 2008 because foreign banks didn’t have to provide much information to their American units as long as they had thoroughly scoured the transactions for suspicious activity.
For Standard Chartered, the settlement signals a strategic shift. Last week, it said it “strongly rejects the position and portrayal of facts” by the agency.
The settlement is far more than the $5 million that the bank had been willing to pay to settle the case earlier this year, people with knowledge of the case said.
Even so, “it’s a small number to pay for the privilege of continuing to do billions of dollars of business through its New York branch,” said Sarah Jane Hughes, a banking law professor at the Indiana University Maurer School of Law.
Gov. Andrew M. Cuomo of New York lauded the Department of Financial Services, which was formed last year through a merger of existing banking and insurance departments. He said in a statement that the “result demonstrates the effectiveness and leadership” of the agency “and I commend the state Legislature for creating a modern regulator for today’s financial marketplace.”
The $340 million will go entirely to Mr. Lawsky’s department and then into the state government’s general fund.
Over the weekend, Standard Chartered worked closely with Mr. Lawsky’s office to hash out some kind of agreement, with the bank’s chief executive, Peter Sands, flying to New York from London early this week.
Mr. Lawsky has been unapologetic in his approach to the bank, even while weathering some criticism for going on the offensive against the bank on his own rather than moving in concert with other regulators.
The bank said that in 2010 it voluntarily turned over to several United States regulators a battery of e-mails and other internal bank documents detailing its dealings with Iran. But Mr. Lawsky felt he couldn’t wait any longer for federal regulators after an examination by his office revealed persistent failures in its compliance with bank secrecy and money-laundering laws, according to people with knowledge of the review.
As part of the settlement, the bank will install a monitor for at least two years to vet the bank’s money-laundering controls and put in permanent officials who will audit the bank’s internal procedures.
by Robert Reich
I’m in Alaska, amid moose and bear, trying to steal some time away from the absurdities of American politics and economics. But even at this remote distance I caught wind of Sanford Weill’s proposal this morning on CNBC that big banks be broken up in order to shield taxpayers from the consequences of their losses. Forget the bear and moose for a moment. This is big game.
If any single person is responsible for Wall Street banks becoming too big to fail it’s Sandy Weill. In 1998 he created the financial powerhouse Citigroup by combining Traveler’s Insurance and Citibank. To cash in on the combination, Weill then successfully lobbied the Clinton administration to repeal the Glass-Steagall Act – the Depression-era law that separated commercial from investment banking. And he hired my former colleague Bob Rubin, then Clinton’s Secretary of the Treasury, to oversee his new empire.
Weill created the business model that Wall Street uses to this day — unleashing traders to make big, risky bets with other peoples’ money that deliver gigantic bonuses when they turn out well and cost taxpayers dearly when they don’t. And Weill made a fortune – as did all the other executives and traders. JPMorgan and Bank of America soon followed Weill’s example with their own mega-deals, and their bonus pools exploded as well.
Citigroup was bailed out in 2008, as was much of the rest of the Street, but that didn’t alter the business model in any fundamental way. The Street neutered the Dodd-Frank act that was supposed to stop the gambling. JPMorgan, headed by one of Weill’s protégés, Jamie Dimon, just lost $5.8 billion on some risky bets. Dimon continues to claim that giant banks like his can be managed so as to avoid any risk to taxpayers.
Sandy Weill has finally seen the light. It’s a bit late in the day, but, hey, he’s already cashed in. You and I and millions of others in the United States and elsewhere around the world are still paying the price.
What’s the betting that one of the presidential candidates will take up Weill’s proposal?
Published on Saturday, July 21, 2012 by Rolling Stone
by Matt Taibbi
Something very interesting is happening.
There’s been so much corruption on Wall Street in recent years, and the federal government has appeared to be so deeply complicit in many of the problems, that many people have experienced something very like despair over the question of what to do about it all.A foreclosed home in Miami, Florida. Joe Raedle/Getty Images
But there’s something brewing that looks like it might be a blueprint to effectively take on Wall Street: a plan to allow local governments to take on the problem of neighborhoods blighted by toxic home loans and foreclosures through the use of eminent domain. I can't speak for how well the program will work, but it's certaily been effective in scaring the hell out of Wall Street.
Under the proposal, towns would essentially be seizing and condemning the man-made mess resulting from the housing bubble. Cooked up by a small group of businessmen and ex-venture capitalists, the audacious idea falls under the category of "That’s so crazy, it just might work!" One of the plan’s originators described it to me as a "four-bank pool shot."
Here’s how the New York Times described it in an article from earlier this week entitled, "California County Weighs Drastic Plan to Aid Homeowners":
Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County … are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater.
Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property.
I’ve been following this story for months now – I was tipped off that this was coming earlier this past spring – and in the time since I’ve become more convinced the idea might actually work, thanks mainly to the extremely lucky accident that the plan doesn’t require the permission of anyone up in the political Olympus.
Cities and towns won’t need to ask for an act of a bank-subsidized congress to do this, and they won’t need a federal judge to sign off on any settlement. They can just do it. In the Death Star of America’s financial oligarchy, the ability of local governments to use eminent domain to seize toxic debt might be the one structural flaw big enough for the rebel alliance to fly through.
The plan only makes sense in the context of America’s overall economic paralysis. Right now the economy is stuck in a standstill, largely because of the housing bubble. Five or six or ten years ago, when Wall Street was cranking out trillions of dollars of cheap home loans so that they could later be chopped up, pooled, and sold to unsuspecting investors in the form of high-grade securitized bonds, millions of ordinary people jumped on the housing comet, buying big houses for big money.
The problem is, if you bought a house for $300,000 then, it might be worth $200,000 now. When you’re $100,000 in debt, you’re not rushing out to buy washing machines, new cars, new DVD players. As Paul Krugman put it in his column today:
There’s no mystery about the reasons the economic recovery has been so weak. Housing is still depressed in the aftermath of a huge bubble, and consumer demand is being held back by the high levels of household debt that are the legacy of that bubble.
Then there’s the other problem. Even if you manage to keep making your payments on your house, your neighbor might not. Whoever used to live next door has left after a foreclosure: there are squatters building a meth lab in the basement now. Two more houses are being boarded up down the street. So now the value of your house is getting lower and lower every day. No matter how fast you make your payments, your debt situation is still going to be moving in the wrong direction.
Instead of letting everyone be slowly ground into dust under the weight of all of that debt, the idea behind the use of eminent domain is to pull the Band-Aid off all at once.
The plan is being put forward by a company called Mortgage Resolution Partners, run by a venture capitalist named Steven Gluckstern. MRP absolutely has a profit motive in the plan, and much is likely to be made of that in the press as this story develops. But I doubt this ends up being entirely about money.
“What happened is, a bunch of us got together and asked ourselves what a fix of the housing/foreclosure problem would look like,” Gluckstern. “Then we asked, is there a way to fix it and make money, too. I mean, we're businessmen. Obviously, if there wasn’t a financial motive for anybody, it wouldn’t happen.”
Here’s how it works: MRP helps raise the capital a town or a county would need to essentially “buy” seized home loans from the banks and the bondholders (remember, to use eminent domain to seize property, governments must give the owners “reasonable compensation,” often interpreted as fair current market value).
Once the town or county seizes the loan, it would then be owned by a legal entity set up by the local government – San Bernardino, for instance, has set up a JPA, or Joint Powers Authority, to manage the loans.
At that point, the JPA is simply the new owner of the loan. It would then approach the homeowner with a choice. If, for some crazy reason, the homeowner likes the current situation, he can simply keep making his same inflated payments to the JPA. Not that this is likely, but the idea here is that nobody would force homeowners to do anything.
On the other hand, the town can also offer to help the homeowner find new financing. In conjunction with companies like MRP (and the copycat firms like it that would inevitably spring up), the counties and towns would arrange for private lenders to enter the picture, and help homeowners essentially buy back his own house, only at a current market price. Just like that, the homeowner is no longer underwater and threatened with foreclosure.
In order to make MRP work, Gluckstern and his partners needed to find local officials with enough stones to try the audacious plan. With so many regions in such desperate straits thanks to the housing mess, that turned out to be not as hard as perhaps might have been expected.
First in line was San Bernardino County in California, not coincidentally located at ground zero of a subprime bubble blown to gigantic proportions by Southern Californian mortgage giants like Countrywide and Long Beach. San Bernardino is more or less a poster child for the mortgage crisis; more than half of its homeowners are underwater on their homes, unemployment is past 12%, and the county recently had to file for bankruptcy.
It’s not surprising, then, that local officials like Acquietta Warren, mayor of the city of Fontana, were receptive to the eminent-domain plan.
“Sooner or later,” Warren told the New York Times, “all these people who are upside down on their homes are just going to leave the keys out on the door and say forget it. This was supposed to be the promised land, and now we have people waiting in some kind of hellish purgatory.”
San Bernardino County officials, along with two of its bigger cities (Fontana and Ontario), have set up the legal mechanisms needed to condemn and seize home loans, but the details of the plan haven’t been completely worked out yet. Still, officials say about 20,000 homeowners in San Bernardino would be eligible for the program; how many will get to use it is unknown.
In the meantime, other counties in other parts of the country are considering the plan. MRP has been courting local officials in Nevada, Florida, and in parts of the Northeast. In New York, officials in Suffolk County on Long Island, where 10% of homes are underwater, are seriously considering the plan.
The role of MRP and the presence of businessmen like Gluckstern in this whole gambit is going to tempt some reporters to pitch this story as a purely financial story, and certainly it does have interest as a business headline.
But MRP’s role aside, this is also a compelling political story with potentially revolutionary consequences. If this gambit actually goes forward, it will inevitably force a powerful response both from Wall Street and from its allies in federal government, setting up a cage-match showdown between lower Manhattan and, well, everywhere else in America. In fact, the first salvoes in that battle have already been fired.
For instance, the Wall Street trade association, SIFMA, this past week issued a denunciation of the eminent domain plan that includes a promise of a legal challenge. “We believe the MRP proposal is unlikely to survive a judicial challenge,” one of SIFMA’s lawyers wrote. Other trade groups are lining up to describe the tactic as illegal or "unconstitutional."
More insidiously, however, SIFMA pledged that its members will not allow future home loans originated in counties that use the eminent domain tactic to participate in something called the To-Be-Announced (TBA) markets for mortgage-backed securities. Explaining this would require a sharp detour into a muck of inside-baseball mortgage terminology, but the long and the short of it is that SIFMA is promising to make it difficult for any community that tries this tactic to obtain private mortgage financing in the future.
Essentially, SIFMA is promising a kind of collusive financial lockout of uncooperative communities. The threat would appear to be a high-handed form of redlining that raises serious antitrust questions, but in a way, that kind of response is to be expected.
Ultimately, the MRP tactic will be a fascinating test case to see exactly how much local self-determination will be allowed by the centralized financial oligarchy and its allies in the federal government.
If through boycotts, collusion, federal pressure and other forms of encirclement, local governments can be stripped of their right to condemn blighted property, we’ll know that the guts have been cut out of the very idea of regional self-rule. It will be fascinating to watch. At the very least, this story has the potential to be the first true open, pitched battle between Wall Street and the homeowners and communities who have been the primary victims of financial corruption.
Tune in for more on this front soon.
Editor's note: Readers interested in learning more about this would do well to read North Carolina congressman Brad Miller's piece on this in American Banker. Miller is not necessarily a proponent of the exact mechanism proposed by MRP, but he is intrigued by the general idea of using eminent domain to address the blighted-loan problem, and seems particularly interested in the strategic possibilities of addressing the problem at the local level. He writes:
The biggest banks have used their political power in Washington to defeat any effort that would effectively reduce foreclosures, such as allowing judicial modification of mortgages in bankruptcy, allowing a federal agency to use eminent domain to buy mortgages, or providing teeth for the chronically ineffective Home Affordable Modification Program, because those efforts would also require the immediate recognition of losses on mortgages.
But Wall Street's power in Washington may be as useless in defeating a proposal in San Bernardino County as strategic nuclear weapons are in fighting an insurgency. No wonder Wall Street is panicked.
Also, here's a piece Miller wrote a couple of years ago in The New Republic suggesting the use of eminent domain through the use of a public vehicle similar to FDR's Home Owners' Loan Corporation, or HOLC.
Again, there's going to be a lot of heated discussion about this, and it's sure to get ugly in the near future. This idea will be portrayed as radical and unrealistic, but in reality it's neither terribly radical nor even all that new. What it is, more than anything else, is uncomfortable. Anyway, more on this to come.© 2012 Rolling Stone
by Ellen Brown
from Nation of Change, July 22, 2012
At one time, calling the large multinational banks a “cartel” branded you as a conspiracy theorist. Today the banking giants are being called that and worse, not just in the major media but in court documents intended to prove the allegations as facts. Charges include racketeering (organized crime under the U.S. Racketeer Influenced and Corrupt Organizations Act or RICO), antitrust violations, wire fraud, bid-rigging, and price-fixing. Damning charges have already been proven, and major damages and penalties assessed. Conspiracy theory has become established fact.
In an article in the July 3rd Guardian titled “Private Banks Have Failed – We Need a Public Solution”, Seumas Milne writes of the LIBOR rate-rigging scandal admitted to by Barclays Bank:
It's already clear that the rate rigging, which depends on collusion, goes far beyond Barclays, and indeed the City of London. This is one of multiple scams that have become endemic in a disastrously deregulated system with inbuilt incentives for cartels to manipulate the core price of finance.
. . . It could of course have happened only in a private-dominated financial sector, and makes a nonsense of the bankrupt free-market ideology that still holds sway in public life.
. . . A crucial part of the explanation is the unmuzzled political and economic power of the City. . . . Finance has usurped democracy.
Bid-rigging and Rate-rigging
Bid-rigging was the subject of U.S. v. Carollo, Goldberg and Grimm, a ten-year suit in which the U.S. Department of Justice obtained a judgment on May 11 against three GE Capital employees. Billions of dollars were skimmed from cities all across America by colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. Other banks involved in the bidding scheme included Bank of America, JPMorgan Chase, Wells Fargo and UBS. These banks have already paid a total of $673 million in restitution after agreeing to cooperate in the government’s case.
Hot on the heels of the Carollo decision came the LIBOR scandal, involving collusion to rig the inter-bank interest rate that affects $500 trillion worth of contracts, financial instruments, mortgages and loans. Barclays Bank admitted to regulators in June that it tried to manipulate LIBOR before and during the financial crisis in 2008. It said that other banks were doing the same. Barclays paid $450 million to settle the charges.
The U. S. Commodities Futures Trading Commission said in a press release that Barclays Bank “pervasively” reported fictitious rates rather than actual rates; that it asked other big banks to assist, and helped them to assist; and that Barclays did so “to benefit the Bank’s derivatives trading positions” and “to protect Barclays’ reputation from negative market and media perceptions concerning Barclays’ financial condition.”
After resigning, top executives at Barclays promptly implicated both the Bank of England and the Federal Reserve. The upshot is that the biggest banks and their protector central banks engaged in conspiracies to manipulate the most important market interest rates globally, along with the exchange rates propping up the U.S. dollar.
CFTC did not charge Barclays with a crime or require restitution to victims. But Barclays’ activities with the other banks appear to be criminal racketeering under federal RICO statutes, which authorize victims to recover treble damages; and class action RICO suits by victims are expected.
The blow to the banking defendants could be crippling. RICO laws, which carry treble damages, have taken down the Gambino crime family, the Genovese crime family, Hell’s Angels, and the Latin Kings.
The Payoff: Not in Interest But on Interest Rate Swaps
Bank defenders say no one was hurt. Banks make their money from interest on loans, and the rigged rates were actually LOWER than the real rates, REDUCING bank profits.
That may be true for smaller local banks, which do make most of their money from local lending; but these local banks were not among the 16 mega-banks setting LIBOR rates. Only three of the rate-setting banks were U.S.banks—JPMorgan, Citibank and Bank of America—and they slashed their local lending after the 2008 crisis. In the following three years, the four largest U.S. banks—BOA, Citi, JPM and Wells Fargo—cut back on small business lending by a full 53 percent. The two largest—BOA and Citi—cut back on local lending by 94 percent and 64 percent, respectively.
Their profits now come largely from derivatives. Today, 96% of derivatives are held by just four banks—JPM, Citi, BOA and Goldman Sachs—and the LIBOR scam significantly boosted their profits on these bets. Interest-rate swaps compose fully 82 percent of the derivatives trade. The Bank for International Settlements reports a notional amount outstanding as of June 2009 of $342 trillion. JPM—the king of the derivatives game—revealed in February 2012 that it had cleared $1.4 billion in revenue trading interest-rate swaps in 2011, making them one of the bank's biggest sources of profit.
The losers have been local governments, hospitals, universities and other nonprofits. For more than a decade, banks and insurance companies convinced them that interest-rate swaps would lower interest rates on bonds sold for public projects such as roads, bridges and schools.
The swaps are complicated and come in various forms; but in the most common form, counter party A (a city, hospital, etc.) pays a fixed interest rate to counter party B (the bank), while receiving a floating rate indexed to LIBOR or another reference rate. The swaps were entered into to insure against a rise in interest rates; but instead, interest rates fell to historically low levels.
Defenders say “a deal is a deal;” the victims are just suffering from buyer’s remorse. But while that might be a good defense if interest rates had risen or fallen naturally in response to demand, this was a deliberate, manipulated move by the Fed acting to save the banks from their own folly; and the rate-setting banks colluded in that move. The victims bet against the house, and the house rigged the game.
State and local officials across the country are now meeting to determine their damages from interest rate swaps, which are held by about three-fourths of America’s major cities. Damages from LIBOR rate-rigging are being investigated by Massachusetts Attorney General Martha Coakley, New York Attorney General Eric Schneiderman, officers at CalPERS (California’s public pension fund, the nation’s largest), and hundreds of hospitals.
One victim that is fighting back is the city of Oakland, California. On July 3, the Oakland City Council unanimously passed a motion to negotiate a termination without fees or penalties of its interest rate swap with Goldman Sachs. If Goldman refuses, Oakland will boycott doing future business with the investment bank. Jane Brunner, who introduced the motion, says ending the agreement could save Oakland $4 million a year, up to a total of $15.57 million—money that could be used for additional city services and school programs. Thousands of cities and other public agencies hold similar toxic interest rate swaps, so following Oakland’s lead could save taxpayers billions of dollars.
What about suing Goldman directly for damages? One problem is that Goldman was not one of the 16 banks setting LIBOR rates. But victims could have a claim for unjust enrichment and restitution, even without proving specific intent:
Unjust enrichmentis a legal term denoting a particular type of causative event in which one party is unjustly enriched at the expense of another, and an obligation to make restitution arises, regardless of liability for wrongdoing. . . . [It is a] general equitable principle that a person should not profit at another's expense and therefore should make restitution for the reasonable value of any property, services, or other benefits that have been unfairly received and retained.
Goldman was clearly unjustly enriched by the collusion of its banking colleagues and the Fed, and restitution is equitable and proper.
RICO Claims on Behalf of Local Banks
Not just local governments but local banks are seeking to recover damages for the LIBOR scam. In May 2012, the Community Bank & Trust of Sheboygan, Wisconsin, filed a RICO lawsuit involving mega-bank manipulation of interest rates, naming Bank of America, JPMorgan Chase, Citigroup, and others. The suit was filed as a class action to encourage other local, independent banks to join in. On July 12, the suit was consolidated with three other LIBOR class action suits charging violation of the anti-trust laws.
The Sheboygan bank claims that the LIBOR rigging cost the bank $64,000 in interest income on $8 million in floating-rate loans in 2008. Multiplied by 7,000 U.S. community banks over 4 years, the damages could be nearly $2 billion just for the community banks. Trebling that under RICO would be $6 billion.
RICO Suits Against Banking Partners of MERS
Then there are the MERS lawsuits. In the State of Louisiana, 30 judges representing 30 parishes are suing 17 colluding banks under RICO, stating that the Mortgage Electronic Registration System (MERS) is a scheme set up to illegally defraud the government of transfer fees, and that mortgages transferred through MERS are illegal. A number of courts have held that separating the promissory note from the mortgage—which the MERS scheme does—breaks the chain of title and voids the transfer.
Several states have already sued MERS and their bank partners, claiming millions of dollars in unpaid recording fees and other damages. These claims have been supported by numerous studies, including one asserting that MERS has irreparably damaged title records nationwide and is at the core of the housing crisis. What distinguishes Louisiana’s lawsuit is that it is being brought under RICO, alleging wire and mail fraud and a scheme to defraud the parishes of their recording fees.
Readying the Lifeboats: The Public Bank Solution
Trebling the damages in all these suits could sink the banking Titanic. As Seumas Milne notes in The Guardian:
Tougher regulation or even a full separation of retail from investment banking will not be enough to shift the City into productive investment, or even prevent the kind of corrupt collusion that has now been exposed between Barclays and other banks. . . .
Only if the largest banks are broken up, the part-nationalised outfits turned into genuine public investment banks, and new socially owned and regional banks encouraged can finance be made to work for society, rather than the other way round. Private sector banking has spectacularly failed – and we need a democratic public solution.
If the last quarter century of U.S. banking history proves anything, it is that our private banking system turns malignant and feeds off the public when it is deregulated. It also shows that a parasitic private banking system will NOT be tamed by regulation, as the banks’ control over the money power always allows them to circumvent the rules. We the People must transparently own and run the nation’s central and regional banks for the good of the nation, or the system will be abused and run for private power and profit as it so clearly is today, bringing our nation to crisis again and again while enriching the few.
We blogged earlier about how traders from JP Morgan Chase and Goldman Sachs descended on European cities such as Casino, Italy and even nunneries selling them interest rate swaps.. Interest rate swaps were also responsible for bankrupting Jefferson County, the county seat of Birmingham, Alabama. Now the same big banks are bankrupting California cities. Stockton, San Bernadino and Mammoth Lakes have already gone down. Oakland is fighting Goldman for its very life.
But what does this have to do with the LIBOR scandal, you say? A lot, it turns out. LIBOR stands for the London Interbank Offered Rate, a benchmark that most other interest rates are tied to including interest rate swaps, the very derivative financial instruments that are now bankrupting California cities. The LIBOR scandal has failed to attract the interest of many Americans because it's so "over there" in London. What does that have to do with us here in the US? The same interest rate swaps that JP Morgan Chase sold to nunneries in Europe, they've sold to Stockton and San Bernadino and Oakland and many other US cities, school districts, hospitals and perhaps even to a few US nunneries.
It has recently come to light that the LIBOR has been fraudulently manipulated by London based Barclays bank and possibly quite a few others. CEO of Barclays, Bob Diamond, has been forced to resign and Barclays has had to pay a $456 million penalty. Diamond (unlike his US counterpart, Jamey Dimon, of JP Morgan Chase who sports Presidential cuff links) has had to eat humble pie in front of the English Parliament. What this means is that interest rates for credit cards, mortgages, student loans and almost every other kind of loan imaginable including interest rate swaps have been fraudulently set for years. A trader at Barclays petitioned a submitter, whose job it is to report accurately on the interest rate, to lower the LIBOR on a certain day so that he could make a killing on his Credit Default Swap, a bet that the LIBOR would go down on that day. When it did and the trader cashed out, he phoned up the submitter and said, "Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger."
It's too late for Stockton, now that it's surpassed Birmingham as the nation's largest municipal bankruptcy, and for San Bernadino, but Oakland is fighting back demanding that Goldman terminate the interest rate swap deal without penalties. Recall that Casino, Italy took JP Morgan Chase to court and eventually won a settlement of a half million euros. Oakland entered into an interest rate swap with Goldman in 1997. They convinced Oakland officials that it would protect taxpayers against the possibility that interest rates would rise on variable rate bonds that the city planned to issue the next year. Oakland's deal with Goldman Sachs converted floating rates on $187 million of bond debt into a fixed 5.6 percent. If the interest rate tied to the benchmark LIBOR went below 5.6%, then Oakland had to pay Goldman, and if it went above 5.6% Goldman had to pay Oakland. Since then, however, the Federal Reserve has kept interest rates near zero so Goldman had made out like a bandit and Oakland has had to pay through the nose taking money away from teachers, firefighters, policemen and garbage workers and funneling it to Goldman. This collapse in city finances is bankrupting the city. If rates stay artificially depressed due to the Federal Reserve's decisions, Oakland will owe Goldman Sachs another $20 million between now and 2021. That's on top of the $26 million the city has already paid.
In all fairness Goldman would say that nobody forced the city of Oakland to enter into the interest rate swap. Oakland made a bet that interest rates would rise and it lost. It's as simple as that. However, Oakland wasn't counting on manipulation of interest rates by the Federal Reserve and by the LIBOR so the deal sucks all the way around. In fact it stinks to high heaven. Leaders of some of Oakland's largest churches are uniting with community organizers, Decolonize Oakland, and Occupy Oakland activists to focus on how "predatory" banks are draining Oakland's budget and causing cuts to vital city services. Oakland can get out of the deal with Goldman by paying a $16 million penalty, but that seems unfair to Oakland's leaders. They say that Goldman got bailed out by the TARP while government money has failed to bail out Oakland. Wall Street got bailed out. Cities got sold out. Federal policies keeping interest rates low are resulting in extracting wealth from cities and transferring it to Wall Street.
On top of that the state of California is taking monies back from cities' Redevelopment Agencies to fund its own budget deficits. A controversial new law terminates all redevelopment agencies and authorizes the seizure of $1.7 billion of their property tax revenue to alleviate the state's own budget deficit. Oakland, however, uses redevelopment money to cover at least some portion of city workers’ pay. Mayors and city councilmembers who oversee redevelopment projects may receive part of their salary from the agency. Funding police services is also consistent with redevelopment law as long as those services are used to mitigate gang activity, graffiti abatement and other causes of community blight. The Oakland Redevelopment Agency has funded full time police officers for five years. With the state clawing back Redevelopment Agency funds and property taxes, city workers including police officers are likely to be laid off.
What's happening in Oakland and many other US cities is similar to what's happening in Greece and all over the world. This is from Occupy Oakland Media:
"The banking deception hits close to home, as Oakland and San Francisco pay millions of extra dollars annually in inflated interest payments to Goldman Sachs and JP Morgan while cutting funding for education, after-school programs, healthcare and infrastructure. Oakland will pay nearly half the amount of its budget deficit to private banks over the next few years because of high interest rate obligations stemming from interest-rate swaps with banks such as Goldman Sachs. This is tantamount to redistribution of wealth from the poorest people in Oakland who will give up education and healthcare to millionaire bankers.
"This has been happening in states all over the country says economist Michael Hudson, “Because what’s happening in Greece is a dress rehearsal for what’s going on in the United States. … What’s happening in Greece in the last week is exactly what’s happened in Minnesota with the close-down of government. And the demands of privatization – thatGreece sell off its roads, its land, its port authority, its water and sewer – is just what Illinois’s been doing, what Chicago’s been doing, what Minnesota’s been told to do, and what American cities are trying to do.
"What if the United States had bailed out the states instead of the multi-national banks? We could have retained funding for education, infrastructure and social programs that could have stimulated local economies and kept people in their homes, where the majority of the people’s wealth is held, since the banks that would have foreclosed upon them would have been stuck in bankruptcy court."
So to recapitulate, California cities are being bankrupted by Wall Street largely due to interest rate swaps which are tied to the LIBOR which we now know has been fraudulently manipulated by the big banks on Wall Street and in London. The result is austerity for the people of Oakland just as it has been for the people of Greece. LIBOR, the rate at which banks borrow from one another, is the basis for roughly $800 trillion worth of loans, financial instruments and derivatives including interest rate swaps. When banks manipulate LIBOR rates lower, they are borrowing money for less while their counterparties in interest rate swap contracts like the City of Oakland are stuck paying them much higher rates.
Published on Sunday, July 15, 2012 by The Guardian/UK
Last fall, I argued that the violent reaction to Occupy and other protests around the world had to do with the 1%ers' fear of the rank and file exposing massive fraud if they ever managed get their hands on the books. At that time, I had no evidence of this motivation beyond the fact that financial system reform and increased transparency were at the top of many protesters' list of demands.
But this week presents a sick-making trove of new data that abundantly fills in this hypothesis and confirms this picture. The notion that the entire global financial system is riddled with systemic fraud – and that key players in the gatekeeper roles, both in finance and in government, including regulatory bodies, know it and choose to quietly sustain this reality – is one that would have only recently seemed like the frenzied hypothesis of tinhat-wearers, but this week's headlines make such a conclusion, sadly, inevitable.
The New York Times business section on 12 July shows multiple exposes of systemic fraud throughout banks: banks colluding with other banks in manipulation of interest rates, regulators aware of systemic fraud, and key government officials (at least one banker who became the most key government official) aware of it and colluding as well. Fraud in banks has been understood conventionally and, I would say, messaged as a glitch. As in London Mayor Boris Johnson's full-throated defense of Barclay's leadership last week, bank fraud is portrayed as a case, when it surfaces, of a few "bad apples" gone astray.
In the New York Times business section, we read that the HSBC banking group is being fined up to $1bn, for not preventing money-laundering (a highly profitable activity not to prevent) between 2004 and 2010 – a six years' long "oops". In another article that day, Republican Senator Charles Grassley says of the financial group Peregrine capital: "This is a company that is on top of things." The article goes onto explain that at Peregrine Financial, "regulators discovered about $215m in customer money was missing." Its founder now faces criminal charges. Later, the article mentions that this revelation comes a few months after MF Global "lost" more than $1bn in clients' money.
What is weird is how these reports so consistently describe the activity that led to all this vanishing cash as simple bumbling: "regulators missed the red flag for years." They note that a Peregrine client alerted the firm's primary regulator in 2004 and another raised issues with the regulator five years later – yet "signs of trouble seemingly missed for years", muses the Times headline.
A page later, "Wells Fargo will Settle Mortgage Bias Charges" as that bank agrees to pay $175m in fines resulting from its having – again, very lucratively – charged African-American and Hispanic mortgagees costlier rates on their subprime mortgages than their counterparts who were white and had the same credit scores. Remember, this was a time when "Wall Street firms developed a huge demand for subprime loans that they purchased and bundled into securities for investors, creating financial incentives for lenders to make such loans." So, Wells Fargo was profiting from overcharging minority clients and profiting from products based on the higher-than-average bad loan rate expected. The piece discreetly ends mentioning that a Bank of America lawsuit of $335m and a Sun Trust mortgage settlement of $21m for having engaged is similar kinds of discrimination.
Are all these examples of oversight failure and banking fraud just big ol' mistakes? Are the regulators simply distracted?
The top headline of the day's news sums up why it is not that simple: "Geithner Tried to Curb Bank's Rate Rigging in 2008". The story reports that when Timothy Geithner, at the time he ran the Federal Reserve Bank of New York, learned of "problems" with how interest rates were fixed in London, the financial center at the heart of the Libor Barclays scandal. He let "top British authorities" know of the issues and wrote an email to his counterparts suggesting reforms. Were his actions ethical, or prudent? A possible interpretation of Geithner's action is that he was "covering his ass", without serious expectation of effecting reform of what he knew to be systemic abuse.
And what, in fact, happened? Barclays kept reporting false rates, seeking to boost its profit. Last month, the bank agreed to pay $450m to US and UK authorities for manipulating the Libor and other key benchmarks, upon which great swaths of the economy depended. This manipulation is alleged in numerous lawsuits to have defrauded thousands of bank clients. So Geithner's "warnings came too late, and his efforts did not stop the illegal activity".
And then what happened? Did Geithner, presumably frustrated that his warnings had gone unheeded, call a press conference? No. He stayed silent, as a practice that now looks as if several major banks also perpetrated, continued.
And then what happened? Tim Geithner became Treasury Secretary. At which point, he still did nothing.
It is very hard, looking at the elaborate edifices of fraud that are emerging across the financial system, to ignore the possibility that this kind of silence – "the willingness to not rock the boat" – is simply rewarded by promotion to ever higher positions, ever greater authority. If you learn that rate-rigging and regulatory failures are systemic, but stay quiet, well, perhaps you have shown that you are genuinely reliable and deserve membership of the club.
Whatever motivated Geithner's silence, or that of the "government official" in the emails to Barclays, this much is obvious: the mainstream media need to drop their narratives of "Gosh, another oversight". The financial sector's corruption must be recognized as systemic.
Meanwhile, Britain is sleepwalking in a march toward total email surveillance, even as the US brings forward new proposals to punish whistleblowers by extending the Espionage Act. In an electronic world, evidence of these crimes lasts forever – if people get their hands on the books. In the Libor case, notably, a major crime has not been greeted by much demand at the top for criminal prosecutions. That asymmetry is one of the insurance policies of power. Another is to crack down on citizens' protest.© Guardian News and Media Limited 2012
by Robert Reich
Just when you thought Wall Street couldn’t sink any lower – when its myriad abuses of public trust have already spread a miasma of cynicism over the entire economic system, giving birth to Tea Partiers and Occupiers and all manner of conspiracy theories; when its excesses have already wrought havoc with the lives of millions of Americans, causing taxpayers to shell out billions (of which only a portion has been repaid) even as its top executives are back to making more money than ever; when its vast political power (via campaign contributions) has already eviscerated much of the Dodd-Frank law that was supposed to rein it in, including the so-called “Volker” Rule that was sold as a milder version of the old Glass-Steagall Act that used to separate investment from commercial banking – yes, just when you thought the Street had hit bottom, an even deeper level of public-be-damned greed and corruption is revealed.
Sit down and hold on to your chair.
What’s the most basic service banks provide? Borrow money and lend it out. You put your savings in a bank to hold in trust, and the bank agrees to pay you interest on it. Or you borrow money from the bank and you agree to pay the bank interest.
How is this interest rate determined? We trust that the banking system is setting today’s rate based on its best guess about the future worth of the money. And we assume that guess is based, in turn, on the cumulative market predictions of countless lenders and borrowers all over the world about the future supply and demand for the dough.
But suppose our assumption is wrong. Suppose the bankers are manipulating the interest rate so they can place bets with the money you lend or repay them – bets that will pay off big for them because they have inside information on what the market is really predicting, which they’re not sharing with you.
That would be a mammoth violation of public trust. And it would amount to a rip-off of almost cosmic proportion – trillions of dollars that you and I and other average people would otherwise have received or saved on our lending and borrowing that have been going instead to the bankers. It would make the other abuses of trust we’ve witnessed look like child’s play by comparison.
Sad to say, there’s reason to believe this has been going on, or something very much like it. This is what the emerging scandal over “Libor” (short for “London interbank offered rate”) is all about.
Libor is the benchmark for trillions of dollars of loans worldwide – mortgage loans, small-business loans, personal loans. It’s compiled by averaging the rates at which the major banks say they borrow.
So far, the scandal has been limited to Barclay’s, a big London-based bank that just paid $453 million to U.S. and British bank regulators, whose top executives have been forced to resign, and whose traders’ emails give a chilling picture of how easily they got their colleagues to rig interest rates in order to make big bucks. (Robert Diamond, Jr., the former Barclay CEO who was forced to resign, said the emails made him “physically ill” – perhaps because they so patently reveal the corruption.)
But Wall Street has almost surely been involved in the same practice, including the usual suspects — JPMorgan Chase, Citigroup, and Bank of America – because every major bank participates in setting the Libor rate, and Barclay’s couldn’t have rigged it without their witting involvement.
In fact, Barclay’s defense has been that every major bank was fixing Libor in the same way, and for the same reason. And Barclays is “cooperating” (i.e., giving damning evidence about other big banks) with the Justice Department and other regulators in order to avoid steeper penalties or criminal prosecutions, so the fireworks have just begun.
There are really two different Libor scandals. One has to do with a period just before the financial crisis, around 2007, when Barclays and other banks submitted fake Libor rates lower than the banks’ actual borrowing costs in order to disguise how much trouble they were in. This was bad enough. Had the world known then, action might have been taken earlier to diminish the impact of the near financial meltdown of 2008.
But the other scandal is even worse. It involves a more general practice, starting around 2005 and continuing until – who knows? it might still be going on — to rig the Libor in whatever way necessary to assure the banks’ bets on derivatives would be profitable.
This is insider trading on a gigantic scale. It makes the bankers winners and the rest of us – whose money they’ve used for to make their bets – losers and chumps.
What to do about it, other than hope the Justice Department and other regulators impose stiff fines and even criminal penalties, and hold executives responsible?
When it comes to Wall Street and the financial sector in general, most of us suffer outrage fatigue combined with an overwhelming cynicism that nothing will ever be done to stop these abuses because the Street is too powerful. But that fatigue and cynicism are self-fulfilling; nothing will be done if we succumb to them.
The alternative is to be unflagging and unflinching in our demand that Glass-Steagall be reinstituted and the biggest banks be broken up. The question is whether the unfolding Libor scandal will provide enough ammunition and energy to finally get the job done.
As a young twenty something ingenue at JP Morgan Chase, Blythe Masters was the inventor of the Credit Default Swap (CDS), the financial instrument responsible for almost destroying the global financial system in 2008. Warren Buffett called CDSs and other derivatives "financial weapons of mass destruction." But exactly what are CDSs and how did they function to almost bring down the entire global banking system? CDSs came about from JP Morgan Chase, Goldman Sachs and other large banks' desire to offload risk and thereby strengthen their balance sheets. They would then be in a position to do more deals due to the fact that they would not have to keep so much collateral on their books to back up their deals. If a loan or bet went south, someone else would be responsible for paying off on the insurance policy, not them. Thus they could increase their profits by doing more and more trades without having to worry about paying off on any of them if anything went awry. That would be some other institution's responsibility. A CDS was an insurance policy. Furthermore, you wouldn't even have to be directly involved as a party or counterparty. You could purchase a "naked" CDS. This is like betting on a horse that you don't own and have no financial stake in or responsibility for.
When the big banks entered the subprime loan market, their problem was "how do we get the rating agencies such as Moody's and Standard and Poor's to rate these securities as anything other than trash and make them more attractive to investors?" First, the subprime loans were bundled together and securitized creating Collateralized Debt Obligations (CDOs). Then they were sold off in tranches (slices) to investors. Blythe Masters' invention circa 1996 enabled them to be rated AAA. How they did it was this. The rating agencies might want to have rated the CDOs BBB or CCC, but the banks said to them "How about if we throw in some insurance that these mortgages won't default? Will that raise the credit rating of this worthless junk?" Sure enough the rating agencies said. So part of the package became a CDS which effectively guaranteed the CDO and got it rated AAA. Investors ate up the product never bothering to look at the underlying worthless mortgages. A AAA rating was good enough for them. After all how could they go wrong with a AAA rated investment product? Then as soon as the deal was done, JP Morgan Chase traded off the CDS to someone else like AIG, for instance. No regulator or anyone else ever bothered to ask if AIG had the assets to back up the risk it had taken on and JP Morgan was free to go on and make other trades and deals since the need to back up any of these deals had just been transferred to some other institution. Without a lot of risk weighing down their balance sheets the big banks were free to make more deals, more trades and higher profits.
Insurance companies are the most highly regulated companies on the planet since it is important to know that an insurance company has the assets to back up the policies it writes. However, no one bothered to check if CDSs, which are essentially insurance products, were backed up by anything and this is what in a nutshell caused the financial deluge of 2008. And the regulatory atmosphere during the Bush administration was that no regulation was good regulation. When subprime mortgages went belly up, the investors tried to redeem their CDSs only to find out that the institutions who had pledged to make them whole didn't have the assets to do so. This is what caused Bear Stearns to throw itself at Tim Geithner's and Ben Bernanke's feet in March of 2008 and beg for mercy. They engineered a takeover of Bear by JP Morgan Chase and to sweeten the deal they gave JP Morgan $30 billion. So they said in effect 'here take $30 billion and Bear Stearns and problem solved'. But the problem was not solved. Treasury Secretary Henry Paulson, a free market guy, was upset that Bear wasn't allowed to go bankrupt because of 'moral hazard'. He thought that banks that had gotten themselves in trouble shouldn't come begging to the government to save them. Moral hazard meant that you had to suffer the consequences of your own decisions even if that meant going bankrupt. You couldn't expect the government to bail you out. Unfortunately, this concept ended up being applied more to average citizens than to the big financial institutions.
What happened next was that Lehman, which also had a large portfolio of CDSs came crying to the government. Paulson said, "No bailout. You guys are on your own." and Lehman promptly went bankrupt. But the dominoes did not stop falling there. AIG had a humungus portfolio of CDSs with not a prayer of a chance of backing them up. The dominoes were falling and the regulators in the government had hardly a clue as to what was happening. Why didn't they know anything or have a plan for dealing with the ensuing catastrophe? Because the CDS market was a dark market. They weren't traded on an exchange. Each deal was a private deal between a party and a counterparty with no one else having a clue as to what was going on. Thus trillions of CDSs accumulated on the books of financial institutions without anyone knowing the total amount or whether or not the institutions were in a position to pay them off if need be.
Here's an example of a dark market. Say you're selling a used car. You'd like to get as much as you can for it and your counterparty would like to pay the least. You, being a used car dealer, and your counterparty being an unsophisticated rube, who do you think is going to get the better end of the deal? The dealer of course. Before the era of Kelly's Blue Book there was a dark market in used car dealing. With the advent of Kelly's Blue Book, the market is no longer dark since the counterparty can look up the value of a used car and know about what he should pay. Similarly, Wall Street traders racked up huge profits because their counterparties didn't know they were being screwed. That is why they don't want CDSs traded on an exchange or any light cast on their activities. It would cut down on the Wall Street trader's profits.
After Lehman failed, the crisis got even worse. So Geithner and Bernanke got together, much to Paulson's chagrin, and said fuck moral hazard, we have to bail out AIG to save the system, and they did to the tune of $180 billion which came as did the $30 billion for Bear Stearns from the Federal Reserve Bank. Note that this all happened during the Bush administration long before Geithner became Treasury Secretary under Obama. Who engineered the takeover of the banks by the government? Who was the big socialist here? Bush and Paulson, free market guys, not Obama. Obama wasn't even in office yet. The next thing was that Bernanke said he could not keep on doing this. Paulson would have to go to the US Congress and demand money for future bailouts, and the result of this was the TARP, the Troubled Asset Relief Program, to the tune of $700 billion. Paulson, the free market guy who believed in letting the chips fall where they may, stuffed $125 billion down the throats of the big banks whether they liked it or not. Many of them did not want to accept the money.
Later after Geithner became Treasury Secretary under Obama, he argued that investors should not have to take the least bit of a haircut. All their bets should be paid off in full. The casino's integrity would have to be preserved at any and all costs or no one would ever bet there again. Quel horreur! So what that amounted to was that if you placed a bet that Lehman was going down and you bought a naked CDS and then sure enough Lehman went down, Geithner argued that that investor should be paid in full regardless of how little he paid to place his bet in the first place or when he placed the bet! Geithner totally pussyfooted around the big banks, but of course people who were being foreclosed on got absolutely no relief whatsoever. Main Street which suffered the most from the banking crisis was left to go it alone (remember moral hazard?) while the banks were being stuffed with cash. No banker had to take a cut in salary or miss a bonus. Wall Street got bailed out. Main Street got sold out. Bankers weren't forced to write down mortgage principles or lower mortgage interest rates. Any writedowns were strictly voluntary so bankers for the most part ignored them. In the final analysis foreclosures were far more profitable. Investors could buy up foreclosed properties on the cheap paying cash and make a killing when prices went up again.
And with all the fuss over TARP, and unbeknownst to the general public, Bernanke's Federal Reserve was still stuffing the banks with cash. A lawsuit by Bloomberg News forced the Fed to reveal that it had given $7.7 trillion to banks all over the world to prevent the looming crisis. No wonder the banks recovered so quickly! This made TARP trivial by comparison. A lot of these bets that were paid in full were on naked CDSs. Anyone could buy a CDS not just a party or counterparty to the original loan, and since these markets were dark, no one knows how many insiders walked off with billions when they knew which way the wind was blowing or how little they paid to place their bets in the first place. Such a one was John Paulson, no relation to the Treasury Secretary. He made $4 billion on one bet. He had Goldman Sachs design a CDO which both he and Goldman knew would fail. Then Paulson bet against it. Goldman's traders enthusiastically talked it up to their clients, er uh, muppets who bought it. Goldman itself bet against its own product. Long story short Paulson made $4 billion which Geithner, of course, demanded that he be paid in toto - no haircut for this sleazy bastard. Now Paulson is using his billions under the Citizens United Ruling of the Supreme Court to donate millions to defeat President Obama and promote right wing policies and politicians. You can thank Tim Geithner for insisting on no haircut for Paulson. Ironically, it was Obama’s Treasury Secretary’s policies that enabled Paulson to pocket the big bucks which he is using to defeat Geithner’s boss!
So what about Blythe Masters who created the CDS when she was a young and pretty twenty something. Her career has gone onward and upward. She still works for JP Morgan Chase. She's the current head of the Global Commodities Department and resides in New York City. She takes no blame for her creation of the Credit Default Swap. She blames the parties and counterparties who made inappropriate use of it. It's their fault not hers. It's faulty execution not the fault of the product itself. She goes blithely along with her life. Masters is Board Chair of the NY Affiliate of the breast cancer charity, Susan G. Komen for the Cure, and a member of the Board of Directors of the National Dance Institute.
Wall Street recruits young, just out of college computer science majors and mathematicians to become "quants" whose skills are used among other things to predict when pension funds are going to make huge trades so that Wall Street can jump in ahead of them and do deals effectively raising the price the pension fund must pay or lowering the profit they might make. One such young twenty something quant was Alexis Goldstein. Goldstein devised trading software for Deutsche Bank and Merrill Lynch. She has divulged some of Wall Street's most closely held cultural secrets such as the phrase "rip the client's face off" which means selling some derivative "solution" to a naive client such as a convent of nuns in Europe at a huge profit to the trader and to Wall Street while convincing the client that it's the best deal they ever made. Sometimes they refer to these clients as "muppets." JP Morgan Chase and Goldman Sachs fanned out all over Europe in the wake of the Commodities Futures Modernization Act of 2000 which legalized derivatives. The legalization of derivatives made it possible to design financial products which shifted the risks and rewards around among different clients, some seeking higher rewards at higher risk and some seeking safety with lower returns and lower risk. Derivatives could be custom designed on the trading floor taking each client's "needs" into account.
Wall Street investment bankers sold derivatives to municipalities, hospitals, convents, school districts and other institutions mainly dealing with unsophisticated people who had no idea of what they were purchasing or what could be the ultimate denouement. They believed the "F9 monkeys" from Wall Street who were nothing more than salesmen making huge commissions by selling junk to unsuspecting rubes. F9 monkeys put in a couple of inputs on their computer and then hit F9. That priced the derivatives for them and then they hit the road. Star traders could make $10-$15 million a year, a heady sum for a young twenty something.
One of the highly touted products was an interest rate swap. The town of Casino near Rome was looking to reduce the 5% interest rate it was paying on its outstanding debt. No problem. An interest rate swap could reduce the interest rate on its debt to say 2%. Little did the town fathers realize that this meant taking on more risk. They swapped from fixed rate to variable rate, from high interest to low interest and back and forth. Some counterparty would always take the other side of the bet. If Casino wanted a lower interest rate with concomitant higher risk, there was always some one or some institution that wanted lower risk and was willing to pay a higher interest rate. All went well for a while until the interest rate Casino's swap was pegged to started to go up. They paid hundreds of thousands more in interest than they bargained for. Casino ended up paying Bear Stearns (now owned by JP Morgan Chase) over a million dollars in interest. They sued and recovered half a million but they are still in the red More than a thousand municipalities and institutions in Europe bought some type of derivative from Wall Street. Potential losses are estimated to be in the billions. Scores of lawsuits have been filed.
Europe's financial troubles largely originated with the machinations of Wall Street. When countries were trying to join the euro club, they let Goldman Sachs and JP Morgan Chase devise policies of regulatory arbitrage. Regulatory arbitrage refers to using derivatives to fashion ways of getting around the spirit of the law which are still legal. Derivative solutions were a magic formula that made European countries' shaky finances still qualify for entry to the euro zone. The French cooked their books by reclassifying pension obligations. Germany played some tricks with gold. Now the chickens are coming home to roost with the collapse of the euro zone. The problem was letting Goldman Sachs and JP Morgan Chase use regulatory arbitrage to get them into the euro zone in the first place and set them on a debt based course where, no matter what they do, they will still be little more than serfs and vassals indebted to Wall Street in perpetuity.
And it wasn't just in Europe. Birmingham, Alabama, county seat of Jefferson County, had squandered $2 billion on a sewer system in 1996. Many constituents ended up with a sewer system to nowhere and huge monthly bills. County officials were looking to refinance their loan and borrow more money to complete the system without raising rates. In 2002 a former TV personality turned politician, Larry Langford, took charge of Birmingham's finances They wanted to refinance their sewer debt by borrowing another $3 billion.This was no problem for derivatives trader, Charles LeCroy, leading producer at JP Morgan, who devised a "solution" consisting of a series of interest rate swaps. Langford consulted a friend, Birmingham financial adviser Bill Blunt, who said it was a good deal. However, far from solving Jefferson County's financial problems, the intervention of JP Morgan Chase only added to them. In 2008 there was a big change in the markets. The county suddenly owed hundreds of millions of dollars in fees and penalties to its debt holders including JP Morgan. And there was another complication. LeCroy had paid Bill Blunt $3 million in bribes according to Federal prosecutors, and Blunt had given money to Larry Langford. In 2010 Langford went to jail for fifteen years on charges of bribery and fraud. JP Morgan was fined $25 million by the SEC and was ordered to forgive Jefferson County $697 million. Blunt cooperated with Federal prosecutors and got a 4 1/2 year sentence. LeCroy got 3 months. In 2011 Jefferson County filed the largest municipal bankruptcy in American history. Over 100 schools and hospitals as well as state and municipal governments bought swaps. In the last 5 years interest rate swaps have cost American taxpayers $20 billion.
Alexis Goldstein recounted how they talk about "FU money" on Wall St. That was when you had so much money that you could say "Fuck You" to anybody and not have there be any consequences. You are above everything and are immune from the world.
At one point in my career, I was being recruited by a hedge fund. During the recruitment process, one of my interviewers frankly described the fund’s founder—his boss’s boss—as a “spoiled brat billionaire.” My interviewer related a story about a meeting between the hedge fund and an executive at a company the fund wanted to work with. At one point, the visiting executive made statements the fund founder didn’t like. The founder turned to the visitor and said, “So, you came here just to try and fuck me over?” The visitor quickly stormed out in a rage. But the founder wasn’t satisfied just yet. He followed the man out of the room, into the elevator, shouted the entire ride down, and then yelled at him in the lobby until he finally left the building. When the founder came back upstairs to greet his shaken employees, he said, invigorated and beaming, “Wasn’t that fun?!”
This is Wall Street’s equivalent of the American Dream: to earn enough money so that you can behave in a way that makes the very existence of other people irrelevant.
She talks about a culture of admiring cheaters. If you do something against regulations and you only get caught once and pay a fine, it's worth it because the end goal is to make money. Wall Street exemplifies an ethic of profits at any cost. Finally, Goldstein said to herself, "I dont know if I can stay here and still be an ethical person." So the ones who end up remaining on Wall Street are the ones who have the least ethical scruples, the ones like the Enron traders of a decade ago who don't mind screwing Grandma out of her pension.
Many young Wall Street quants and traders who can't take the ridiculous long hours and have moral qualms about ripping their clients' faces off and legally gouging pension funds leave Wall Street after a short sojourn there. Alexis Goldstein now has her own consulting company. She started out teaching Occupy Wall Street about the Glass-Steagall Act, the depression era act that separated commercial from investment banking. That act was dismantled by the Gramm-Leach-Bliley Act of 1999 signed by President Bill Clinton. This made it possible for the combination of investment banks with insurance companies and commercial banks paving the way for collateralized debt obligations, credit default swaps and other sophisticated financial products.
I'll give Alexis the final word:
"It is hard to contrast the joy of community I feel at Occupy Wall Street with the isolation I felt on Wall Street. It’s hard because I cannot think of two more disparate cultures. Wall Street believes in, and practices, a culture of scarcity. This breeds hoarding, distrust, and competition. As near as I can tell, Occupy Wall Street believes in plenty. This breeds sharing, trust, and cooperation. On Wall Street, everyone was my competitor. They’d help me only if it helped them. At Occupy Wall Street, I am offered food, warmth, and support, because it’s the right thing to do, and because joy breeds joy.
I was privileged enough to make it in the door on Wall Street, and to get bonuses during my time there. But I never felt as fortunate, or joyful, as I did the night after the eviction of Occupy Wall Street from Liberty Square, when we had our first post-raid General Assembly. When the thousands of supporters who filled the park necessitated three waves of the people’s mic. When our voices together echoed not just down the park, but up into the sky as the buildings caused the sound to ricochet off their glass walls.
And so I say to my friends who still dwell behind the Wall: come join us. The spoils of money can never match the joys of community. When you’re ready, we’ll be here."
by Robert Reich
Horror of horrors, say the banks.
“If JPMorgan overseas operates under different rules than our foreign competitors,” warned Jamie Dimon, chair and CEO of JP Morgan, Wall Street would lose financial business to the banks of nations with fewer regulations, allowing “Deutsche Bank to make the better deal.”
This is the same Jamie Dimon who chose London as the place to make highly-risky swaps trades that have lost the firm upwards of $2 billion so far – and could leave American taxpayers holding the bag if JPMorgan’s exposure to tottering European banks gets much worse.
Dimon’s foreign affair is itself proof that unless the overseas operations of Wall Street banks are covered by U.S. regulations, giant banks like JPMorgan will just move more of their betting abroad – hiding their wildly-risky bets overseas so U.S. regulators can’t control them. Even now no one knows how badly JPMorgan or any other Wall Street bank will be shaken if major banks in Spain or elsewhere in Europe go down.
Call it the Dimon loophole.
This is the same Jamie Dimon, by the way, who at a financial conference a year ago told Fed chief Ben Bernanke there was no longer any reason to crack down on Wall Street. “Most of the bad actors are gone,” he said. “[O]ff-balance-sheet businesses are virtually obliterated, … money market funds are far more transparent” and “most very exotic derivatives are gone.”
One advantage of being a huge Wall Street bank is you get bailed out by the federal government when you make dumb bets. Another is you can choose where around the world to make the dumb bets, thereby dodging U.S. regulations. It’s a win-win.
Wall Street would like to keep it that way.
For two years now, squadrons of Wall Street lawyers and lobbyists have been pressing the Treasury, Comptroller of the Currency, Commodity Futures Trading Commission, SEC, and the Fed to go easier on the Street for fear that if regulations are too tight, the big banks will be less competitive internationally.
Translated: They’ll move more of their business to London and Frankfurt, where regulations are looser.
Meanwhile, the Street has been warning Europeans that if their financial regulations are too tight, the big banks will move more of their business to the US, where regulations will (they hope) be looser.
After the Basel Committee on Banking Supervision (a global financial regulatory oversight body) came up with a new set of rules to toughen bank capital and liquidity requirements, European officials threatened to get even tougher. They approved a new system of European regulatory bodies with added powers to ban certain financial products or activities in times of market stress.
This prompted Lloyd Blankfein, CEO of Goldman Sachs, to issue — in the words of the Financial Times — “a clear warning that the bank could shift its operations around the world if the regulatory crackdown becomes too tough.”
Blankfein told a European financial conference that while Europe remains of vital importance to Goldman, with less than half of the bank’s business now generated in the U.S., the introduction of “mismatched regulation” across different regions (that is, tougher regulations in Europe than in the U.S.) would tempt banks to search out the cheapest and least intrusive jurisdiction in which to operate.
“Operations can be moved globally and capital can be accessed globally,” he warned.
Someone should remind Dimon and Blankfein that a few years ago they and their colleagues on the Street almost eviscerated the American economy, and that of much of the rest of the world. The Street’s antics required a giant taxpayer-funded bailout. Most Americans are still living with the results, as are millions of Europeans.
Wall Street can’t have it both ways – too big to fail, and also able to make wild bets anywhere around the world.
If Wall Street banks demand a free rein overseas, the least we should demand is they be broken up here
I have never heard so many conservative pundits offering gratuitous avuncular advice to Barack Obama that his campaign strategy attacking Bain Capital will not get him anywhere. Joe Scarborough of Morning Joe on msnbc and others have gone on and on about how using Bain Capital against Mitt Romney is not a good strategy. Well, when conservatives offer advice to Barack Obama about what will or will not work for him, Obama better do just the opposite of what they recommend because ultimately they want him to lose. Therefore, he should double down, not abandon, the Bain Capital strategy.
But the problem with Obama is that he starts out praising Romney for being a good businessman (Clinton said he was "superlative"), certainly something no Republican would do for Obama. Then Obama goes on to say that, while Romney created wealth for himself and his investors, the President of the US must be concerned about creating jobs for everyone. This is a roundabout, circuitous route to putting Romney down, a circumlocution, something the Republicans would never do. Instead, they start right our calling Obama a failure. Obama starts out praising Romney, then seeming to walk on eggshells aiming at a scholarly criticism of his activities at Bain. Obama should get right to the point: Romney made his money at Bain by destroying jobs and companies, picking over their bones like the vulture he is.
Bain Capital is a private equity (formerly known as leveraged buyout) firm. They changed the name to protect the guilty. What they do is to pick the bones of perfectly healthy companies and in many cases drive them into bankruptcy. Here's how it works: they buy a private company with borrowed money (the leverage in leveraged buyout). But they don't buy just any company. They buy one with assets they can strip. It just so happens that they usually buy companies that have a unionized work force. Why? Because a company with a unionized work force usually has a pension fund. Their goal is to get their hands on that pension fund and transfer that asset to Bain Capital. So they borrow the money to buy a company, strip the pension fund and fire all the unionized workers. Then they hire a nonunionized work force to do the same jobs at half the pay. In this way they claim to have made the company "more efficient." Contrary to Republican hogwash, wealthy Individuals like Romney are job destroyers not job creators. Then the vulture capitalists borrow as much money as they can using the company itself as collateral. The next thing they do is to pay Mitt Romney himself, his partners and investors all the borrowed money plus the pension fund. They may also sell off parts of the company or move jobs overseas. Then the company is left to sink or swim on its own. If it can manage to pay all the increased debt Bain Capital put it in, it swims. If not, it sinks and goes bankrupt. In either case, Mitt Romney and Bain Capital have made tens or hundreds of millions of dollars.
President Obama's attack on Romney and Bain Capital has been rather tepid and timid. He essentially says that, while Romney and Bain have done wonderfully well for Bain Capital's investors making them a lot of money, that this is not the skill set required of the President of the United States who has to create jobs for the general public, not make a lot of money for investors. This is typical Barack Obama rationalizing. Instead, he should go for Romney's jugular, something the Republicans including Romney never fail to do, not congratulate him on making money for his investors. First of all, even the companies that have managed to survive the Bain treatment have ended up with a non-union work force working for minimal pay. The fact that Staples and some others are successful companies has nothing to do with it. Staples was never acquired by Bain. They just played a venture capital role there. Romney's role as a vulture capitalist was to identify companies with tangible assets and then to figure out a way to get control of those assets for Bain and its investors. But it gets worse from there.
This is from the LA Times:
Bain Capital had bought a controlling interest in a paper products company called Ampad for $5 million in 1992. Two years later, after Ampad bought a factory in Marion, Ind., the new management team dismissed about 200 workers, slashed salaries and benefits, and hired strikebreakers after the union called a walkout.
“We were just fired,” Randy Johnson, a former worker and union officer at the Marion plant, recalled in a telephone interview. “They came in and said, ‘You’re all fired. If you want to work for us, here’s an application.’ We had insurance until the end of the week. That was it. It was brutal.”
In October 1994, Johnson and other striking workers drove to Massachusetts to protest Romney’s Senate campaign. “We chased him everywhere,” Johnson recalled. “He took good jobs with benefits, and created low-wage, part-time, no-benefit jobs. That’s what he was creating with his investments.”
The Republicans like to point out how Solyndra, which was invested in by Obama's administration and then went bankrupt, was a huge flop. No matter how many successes the Obama administration has had, Republicans will characterize the whole program as a failure because of the failure of a small part of it. They don't mention the other successes like saving General Motors. By the same token Obama should talk about Ampad, GST Steel, Aventis and other companies whose bones have been picked by Romney and Bain and ignore any successes Romney and Bain might have had.
This is from Rolling Stone:
And let's take a look at the record specifically of Bain Capital, which Romney owned from 1992 to 2001.
• 1988: Bain put $10 million down to buy Stage Stores, and in the mid-'90s took it public, collecting $184 million from stock offerings. Stage filed for bankruptcy in 2000.
• 1992: Bain bought American Pad & Paper, investing $5 million, and collected $107 million from dividends. The business filed for bankruptcy in 2000.
• 1993: Bain invested $25 million when buying GS Industries, and received $58 million from dividends. GS filed for bankruptcy in 2001.
• 1994: Bain put $27 million down to buy medical equipment maker Dade Behring. Dade borrowed $230 million to buy some of its shares. Dade went bankrupt in 2002.
• 1997: Bain invested $41 million when buying Details, and collected at least $70 million from stock offerings. The company filed for bankruptcy in 2003.
President Obama is afraid to criticize Romney's Bain Capital days because Republicans will accuse him of being against capitalism. Well, so what. Today's capitalism is not your Grandfather's capitalism. If a law were passed making it illegal to raid a company's pension fund and make a large payout to investors, would that be against capitalism? Capitalism is malleable. It only exists within a legal framework. Some of it should be outlawed like the part that let Romney buy companies with borrowed money and then take a tax writeoff because the money was borrowed. Wall street lobbyists have changed the laws regarding capitalism to their own advantage. The Commodities Futures Modernization Act of 2000 deregulated derivatives and helped to cause the financial meltdown of 2008. Advocating reregulating derivatives is not anti-capitalistic. So if Obama were to go after Romney's record as a vulture capitalist, it does not mean he is against capitalism, only capitalism as it has been "modernized" and deregulated.
Obama should double down on what Romney and Bain Capital really did which was to load companies up with debt, take the borrowed money for their own personal benefit, raid pension funds, fire unionized workers and hire nonunionized ones at much reduced pay, sell off profitable parts of companies and then force them into bankruptcy. This is exactly what a vulture does: picks apart a carcass for its own profit. He should not give Romney one iota of credit for making money for himself and his investors. After all Romney will never be caught dead giving Obama one iota of credit for anything.
by Robert Reich
I wish President Obama would draw the obvious connection between Bain Capital and JPMorgan Chase.
That way his so-called “attack” on private equity is neither a personal attack on Mitt Romney nor a generalized attack on American business.
It’s an attack on a particular kind of capitalism that Romney and JPMorgan both practice: Using other peoples’ money to make big bets which, if they go wrong, can wreak havoc on the economy.
It’s the substitution of casino capitalism for real capitalism, the dominance of the betting parlor over the real business of America, financial innovation rather than product innovation.
It’s been terrible for the American economy and for our democracy.
It’s also why Obama has to come out swinging about JPMorgan. The JPMorgan Chase debacle would have been prevented if the Volcker Rule were sufficiently strict, prohibiting banks from using commercial deposits to make bets except very specific offsetting bets (hedges) on narrow classes of trades.
But Jamie Dimon and JPMorgan have been lobbying like mad to loosen the Volcker Rule and widen that exception to include the very kind of reckless bets JPMorgan made. And they’re still at it, as evidenced by Dimon’s current claim that the rule that eventually emerges would allow those bets.
As a practical matter, the Volcker Rule is hopeless. It was intended to be Glass-Steagall lite — a more nuanced version of the original Depression-era law that separated commercial from investment banking. But JPMorgan has proven that any nuance — any exception — will be stretched beyond recognition by the big banks.
So much money can be made when these bets turn out well that the big banks will stop at nothing to keep the spigot open.
There’s no alternative but to resurrect Glass-Steagall as a whole. Even then, the biggest banks are still too big to fail or to regulate. We also need to heed the recent advice of the Dallas branch of the Federal Reserve, and break them up.
At the same time, there’s no point to the “carried interest” loophole that allows private-equity managers like Mitt Romney to treat their incomes as capital gains, taxed at only 15 percent, when they’ve risked no money of their own.
If private equity were good for America it wouldn’t need this or the other tax preference it depends on, elevating debt over equity. But the private equity industry has huge political clout, which is why these tax preferences remain.
Get it? Bain Capital and JPMorgan are parts of the same problem. The President should be leading the charge against both.
by Robert Reich
The Cory Booker imbroglio has ignited a silly but potentially pernicious debate in the Democratic Party between so-called “pro-growth centrists” who want the President to focus on how well he’s done getting the economy back on its feet after the Bush administration almost knocked it out, and “pro-fairness populists” who want him to focus on the nation’s widening inequality and Wall Street’s (and Romney’s) continuing role in generating profits for a few at the expense of almost everyone else.
According to the National Journal’s Josh Kraushaar, for example:
Conversations with liberal activists and labor officials reveal an unmistakable hostility toward the pro-business, free-trade, free-market philosophy that was in vogue during the second half of the Clinton administration….. Moderate Democratic groups and officials, meanwhile, privately fret about the party’s leftward drift and the Obama campaign’s embrace of an aggressively populist message… [T]hey wish the administration’s focus was on growth over fairness.
This is pure bunk – or should be.
Fairness isn’t inconsistent with growth; it’s essential to it. The only way the economy can grow and create more jobs is if prosperity is more widely shared.
The key reason why the recovery is so anemic is so much income and wealth are now concentrated at the top is America’s the vast middle class no longer has the purchasing power necessary to boost the economy.
The richest 1 percent of Americans save about half their incomes, while most of the rest of us save between 6 and 10 percent. That shouldn’t be surprising. Being rich means you already have most of what you want and need. That second yacht isn’t nearly as exciting as was the first.
It follows that when, as now, the top 1 percent rakes in more than 20 percent of total income — at least twice the share it had 30 years ago — there’s insufficient demand for all the goods and services the economy is capable of producing at or near full employment. And without demand, the economy doesn’t grow or generate nearly enough jobs.
Wall Street is part of the problem because it’s responsible for so much of the concentration of income and wealth at the very top – and for much of the distress still felt in the rest of the economy after the Street nearly melted down in 2008.
The Street has turned a significant part of the economy into a giant casino involving mammoth bets with other peoples’ money. When the bets go well, the rich owners of the casino (Wall Street executives, traders, hedge-fund managers, private-equity managers) become even richer. When the bets go sour, the rest of us bear the costs.
The casino also requires continuous transfers of wealth from ordinary taxpayers. Some are built into the tax code. One is the preference of debt over equity (interest on debt is tax deductible), which awards Wall Street banks like JPMorgan for risky lending and awards private-equity firms like Bain Capital for piling debt on the firms it buys.
Another is the “carried interest” rule that, absurdly, allows private-equity managers (like Mitt Romney) to treat their income as capital gains even when they haven’t risked any of their money.
The biggest of all is the invisible guarantee that if the biggest banks get into trouble, taxpayers will bail them out. This subsidy reduces the big banks’ cost of capital relative to other banks and fuels even more risky lending.
None of this is fair. It’s also bad for economic growth and jobs – as we’ve so painfully witnessed.
Translated into presidential politics, all this means the President should be talking about fairness and growth and jobs, and explaining why we can’t have the latter without the former.
It also means he should be attacking Mitt Romney because Romney is part of the system of casino capitalism that has harmed America and held back growth — and Romney wants even less regulation of Wall Street (he’s vowed to repeal Dodd-Frank).
And because the budget Romney has put forth would gut public services vital to the middle class and poor, while cutting taxes on the rich and on corporations even more than they’ve already been cut.
In other words, Romney epitomizes the unfairness of the American economy in this new Gilded Age. For that same reason, Romney is the quintessence of an economic approach shown to be anti-growth and anti-jobs.
by Robert Reich
J.P. Morgan Chase & Co., the nation’s largest bank, whose chief executive, Jamie Dimon, has led Wall Street’s war against regulation, announced Thursday it had lost $2 billion in trades over the past six weeks and could face an additional $1 billion of losses, due to excessively risky bets.
The bets were “poorly executed” and “poorly monitored,” said Dimon, a result of “many errors, “sloppiness,” and “bad judgment.” But not to worry. “We will admit it, we will fix it and move on.”
Move on? Word on the Street is that J.P. Morgan’s exposure is so large that it can’t dump these bad bets without affecting the market and losing even more money. And given its mammoth size and interlinked connections with every other financial institution, anything that shakes J.P. Morgan is likely to rock the rest of the Street.
Ever since the start of the banking crisis in 2008, Dimon has been arguing that more government regulation of Wall Street is unnecessary. Last year he vehemently and loudly opposed the so-called Volcker rule, itself a watered-down version of the old Glass-Steagall Act that used to separate commercial from investment banking before it was repealed in 1999, saying it would unnecessarily impinge on derivative trading (the lucrative practice of making bets on bets) and hedging (using some bets to offset the risks of other bets).
Dimon argued that the financial system could be trusted; that the near-meltdown of 2008 was a perfect storm that would never happen again.
Since then, J.P. Morgan’s lobbyists and lawyers have done everything in their power to eviscerate the Volcker rule — creating exceptions, exemptions, and loopholes that effectively allow any big bank to go on doing most of the derivative trading it was doing before the near-meltdown.
And now — only a few years after the banking crisis that forced American taxpayers to bail out the Street, caused home values to plunge by more than 30 percent, pushed millions of homeowners underwater, threatened or diminished the savings of millions more, and sent the entire American economy hurtling into the worst downturn since the Great Depression — J.P. Morgan Chase recapitulates the whole debacle with the same kind of errors, sloppiness, bad judgment, and poorly-executed and excessively risky trades that caused the crisis in the first place.
In light of all this, Jamie Dimon’s promise that J.P. Morgan will “fix it and move on” is not reassuring.
The losses here had been mounting for at least six weeks, according to Morgan. Where was the new transparency that’s supposed to allow regulators to catch these things before they get out of hand?
Several weeks ago there were rumors about a London-based Morgan trader making huge high-stakes bets, causing excessive volatility in derivatives markets. When asked about it then, Dimon called it “a complete tempest in a teapot.” Using the same argument he has used to fend off regulation of derivatives, he told investors that “every bank has a major portfolio” and “in those portfolios you make investments that you think are wise to offset your exposures.”
Let’s hope Morgan’s losses don’t turn into another crisis of confidence and they don’t spread to the rest of the financial sector.
But let’s also stop hoping Wall Street will mend itself. What just happened at J.P. Morgan – along with its leader’s cavalier dismissal followed by lame reassurance – reveals how fragile and opaque the banking system continues to be, why Glass-Steagall must be resurrected, and why the Dallas Fed’s recent recommendation that Wall Street’s giant banks be broken up should be heeded.
Frank Thomas has written an excellent article on the transition from fossil fuels as a source of energy to renewable resources such as wind, solar and biomass that is going on in Denmark and Germany. In this article we explore how the price of gas at the pump is determined. This is an opaque subject which has been heaped in layers of obfuscation because the oil companies don't want you to know what a huge scam they are perpetrating on the American public systematically ripping them off at the gas tank. They want you to think that gas prices are set by immutable, impersonal factors like the "world oil market" over which we have no control nor ever could we. When the oil company executives went before a Congressional hearing in May 2011 as gas prices hit $4.00 a gallon, Rex Tillerson, CEO of Exxon Mobil, was asked "how are oil prices set?" He responded that they were based on the marginal cost of producing the next barrel of oil. Nothing could be further from the reality of the situation although it would be a worthy aspirational ideal, something to shoot for in a more perfect world. The Big 5 oil companies - Exxon Mobil, Shell, ConocoPhillips, BP America and Chevron - defended their huge tax breaks and subsidies despite record and eye popping profits as necessary to incentivize them to drill for more oil implying that more domestically produced oil would lessen dependency on imported foreign oil and keep the price down. This is also a total crock. Prices are set on the "world oil market" and have nothing to do with whether or not the oil is produced domestically or abroad.
According to Public Citizen:
Big Oil CEOs testify Thursday before the Senate Committee on Finance to defend the trillion dollars in profits they have made in the past decade thanks to you, the American consumer. Some in Congress will defend the billions of dollars in tax breaks and royalty relief taxpayers give to these same companies each year.
Public Citizen recently crunched the numbers and found that Big Oil’s profits aren’t the only eye-popping statistic – what the industry is spending its money on is equally astonishing. Big Oil lavishes more on stock buybacks, dividend payments, lobbying and marketing than on U.S. oil investments. Our research shows that since 2005, the largest five oil companies operating in the U.S. spent nearly half a trillion dollars buying back their own stock and paying dividends to shareholders. That’s more money than they spent investing in their U.S. infrastructure.
This contradicts the industry’s insistence that its billions of dollars a year in tax breaks are needed to create jobs and keep gas prices affordable. In fact, Big Oil’s investment decisions are driven by market prices of crude oil, not U.S. tax policy.
It’s time our leaders stop bowing to corporate interests and put an end to the “take the money and run” tactics of Big Oil that are nothing short of highway robbery.
While the speculation-fueled price of oil per barrel has continued to escalate, the underlying costs to produce oil haven’t. Consider this: On average, it costs $20 to produce a barrel of oil. Big Oil sells it to us for more than $100. This generates the massive cash flow that fuels oil companies’ profits and spending.
Ever wonder who pays for those ubiquitous "touchy-feely" TV ads by ExxonMobil, Chevron and the Oil and Gas Industry that you see day in and day out? You do. Without them the price of gas at the pump could be lower.
But despite the oil company executives' dissimulation, deception and mendacity, there are several factors that go into the witch's brew of oil and gas prices: namely, royalties paid to the owner of the oil before its extracted, the law of supply and demand and speculation. First, the oil as it sits in the ground, unbeknownst to most American citizens does not belong to the oil companies. It belongs to them! It is a public resource no matter how much the executives would try to persuade you that it is private property. Oil corporations pay the Federal government (meaning you the taxpayer) royalties in return for the right to drill on goverment (citizen) owned property. During most of the twentieth century, oil and gas companies generally paid between 12.5 and 16.7 percent in royalties for a lease to drill on public land or water. This is one of the lowest rates paid to a government anywhere in the world! In comparison Norway's citizen/taxpayers get a 50% return on their oil assets.
According to the US Goverment Accountability Office:
Based on results of a number of studies, the U.S. federal government receives one of the lowest government takes in the world. Collectively, the results of five studies presented in 2006 by various private sector entities show that the United States receives a lower government take from the production of oil in the Gulf of Mexico than do states - such as Colorado, Wyoming, Texas, Oklahoma, California, and Louisiana - and many foreign governments. Other government-take studies issued in 2006 and prior years similarly show that the United States has consistently ranked low in government take compared to other governments.
So American taxpayers/consumers are being ripped off by oil companies before the oil even gets out of the ground! If higher royalties were paid, this would offset the price of gas at the pump and/or reduce taxes. In any event this would benefit the American consumer/taxpayer. Moreover, royalties have been fraudulently underpaid or exempted from for years. In 1995, both houses of Congress passed and President Bill Clinton signed the Deep Water Royalty Relief Act (S.395), which granted a royalty "holiday" to oil and gas companies drilling in government-owned deep waters in the Gulf of Mexico for leases sold between 1996 and 2000. In 2005, Congress passed and President Bush signed the Energy Policy Act of 2005 (H.R. 6). which included a variety of provisions to provide royalty relief to oil and gas companies.
But wait there's more:
During the mid-nineties, whistleblowers and the Project on Government Oversight (POGO), a government watchdog group, filed suit against sixteen oil companies for failing to pay their required royalties. POGO’s suit was filed under the False Claims Act (FCA), which provides citizens the power to sue on behalf of the federal government for fraud. In these cases, the Justice Department has the right to join the case. This ultimately happened in the POGO case. From 1998 to 2001, a dozen major companies, while acknowledging no wrongdoing, paid $438 million to settle charges that they had intentionally misreported their sale prices for oil (in order to pay lower royalties).
So while the big oil companies were recording record profits, paying little if any taxes to the Federal government (causing you to pay more) and receiving subsidies, they were also committing fraud by underpaying royalties which were minimal in the first place.
Now that we've got the oil out of the ground, what is the next step? Why placing it on the world oil market which means that US oil companies will sell it anywhere in the world to the highest bidder. You might think that they would sell oil extracted in the US to US consumers first and then this would be supplemented by oil bought from abroad - the so-called foreign oil - to make up the shortfall in which case oil would be subject to the law of supply and demand within the US but such is not the case. American consumers are expected to buy gas that is subjected to the law of supply and demand among world consumers which means that as demand goes up in China and India, for example, American gas prices will rise even as demand within the US is falling. Dependency on foreign oil is a misnomer and a bugaboo. Our supposed dependence on foreign oil has nothing to do with the price of oil. What we're really dependent on is that "our" oil companies sell us "our" oil based on world oil market prices which means that they extract from us much higher prices than if they sold us "our" oil based on the domestic oil market. In other words oil produced on US real estate and sold to US consumers would end up being cheaper than oil placed on the world oil market and priced accordingly. So drilling for more oil on American soil has nothing to do with lessening our dependence on foreign oil because the pricing of oil we consume has nothing to do with how much oil is extracted from American soil.
To the extent that the law of supply and demand comes into effect which, as we shall see, is minimal, it is easily seen that this factor gives the lie to Tillerson's claim that the price of oil is based on the "marginal cost of the next barrel of oil that is produced." The law of supply and demand states that the seller will sell his product for the highest price he can get irregardless of cost. The selling price has nothing whatsoever to do with cost. It only has to do with demand. Edvard Munch probably produced "The Scream" for less than $10. Yet it sold recently at auction for $119 million. A Liz Claiborne sweater for which the worker in Thailand is paid 3 cents to make sells for $170. The law of supply and demand insures that cost has nothing to do with selling price. Insofar as the price of oil is affected by supply and demand, the same thing holds true.
The next factor to be considered is speculation. Oil being a commodity is traded on the commodities exchange. Futures contracts are bought and sold. What this means is that gas prices aren't simply set by the law of supply and demand but that speculators who are only in it purely for profit can drive up the price of oil. These are people who have no interest in ever taking delivery of the oil. They will buy a futures oil contract only to sell it (hopefully at a profit) before the oil has to be delivered. It has been estimated that 80% of the oil market is under the control of speculators. None other than Rex Tillerson, CEO of ExxonMobil, has testified that this has caused a 40% spike in gas prices. So "market forces," namely the selling of oil on the world market instead of just the domestic market and speculators have control of and can manipulate the price of gas at the pump in order to gouge the American public and increase their profits. Although the Commodities Futures Trading Commission was ordered to put position limits on speculators under the Wall Street reform act passed by Congress in 2010, they have failed to do so. This has allowed the continuation of unbridled speculation which translates into an additional $750. a year going directly from your pocket into those of the Wall Street speculators every time you fill up your vehicle!
Some believe that speculators control the market completely and supply and demand has nothing to do with it. In a blog titled "Futures Prices Determine Physical Oil Prices," JD contends that spot oil prices adjust to futures prices and not the other way around as is commonly thought. The spot oil price is simply the price of physical oil if you went out and bought some today. It is not too hard to see why the futures oil price would control the market if most of the oil market was tied up in futures contracts. If that were the case, there would simply not be enough oil on the spot market for current users, and oil consumers would be forced to buy from those who held the futures contracts in which case they would have to pay the futures contract price not the spot oil price. Supply and demand would have little to do with it since there would be relatively little supply on the current physical oil market.
All of this begs the question of why does oil and gas have to be subject to market forces and speculation at all? The answer to that question is that this maximizes profits for the oil companies and Wall Street while providing a disservice to American citizens/taxpayers. If the price of oil was not set by "the market", if control of natural resources was in the hands of or controlled by the citizens/taxpayers, we wouldn't have the ridiculous situation that supply of oil is as great as it's ever been while demand is exceedingly low, yet the price of gas at the pump has doubled compared to what it was when supply was lower and demand was greater.
In the documentary "GasHole" the nefarious activities of the oil companies are pointed out including the elimination of any technology such as the water injected carbuerator which results in a car getting 100 mpg and the electric car that was killed by the oil companies in the 1990s as recorded in the documentary "Who Killed the Electric Car?". Before the turn of the 20th century, in 1893, Rudolf Diesel developed a fuel source based on peanut energy. He said, “The use of vegetable oil for engine fuels may seem insignificant today. But such oils may become, in the course of time, as important as petroleum.” His demise is also shrouded in mystery, and his engine invention moved forward — using oil, another example of how the oil corporations bought out or forced out every alternative to the use of oil to propel vehicles. In 1904 progressive muckraker Ida Tarbell wrote "The History of Standard Oil" in which she pointed out how John D Rockefeller had used unethical business practices to force out smaller oil producers. As a result the Standard Oil monopoly was broken up into smaller companies based on states. In New Jersey it became Standard Oil of New Jersey which later became Exxon. In New York it became Mobil etc. Under the Clinton administration these two corporations were allowed to merge again into ExxonMobil.
The biggest crock is that the way to lower gas prices is to produce more domestic oil - drill, baby, drill. This is because oil prices are set on the world oil market not on any kind of domestic oil market. The way to lower gas prices is for the American people to take control of the resources they purportedly own. We can hire the oil companies to do the work for us of getting the oil out of the ground and refining it, but we should control gas prices, not the oil corporations or the "markets" namely Wall Street speculators. If We the People controlled the price of gas, it could be more rationally based on, as Rex Tillerson said, "the marginal cost of producing the next barrel of oil," instead of oil prices set by the "world oil market" and speculators.
by Robert Reich
But most of these gains are going to the richest 10 percent of Americans who own 90 percent of the shares traded on Wall Street. And the lion’s share of the gains are going to the wealthiest 1 percent.
Shares are up because corporate profits are up, and profits are up largely because companies have figured out how to do more with less.
Payrolls used to account for almost 70 percent of the typical company’s costs. But one of the most striking legacies of the Great Recession has been the decline of full-time employment – as companies have substituted software or outsourced jobs abroad (courtesy of the Internet, making outsourcing more efficient than ever), or shifted them to contract workers also linked via Internet and software.
That’s why most of the gains from the productivity revolution are going to the owners of capital, while typical workers are either unemployed or underemployed, or else getting wages and benefits whose real value continues to drop. The portion of total income going to capital rather than labor is the highest since the 1920s.
Increasingly, the world belongs to those collecting capital gains.
They’re the ones who demanded and got massive tax cuts in 2001 and 2003, on the false promise that the gains would “trickle down” to everyone else in the form of more jobs and better wages.
They’re now advocating austerity economics, on the false basis that cuts in public spending – including education, infrastructure, and safety nets – will generate more “confidence” and “certainty” among lenders and investors, and also lead to more jobs and better wages.
None of this is sustainable, economically or socially.
It’s not sustainable economically because it has resulted in chronically inadequate demand for goods and services. That’s meant anemic growth punctuated by recessions. Without a larger share of the economic gains, the vast middle class doesn’t have the purchasing power to buy the goods and services an ever-more productive economy can generate.
It’s not sustainable socially because it has resulted in rising frustration over the inability of most people to get ahead.
Austerity economics in Europe is fanning the flames, as public budgets are slashed on the false crucible of fiscal responsibility. In the United States, an anemic recovery and plunging home prices are taking a toll: a large portion of the public believes the game is rigged, and no longer trusts that the major institutions of society – big business, Wall Street, or government – are on their side. In Europe and America, 30 to 50 percent of recent college graduates are unemployed or underemployed.
Inequality is also widening in China, where the scandal surrounding Bo Xilai and his family is serving as a public morality tale about great wealth and official corruption. Students in Chile are in revolt over soaring tuition and other perceived social injustices.
It’s a combustible concoction wherever it occurs: Increasing productivity, widening inequality, and rising unemployment create tinder-box societies.
Public anger and frustration can ignite in two very different ways. One is toward reforms that more broadly share the productivity gains.
The other is toward demagogues that turn people against one another.
Demagogues use fear and frustration to advance themselves and their own narrow political agendas – scapegoating immigrants, foreigners, ethnic minorities, labor unions, government workers, the poor, the rich, and “enemies within” such as communists, terrorists, or other conspirators.
Be warned. The demagogues already are on the loose. In Europe, fringe parties on the right and left are gaining ground. In America, politics has turned especially caustic and polarized. (The right is even accusing people it doesn’t like of being communists.) No one knows where China is heading, but reformers and ideologues are battling some of it out in public.
May 1 may be a good day for the Dow Jones Industrial Average, but the future depends on the job prospects and wages of the average worker.
by Robert Reich
The shareholders of Wall Street giant Citigroup are out to prove that corporate democracy isn’t an oxymoron. They’ve said no to the exorbitant $15 million pay package of Citi’s CEO Vikram Pandit, as well as to the giant pay packages of Citi’s four other top executives.
The vote, at Citigroup’s annual meeting in Dallas Tuesday, isn’t binding on Citigroup. But it’s a warning shot across the bow of every corporate boardroom in America.
Shareholders aren’t happy about executive pay.
And why should they be? CEO pay at large publicly-held corporations is now typically 300 times the pay of the average American worker. It was 40 times average worker pay in the 1960s and has steadily crept upward since then as corporations have morphed into “winner-take-all” contraptions that reward their top executives with boundless beneficence and perks while slicing the jobs, wages, and benefits of almost everyone else.
Meanwhile, too many of these same corporations have failed to deliver for their shareholders. Citigroup, for example, has had the worst stock performance among all large banks for the last decade but ranked among the highest in executive pay.
The real news here is new-found activism among institutional investors – especially the managers of pension funds and mutual funds. They’re the ones who fired the warning shot Tuesday.
Institutional investors are catching on to a truth they should have understood years ago: When executive pay goes through the roof, there’s less money left for everyone else who owns shares of the company.
For too long, most fund managers played the game passively and obediently. Some have been too cozy with top corporate management, forgetting their fiduciary duty to their own investors. How else do you explain the abject failure of fund managers to police Wall Street as it careened toward the abyss in 2008? Or to adequately oversee executives, such as the Enron criminals, who were looting their companies in the years before 2002?
The new Dodd-Frank law, much of which is being eviscerated by Wall Street’s lawyers and lobbyists, at least requires that public companies give shareholders a say on pay. As a practical matter, this gives institutional investors the chance to speak clearly and openly about the scandal of unbridled executive compensation.
Two key questions for the future: Will institutional investors keep the pressure on? And will CEOs and boards of directors get the message?
The American solution to the 2008 financial crisis was flooding the economy with money. There was the TARP, the Troubled Asset Relief Program, a $700 billion bailout of the US' largest banks. But that was only the beginning. Dr. Ben Bernanke at the Federal Reserve bank added another $9 trillion to the money supply with his policy of "quantitative easing" which is just a euphemism for "printing money." The Fed has printed money again and again. There was a follow-up policy, QE2, because the Fed figured it hadn't printed enough money with QE1. In addition to the US Fed, the European Central Bank (ECB) has been printing money to bail out Greece and other vulnerable European economies. The Central Bank of Japan has also been printing money fast and furiously. Both the US Fed and the ECB are legally prohibited from buying up their country's debts directly, but they can loan money to their big banks and these banks can in turn loan money to the respective countries in an indirect "wink-wink" transaction thus getting around the inconvenient limitations imposed by law. As a consequence another layer of interest accrues to the big banks increasing their power and dominance over the world economy to the point that supposedly sovereign countries have become mere dependencies on them.
What does all this money creation do? First, it supposedly offers a stimulus to economies that are verging on recession. But that is not really happening due to the fact that most of this money is simply being siphoned off by the world's big banks, and, instead of stimulating the economy, is simply going into the financial sector fueling even more speculation and contributing to a possible further meltdown and bailout down the road. In Europe the money is simply going to pay down debts incurred by the various countries. Nothing is being done to spur Greece's economy, for example. Instead the Greeks are being subjected to a regime of austerity - firing workers, reducing pensions and generally creating economic malaise for the average Greek citizen. This will force the Greek economy into a deeper recession with the result that Greek indebtedness will only increase requiring another round of bailouts by the ECB.
Another effect of printing money, sometimes called government "fiat money", since it's not backed by gold or anything else, is the debasement of the currency and inflation. In general the larger the money supply, the more inflation there is. This is not a big concern when an economy is in recession, but becomes a greater concern when the economy starts to "heat up." As far as the debasement of the currency is concerned, the dollar is starting to lose value with respect to other currencies. The more fiat money the government creates, the less the dollar will be worth and this has implications for the dollar as the world's "reserve currency."
Ellen Brown has written extensively about the good aspects of fiat money, namely, Abraham Lincoln's use of it to win the Civil War and build the transcontinental railroad. But all fiat money is not created equal. In Lincoln's day his fiat money went directly into the "real" economy. That is it went to average working people to fight a war and create infrastructure. It avoided having to borrow the money and saved the US government $4 billion in interest. There is a difference in the fiat money that the Fed and the ECB are creating today. Their fiat money is going directly into the financial sector instead of into projects that distribute the money to average citizens and workers. In other words in a perverted downward spiral, today's fiat money is going to pay off the world's big banks like JC Morgan Chase and Goldman Sachs and to pay interest on huge debts owed to private bankers. The Lloyd Blankfeins and the Jamie Diamonds of the world are profiting while the average working person and citizen is only going deeper into debt. The money is not "trickling down", making Republican assertions that all we need to do to get the economy booming again is to give more money to the rich, a ridiculous assertion. The only way to get the economy working again is to give the money directly to the average working person, but this possibility is not even on the radar of the world's western economies like it was during the Great Depression. That is, instead of inserting fiat money into the financial sector resulting in huge profits for bankers and miniscule results for the middle class, the money needs to be inserted into the economy directly at the middle class level which is to say in the form of infrastructure development and support programs like food stamps and tax breaks for the middle class.
The dollar is the world's reserve currency only because the US cut a deal with the middle east oil sheiks that oil on the world market would only be traded in dollars. But here too the dollar is being undercut since some countries, notably China, are cutting direct country to country deals which bypass the world oil market and bypass having to purchase oil in dollars. There are also moves afoot to replace the dollar by a basket of other currencies which would compete with the dollar. All of this is not promising for the continuance of the predominace of the dollar. Increasingly, US Treasuries are becoming less desirable as investment vehicles which means that the money printed by the Federal Reserve is increasingly being used just to buy up the US deficit which is the shortfall between Federal government expenditures and Federal tax revenues. So money is being printed just to bridge the gap. Obviously, this can only be a short term solution to US deficit and fiscal problems. For the long term the US economy itself has to produce tax revenues sufficient to balance government expenditures or, more likely, to pay increasingly higher interest rates to attract private investors just as Greece and Spain are having to do.
So as the US money supply is further diluted by quantitative easing, the value of US money is diminishing, dollar-denominated debt is less desirable as an investment and the role of the US dollar as the world's reserve currency is being eroded. European countries are in a similar predicament having become essentially subsidiaries of US and European banks. One of the statistics that substantiates these assertions is that 93% of the income gains since the Great Recession have gone to the upper 1%. In other words most of the money created has gone to the hedge funds, large banks and other elements of the financial sector. This money has not "trickled down" to the real economy. This is the ultimate denouement of the fact that the western world has relied too much on debt basing their economies. Rather than spending from strength which is spending from savings and accumulated wealth which countries with sovereign wealth funds are able to do, western countries and individuals have overspent by going into debt and the accrued interest is only driving them further into debt. The result is that huge amounts of interest are owed to the big banks, and this amount of money is swamping western economies and debasing the values of the dollar, euro and yen.
In a Trillion Euros Didn't Buy Much Time, Rick Ackerman discusses the fact that the US and Europe have both been reduced to the same level. Their central banks are being forced into the position of bailing out the US and the European countries by buying up their debt since private investors are becoming more and more reluctant to buy it. The US Fed is printing money to make up the difference between US government expenditures and what US taxes and private investors are willing to fund and in the European case, the ECB is buying up Greek and Spanish debt that private investors are turning up their noses at. This buying of debt means that central banks are effectively printing money to pay off the big banks which are owed money that US and European citizens as taxpayers don't have the money to pay and which increasingly cannot be borrowed from private investors.
All this supports my contention that the real action in the world economy these days is not with the average worker/consumer. The average person is becoming increasingly irrelevant. Instead the big banks, hedge funds and central banks are where the action is. In the US the big banks were bailed out while practically nothing was done to bail out the average person. Just think of the foreclosure crisis where HAMP, the Home Affordable Mortgage Program, turned out to be a worthless, toothless approach which did more damage to the average home owner by raising hopes which were later dashed than if it had never been enacted. It did almost nothing to protect home owners from being foreclosed on even though most of the foreclosures were fraudulent. In some cases home owners were led on being promised modified mortgages if they would only keep up current payments only to be foreclosed on at a later date instead of being given the revised mortgages they had been promised. The government's attitude was "we have to let the banks do anything they want, even engage in fraudulent activities, because to do otherwise would risk collapse of the entire system." Ellen Brown's plea for the elimination of the debt based, interest oriented economy in favor of public banking favoring fiat money injected into the real economy instead of into the financialized economy seems further and further from any possibility of being realized.
Posted by John on April 21, 2012 at 09:38 AM in John Lawrence, Austerity, Banking, Capitalism, Europe, Federal Reserve, Foreclosure, Greece, Hedge Funds, International, Money, Mortgage Crisis, Recession, Speculation, The Economy, The Federal Reserve, Wall Street | Permalink | Comments (0) | TrackBack (0)
Matt Taibbi speaking at an Occupy Wall Street day of action, February 29th, 2012. He wrote this article for OWS, and passed it out to the crowd. It’s an informative and urgent call to action for Americans from all walks of life.
from fthebanks.com, February 29, 2012
There are two things every American needs to know about Bank of America.
The first is that it’s corrupt. This bank has systematically defrauded almost everyone with whom it has a significant business relationship, cheating investors, insurers, homeowners, shareholders, depositors, and the state. It is a giant, raging hurricane of theft and fraud, spinning its way through America and leaving a massive trail of wiped-out retirees and foreclosed-upon families in its wake.
The second is that all of us, as taxpayers, are keeping that hurricane raging. Bank of America is not just a private company that systematically steals from American citizens: it’s a de facto ward of the state that depends heavily upon public support to stay in business. In fact, without the continued generosity of us taxpayers, and the extraordinary indulgence of our regulators and elected officials, this company long ago would have been swallowed up by scandal, mismanagement, prosecution and litigation, and gone out of business. It would have been liquidated and its component parts sold off, perhaps into a series of smaller regional businesses that would have more respect for the law, and be more responsive to their customers.
But Bank of America hasn’t gone out of business, for the simple reason that our government has decided to make it the poster child for the “Too Big To Fail” concept. Because it is considered a “systemically important institution” whose collapse would have a major, Lehman-Brothers-style impact on the economy, two consecutive presidential administrations have taken extraordinary measures to keep Bank of America in business, despite a staggering recent legacy of corruption schemes, many of which were simply overlooked by regulators.
This is why the question of whether or not Bank of America should remain on public life support is so critical to all Americans, and not just those millions who have the misfortune to be customers of the bank, or own shares in the firm, or hold mortgages serviced by the company. This gigantic financial institution is the ultimate symbol of a new kind of corruption at the highest levels of American society: a tendency to marry the near-limitless power of the federal government with increasingly concentrated, increasingly unaccountable private financial interests.
The inevitable result of that new form of corruption is this bank, whose continued, state-supported existence should naturally outrage all Americans, be they conservative or progressive.
Conservatives should be outraged by Bank of America because it is perhaps the biggest welfare dependent in American history, with the $45 billion in bailout money and the $118 billion in state guarantees it’s received since 2008 representing just the crest of a veritable mountain of federal bailout support, most of it doled out by the Obama administration.
For instance, with its own credit rating hovering just above junk status, Bank of America has been allowed to borrow tens of billions of dollars against the government’s credit rating using little-known bailout programs with names like the Temporary Liquidity Guarantee Program. Since the crash of 2008, it’s also borrowed billions if not trillions in emergency, near-zero interest rate loans from the Federal Reserve – it took out $91 million in rolling low-interest financing from the Fed on just one day in January, 2009.
Conservatives believe that a commitment to free market principles and limited government will lead us out of our economic troubles, but Bank of America represents the opposite dynamic: a company that is kept protected from the judgments of the free market, and forces the state to expand to take on its debts.
Last summer, for instance, the Bank – in order to satisfy creditors who were nervous about the enormous quantity of risky assets on its balance sheet – decided to move some $73 trillion (that’s trillion, with a T) in exotic derivative bets from one end of the company into the federally-insured, depository side of the bank.
This move, encouraged by the Obama administration, put the American taxpayer on the hook for an entire generation of irresponsible gambles made by another failed investment firm that should have gone out of business, but was instead acquired by Bank of America with $25 billion in taxpayer help – Merrill Lynch.
When did we make it the job of the taxpayer to buy failed companies, and rescue companies from their own bad decisions? How is that conservative?
Meanwhile, if you’re a progressive, Bank of America is the ultimate symbol of modern predatory capitalism. This company has knowingly sold hundreds of billions of worthless securities to unions and pension funds (New York state filed two different lawsuits against Bank of America and its subsidiaries on behalf of its pension fund, one of which was settled for $624 million) brazenly overcharged its depositors (it was forced to pay customers $410 million in restitution for bogus overdraft charges), and repeatedly lied to its shareholders (most notoriously, it lied about billions in losses on Merrill Lynch’s books before asking shareholders to approve its merger with the firm).
Moreover, Bank of America has ruthlessly preyed upon millions of homeowners, throwing them out on the street on the strength of doctored, “robosigned” paperwork created through brazenly illegal practices they helped pioneer — the firm sped struggling families to foreclosure court using perjured affidavits produced in factory-like fashion by the hundreds or thousands every day, with full knowledge of management. Through the firm’s improper use of an unaccountable private electronic mortgage registry system called MERS, it also systematically evaded millions of dollars in local fees, forcing some communities to cut services and raise property taxes.
Even when caught and punished for its crimes by the authorities, Bank of America has repeatedly ignored court orders. It was one of five companies identified in two separate investigations earlier this year that were caught continuing the practice of robosigning, even after promising to stop in a legally binding consent decree. Last summer, the state of Nevada sought to terminate a settlement over mortgage abuses it had entered into with Bank of America after it found the company was brazenly violating the agreement, among other things raising payments and interest rates on mortgage customers, despite the fact that the settlement only allowed them to modify loans downward.
Over and over again, we see that leveling fines and punishments at this bank is not enough: it simply ignores them. It is the very definition of an unaccountable corporate villain.
Companies like Bank of America are a direct threat to national security, for many reasons. For one thing, they drive smaller, more honest banks out of business: since the market knows the federal government will never let Bank of America fail, it charges less to lend the bank money. That gives Bank of America, despite its near-junk credit rating, a competitive advantage over a smaller, regional bank that might have a better credit rating, but doesn’t have the implicit support of the federal government.
Worse still, stock market investor dollars that normally would go to more customer-friendly, more creative, and more commercially dependable firms will instead continue to flow to Too-Big-To-Fail behemoths like Bank of America, as buying stock in a company with implicit state support will be considered almost a safe-haven investment, like buying gold or Treasury bills.
This robs more deserving and ingenious entrepreneurs of scarce capital, and also encourages existing companies to pour resources not into better performance and increased productivity, but into lobbying and government influence. The result will be fewer Googles and Apples, more bad banks, and more campaign contributions for politicians.
Moreover, we’ve seen throughout our history that when criminal organizations are not punished, they tend to be encouraged to commit more crimes. Five years from now, our government’s decision to avoid jailing Bank of America executives for their roles in the vast robosigning program may result in a situation where no court document of any kind can be trusted, as companies will realize that it is cheaper and easier to simply invent legal affidavits than to draw them up properly and accurately.
What will your defense be against a future lawsuit for a credit card debt or a foreclosure, when your bank walks into court with a pile of invented documents? Will you wish then that you’d fought harder for Bank of America to be punished now?
And the state’s decision to allow Bank of America to pay a middling, $137 million fine for the rigging of bids for five years of municipal bond issues – a very serious crime that robbed taxpayers of millions in revenue, and incidentally is exactly the sort of thing we used to put mobsters in jail for, when the rigged contracts were for cement instead of bonds – may mean that down the road, all municipal bond issues will be rigged.
In recent years, Too-Big-To-Fail banks like Bank of America and Chase and Wells Fargo have been caught rigging the bids for financial services in dozens of municipalities nationwide. Worse, these same banks have repeatedly been let off the hook by regulators, who rarely seek jail sentences for the offenders, and more often simply apply fractional fines to the companies caught. This behavior, if left unchecked, will ultimately mean that we will all have to pay more for our roads, our traffic lights, our sewers, in fact all public services, as the banker’s secret bonus will soon become an institutionalized part of the invoice. And it’ll be our fault, because we didn’t do anything about it now.
The only way to prevent this kind of slide to total lawlessness is to break this unhealthy relationship between bank and government. It would be a great sign of America’s return to healthier capitalism if we could allow one of the worst of public-private monsters, Bank of America, to sink or swim on its own, in the free market.
We don’t want Bank of America to fail. Our position is, it already is insolvent, and already has failed – and only our tax dollars, and our government’s continued protection, is keeping that failure from becoming more common knowledge. There are many opinions about the nature of modern American capitalism. Some think the system is no longer able to meet the needs of ordinary people and needs to be radically overhauled, while others like it just the way it is.
But one thing that everyone on this spectrum of beliefs can agree upon is that our system doesn’t work when corrupt companies, companies that should fail in the free market, are kept alive by the government. When we allow that, what we get is a system that is neither capitalism nor socialist, but somewhere more miserably in between – a bureaucratic state in which profit is not tied to performance, but political power.
We have to break that cycle, and we can. Even with the enormous levels of state support, Bank of America has been teetering on the edge of collapse for years now. In December of 2011, its share price briefly dipped below $5, a near-fatal event in the firm’s history. The market has reacted violently to bad news about the bank on multiple occasions in the last year – after news of layoffs, after hints that the government might not bail the bank out completely in the event of a collapse, and after significant new lawsuits were filed. Each of these corrections nearly sent the company into a tailspin, but it was always rescued in the end by the widespread belief that Uncle Sam would bail it out in the event of a collapse.
We need to put a dent in that belief. We need to convince politicians and investors alike to allow failure to fail.
– Matt Taibbi, February 29th, 2012, Occupy Wall Street
Published on Monday, April 9, 2012 by Common Dreams
It is well known that Philadelphia was the birthplace of the U.S. Constitution and American democracy. Less well known is that it was also the birthplace of public banking in America. The Philadelphia Quakers originated a banking model involving government-issued money lent to farmers. The profits returned to the government and the people in a sustainable feedback loop that nourished and supported the local economy.
Both landmark events will be commemorated in upcoming gatherings in Philadelphia. On April 7th, during Occupy Philly’s celebration of its six month anniversary on the mall in front of Independence Hall, the Occupy Philly General Assembly reached consensus in support of the National Gathering Working Group proposal to hold an Occupy National Gathering at the same location from June 30 to July 4, 2012. The endorsement included a commitment by Occupy Philly to provide the resources necessary to make the first Occupy national gathering in history a resounding success. The stage was thus set for what could be a revolutionary event located at the historic birthplace of the First American Revolution.
Resonating with that theme, on April 27th-28th the Public Banking in America Conference will be held at the Quaker Friends Center in Philadelphia, hosted by the Public Banking Institute (PBI). PBI’s vision is to establish a network of public banks across the country to generate affordable credit according to the priorities of real people, not corporate persons or banks. These priorities include student loans, sustainable agriculture, worker-owned coops, renewable energy, and so on. The Bank of North Dakota, currently the only publicly-owned depository bank in the USA, has over two dozen loan programs reflecting the priorities of the people of North Dakota.
Freeing the American people from the economic injustices perpetuated by Wall Street is what Occupy Wall Street is all about. We have become slaves to the economic power of Wall Street and their political lackeys. We now pay obscene amounts of interest to private bankers in exchange for the necessities of life. The American public thought it was chasing the two pillars of the American Dream: getting an education and buying a house. Now both of these pillars have been used against us to further the interests of Wall Street. Student and mortgage debt are used to club us into servitude.
Samuel Adams said of those whose allegiance was to money: “If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel nor your arms. Crouch down and lick the hand that feeds you. May your chains set lightly upon you; and may posterity forget that ye were our countrymen."
After over six months of OWS protests over economic injustice, the Occupy National Gathering and Public Banking in America Conference will look at solutions, inspired by the revolutionary efforts of those who came before us in the birthplace of American freedom, Philadelphia.
March 14, 2012 | This article appeared in the April 2, 2012 edition of The Nation.
Occupy Wall Street. What other political movement in modern times has won the sympathy and/or support of the majority of the American public—in less than two months? How did this happen? I think it was a revolt that has been percolating across the country since Reagan fired the first air traffic controller. Then, on September 17, 2011, a group of (mostly) young adults decided to take direct action. And this action struck a raw nerve, sending a shock wave throughout the United States, because what these kids were doing was what tens of millions of people wished they could do. The people who have lost their jobs, their homes, their “American dream”—they cathartically cheered on this ragtag bunch who got right in the face of Wall Street and said, “We’re not leaving until you give us our country back!”
By purposely not creating a formal, hierarchical organization with rules and dues and structure and charismatic leaders and spokespeople—all the things their parents told them they would need in order to get anything done—this new way allowed people from all over the country to feel like they were part of the rebellion by simply deciding that they were part of the rebellion. You want to occupy your local bank—do it! You want to occupy your college board of trustees—done! You want to occupy Oakland or Cincinnati or Grass Valley—be our guest! This is your movement, and you can make it what you want it to be.
In the old days, if you were starting a movement, you had to first educate the public about the problem you were trying to fix, and then you had to persuade them to join you. To move America toward a nonracist, nonsexist, nonhomophobic, peace-seeking nation took years—decades—and we’re still not there. But with Occupy Wall Street, you don’t have to convince the majority of Americans that greed rules Wall Street, that the banks have no one’s interests but their own at heart or that corporate America is out to squeeze every last bit of labor and wages out of everyone’s pocket. Everybody gets it. Even those who oppose it. The hardest part of this or any movement—building a majority—has already happened. The people are with us. So now what do we do?
Here’s what we don’t do: don’t turn Occupy Wall Street into another bureaucratic, top-down organization. That will certainly kill it. Baby boomers who grew up working within traditional organizations need to calm down and not shoehorn this movement into the old paradigm of “Let’s elect people to office and then lobby them to pass good laws!” Let Occupy take its natural course. The candidates for office that we need are in this movement. (Are you one of them? Why not? Someone has to do it, and it would be better if it was you!) The laws that must be enacted to make this a more just nation will come in due time. And not ten years from now; some of this will happen this year. The leading candidate for Congress from my hometown of Flint, Michigan, has already taken a pledge to make “getting money out of politics” his top goal once in office. Others have joined him. We need to vote for them and then hold them to it.
But right now, Occupy has to continue as a bold, in-your-face movement—occupying banks, corporate headquarters, board meetings, campuses and Wall Street itself. We need weekly—if not daily—nonviolent assaults right on Wall Street. You have no idea how many people across the country would come to New York City to participate in wave after wave of arrests as they/we attempt to shut down the murderous, thieving machine that is Wall Street. Forty-five thousand people a year die simply because they don’t have health insurance. Do you think they have any relatives, friends, neighbors, parishioners who might be a little upset? How about the 4 million people losing their homes to the banks? Or the millions of students being crushed by debt? I think we could organize a few of them to shut down Wall Street.
And in town after town across America, people need to do similar things, but on a local level. Evictions of people who have been foreclosed upon must be met by citizens occupying the front door of the repossessed home and nonviolently blocking the bank from tossing the family out to the curb. When a neighbor can’t get the medical procedure she needs, people in town must occupy the hospital or the lobby of the insurance company. When a university raises students’ tuition for the umpteenth time, those students must occupy the administration’s office until the board of trustees relents.
It’s important to remember, though, that Occupy Wall Street is about occupying Wall Street. The other Occupies that have sprung up around the country are in solidarity, and while they attack the tentacles and the symptoms of the beast that exist locally everywhere, the head can be chopped off only in one place—and that place is in downtown Manhattan, where this movement started and must continue.
Our kids—the heart and soul of this movement—have watched us for years beating our heads against the walls of power, always marching on Washington, sending in checks to the environmental groups, giving up red meat—and what they got from this is that they are the first generation who will now be worse off than their parents. They still love us (which is remarkable when you think of the world we’ve handed them), but they are taking a different path from ours. Let them. The kids are all right. Do they know where their path will lead? Not necessarily—but that’s the beauty of Occupy Wall Street. The mystery of what’s ahead is the lure. Millions want in on that adventure because, deep down, they know they have no choice. And they know that there’s more of them than the men on Wall Street who currently occupy America. They have no choice but to win.
Click here to read this article in Spanish.
By Matt Taibbi, March 14, 2012 from Rolling Stone
At least Bank of America got its name right. The ultimate Too Big to Fail bank really is America, a hyper- gluttonous ward of the state whose limitless fraud and criminal conspiracies we'll all be paying for until the end of time. Did you hear about the plot to rig global interest rates? The $137 million fine for bilking needy schools and cities? The ingenious plan to suck multiple fees out of the unemploy- ment checks of jobless workers? Take your eyes off them for 10 seconds and guaranteed, they'll be into some shit again: This bank is like the world's worst-behaved teenager, taking your car and running over kittens and fire hydrants on the way to Vegas for the weekend, maxing out your credit cards in the three days you spend at your aunt's funeral. They're out of control, yet they'll never do time or go out of business, because the government remains creepily committed to their survival, like overindulgent parents who refuse to believe their 40-year-old live-at-home son could possibly be responsible for those dead hookers in the backyard.
It's been four years since the government, in the name of preventing a depression, saved this megabank from ruin by pumping $45 billion of taxpayer money into its arm. Since then, the Obama administration has looked the other way as the bank committed an astonishing variety of crimes – some elaborate and brilliant in their conception, some so crude that they'd be beneath your average street thug. Bank of America has systematically ripped off almost everyone with whom it has a significant business relationship, cheating investors, insurers, depositors, homeowners, shareholders, pensioners and taxpayers. It brought tens of thousands of Americans to foreclosure court using bogus, "robo-signed" evidence – a type of mass perjury that it helped pioneer. It hawked worthless mortgages to dozens of unions and state pension funds, draining them of hundreds of millions in value. And when it wasn't ripping off workers and pensioners, it was helping to push insurance giants like AMBAC into bankruptcy by fraudulently inducing them to spend hundreds of millions insuring those same worthless mortgages.
But despite being the very definition of an unaccountable corporate villain, Bank of America is now bigger and more dangerous than ever. It controls more than 12 percent of America's bank deposits (skirting a federal law designed to prohibit any firm from controlling more than 10 percent), as well as 17 percent of all American home mortgages. By looking the other way and rewarding the bank's bad behavior with a massive government bailout, we actually allowed a huge financial company to not just grow so big that its collapse would imperil the whole economy, but to get away with any and all crimes it might commit. Too Big to Fail is one thing; it's also far too corrupt to survive.
All the government bailouts succeeded in doing was to make the bank even more prone to catastrophic failure – and now that catastrophe might finally be at hand. Bank of America's share price has plunged into the single digits, and the bank faces battles in courtrooms all over America to avoid paying back the hundreds of billions it stole from everyone in sight. Its credit rating, already downgraded to a few rungs above junk status, could plummet with the next bad analyst report, causing a frenzied rush to the exits by creditors, investors and stockholders – an institutional run on the bank.
They're in deep trouble, but they won't die, because our current president, like the last one, apparently believes it's better to project a false image of financial soundness than to allow one of our oligarchic banks to collapse under the weight of its own corruption. Last year, the Federal Reserve allowed Bank of America to move a huge portfolio of dangerous bets into a side of the company that happens to be FDIC-insured, putting all of us on the hook for as much as $55 trillion in irresponsible gambles. Then, in February, the Justice Department's so-called foreclosure settlement, which will supposedly provide $26 billion in relief for ripped-off homeowners, actually rewarded the bank with a legal waiver that will allow it to escape untold billions in lawsuits. And this month the Fed will release the results of its annual stress test, in which the bank will once again be permitted to perpetuate its fiction of solvency by grossly overrating the mountains of toxic loans on its books. At this point, the rescue effort is so sweeping and elaborate that it goes far beyond simply gouging the tax dollars of millions of struggling families, many of whom have already been ripped off by the bank – it's making the government, and by extension all of us, full-blown accomplices to the fraud.
Anyone who wants to know what the Occupy Wall Street protests are all about need only look at the way Bank of America does business. It comes down to this: These guys are some of the very biggest assholes on Earth. They lie, cheat and steal as reflexively as addicts, they laugh at people who are suffering and don't have money, they pay themselves huge salaries with money stolen from old people and taxpayers – and on top of it all, they completely suck at banking. And yet the state won't let them go out of business, no matter how much they deserve it, and it won't slap them in jail, no matter what crimes they commit. That makes them not bankers or capitalists, but a class of person that was never supposed to exist in America: royalty.
Self-appointed royalty, it's true – but just as dumb and inbred as the real thing, and every bit as expensive to support. Like all royals, they reached their position in society by being relentlessly dedicated to the cause of Bigness, Unaccountability and the Worthlessness of Others. And just like royals, they spend most of their lives getting deeper in debt, and laughing every year when our taxes go to covering their whist markers. Two and a half centuries after we kicked out the British, it's really come to this?
Published on Wednesday, March 14, 2012 by The New York Times
Today is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.
To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.
But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.
I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.
When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.
Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.
My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.
I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.© 2012 Greg Smith
by Robert Reich
Republicans have morality upside down. Santorum, Gingrich, and even Romney are barnstorming across the land condemning gay marriage, abortion, out-of-wedlock births, access to contraception, and the wall separating church and state.
But America’s problem isn’t a breakdown in private morality. It’s a breakdown in public morality. What Americans do in their bedrooms is their own business. What corporate executives and Wall Street financiers do in boardrooms and executive suites affects all of us.
There is moral rot in America but it’s not found in the private behavior of ordinary people. It’s located in the public behavior of people who control our economy and are turning our democracy into a financial slush pump. It’s found in Wall Street fraud, exorbitant pay of top executives, financial conflicts of interest, insider trading, and the outright bribery of public officials through unlimited campaign “donations.”
Political scientist James Q. Wilson, who died last week, noted that a broken window left unattended signals that no one cares if windows are broken. It becomes an ongoing invitation to throw more stones at more windows, ultimately undermining moral standards of the entire community
The windows Wall Street broke in the years leading up to the crash of 2008 remain broken. Despite financial fraud on a scale not seen in this country for more than eighty years, not a single executive of a major Wall Street bank has been charged with a crime.
Since 2009, the Securities and Exchange Commission has filed 25 cases against mortgage originators and securities firms. A few are still being litigated but most have been settled. They’ve generated almost $2 billion in penalties and other forms of monetary relief, according to the Commission. But almost none of this money has come out of the pockets of CEOs or other company officials; it has come out of the companies — or, more accurately, their shareholders. Federal prosecutors are now signaling they won’t even bring charges in the brazen case of MF Global, which lost billions of dollars that were supposed to be kept safe.
Nor have any of the lawyers, accountants, auditors, or top executives of credit-rating agencies who aided and abetted Wall Street financiers been charged with doing anything wrong.
And the new Dodd-Frank law that was supposed to prevent this from happening again is now so riddled with loopholes, courtesy of Wall Street lobbyists, that it’s almost a sham. The Street prevented the Glass-Steagall Act from being resurrected, and successfully fought against limits on the size of the largest banks.
Windows started breaking years ago. Enron’s court-appointed trustee reported that bankers from Citigroup and JP Morgan Chase didn’t merely look the other way; they dreamed up and sold Enron financial schemes specifically designed to allow Enron to commit fraud. Arthur Andersen, Enron’s auditor, was convicted of obstructing justice by shredding Enron documents, yet most of the Andersen partners who aided and abetted Enron were never punished.
Americans are entitled to their own religious views about gay marriage, contraception, out-of-wedlock births, abortion, and God. We can be truly free only if we’re confident we can go about our private lives without being monitored or intruded upon by government, and can practice whatever faith (or lack of faith) we wish regardless of the religious beliefs of others. A society where one set of religious views is imposed on a large number of citizens who disagree with them is not a democracy. It’s a theocracy.
But abuses of public trust such as we’ve witnessed for years on the Street and in the executive suites of our largest corporations are not matters of private morality. They’re violations of public morality. They undermine the integrity of our economy and democracy. They’ve led millions of Americans to conclude the game is rigged.
Regressive Republicans have no problem hurling the epithets “shameful,” “disgraceful,” and “contemptible” at private moral decisions they disagree with. Rush Limbaugh calls a young woman a “slut” just for standing up for her beliefs about private morality.
Republicans have staked out the moral low ground. It’s time for Democrats and progressives to stake out the moral high ground, condemning the abuses of economic power and privilege that characterize this new Gilded Age – business deals that are technically legal but wrong because they exploit the trust that investors or employees have place[d] in those businesses, pay packages that are ludicrously high compared with the pay of average workers, political donations so large as to breed cynicism about the ability of their recipients to represent the public as a whole.
An economy is built on a foundation of shared morality. Adam Smith never called himself an economist. The separate field of economics didn’t exist in the eighteenth century. He called himself a moral philosopher. And the book he was proudest of wasn’t “The Wealth of Nations,” but his “Theory of Moral Sentiments” – about the ties that bind people together into societies.
Twice before progressive[s] have saved capitalism from its own excesses by appealing to public morality and common sense. First in the early 1900s, when the captains for American industry had monopolized the economy into giant trusts, American politics had sunk into a swamp of patronage and corruption, and many factory jobs were unsafe – entailing long hours of work at meager pay and often exploiting children. In response, we enacted antitrust, civil service reforms, and labor protections.
And then again in 1930s after the stock market collapsed and a large portion of American workforce was unemployed. Then we regulated banks and insured deposits, cleaned up stock market, and provided social insurance to the destitute.
It’s time once again to save capitalism from its own excesses — and to base a new era of reform on public morality and common sense.
Published on Thursday, February 2, 2012 by TruthDig.com
That Lawrence Summers, a president emeritus of Harvard, is a consummate distorter of fact and logic is not a revelation. That he and Bill Clinton, the president he served as treasury secretary, can still get away with disclaiming responsibility for our financial meltdown is an insult to reason.
Yet, there they go again. Clinton is presented, in a fawning cover story in the current edition of Esquire magazine, as “Someone we can all agree on. ... Even his staunchest enemies now regard his presidency as the good old days.” In a softball interview, Clinton is once again allowed to pass himself off as a job creator without noting the subsequent loss of jobs resulting from the collapse of the housing derivatives bubble that his financial deregulatory policies promoted.Former presidents George W. Bush and Bill Clinton, right, share a laugh in 2006. Both men share blame for the economic collapse of 2008. It was Clinton’s financial deregulation that legalized the merger of commercial and investment banks, creating institutions that were both risky and too-big-to-fail.
At least Summers, in a testier interview by British journalist Krishnan Guru-Murthy of Channel 4 News, was asked some tough questions about his responsibility as Clinton’s treasury secretary for the financial collapse that occurred some years later. He, like Clinton, still defends the reversal of the 1933 Glass-Steagall Act, a 1999 repeal that destroyed the wall between investment and commercial banking put into place by Franklin Roosevelt in response to the Great Depression.
“I think the evidence is that I am right about that. If you look at the big players, Lehman and Bear Stearns were both standalone investment banks,” Summers replied, referring to two investment banks allowed to fold. Summers is very good at obscuring the obvious truth—that the too-big-to-fail banks, made legal by Clinton-era deregulation, required taxpayer bailouts.
The point of Glass-Steagall was to prevent jeopardizing commercial banks holding the savings of average citizens. Summers knows full well that the passage of the repeal of Glass-Steagall was pushed initially by Citigroup, a mammoth merger of investment and commercial banking that create the largest financial institution in the world, an institution that eventually had to be bailed out with taxpayer funds to avoid economic disaster for millions of ordinary Americans. He also knows that Citigroup—where Robert Rubin, who preceded Summers as Clinton’s treasury secretary, played leading roles during a critical time—specialized in precisely the mortgage and other debt packages and insurance scams that were the source of America’s economic crisis.
Even Clinton, in a rare moment of honest appraisal of his record, conceded that his signing of the Commodity Futures Modernization Act (CFMA), legalizing those credit default swaps and collateralized debt obligations, was based on bad advice. That advice would have had to come from Summers, his point man pushing the CFMA legislation, which Clinton signed into law during his lame-duck days.
When the British interviewer reminded him of Clinton’s comment, Summers, as is his style, simply bristled: “Again, you make everything so simple, when in fact it’s complicated. Would it have been better if the whole financial reform legislation had passed in 1999, or 1998, or 1992? Yes, of course it would have been better. But … at the time Bill Clinton was president, there essentially were no credit default swaps. So the issue that became a serious problem really wasn’t an issue that was on the horizon.”
That is a lie. Credit default swaps had been sold at least since 1991, and collateralized debt obligations of all sorts quickly became the rage during the Clinton years. Summers surely remembers that Brooksley Born, the legal expert on such matters that Clinton appointed to head the Commodity Futures Trading Commission (CFTC), warned about the ballooning danger of those unregulated derivatives. Born, who served with Summers as one of four members of the President’s Working Group on Financial Markets, tried repeatedly and in vain to get her colleagues to act. When her pleas fell on deaf ears she issued a “concept release” calling attention to an unregulated derivatives market that was even then spiraling out of control.
The CFMA legislation that Summers pushed and Clinton signed was a specific rebuke to Born’s efforts. As Summers testified at the time before a Senate committee: “As you know, Mr. Chairman, the CFTC’s recent concept release has been a matter of great concern, not merely to Treasury, but to all those with an interest in the OTC [over-the-counter] derivatives market. In our view, the Release has cast the shadow of regulatory uncertainty over an otherwise thriving market—raising risks for stability and competitiveness of American derivative trading. We believe it quite important that the doubts be eliminated.”
Those doubts were eliminated by the new law exempting all of that troubling OTC derivatives trading from all existing regulations and regulatory agencies. Summers argued in his congressional testimony that there was no reason for any government regulation of what turned out to be tens of trillions of dollars in toxic assets:
“First, the parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies and most of which are already subject to basic safety and soundness regulation under existing banking and securities law.
“Second, given the nature of the underlying assets involved—namely supplies of financial exchange and other financial instruments—there would seem to be little scope for market manipulation of the kind seen in traditional agricultural commodities, the supply of which is inherently limited and changeable.”
Has any economist ever gotten it so wrong?
In her excellent book, "Web of Debt," Ellen Brown questions the whole notion that governments, whether they be the US or the Eurozone, should have to go into debt to private bankers such as Goldman Sachs and Deutsche Bank to get the money they need to finance their operations. Consider the Federal Reserve which is the primary creator of the money supply in the US. It is neither Federal nor is it a reserve. It is a private bank which creates money as an accounting entry on a computer screen. Recently, it loaned over $7 trillion to private banks at a ridiculously low .01% interest rate. That wasn't money it held in reserve; it was money that was "printed" or rather created out of whole cloth. And who do you think sits on the Board of the privately owned Federal Reserve? Jamie Dimon, CEO of JPMorgan Chase! Do you think that the Federal Reserve acts in the interest of anyone other than the large, too big to fail, banks? The banking system prints or creates money all the time, and not only central banks do it. It has been a longstanding practice of banks everywhere to loan out more money than they hold in deposits. This is called "fractional reserve" banking. For example, when a bank takes in $100 in deposits, it will loan out $1000 figuring that that will be sufficient for depositors who wish to redeem their deposits. Unless there's a run on the bank, that usually is sufficient. So money is created by the private banking system all the time and on a daily basis. Many multiples of the banks' deposits are then loaned out at interest.
Individuals, businesses, corporations and governments then borrow money from private banks to meet their needs for expansion and simply to pay their bills. The US government, for example, borrows the money it needs to function essentially from Goldman Sachs and other large banks and then pays interest to those banks. This happens because the US sells Treasury bonds to those large institutions in return for money to fund its wars and pay social security and medicare recipients among other things. The taxpayers are then on the hook for paying the interest on these bonds. Goldman Sachs got the money in the first place from the Federal Reserve so that by means of a little bit of subterfuge (the Federal Reserve cannot by law loan money directly to the US government), money is transferred from the privately owned Federal Reserve bank, which it created out of thin air, to the US government with interest to be paid by the taxpayers to private banking interests. This begs the question that Ms. Brown makes a central point of her book: if a private central bank can increase the money supply by creating money out of thin air as an accounting entry on a computer screen, why can't the government itself create the money to fund its needs? In particular, if the government created the money instead of the private banking system, taxpayers wouldn't be on the hook for the interest payments which are rapidly eating up an ever increasing share of the Federal budget. Interest on the national debt is projected to be $241.6 billion in FY 2012; it will only increase every year as the national debt goes up. The question is why should US taxpayers pay interest to private bankers on the money loaned to the US government which was created by private bankers when the US government itself could just as well have created the money interest free?
The same line of reasoning holds for the Eurozone which is caught up in a debt crisis in which the private banking system is raising interest rates for countries that it considers weak. The rising interest rates make countries such as Spain and Italy even weaker and all this is being fueled by speculators who are shorting the bonds of these countries. Derivative trading such as shorting drives up interest rates since it makes it seem that investors are selling rather than buying the bonds of those countries.
The process of shorting can be simply explained as follows. Suppose my neighbor buys a lawnmower for $500. I then ask to borrow my neighbor's lawnmower to mow my yard. As I'm mowing, another neighbor drives by and offers to buy the mower for $450. As it happens, I know about a sale at the local Sears where I can buy the same exact lawnmower for $400. So I sell the lawnmower for $450., rush down to Sears and buy another one for $400., return the mower to the neighbor I originally borrowed it from and then pocket the $50. profit. Now in the dark world of derivatives markets it's not even necessary to borrow anything from a preexisting owner in order to short sell. These trades are called "naked shorts." The whole effect will drive up interest rates in Greece and Italy making their borrowing costs to turn over their loans even more expensive and hasten the day when these countries will default. Speculators stand to make big money if and when a Eurozone country does default because they have placed large bets on this outcome. It is to be noted that the European Central Bank (ECB) has the same deal that the US Federal Reserve has in that it can't give money directly to one of its member countries. Monies have to be funneled through banks. This means that they are subject to the machinations of the bond market and speculators. If the ECB created the money directly and then loaned it to member countries, the interest rate could be maintained constant as speculators would be eliminated and it would be lower as the private bankers would not be getting their cut.
If the whole notion of a central government creating the money supply as opposed to a private central bank creating it seems radical to you, please bear in mind that this is exactly what Abraham Lincoln did to fund the Civil War and the economic expansion following it including the transcontinental railroad, the land grant colleges and the Homestead Act which gave away free land to settlers in the west. Greenbacks were government created currency which was spent into the market. Today Federal Reserve notes are created by the privately owned Federal Reserve and are the official US currency. Ellen Brown maintains that any government can create a fiat currency. This simply means that the government created currency is declared to be the legal currency of that government. It doesn't have to be backed by gold or anything else. It is the official currency just because the government says it is. Ellen Brown characterizes the Greenback era as follows:
How was all this accomplished with a Treasury that was completely broke and a Congress that hadn't been paid themselves? ... Lincoln tapped into the same cornerstone that had gotten the impoverished colonists through the American Revolution and a long period of internal development before that: he authorized the government to issue its own paper fiat money. National control was reestablished over banking, and the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production. A century later, Franklin Roosevelt would use the same techniques to pull the country through the Great Depression; but Roosevelt's New Deal would be financed with borrowed money. Lincoln's government used a system of payment that was closer to the medieval tally. Officially called United States notes, these nineteenth century tallies were popularly called "Greenbacks" because they were printed on the back with green ink (a feature the dollar retains today). They were basically just receipts acknowledging work done or goods delivered, which could be traded in the community for an equivalent value of goods or services. The Greenbacks represented man-hours rather than borrowed gold. Lincoln is quoted as saying, "The wages of men should be recognized as more important than the wages of money." Over 400 million Greenback dollars were printed and used to pay soldiers and government employees, and to buy supplies for the war.
The Greenback system was not actually Lincoln's idea. but when pressure grew in Congress for the plan, he was quick to endorse it. The South had seceded from the Union soon after his election in 1860. To fund the War between the States, these Eastern banks had offered a loan package that was little short of extortion - $150 million advanced at interest rates of 24 to 36 percent. Lincoln knew the loan would be impossible to pay off. He took the revolutionary approach because he had no other real choice. The government could either print its own money or succumb to debt slavery to the bankers.
So the war and the economic development following it were financed with goverment created fiat money, the Greenback. This would be perfect today for funding the $2 trillion in infrastructure repair and rebuilding that the IEEE claims is needed - in other words an infrastructure bank. This would solve a lot of the US' unemployment problems as well as bringing the US infrastructure up to par with China and other countries which are modernizing their infrastructure at rates far exceeding the US. The Eurozone ECB could also print or create euros without borrowing or funneling them through private bankers and subjecting the economies of certain countries to the whims of speculators. For the US it would be simple to move the Federal Reserve into the Treasury Department, transfer ownership to the public sector and keep the fact that the chairman would be appointed by the President. To keep its autonomy, Congress should not have the ability to interfere with the newly created Federal Reserve just as the situation exists now. So what would change? Only that the money created would be the equivlent of Greenbacks which would be non-interest bearing notes. Government created money would not be money that the government would have to pay interest on to private sector banks. These Greenbacks could coexist with Federal Reserve notes so that there would be two forms of currency in circulation both of which would be legal tender. Therefore, Federal Reserve notes would not have to be recalled. The new system could be created overnight with a minimum of disruption to commerce.
The Eurozone probably operates the same way. I'm not an expert but I surmise that the large European banks such as Deutsche bank, Societe Generale and ING loan money to Eurozone countries at interest. Even Goldman Sachs, since it is an international bank, probably has its finger in the pie of Eurozone money creation. Even money created by the ECB needs to be funneled through these banks before it gets into the coffers of the respective Eurozone countries. This means that not only are countries such as Greece and Italy paying interest to the large European and international banks but the interest rates they are paying are subject to market speculation which drives them up even more. If the ECB issued euros directly instead of letting the large banks do it, the interest rate could be carefully controlled, the rates wouldn't be subject to speculation and the interest paid would go into the coffers of the ECB instead of into the coffers of large private banks.
Individuals and families in the US and throughbout the world are increasingly indebted to private banks for mortgage debt, student loan debt and credit card debt. Easy credit and low initial interest rates as well as declining wages have induced much of the population to go into debt in the same way that countries have gone into debt. Ultimately, these levels of debt are unsustainable especially if today's historical low interest rates start to rise. Of course the banks' major goal is to have everyone in debt paying interest money to them as a major part of their expenditures. If everyone is a debt slave, the banks are in the position of owning most of society's assets. Ellen Brown's ideas about taking money creation out of private bankers' hands and putting it into the hands of central governments strikes at the core of capitalist economics which assumes that money creation remains entirely privatized. However, other countries such as China have shown that government owned large banks can be a boon to economic development and growth.
Also in the US state owned banks such as the Bank of North Dakota maintain that state in a healthy economic condition compared to the US as a whole. Interest collected on loans goes back into state coffers defraying taxpayer expenses. So lower taxes are the result of a state owned rather than a privately owned bank. The same could be true for countries as well. Also loans can be more carefully controlled so that they go for socially useful purposes rather than fueling speculative investment. Finally, many countries including China and Norway have sovereign wealth funds which act to make those countries more creditworthy than countries which have no assets and only debts. As any banker knows, an individual's creditworthiness represents the difference between his assets and his debts. The same holds true also for countries. If governments created their own money, it could be loaned directly to families that are being foreclosed on instead of relying on private bankers to work out deals with them which they have been reluctant to do thus exacerbating the foreclosure crisis. Greater leniency could also be granted to student loan debtors than is the case now.
Lincoln saved the US an incredible amount of interest repayments by issuing Greenbacks instead of borrowing the money:
In 1972, the United States Treasury Department was asked to compute the amount of interest that would have been paid if the $400 million in Greenbacks had been borrowed from the banks instead. According to the Treasury Department's calculations, in his short tenure Lincoln saved the government a total of $4 billion in interest, just by avoiding this $400 million loan.
Finally, a quote from Thomas Edison from an interview in the 1921 New York Times:
If the Nation can issue a dollar bond it can issue a dollar bill, The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution, pays noboldy but those who contribute in some useful way. It is absurd to say that our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.
Therefore, the "full faith and credit" of the US government and the ECB could apply to currency as well as bonds, and private bankers and speculators could be eliminated from the loop.
By GAR ALPEROVITZ
Published: December 14, 2011 by the New York Times
College Park, Md.
THE Occupy Wall Street protests have come and mostly gone, and whether they continue to have an impact or not, they have brought an astounding fact to the public’s attention: a mere 1 percent of Americans own just under half of the country’s financial assets and other investments. America, it would seem, is less equitable than ever, thanks to our no-holds-barred capitalist system.
But at another level, something different has been quietly brewing in recent decades: more and more Americans are involved in co-ops, worker-owned companies and other alternatives to the traditional capitalist model. We may, in fact, be moving toward a hybrid system, something different from both traditional capitalism and socialism, without anyone even noticing.
Some 130 million Americans, for example, now participate in the ownership of co-op businesses and credit unions. More than 13 million Americans have become worker-owners of more than 11,000 employee-owned companies, six million more than belong to private-sector unions.
And worker-owned companies make a difference. In Cleveland, for instance, an integrated group of worker-owned companies, supported in part by the purchasing power of large hospitals and universities, has taken the lead in local solar-panel installation, “green” institutional laundry services and a commercial hydroponic greenhouse capable of producing more than three million heads of lettuce a year.
Local and state governments are likewise changing the nature of American capitalism. Almost half the states manage venture capital efforts, taking partial ownership in new businesses. Calpers, California’s public pension authority, helps finance local development projects; in Alaska, state oil revenues provide each resident with dividends from public investment strategies as a matter of right; in Alabama, public pension investing has long focused on state economic development.
Moreover, this year some 14 states began to consider legislation to create public banks similar to the longstanding Bank of North Dakota; 15 more began to consider some form of single-payer or public-option health care plan.
Some of these developments, like rural co-ops and credit unions, have their origins in the New Deal era; some go back even further, to the Grange movement of the 1880s. The most widespread form of worker ownership stems from 1970s legislation that provided tax benefits to owners of small businesses who sold to their employees when they retired. Reagan-era domestic-spending cuts spurred nonprofits to form social enterprises that used profits to help finance their missions.
Recently, growing economic pain has provided a further catalyst. The Cleveland cooperatives are an answer to urban decay that traditional job training, small-business and other development strategies simply do not touch. They also build on a 30-year history of Ohio employee-ownership experiments traceable to the collapse of the steel industry in the 1970s and ’80s.
Further policy changes are likely. In Indiana, the Republican state treasurer, Richard Mourdock, is using state deposits to lower interest costs to employee-owned companies, a precedent others states could easily follow. Senator Sherrod Brown, Democrat of Ohio, is developing legislation to support worker-owned strategies like that of Cleveland in other cities. And several policy analysts have proposed expanding existing government “set aside” procurement programs for small businesses to include co-ops and other democratized enterprises.
If such cooperative efforts continue to increase in number, scale and sophistication, they may suggest the outlines, however tentative, of something very different from both traditional, corporate-dominated capitalism and traditional socialism.
It’s easy to overestimate the possibilities of a new system. These efforts are minor compared with the power of Wall Street banks and the other giants of the American economy. On the other hand, it is precisely these institutions that have created enormous economic problems and fueled public anger.
During the populist and progressive eras, a decades-long buildup of public anger led to major policy shifts, many of which simply took existing ideas from local and state efforts to the national stage. Furthermore, we have already seen how, in moments of crisis, the nationalization of auto giants like General Motors and Chrysler can suddenly become a reality. When the next financial breakdown occurs, huge injections of public money may well lead to de facto takeovers of major banks.
And while the American public has long supported the capitalist model, that, too, may be changing. In 2009 a Rasmussen poll reported that Americans under 30 years old were “essentially evenly divided” as to whether they preferred “capitalism” or “socialism.”
A long era of economic stagnation could well lead to a profound national debate about an America that is dominated neither by giant corporations nor by socialist bureaucrats. It would be a fitting next direction for a troubled nation that has long styled itself as of, by and for the people.
Gar Alperovitz, a professor of political economy at the University of Maryland and a founder of the Democracy Collaborative, is the author of “America Beyond Capitalism.”
John Coltrane: One Down, One Up
Monk and Coltrane: Thelonious Monk and John Coltrane at Carnegie Hall
Best album of 2005 (*****)
Doug Ramsey: Take Five: The Public and Private Lives of Paul Desmond
This is a great book! Paul Desmond and Dave Brubeck formed the heart of one of the best all time jazz groups. Paul was the quintessential intellectual, white jazz musician. A talented writer, he never published anything. However author, Doug Ramsey has collected Paul's letters here. How ironic that now his writing in the form of letters to his father and ex-wife, among others, is finally published showing another window on the mind of this talented person. A sideman, for the most part, his entire life, the Dave Brubeck Quartet might never have happened at all due to the fact that Paul had managed to offend Dave to the point where he never wanted to see him again. It had to do with a gig that Paul actually was the leader of. Paul wanted to take the summer off to play another gig, and Dave wanted Paul to let him take over the gig at the Band Box in Palo Alto, CA. Paul wouldn't let him and Dave, married with two children, proceeded to starve. Due to an elaborate publicity campaign, when he realized the error of his ways, Paul managed to worm himself back into Dave's good graces. The rest is history. This book is remarkable for the insight it gives into a working jazz musician's mind, wonderful pictures and interviews with the significant figures in Paul's life. Author Ramsey, not a remarkable penman himself, has nevertheless done a magnificent job of assembling all these various materials. Unlike a lot of jazz authors, he doesn't overly idolize his subject with the result that you get the feeling that you have met a real person and not a idealized version. That's high praise indeed for any biographer. (*****)