"In a time of universal deceit telling the truth is a revolutionary act." -George Orwell

Posts Tagged ‘Finance’

A Failed Social Model: Providing Basic Goods Via Crushing Consumer Debt

In Uncategorized on November 22, 2011 at 4:15 pm

Oldspeak:” Something to think about days before the annual hedonistic consumption orgy that is “Black Friday” when crushing consumer debt will likely increase. “We have been living in a society where debts, rather than rights, have been the major means for accessing basic social goods like housing, education, and health care. That social model was built around the assumption that while real incomes stagnated and the state did not directly provide many basic goods through universal entitlements, cheap credit would do the trick instead. High finance was inextricably intertwined with the privileges of citizenship.” -Alex Gourevitch When High finance is linked to a system, you can pretty much guarantee it will be accompanied by exploitation, corruption, fraud, greed and disenfranchisement. We are beginning to see the devastating effects of attaching debt commitments to basic needs combined with decades long wage stagnation for most workers and concentration of wealth among owners. A collapsed housing market and unprecedented rates of foreclosure. 1 in 5 Americans on food stamps. 1 in 3 children living in poverty. Widespread medical bankruptcies and less and less access to preventative health care.  Exploding student loan debt and creation of artificially constricted choice of profession and shortages of manpower in vital and low-paid ‘public interest’ jobs. All while the banksters have grown richer and more brazen in their casino capitalistic practices. Providing basic social goods for all has very few negative consequences. However it doesn’t adhere to basic corporcratic ethos “Internalize profits, externalize costs”, thus universal rights and freedoms will continue to be at worst denied, and at best a monetarily  based privilege. “Profit Is Paramount”

By Alex Gourevitch @ New Deal 2.0:

Some things — education, health, housing — should be rights, not financed through taking on more and more debt.

Occupiers have joined anti-foreclosure advocates to occupy home auctions and abandoned buildings and block foreclosures. A few state attorneys general have begun resisting the Obama administration’s awful mortgage fraud settlement and started investigating banks and servicers. Even shareholders are in revolt, filing class action suits against their companies. By one measure, student loans are one of the biggest concerns amongst supporters of Occupy Wall Street. There is now an OccupyStudentDebt. A petition to forgive student loans has gathered 300,000 signatures and was included as part of a general debt forgiveness bill on the floor of the House of Representatives. Congress has even begun to touch on medical debt issues.

Taken together, we can say that these and other actions are the sign of growing resistance to key aspects of the social model of the past 30 to 40 years. We have been living in a society where debts, rather than rights, have been the major means for accessing basic social goods like housing, education, and health care. That social model was built around the assumption that while real incomes stagnated and the state did not directly provide many basic goods through universal entitlements, cheap credit would do the trick instead. High finance was inextricably intertwined with the privileges of citizenship. This was not a very good social model. With any luck, and a serious amount of political action, current resistance could lead to alternative ways of thinking about how we make these goods available to all.

After all, while the previous decade has been represented as a debt-financed spending binge when consumers lived well beyond their means, it turns a complex story into a morality play. A major part of the credit ‘binge’ was about necessities, not luxuries. Sub-prime mortgages (especially with the decline of affordable housing) were the only way for many to become homeowners. Similarly, student loans were the only way for many to gain access to higher education and thus participate as equals in the radically unequal distribution of opportunity in the United States. The total value of student loans has surpassed total credit card debt, and is projected to top $1 trillion later this year. Mike Konczal posted the following graph at Rortybomb showing the dramatic rise of student debt. In a decade, student loans have gone from a third of consumer loans to far more than half.

alex1

We find a similar story in health care. Two major national studies of medical indebtedness by a group of scholars, including Elizabeth Warren, have shown that illness and medical costs are a major cause of household bankruptcy. They noted that by 2001 “illness or medical bills contributed to about half of bankruptcies.” Notably, in their 2001 study, they found that 75.7 percent of medical debtorshad insurance at the onset of illness. Underinsurance, as much as lack of insurance, was a major financial burden. So too was loss of income due to illness (by their estimate, income loss is 40 percent of medical-related indebtedness). Worse yet, their follow up 2007 study of medical indebtedness notes that the “number of un- and underinsured Americans has grown; health costs have increased; and Congress tightened the bankruptcy laws.” That has led to a 50 percent increase in the proportion of bankruptcies attributable to medical problems. These bankruptcies, moreover, occurred in families only marginally worse than the median income and occupational class of American citizens. Once again, indebtedness is the product of the 99% trying to meet the costs of a basic good — health care.

If there is a reasonable expectation that debtors can meet their interest payments then in theory debt is not a particularly bad way to finance access to certain goods. It is on the individual borrower to make a judgment about what constitutes a reasonable debt burden.

There are, however, two problems with this theoretical view. First, there might be very good social reasons to not want to yoke access to certain social goods to debt. Education is a prime example. Taking on debt means accepting a kind of discipline. One must make all future calculations about, say, educational and career choices with the need to meet future interest payments in mind. In conscious and unconscious ways this narrows horizons and produces a more instrumental relationship to education. In college I saw concerns about debt shape decisions about which classes to take and what to major in. I also saw many of my college classmates make more conservative professional choices (corporate law, consulting, finance, medical specialist) than they might otherwise have made (public service, teaching, science, public interest law) in order to ensure their ability to pay back loans. This appears to have been a pattern. A study of educational and career choices in the early 2000s by Princeton economists has found that “debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid ‘public interest’ jobs.”

It is frequently observed that the growth of finance sucked up the math and physics geniuses, who might have contributed something lasting to society, into hedge funds and investment banks to ruinous effect. But the alteration of professional choices is much wider than that. The number crunchers at the top were, one suspects, lured away by lucrative pay. The much more widespread, and difficult to measure, shift in career choices due to the discipline of debt burdens is probably the more important, and still ongoing, consequence of high student loans.

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If access to higher education were on the order of something like a right — a publicly financed good, provided at little or no cost, to ensure real equality of opportunity — then one can imagine a much different set of results. While conservatives like to talk about ‘freedom,’ this is a place where the left ought to have the upper hand in connecting economic practices to real freedoms. Providing necessary social goods, especially education, as a right rather than through debt not only reduces the disciplining effects of the latter. It also is a way of publicly recognizing and democratically defending the real freedoms of all citizens.

To be clear, this is not a moralistic criticism of debt as evil or irresponsible. But there are very good reasons why society would not want to impose certain kinds of discipline on (most of) its citizens. Firstly, from a social point of view, people’s talents might be much more productively used in some other area than those that promise the most immediate monetary returns. There is no shortage of aspiring bankers and traders, but there is a primary care doctor shortage. Primary care doctors can graduate medical school with as much as $200,000 in debt.

A second reason is that practice does not resemble theory. Again, the theory is that so long as each individual makes a reasonable calculation about his or her ability to meet debt payments, there is nothing wrong with financing access to basic social goods through credit. Putting systematic fraud aside (but remembering it is unlikely that credit can sink that far into housing and educational markets without it), there is a deep historical reason for thinking that practice was the opposite of theory. The rise of debt-financed household consumption generally was the product of stagnating wages. Consider, for instance, this research by the Federal Reserve Bank of San Francisco comparing the growth of debt, wealth, and income:

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Or compare the above growth of household debt with the stagnation of wages and benefits during that same period (from State of Working America):

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Debt-financed consumption was, in other words, a response to the declining ability of most households to afford existing rates of consumption, not an increasing ability or trust in future ability to pay back that debt.

The entire social model, then, was built on a lie. The separation of consumption (financed by future promises to pay) from production (based on limiting present ability to earn) was a mirage. The problem has been that the underlying right to maintain a certain standard of living, or even to access to certain basic social goods like housing, health, and education, was just that: implicit. Every so often, of course, it was made somewhat public — for instance when Clinton or Bush would say something about providing housing to the poor and minorities who could not otherwise afford it (mainly by changing market incentives and promoting sub-prime borrowing, as it turned out). But this promise was always implicit and had to stay that way because it was mediated through the credit system. Access to these basic social goods was never a fully publicclaim each individual had against society. Instead, access to these social goods was a matter of a complex series of private, individualized claims against other private institutions like banks and employers, with the public role submerged in the form of altered market incentives. That is the difference between debt and right, and it is clear that the debt-based social model has failed.

There are certainly some situations where debt-financed consumption is a perfectly good option. For instance, the current call for more fiscal austerity at the federal level is ideological claptrap. Moreover, any economy always has to take a bet on the future if it is going to innovate, especially since innovation always comes with the risk of failure. But there are certain kinds of basic goods that are better provided as a matter of universal right, both for the sake of the freedom of the persons who need those goods and as a matter of economic efficiency and productivity. We can have risk-averse graduates and a chronically ill workforce chained to underwater mortgages, or we can have healthy, well-educated citizens with enough security, and thus freedom, to take real risks in their lives.

Alex Gourevitch a Post-Doctoral Research Associate at the Political Theory Project at Brown University. He also runs a blog calledThe Current Moment.

Why Isn’t Wall Street In Jail?

In Uncategorized on March 6, 2011 at 1:06 pm

Oldspeak:”With all the whining by corporocrats and their mavens in media about debt, unions, public workers, their pensions, and other public services that need to be cut to move toward “fiscal responsibility” None of the people who blew up the global economy are in jail. None of them had to give the money they fraudulently and illegally “earned” Well maybe Madoff. ‘When it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who’s in office or which party’s in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.’  -Matt Taibbi”

By Matt Taibbi @ Rolling Stone:

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

“Everything’s fucked up, and nobody goes to jail,” he said. “That’s your whole story right there. Hell, you don’t even have to write the rest of it. Just write that.”

I put down my notebook. “Just that?”

“That’s right,” he said, signaling to the waitress for the check. “Everything’s fucked up, and nobody goes to jail. You can end the piece right there.”

Nobody goes to jail. This is the mantra of the financial-crisis era, one that saw virtually every major bank and financial company on Wall Street embroiled in obscene criminal scandals that impoverished millions and collectively destroyed hundreds of billions, in fact, trillions of dollars of the world’s wealth — and nobody went to jail. Nobody, that is, except Bernie Madoff, a flamboyant and pathological celebrity con artist, whose victims happened to be other rich and famous people.

This article appears in the March 3, 2011 issue of Rolling Stone. The issue is available now on newsstands and will appear in the online archive February 18.

The rest of them, all of them, got off. Not a single executive who ran the companies that cooked up and cashed in on the phony financial boom — an industrywide scam that involved the mass sale of mismarked, fraudulent mortgage-backed securities — has ever been convicted. Their names by now are familiar to even the most casual Middle American news consumer: companies like AIG, Goldman Sachs, Lehman Brothers, JP Morgan Chase, Bank of America and Morgan Stanley. Most of these firms were directly involved in elaborate fraud and theft. Lehman Brothers hid billions in loans from its investors. Bank of America lied about billions in bonuses. Goldman Sachs failed to tell clients how it put together the born-to-lose toxic mortgage deals it was selling. What’s more, many of these companies had corporate chieftains whose actions cost investors billions — from AIG derivatives chief Joe Cassano, who assured investors they would not lose even “one dollar” just months before his unit imploded, to the $263 million in compensation that former Lehman chief Dick “The Gorilla” Fuld conveniently failed to disclose. Yet not one of them has faced time behind bars.

Invasion of the Home Snatchers

Instead, federal regulators and prosecutors have let the banks and finance companies that tried to burn the world economy to the ground get off with carefully orchestrated settlements — whitewash jobs that involve the firms paying pathetically small fines without even being required to admit wrongdoing. To add insult to injury, the people who actually committed the crimes almost never pay the fines themselves; banks caught defrauding their shareholders often use shareholder money to foot the tab of justice. “If the allegations in these settlements are true,” says Jed Rakoff, a federal judge in the Southern District of New York, “it’s management buying its way off cheap, from the pockets of their victims.”

Taibblog: Commentary on politics and the economy by Matt Taibbi

To understand the significance of this, one has to think carefully about the efficacy of fines as a punishment for a defendant pool that includes the richest people on earth — people who simply get their companies to pay their fines for them. Conversely, one has to consider the powerful deterrent to further wrongdoing that the state is missing by not introducing this particular class of people to the experience of incarceration. “You put Lloyd Blankfein in pound-me-in-the-ass prison for one six-month term, and all this bullshit would stop, all over Wall Street,” says a former congressional aide. “That’s all it would take. Just once.”

But that hasn’t happened. Because the entire system set up to monitor and regulate Wall Street is fucked up.

Just ask the people who tried to do the right thing.

Wall Street’s Naked Swindle

 

Here’s how regulation of Wall Street is supposed to work. To begin with, there’s a semigigantic list of public and quasi-public agencies ostensibly keeping their eyes on the economy, a dense alphabet soup of banking, insurance, S&L, securities and commodities regulators like the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), the Office of the Comptroller of the Currency (OCC) and the Commodity Futures Trading Commission (CFTC), as well as supposedly “self-regulating organizations” like the New York Stock Exchange. All of these outfits, by law, can at least begin the process of catching and investigating financial criminals, though none of them has prosecutorial power.

The major federal agency on the Wall Street beat is the Securities and Exchange Commission. The SEC watches for violations like insider trading, and also deals with so-called “disclosure violations” — i.e., making sure that all the financial information that publicly traded companies are required to make public actually jibes with reality. But the SEC doesn’t have prosecutorial power either, so in practice, when it looks like someone needs to go to jail, they refer the case to the Justice Department. And since the vast majority of crimes in the financial services industry take place in Lower Manhattan, cases referred by the SEC often end up in the U.S. Attorney’s Office for the Southern District of New York. Thus, the two top cops on Wall Street are generally considered to be that U.S. attorney — a job that has been held by thunderous prosecutorial personae like Robert Morgenthau and Rudy Giuliani — and the SEC’s director of enforcement.

The relationship between the SEC and the DOJ is necessarily close, even symbiotic. Since financial crime-fighting requires a high degree of financial expertise — and since the typical drug-and-terrorism-obsessed FBI agent can’t balance his own checkbook, let alone tell a synthetic CDO from a credit default swap — the Justice Department ends up leaning heavily on the SEC’s army of 1,100 number-crunching investigators to make their cases. In theory, it’s a well-oiled, tag-team affair: Billionaire Wall Street Asshole commits fraud, the NYSE catches on and tips off the SEC, the SEC works the case and delivers it to Justice, and Justice perp-walks the Asshole out of Nobu, into a Crown Victoria and off to 36 months of push-ups, license-plate making and Salisbury steak.

That’s the way it’s supposed to work. But a veritable mountain of evidence indicates that when it comes to Wall Street, the justice system not only sucks at punishing financial criminals, it has actually evolved into a highly effective mechanism for protecting financial criminals. This institutional reality has absolutely nothing to do with politics or ideology — it takes place no matter who’s in office or which party’s in power. To understand how the machinery functions, you have to start back at least a decade ago, as case after case of financial malfeasance was pursued too slowly or not at all, fumbled by a government bureaucracy that too often is on a first-name basis with its targets. Indeed, the shocking pattern of nonenforcement with regard to Wall Street is so deeply ingrained in Washington that it raises a profound and difficult question about the very nature of our society: whether we have created a class of people whose misdeeds are no longer perceived as crimes, almost no matter what those misdeeds are. The SEC and the Justice Department have evolved into a bizarre species of social surgeon serving this nonjailable class, expert not at administering punishment and justice, but at finding and removing criminal responsibility from the bodies of the accused.

The systematic lack of regulation has left even the country’s top regulators frustrated. Lynn Turner, a former chief accountant for the SEC, laughs darkly at the idea that the criminal justice system is broken when it comes to Wall Street. “I think you’ve got a wrong assumption — that we even have a law-enforcement agency when it comes to Wall Street,” he says.

In the hierarchy of the SEC, the chief accountant plays a major role in working to pursue misleading and phony financial disclosures. Turner held the post a decade ago, when one of the most significant cases was swallowed up by the SEC bureaucracy. In the late 1990s, the agency had an open-and-shut case against the Rite Aid drugstore chain, which was using diabolical accounting tricks to cook their books. But instead of moving swiftly to crack down on such scams, the SEC shoved the case into the “deal with it later” file. “The Philadelphia office literally did nothing with the case for a year,” Turner recalls. “Very much like the New York office with Madoff.” The Rite Aid case dragged on for years — and by the time it was finished, similar accounting fiascoes at Enron and WorldCom had exploded into a full-blown financial crisis. The same was true for another SEC case that presaged the Enron disaster. The agency knew that appliance-maker Sunbeam was using the same kind of accounting scams to systematically hide losses from its investors. But in the end, the SEC’s punishment for Sunbeam’s CEO, Al “Chainsaw” Dunlap — widely regarded as one of the biggest assholes in the history of American finance — was a fine of $500,000. Dunlap’s net worth at the time was an estimated $100 million. The SEC also barred Dunlap from ever running a public company again — forcing him to retire with a mere $99.5 million. Dunlap passed the time collecting royalties from his self-congratulatory memoir. Its title: Mean Business.

The pattern of inaction toward shady deals on Wall Street grew worse and worse after Turner left, with one slam-dunk case after another either languishing for years or disappearing altogether. Perhaps the most notorious example involved Gary Aguirre, an SEC investigator who was literally fired after he questioned the agency’s failure to pursue an insider-trading case against John Mack, now the chairman of Morgan Stanley and one of America’s most powerful bankers.

Aguirre joined the SEC in September 2004. Two days into his career as a financial investigator, he was asked to look into an insider-trading complaint against a hedge-fund megastar named Art Samberg. One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial. “It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller,” Aguirre recalls. “And he wasn’t just buying shares — there were some days when he was trying to buy three times as many shares as were being traded that day.” A few weeks later, Heller was bought by General Electric — and Samberg pocketed $18 million.

After some digging, Aguirre found himself focusing on one suspect as the likely source who had tipped Samberg off: John Mack, a close friend of Samberg’s who had just stepped down as president of Morgan Stanley. At the time, Mack had been on Samberg’s case to cut him into a deal involving a spinoff of the tech company Lucent — an investment that stood to make Mack a lot of money. “Mack is busting my chops” to give him a piece of the action, Samberg told an employee in an e-mail.

A week later, Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank’s clients, as it happened, was a firm called Heller Financial. We don’t know for sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his notes about the meetings. But we do know that as soon as Mack returned from the trip, on a Friday, he called up his buddy Samberg. The very next morning, Mack was cut into the Lucent deal — a favor that netted him more than $10 million. And as soon as the market reopened after the weekend, Samberg started buying every Heller share in sight, right before it was snapped up by GE — a suspiciously timed move that earned him the equivalent of Derek Jeter’s annual salary for just a few minutes of work.

The deal looked like a classic case of insider trading. But in the summer of 2005, when Aguirre told his boss he planned to interview Mack, things started getting weird. His boss told him the case wasn’t likely to fly, explaining that Mack had “powerful political connections.” (The investment banker had been a fundraising “Ranger” for George Bush in 2004, and would go on to be a key backer of Hillary Clinton in 2008.)

Aguirre also started to feel pressure from Morgan Stanley, which was in the process of trying to rehire Mack as CEO. At first, Aguirre was contacted by the bank’s regulatory liaison, Eric Dinallo, a former top aide to Eliot Spitzer. But it didn’t take long for Morgan Stanley to work its way up the SEC chain of command. Within three days, another of the firm’s lawyers, Mary Jo White, was on the phone with the SEC’s director of enforcement. In a shocking move that was later singled out by Senate investigators, the director actually appeared to reassure White, dismissing the case against Mack as “smoke” rather than “fire.” White, incidentally, was herself the former U.S. attorney of the Southern District of New York — one of the top cops on Wall Street.

Pause for a minute to take this in. Aguirre, an SEC foot soldier, is trying to interview a major Wall Street executive — not handcuff the guy or impound his yacht, mind you, justtalk to him. In the course of doing so, he finds out that his target’s firm is being represented not only by Eliot Spitzer’s former top aide, but by the former U.S. attorney overseeing Wall Street, who is going four levels over his head to speak directly to the chief of the SEC’s enforcement division — not Aguirre’s boss, but his boss’s boss’s boss’s boss. Mack himself, meanwhile, was being represented by Gary Lynch, a former SEC director of enforcement.

Aguirre didn’t stand a chance. A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. “It all happened so fast, I needed a seat belt,” recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal.

Rather than going after Mack, the SEC started looking for someone else to blame for tipping off Samberg. (It was, Aguirre quips, “O.J.’s search for the real killers.”) It wasn’t until a year later that the agency finally got around to interviewing Mack, who denied any wrongdoing. The four-hour deposition took place on August 1st, 2006 — just days after the five-year statute of limitations on insider trading had expired in the case.

“At best, the picture shows extraordinarily lax enforcement by the SEC,” Senate investigators would later conclude. “At worse, the picture is colored with overtones of a possible cover-up.”

 

Episodes like this help explain why so many Wall Street executives felt emboldened to push the regulatory envelope during the mid-2000s. Over and over, even the most obvious cases of fraud and insider dealing got gummed up in the works, and high-ranking executives were almost never prosecuted for their crimes. In 2003, Freddie Mac coughed up $125 million after it was caught misreporting its earnings by $5 billion; nobody went to jail. In 2006, Fannie Mae was fined $400 million, but executives who had overseen phony accounting techniques to jack up their bonuses faced no criminal charges. That same year, AIG paid $1.6 billion after it was caught in a major accounting scandal that would indirectly lead to its collapse two years later, but no executives at the insurance giant were prosecuted.

All of this behavior set the stage for the crash of 2008, when Wall Street exploded in a raging Dresden of fraud and criminality. Yet the SEC and the Justice Department have shown almost no inclination to prosecute those most responsible for the catastrophe — even though they had insiders from the two firms whose implosions triggered the crisis, Lehman Brothers and AIG, who were more than willing to supply evidence against top executives.

In the case of Lehman Brothers, the SEC had a chance six months before the crash to move against Dick Fuld, a man recently named the worst CEO of all time by Portfoliomagazine. A decade before the crash, a Lehman lawyer named Oliver Budde was going through the bank’s proxy statements and noticed that it was using a loophole involving Restricted Stock Units to hide tens of millions of dollars of Fuld’s compensation. Budde told his bosses that Lehman’s use of RSUs was dicey at best, but they blew him off. “We’re sorry about your concerns,” they told him, “but we’re doing it.” Disturbed by such shady practices, the lawyer quit the firm in 2006.

Then, only a few months after Budde left Lehman, the SEC changed its rules to force companies to disclose exactly how much compensation in RSUs executives had coming to them. “The SEC was basically like, ‘We’re sick and tired of you people fucking around — we want a picture of what you’re holding,'” Budde says. But instead of coming clean about eight separate RSUs that Fuld had hidden from investors, Lehman filed a proxy statement that was a masterpiece of cynical lawyering. On one page, a chart indicated that Fuld had been awarded $146 million in RSUs. But two pages later, a note in the fine print essentially stated that the chart did not contain the real number — which, it failed to mention, was actually $263 million more than the chart indicated. “They fucked around even more than they did before,” Budde says. (The law firm that helped craft the fine print, Simpson Thacher & Bartlett, would later receive a lucrative federal contract to serve as legal adviser to the TARP bailout.)

Budde decided to come forward. In April 2008, he wrote a detailed memo to the SEC about Lehman’s history of hidden stocks. Shortly thereafter, he got a letter back that began, “Dear Sir or Madam.” It was an automated e-response.

“They blew me off,” Budde says.

Over the course of that summer, Budde tried to contact the SEC several more times, and was ignored each time. Finally, in the fateful week of September 15th, 2008, when Lehman Brothers cracked under the weight of its reckless bets on the subprime market and went into its final death spiral, Budde became seriously concerned. If the government tried to arrange for Lehman to be pawned off on another Wall Street firm, as it had done with Bear Stearns, the U.S. taxpayer might wind up footing the bill for a company with hundreds of millions of dollars in concealed compensation. So Budde again called the SEC, right in the middle of the crisis. “Look,” he told regulators. “I gave you huge stuff. You really want to take a look at this.”

But the feds once again blew him off. A young staff attorney contacted Budde, who once more provided the SEC with copies of all his memos. He never heard from the agency again.

“This was like a mini-Madoff,” Budde says. “They had six solid months of warnings. They could have done something.”

Three weeks later, Budde was shocked to see Fuld testifying before the House Government Oversight Committee and whining about how poor he was. “I got no severance, no golden parachute,” Fuld moaned. When Rep. Henry Waxman, the committee’s chairman, mentioned that he thought Fuld had earned more than $480 million, Fuld corrected him and said he believed it was only $310 million.

The true number, Budde calculated, was $529 million. He contacted a Senate investigator to talk about how Fuld had misled Congress, but he never got any response. Meanwhile, in a demonstration of the government’s priorities, the Justice Department is proceeding full force with a prosecution of retired baseball player Roger Clemens for lying to Congress about getting a shot of steroids in his ass. “At least Roger didn’t screw over the world,” Budde says, shaking his head.

Fuld has denied any wrongdoing, but his hidden compensation was only a ripple in Lehman’s raging tsunami of misdeeds. The investment bank used an absurd accounting trick called “Repo 105″ transactions to conceal $50 billion in loans on the firm’s balance sheet. (That’s $50 billion, not million.) But more than a year after the use of the Repo 105s came to light, there have still been no indictments in the affair. While it’s possible that charges may yet be filed, there are now rumors that the SEC and the Justice Department may take no action against Lehman. If that’s true, and there’s no prosecution in a case where there’s such overwhelming evidence — and where the company is already dead, meaning it can’t dump further losses on investors or taxpayers — then it might be time to assume the game is up. Failing to prosecute Fuld and Lehman would be tantamount to the state marching into Wall Street and waving the green flag on a new stealing season.

The most amazing noncase in the entire crash — the one that truly defies the most basic notion of justice when it comes to Wall Street supervillains — is the one involving AIG and Joe Cassano, the nebbishy Patient Zero of the financial crisis. As chief of AIGFP, the firm’s financial products subsidiary, Cassano repeatedly made public statements in 2007 claiming that his portfolio of mortgage derivatives would suffer “no dollar of loss” — an almost comically obvious misrepresentation. “God couldn’t manage a $60 billion real estate portfolio without a single dollar of loss,” says Turner, the agency’s former chief accountant. “If the SEC can’t make a disclosure case against AIG, then they might as well close up shop.”

As in the Lehman case, federal prosecutors not only had plenty of evidence against AIG — they also had an eyewitness to Cassano’s actions who was prepared to tell all. As an accountant at AIGFP, Joseph St. Denis had a number of run-ins with Cassano during the summer of 2007. At the time, Cassano had already made nearly $500 billion worth of derivative bets that would ultimately blow up, destroy the world’s largest insurance company, and trigger the largest government bailout of a single company in U.S. history. He made many fatal mistakes, but chief among them was engaging in contracts that required AIG to post billions of dollars in collateral if there was any downgrade to its credit rating.

St. Denis didn’t know about those clauses in Cassano’s contracts, since they had been written before he joined the firm. What he did know was that Cassano freaked out when St. Denis spoke with an accountant at the parent company, which was only just finding out about the time bomb Cassano had set. After St. Denis finished a conference call with the executive, Cassano suddenly burst into the room and began screaming at him for talking to the New York office. He then announced that St. Denis had been “deliberately excluded” from any valuations of the most toxic elements of the derivatives portfolio — thus preventing the accountant from doing his job. What St. Denis represented was transparency — and the last thing Cassano needed was transparency.

 

Another clue that something was amiss with AIGFP’s portfolio came when Goldman Sachs demanded that the firm pay billions in collateral, per the terms of Cassano’s deadly contracts. Such “collateral calls” happen all the time on Wall Street, but seldom against a seemingly solvent and friendly business partner like AIG. And when they do happen, they are rarely paid without a fight. So St. Denis was shocked when AIGFP agreed to fork over gobs of money to Goldman Sachs, even while it was still contesting the payments — an indication that something was seriously wrong at AIG. “When I found out about the collateral call, I literally had to sit down,” St. Denis recalls. “I had to go home for the day.”

After Cassano barred him from valuating the derivative deals, St. Denis had no choice but to resign. He got another job, and thought he was done with AIG. But a few months later, he learned that Cassano had held a conference call with investors in December 2007. During the call, AIGFP failed to disclose that it had posted $2 billion to Goldman Sachs following the collateral calls.

“Investors therefore did not know,” the Financial Crisis Inquiry Commission would later conclude, “that AIG’s earnings were overstated by $3.6 billion.”

“I remember thinking, ‘Wow, they’re just not telling people,'” St. Denis says. “I knew. I had been there. I knew they’d posted collateral.”

A year later, after the crash, St. Denis wrote a letter about his experiences to the House Government Oversight Committee, which was looking into the AIG collapse. He also met with investigators for the government, which was preparing a criminal case against Cassano. But the case never went to court. Last May, the Justice Department confirmed that it would not file charges against executives at AIGFP. Cassano, who has denied any wrongdoing, was reportedly told he was no longer a target.

Shortly after that, Cassano strolled into Washington to testify before the Financial Crisis Inquiry Commission. It was his first public appearance since the crash. He has not had to pay back a single cent out of the hundreds of millions of dollars he earned selling his insane pseudo-insurance policies on subprime mortgage deals. Now, out from under prosecution, he appeared before the FCIC and had the enormous balls to compliment his own business acumen, saying his atom-bomb swaps portfolio was, in retrospect, not that badly constructed. “I think the portfolios are withstanding the test of time,” he said.

“They offered him an excellent opportunity to redeem himself,” St. Denis jokes.

In the end, of course, it wasn’t just the executives of Lehman and AIGFP who got passes. Virtually every one of the major players on Wall Street was similarly embroiled in scandal, yet their executives skated off into the sunset, uncharged and unfined. Goldman Sachs paid $550 million last year when it was caught defrauding investors with crappy mortgages, but no executive has been fined or jailed — not even Fabrice “Fabulous Fab” Tourre, Goldman’s outrageous Euro-douche who gleefully e-mailed a pal about the “surreal” transactions in the middle of a meeting with the firm’s victims. In a similar case, a sales executive at the German powerhouse Deutsche Bank got off on charges of insider trading; its general counsel at the time of the questionable deals, Robert Khuzami, now serves as director of enforcement for the SEC.

Another major firm, Bank of America, was caught hiding $5.8 billion in bonuses from shareholders as part of its takeover of Merrill Lynch. The SEC tried to let the bank off with a settlement of only $33 million, but Judge Jed Rakoff rejected the action as a “facade of enforcement.” So the SEC quintupled the settlement — but it didn’t require either Merrill or Bank of America to admit to wrongdoing. Unlike criminal trials, in which the facts of the crime are put on record for all to see, these Wall Street settlements almost never require the banks to make any factual disclosures, effectively burying the stories forever. “All this is done at the expense not only of the shareholders, but also of the truth,” says Rakoff. Goldman, Deutsche, Merrill, Lehman, Bank of America … who did we leave out? Oh, there’s Citigroup, nailed for hiding some $40 billion in liabilities from investors. Last July, the SEC settled with Citi for $75 million. In a rare move, it also fined two Citi executives, former CFO Gary Crittenden and investor-relations chief Arthur Tildesley Jr. Their penalties, combined, came to a whopping $180,000.

Throughout the entire crisis, in fact, the government has taken exactly one serious swing of the bat against executives from a major bank, charging two guys from Bear Stearns with criminal fraud over a pair of toxic subprime hedge funds that blew up in 2007, destroying the company and robbing investors of $1.6 billion. Jurors had an e-mail between the defendants admitting that “there is simply no way for us to make money — ever” just three days before assuring investors that “there’s no basis for thinking this is one big disaster.” Yet the case still somehow ended in acquittal — and the Justice Department hasn’t taken any of the big banks to court since.

All of which raises an obvious question: Why the hell not?

Gary Aguirre, the SEC investigator who lost his job when he drew the ire of Morgan Stanley, thinks he knows the answer.

Last year, Aguirre noticed that a conference on financial law enforcement was scheduled to be held at the Hilton in New York on November 12th. The list of attendees included 1,500 or so of the country’s leading lawyers who represent Wall Street, as well as some of the government’s top cops from both the SEC and the Justice Department.

Criminal justice, as it pertains to the Goldmans and Morgan Stanleys of the world, is not adversarial combat, with cops and crooks duking it out in interrogation rooms and courthouses. Instead, it’s a cocktail party between friends and colleagues who from month to month and year to year are constantly switching sides and trading hats. At the Hilton conference, regulators and banker-lawyers rubbed elbows during a series of speeches and panel discussions, away from the rabble. “They were chummier in that environment,” says Aguirre, who plunked down $2,200 to attend the conference.

Aguirre saw a lot of familiar faces at the conference, for a simple reason: Many of the SEC regulators he had worked with during his failed attempt to investigate John Mack had made a million-dollar pass through the Revolving Door, going to work for the very same firms they used to police. Aguirre didn’t see Paul Berger, an associate director of enforcement who had rebuffed his attempts to interview Mack — maybe because Berger was tied up at his lucrative new job at Debevoise & Plimpton, the same law firm that Morgan Stanley employed to intervene in the Mack case. But he did see Mary Jo White, the former U.S. attorney, who was still at Debevoise & Plimpton. He also saw Linda Thomsen, the former SEC director of enforcement who had been so helpful to White. Thomsen had gone on to represent Wall Street as a partner at the prestigious firm of Davis Polk & Wardwell.

Two of the government’s top cops were there as well: Preet Bharara, the U.S. attorney for the Southern District of New York, and Robert Khuzami, the SEC’s current director of enforcement. Bharara had been recommended for his post by Chuck Schumer, Wall Street’s favorite senator. And both he and Khuzami had served with Mary Jo White at the U.S. attorney’s office, before Mary Jo went on to become a partner at Debevoise. What’s more, when Khuzami had served as general counsel for Deutsche Bank, he had been hired by none other than Dick Walker, who had been enforcement director at the SEC when it slow-rolled the pivotal fraud case against Rite Aid.

“It wasn’t just one rotation of the revolving door,” says Aguirre. “It just kept spinning. Every single person had rotated in and out of government and private service.”

The Revolving Door isn’t just a footnote in financial law enforcement; over the past decade, more than a dozen high-ranking SEC officials have gone on to lucrative jobs at Wall Street banks or white-shoe law firms, where partnerships are worth millions. That makes SEC officials like Paul Berger and Linda Thomsen the equivalent of college basketball stars waiting for their first NBA contract. Are you really going to give up a shot at the Knicks or the Lakers just to find out whether a Wall Street big shot like John Mack was guilty of insider trading? “You take one of these jobs,” says Turner, the former chief accountant for the SEC, “and you’re fit for life.”

Fit — and happy. The banter between the speakers at the New York conference says everything you need to know about the level of chumminess and mutual admiration that exists between these supposed adversaries of the justice system. At one point in the conference, Mary Jo White introduced Bharara, her old pal from the U.S. attorney’s office.

“I want to first say how pleased I am to be here,” Bharara responded. Then, addressing White, he added, “You’ve spawned all of us. It’s almost 11 years ago to the day that Mary Jo White called me and asked me if I would become an assistant U.S. attorney. So thank you, Dr. Frankenstein.”

Next, addressing the crowd of high-priced lawyers from Wall Street, Bharara made an interesting joke. “I also want to take a moment to applaud the entire staff of the SEC for the really amazing things they have done over the past year,” he said. “They’ve done a real service to the country, to the financial community, and not to mention a lot of your law practices.”

Haw! The line drew snickers from the conference of millionaire lawyers. But the real fireworks came when Khuzami, the SEC’s director of enforcement, talked about a new “cooperation initiative” the agency had recently unveiled, in which executives are being offered incentives to report fraud they have witnessed or committed. From now on, Khuzami said, when corporate lawyers like the ones he was addressing want to know if their Wall Street clients are going to be charged by the Justice Department before deciding whether to come forward, all they have to do is ask the SEC.

“We are going to try to get those individuals answers,” Khuzami announced, as to “whether or not there is criminal interest in the case — so that defense counsel can have as much information as possible in deciding whether or not to choose to sign up their client.”

Aguirre, listening in the crowd, couldn’t believe Khuzami’s brazenness. The SEC’s enforcement director was saying, in essence, that firms like Goldman Sachs and AIG and Lehman Brothers will henceforth be able to get the SEC to act as a middleman between them and the Justice Department, negotiating fines as a way out of jail time. Khuzami was basically outlining a four-step system for banks and their executives to buy their way out of prison. “First, the SEC and Wall Street player make an agreement on a fine that the player will pay to the SEC,” Aguirre says. “Then the Justice Department commits itself to pass, so that the player knows he’s ‘safe.’ Third, the player pays the SEC — and fourth, the player gets a pass from the Justice Department.”

 

When I ask a former federal prosecutor about the propriety of a sitting SEC director of enforcement talking out loud about helping corporate defendants “get answers” regarding the status of their criminal cases, he initially doesn’t believe it. Then I send him a transcript of the comment. “I am very, very surprised by Khuzami’s statement, which does seem to me to be contrary to past practice — and not a good thing,” the former prosecutor says.

Earlier this month, when Sen. Chuck Grassley found out about Khuzami’s comments, he sent the SEC a letter noting that the agency’s own enforcement manual not only prohibits such “answer getting,” it even bars the SEC from giving defendants the Justice Department’s phone number. “Should counsel or the individual ask which criminal authorities they should contact,” the manual reads, “staff should decline to answer, unless authorized by the relevant criminal authorities.” Both the SEC and the Justice Department deny there is anything improper in their new policy of cooperation. “We collaborate with the SEC, but they do not consult with us when they resolve their cases,” Assistant Attorney General Lanny Breuer assured Congress in January. “They do that independently.”

Around the same time that Breuer was testifying, however, a story broke that prior to the pathetically small settlement of $75 million that the SEC had arranged with Citigroup, Khuzami had ordered his staff to pursue lighter charges against the megabank’s executives. According to a letter that was sent to Sen. Grassley’s office, Khuzami had a “secret conversation, without telling the staff, with a prominent defense lawyer who is a good friend” of his and “who was counsel for the company.” The unsigned letter, which appears to have come from an SEC investigator on the case, prompted the inspector general to launch an investigation into the charge.

All of this paints a disturbing picture of a closed and corrupt system, a timeless circle of friends that virtually guarantees a collegial approach to the policing of high finance. Even before the corruption starts, the state is crippled by economic reality: Since law enforcement on Wall Street requires serious intellectual firepower, the banks seize a huge advantage from the start by hiring away the top talent. Budde, the former Lehman lawyer, says it’s well known that all the best legal minds go to the big corporate law firms, while the “bottom 20 percent go to the SEC.” Which makes it tough for the agency to track devious legal machinations, like the scheme to hide $263 million of Dick Fuld’s compensation.

“It’s such a mismatch, it’s not even funny,” Budde says.

But even beyond that, the system is skewed by the irrepressible pull of riches and power. If talent rises in the SEC or the Justice Department, it sooner or later jumps ship for those fat NBA contracts. Or, conversely, graduates of the big corporate firms take sabbaticals from their rich lifestyles to slum it in government service for a year or two. Many of those appointments are inevitably hand-picked by lifelong stooges for Wall Street like Chuck Schumer, who has accepted $14.6 million in campaign contributions from Goldman Sachs, Morgan Stanley and other major players in the finance industry, along with their corporate lawyers.

As for President Obama, what is there to be said? Goldman Sachs was his number-one private campaign contributor. He put a Citigroup executive in charge of his economic transition team, and he just named an executive of JP Morgan Chase, the proud owner of $7.7 million in Chase stock, his new chief of staff. “The betrayal that this represents by Obama to everybody is just — we’re not ready to believe it,” says Budde, a classmate of the president from their Columbia days. “He’s really fucking us over like that? Really? That’s really a JP Morgan guy, really?”

Which is not to say that the Obama era has meant an end to law enforcement. On the contrary: In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would “demean the seriousness” of the offenses.

So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It’s not a crime. Prison is too harsh. Get them to say they’re sorry, and move on. Oh, wait — let’s not even make them say they’re sorry. That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What’s next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?

The mental stumbling block, for most Americans, is that financial crimes don’t feel real; you don’t see the culprits waving guns in liquor stores or dragging coeds into bushes. But these frauds are worse than common robberies. They’re crimes of intellectual choice, made by people who are already rich and who have every conceivable social advantage, acting on a simple, cynical calculation: Let’s steal whatever we can, then dare the victims to find the juice to reclaim their money through a captive bureaucracy. They’re attacking the very definition of property — which, after all, depends in part on a legal system that defends everyone’s claims of ownership equally. When that definition becomes tenuous or conditional — when the state simply gives up on the notion of justice — this whole American Dream thing recedes even further from reality.


The Stakes Are Huge: There’s Another Bank Crash Looming, And We Must Prevent Another Bailout

In Uncategorized on January 24, 2011 at 12:54 pm

Oldspeak:“To once again bail out the bankers, this time by changing real estate law in a way that hasn’t been done since the 1670s, would be a far bigger deal than even the trillions in bailout dollars the TARP and Fed gave these banks in 2008/9. But the bankers and their allies…will try to present this as a simple fix to some minor paperwork problems….But they have made a Texas-sized mess of the entire mortgage title system in their haste to make money, and it is time to pay the piper.”

From Mike Lux @ Open Left:

Everything I am reading these days on financial issues points to some serious reckoning soon to come, especially because of — as the folks at Third Way are calling it — foreclosure-gate. The Massachusetts Supreme Court ruling in the Ibanez case, along with a growing body of cases where the banks and/or their servicers have been ruled against in foreclosure cases, and even the banks’ lawyers are being castigated in court by judges for bringing in made-up paperwork, is causing a growing sense of panic among the biggest banks that hold the most mortgages. Spokespeople for the banks are talking bravely, trying to dismiss the situation as some minor paperwork errors, but everyone who has been paying attention to the situation fears that there are really big consequences afoot.

The plain fact is that over the last decade, in their overwhelming rush to make bigger and bigger profits from trading in the bubble-driven real estate securities market, the banks ran roughshod over the home mortgage and title system that had served this country (and England and many others) quite well for hundreds of years — and they made a serious mess of it. Because of the way these mortgages have been sliced and diced and sold into complicated securities, homeowners, judges, and the banks themselves are having quite a bit of trouble figuring out who actually owns the note in more cases than is easy to believe. The “paperwork” — figuring out who owns the note – is not just a little messed up, it is a disaster area.

This wouldn’t be as big a deal except that the combination of the housing bubble itself plus the worst recession since the Great Depression (caused in great part by that bubble) has created a foreclosure crisis of gargantuan proportions. Millions of homeowners are in foreclosure proceedings, millions more underwater because of the collapse of housing prices. And because the banks have cooked their books, not wanting all these toxic assets to wreak havoc with their official valuation and their stock prices, they have no interest in helping homeowners stay in their homes by writing down these mortgages to current market levels. So banks are moving to foreclose these millions of homes, but they can’t prove to judges that they even own the notes that would allow them to foreclose. Thus you have robo-signers, falsified affidavits, and all kinds of strange things being presented to judges in courts. The judges who are not bought and paid for by the banks are raising big red flags about all this, and thus you have cases like Ibanez going against the banks.

This is a mess not just for the housing market but for the entire economy, as the numbers on all this are staggering, and the housing market really does have the potential to just completely freeze up, which would be an economic nightmare. Our economy has no chance of getting dramatically better until the housing market starts moving again. So the banks are now going to their political allies, just like they did in 2008, and telling them: unless you save us from the mess that we’ve created (oh, wait, they don’t use those last four words, instead it’s the unforeseeable “perfect storm”, “black swan” thing), we will go under and take the entire economy down with us. The good news for the banks is they are not necessarily looking for a cash handout this time – although it may come to that – but just some legal “tweaking” of this “minor paperwork problem.”

If you have the stomach for it and want to learn more about the gory details about the policy side of all this, there are a bunch of good writers you can turn to, including Yves SmithDavid Dayen, and Marcy Wheeler, all of whom have put up great pieces worth looking at in the last couple of days.Numerian has a great post I have already linked to a couple times in past pieces this week on the truly scary implications of what is going down.

But my focus, as usual, is on the politics of all this, because the drumbeat is beginning in a big way to bail out the bankers from their own mess once again. Third Way’s piece, which Yves, David, and Marcy do a good job deconstructing, is the opening shot in what will be a very focused legislative push to once again bail out the bankers from their own mess. The banks and their allies will try to do this as quickly and quietly as they can, portraying it as a simple legal fix for minor paperwork problems. However, the consequences of this kind of legal bailout are actually far greater in some ways than the TARP bailout, as costly as that was. The TARP bailout was just dollars though. This one, as Yves writes, undermines fundamental property law that our entire economic system is based on:

This proposal guts state control of their own real estate law when the Supreme Court has repeatedly found that “dirt law” is not a Federal matter. It strips homeowners of their right to their day in court to preserve their contractual rights, namely, that only the proven mortgagee, and not a gangster, or in this case, bankster, can take possession of their home.
This sort of protection is fundamental to the operation of capitalism, so it’s astonishing to see neoliberals so willing to throw it under the bus to preserve the balance sheets of the TBTF banks. Readers may recall how we came to have this sort of legal protection in the first place. England learned the hard way in the 17th century what happens with low documentation requirements: abuse of court procedures, perjury and corruption become the norm. Parliament enacted the 1677 Statute of Fraudsto establish higher standards for contracts, such as witnessing by a third party, to stop the widespread theft of property that was underway.

The memo completely ignores the harm to investors from the bank mistakes and lacks any provisions for damage to investors to be remedied. Moreover, denying borrower rights removes their leverage to obtain deep principal mortgage modifications, which for viable borrowers produces lower losses than costly foreclosures and sales of distressed property. Thus this shredding of contractual protections in mortgages not only hurts borrowers but also harms investors.

So to save the banks from their own, colossal abuses of contracts that they devised, the Third Way document advocates Congressional intervention into well established, well functioning state law. This is a case where these matters can and should be left to the courts and ultimately state AGs to coordinate the template of a more broadbased solution.

To once again bail out the bankers, this time by changing real estate law in a way that hasn’t been done since the 1670s, would be a far bigger deal than even the trillions in bailout dollars the TARP and Fed gave these banks in 2008/9. But the bankers and their allies like Third Way will try to present this as a simple fix to some minor paperwork problems. Look, if these paperwork problems were so minor, we wouldn’t need the fix they are proposing: the banks would get nicked a little in a few cases where they screwed up a little bit of paperwork, and everyone would go on their way. But they have made a Texas-sized mess of the entire mortgage title system in their haste to make money, and it is time to pay the piper.

What’s the solution? We should start with a foreclosure freeze while the government sorts through the mess and the state attorney generals finish their negotiations with the big banks. Clearly, a massive amount of mortgage write-downs to underwater homeowners to reflect current housing prices makes a ton of sense, and would dramatically cut the need for foreclosures, taking some of the pressure off the system. Once those two steps are taken, hopefully the AGs can cut a good deal for the American people to make things work better going forward.

The problem with sensible pro-middle class solutions like this is the incredible political power of these big banks. Here’s the deal, though: politicians hate the idea of having to bail these guys out again. If progressives can make clear that any legal changes the bankers are trying to push through on mortgage and title law are just one more big bailout of the big banks, we can win this fight. Let’s hope we do, because the stakes are pretty damn high.


Bank of America Is In Deep Trouble, And There May Be Financial Disaster On The Horizon

In Uncategorized on November 12, 2010 at 9:04 am

Oldspeak:”Its stock value has dropped 40 percent since April, and the bank is mum on what losses it’s hiding on its $2.3 trillion balance sheet. No Bueno. Withdraw your support for the Internation Banking Cartels that have devastated and pillaged our economy. Their chickens are coming home to roost, but the American people may once again be forced to pay for their lies and thievery that precipitated this mess, as they attempt once again to privatize profit and externalize costs.”

From Joshua Holland @ Alter Net:

Will Bank of America be the first Wall Street giant to once again point a gun to its own head, telling us it’ll crash and burn and take down the financial system if we don’t pony up for another massive bailout?

When former Treasury Secretary Hank Paulson was handing out trillions to Wall Street, BofA collected $45 billion from the Troubled Asset Relief Program (TARP) to stabilize its balance sheet. It was spun as a success story — a rebuke of those who urged the banks be put into receivership — when the behemoth “paid back” the cash last December. But the bank’s stock price has fallen by more than 40 percent since mid-April, and the value of its outstanding stock is currently at around half of what it should be based on its “book value” — what the company says its holdings are worth.

“The problem for anyone trying to analyze Bank of America’s $2.3 trillion balance sheet,” wrote Bloomberg columnist Jonathan Weil, “is that it’s largely impenetrable.” Nobody really knows the true values of the assets these companies are holding, which has been the case ever since the collapse. But according to Weil, some of BofA’s financial statements “are so delusional that they invite laughter.”

Weil points to the firm’s accounting of its purchase of Countrywide Financial — the criminal enterprise at the center of the sub-prime securitization market. Bank of America, Weil notes, hasn’t written off Countrywide’s entire value. “In its latest quarterly report with the SEC,” he wrote, “Bank of America said it had determined the asset wasn’t impaired. It might as well be telling the public not to believe any of the numbers on its financial statements.”

With investors valuing BofA at half the worth that the bank claims, it’s one titan of Wall Street that may be on the brink of collapse. But it’s not alone. “Everybody was doing this, this is not just something that Countrywide and Bank of America were doing,” legendary investor Jim Rogers told CNBC. As a result, the banks’ balance sheets are “full of rotten stuff” that “is going to be a huge mess for a long time to come.”

And that “rotten stuff” will continue to be a drag on the brick-and-mortar economy until the mess gets cleaned up. Which, in turn, is a powerful argument for a second dip into the public trough.

When the financial crisis hit, those of us who view the free market as more than a hollow slogan urged the government to take over the ailing giants of Wall Street, wipe out their investors, send their parasitic management teams to the unemployment line and gradually unwind the huge pile of “toxic” assets that they’d amassed before selling them back, leaner and meaner, to the private sector.

It worked in the past — it was Ronald Reagan’s response to the Savings and Loan crisis of the 1980s. But that was then, and today Reaganite policies are deemed to be “creeping socialism” — thoroughly unacceptable. We were told the banks were too big to fail, and Bush saw eye-to-eye with Republicans and Blue Dogs in Congress and bailed the banks out without exacting a penalty in exchange for the taxpayers’ largesse. They socialized the risk, but the financial industry went right back to its old tricks, paying its execs fat bonuses and playing fast and loose with its accounting.

Much of that toxic paper remains on their books — somewhere. The assets are still impossible to price and now several Wall Street titans appear to be approaching a tipping point, poised to once again to extort a mountain of cash from our Treasury by claiming to be too big — and interconnected — to crash and burn as the principles of the free market would otherwise dictate.

But there’s a difference between then and now.  At the time, most of us saw the crash as a result of hubris and greed run amok in an under-regulated financial sector. Now, we know the financial crisis was the result of unchecked criminality — that fraud was perpetrated, in the words of University of Missouri scholar (and veteran regulator) William Black, “at every step in the home finance food chain.” As Black and economist L. Randall Wray wrote recently:

The appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers’ incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false [representations] and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct.That homeowners would default on the nonprime mortgages was a foregone conclusion throughout the industry — indeed, it was the desired outcome. This was something the lending side knew, but which few on the borrowing side could have realized.

And since the crash, they’ve committed widespread foreclosure fraud, dutifully whitewashed by the corporate media as nothing more than some “paperwork” problems resulting from a handful of “errors.”

It is anything but. As Yves Smith, author of Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism, wrote in theNew York Times, “The major banks and their agents have for years taken shortcuts with their mortgage securitization documents — and not due to a momentary lack of attention, but as part of a systematic approach to save money and increase profits.”

Increasingly, homeowners being foreclosed on are correctly demanding that servicers prove that the trust that is trying to foreclose actually has the right to do so. Problems with the mishandling of the loans have been compounded by the Mortgage Electronic Registration System, an electronic lien-registry service that was set up by the banks. While a standardized, centralized database was a good idea in theory, MERS has been widely accused of sloppy practices and is increasingly facing legal challenges.

Judges are beginning to demand that the banks show their work — prove they have the right to foreclose — and in many instances they can’t, having sliced and diced those mortgages up into a thousand securities without bothering to verify the paperwork as most states require by law. This leaves what Smith calls a “cloud of uncertainty” hanging over trillions in mortgage-backed securities — the largest class of assets in the world — and preventing a real recovery of the housing market. In turn, that is holding back the economy at large; according to the International Monetary Fund, it’s the drag of the housing mess that’s causing the high and sustained levels of unemployment we see today.

Big financial firms have also been cooking their books in order to obscure how shaky their balance sheets really are because honest accounting would likely bring an end to those big bonuses that drive “the Street.” Yet a day of reckoning may be fast approaching.

If the worst-case scenario should come to pass, with the banks hit by thousands of lawsuits, unable to foreclose on properties in default and with investors running for the hills, expect to hear calls for TARP II. It’d be a very heavy political lift, but given Congress’s fealty to Wall Street it could plausibly be passed.

There are alternatives. As in 2008, the federal government could put failing financial institutions into receivership. But some experts are saying that if we want to get off the roller coaster of an economy moving from one financial bubble to the next, a bolder approach is necessary: permanent nationalization of banks that can’t survive without public dollars.

“Inevitably, American taxpayers are going to pick up much of the tab for the banks’ failures,” wrote Nobel prize-winning economist Joseph Stiglitz last year.  “The question facing us is, to what extent do we participate in the upside return?” Stiglitz argued that the government should take “over those banks that cannot assemble enough capital through private sources to survive without government assistance.”

To be sure, shareholders and bondholders will lose out, but their gains under the current regime come at the expense of taxpayers. In the good years, they were rewarded for their risk-taking. Ownership cannot be a one-sided bet.Of course, most of the employees will remain, and even much of the management. What then is the difference? The difference is that now, the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.

Leo Panitch, a professor of comparative political economy at Canada’s York University, wrote that “the prospect of turning banking into a public utility might be seen as laying the groundwork for the democratization of the economy.”

Ellen Brown, author of Web of Debt, points to the success of the nation’s only government-owned bank, the Bank of North Dakota. “Last year,” she wrote, “North Dakota had the largest budget surplus it had ever had…and it was the only state that was actually adding jobs when others were losing them.”

North Dakota has an abundance of natural resources, including oil, but as Brown notes, other states that enjoy similar riches were deep in the red. “The sole truly distinguishing feature of North Dakota seems to be that it has managed to avoid the Wall Street credit freeze by owning and operating its own bank.” She adds that the bank serves the community, making “low-interest loans to students, farmers and businesses; underwrit[ing] municipal bonds; and serv[ing] as the state’s ‘Mini Fed,’ providing liquidity and clearing checks for more than 100 banks around the state.”

Several states have considered proposals to emulate North Dakota, but such a bold move would obviously be all but impossible in Washington. But it shouldn’t be off the table. Banks provide an “intermediary good” to the economy, creating no real value. But Big Finance’s speculation economy has caused great and real pain for the rest of us. As Joe Stiglitz put it, there’s no reason in the world the incentives of the banks shouldn’t be better aligned with the interests of the country and its citizens.

 

Joshua Holland is an editor and senior writer at AlterNet. He is the author ofThe 15 Biggest Lies About the Economy (and Everything else the Right Doesn’t Want You to Know About Taxes, Jobs and Corporate America)Drop him an email or follow him on Twitter.



Wall Street Wins Again

In Uncategorized on November 10, 2010 at 3:01 pm


Oldspeak: “In the wake of the election, the Fed pulled off a move detected only by downtown Manhattan. It quietly announced a purchase of $600 billion in Treasury securities (read: our debt) while pundits on the left and right were dissecting the role of the tea party in political life as we know it, the Obama dissatisfaction quotient, and the chance of Sarah Palin heading for the White House in 2012. The ongoing bailout of the financial system received not a mention in pre- or postelection talk. No one in Congress or the White House gets a say on the maneuver. Yet, it was the Fed buying more treasuries, and not the fact that the Republicans gained control of the House, that caused the Dow to shoot to a 2010 high and bank stocks to rally 2 percent on average.”

From Nomi Prins @ Truthdig:

The Republicans may have stormed the House, but it was Wall Street and the Fed that won the election. Regardless of party power plays and posturing, there are two constants that remain unaltered after the election. First, Wall Street will continue on with business as usual while shifting its campaign and lobbying dollars to the new winning team. And second, the Fed will keep on pretending to prop up the economy by buying more U.S. debt, thereby keeping interest rates low, the dollar weak and money cheap for the banking system to inhale. This fictional boosting of the financial economy, absent the real boosting of the general economy, will march on sans debate, inspection or restriction.

In the wake of the election, the Fed pulled off a move detected only by downtown Manhattan. It quietly announced a purchase of $600 billion in Treasury securities (read: our debt) while pundits on the left and right were dissecting the role of the tea party in political life as we know it, the Obama dissatisfaction quotient, and the chance of Sarah Palin heading for the White House in 2012.

That $600 billion figure was about twice what the proverbial “analysts” on Wall Street had predicted. This means that, adding to the current stash, the Fed will have shifted onto its books about $1 trillion of the debt that the Treasury Department has manufactured. That’s in addition to $1.25 trillion more in various assets backed by mortgages that the Fed is keeping in its till (not including AIG and other backing) from the 2008 crisis days. This ongoing bailout of the financial system received not a mention in pre- or postelection talk. No one in Congress or the White House gets a say on the maneuver. Yet, it was the Fed buying more treasuries, and not the fact that the Republicans gained control of the House, that caused the Dow to shoot to a 2010 high and bank stocks to rally 2 percent on average.

Like many other Americans, as the results of the elections were pouring in for insta-analysis I was obsessively flipping cable TV channels. It didn’t matter whether I landed on Fox, CNBC or MSNBC, the same two main items were being debated: (1) the tea party’s rise and (2) the other victorious Republicans (including the ones labeled as tea party candidates—even though they did not actually run as candidates of a separate party, a trick that progressives have never managed to pull off or even try).

All the Republicans sang their refrain from the same song sheet, vowing to work on extending George W. Bush’s tax cuts, killing what they refer to as Obamacare, cutting spending (though none gave specific details as to how) and, of course, getting Americans back to work. The catch—and this was a notion taken up by President Barack Obama and ignored by the Fed the very next day—is that the Republicans wanted to do so the free-market way, by reducing government constraints on businesses so they can stop worrying about obstacles like rules, and thus somehow spontaneously start hiring more. (Note: To underscore this strategy, CNBC paraded a bunch of chief executive officers on screen throughout the election night.)

But, for the most part, the Republicans left the so-called financial reform bill alone as a topic, except to make it clear, as incoming House Majority Whip (aka 2012 contender) Eric Cantor did, that they don’t want onerous regulations (it is much better to wait for the next leg of this crisis and the loss of more jobs and homes, apparently, than to bar Wall Street from financial innovation).

Here’s what wasn’t mentioned during the election or postelection chatter: the cost and logic of bailing out, subsidizing and now propping up Wall Street as it heads decisively (despite Obama’s promises of those days of fill-in-the-blank being over) to another year of record bonuses.

No winning Republican mentioned repealing the financial reform bill, since it doesn’t really actually reform finance, bring back Glass-Steagall, make the big banks smaller or keep them from creating complex assets for big fees. Score one for Wall Street. No winning Democrat thought out loud that maybe since the Republican tea partyers were so anti-bailouts they should suggest a strategy that dials back ongoing support for the banking sector as it continues to foreclose on homes, deny consumer and small business lending restructuring despite their federal windfall, and rake in trading profits. The Democrats couldn’t suggest that, because they were complicit. Score two for Wall Street.

In other words, nothing will change. And that, more than the disillusionment of his supporters who had thought he would actually stand by his campaign rhetoric, is why Obama will lose the White House in 2012.

Then, there’s the Fed. Ben Bernanke, who like Treasury Secretary Timothy Geithner has survived two administrations under different parties to have a hand in bailing out the banking system and fictitiously stabilizing the markets, continues to run the country into the path of massive debt in the name of easing money, so as to avoid the Second Great Depression from which Obama thinks he saved us (along with Geithner and former Treasury Secretary Hank Paulson).

Last Wednesday morning, Obama had the chance to at least attempt to re-engage the voters who believed in his mantra of change. In his contrition speech, he took responsibility (read: apologized) for having made it seem he extended government too much (thereby taking on the language of the Republican opponents), explaining that we were in an emergency situation (not that the banks screwed up and stole the life rafts). He assured businesses he was still on their side (in case the fact that he’s keeping Wall Street lackey Geithner on and his ringing praise for Larry Summers on “The Daily Show” weren’t sufficient signs).

It is likely that, going forward, Democrats will fear losing more seats in 2012 and vote more with the pro-bank center. That would be a mistake for them and bad for the country.

Yet sadly, Obama showed pre-emptive signs of capitulation with two words: free market. Toward the end of the Q&A session after his speech, Obama said that the free market has to be “nurtured and cultivated” and that he has to take responsibility to make clear to the business community and the country that the most important thing we can do is boost and encourage our business sector and make sure that companies are hiring. His facial expression was as hollow as his words. He added that “we” have been talking to CEOs constantly (and don’t we all feel good about that?)—and that on his trip to Asia this week his whole focus will be on opening up markets, so “we can prosper, sell more goods and create more jobs in the United States” (that playbook comes from Bush Treasury Secretary Paulson, but that policy has been shown only to enable CEOs to outsource more, not less). He also pointed out that a whole bunch of corporate executives will join “us.”

And that is the second reason he will not be re-elected: Businesses won’t need to fund his next campaign when they can fund the Republicans now that they are back in vogue. Businesses will meanwhile just extract what they can as long as they can, like better deals abroad in the name of free markets—the kind that the Fed is subsidizing back here at home. Obama and his supporters will see this in 2012 if they don’t now. The president could go all out and ignore the CEOs and focus on the general populace, but signs point to the contrary. If he has learned something from the November elections about loyalty to his voters, he isn’t showing it. So maybe progressives should stop defending him and start yelling at him … or seriously look for another 2012 candidate to run against Sarah Palin


Wachovia’s Drug Habit – Banks Financing Mexico Gangs Admitted In Wells Fargo Deal

In Uncategorized on July 20, 2010 at 11:08 am

Mexican troops burn cocaine seized from a jet bought through two U.S. banks. Photograph by Abraham Martínez/Procesofoto

Oldspeak: ” How bout it. The Megabank as threat to national security. The bank, now a unit of Wells Fargo, leads a list of firms that have moved dirty money for Mexico’s narcotics cartels–helping a $39 billion trade that has killed more than 22,000 people since 2006. It’s nice to see international cartels working together….  :-|Profit is Paramount.”

From Michael Smith @ Bloomberg News:

Just before sunset on April 10, 2006, a DC-9 jet landed at the international airport in the port city of Ciudad del Carmen, 500 miles east of Mexico City. As soldiers on the ground approached the plane, the crew tried to shoo them away, saying there was a dangerous oil leak. So the troops grew suspicious and searched the jet.

They found 128 black suitcases, packed with 5.7 tons of cocaine, valued at $100 million. The stash was supposed to have been delivered from Caracas to drug traffickers in Toluca, near Mexico City, Mexican prosecutors later found. Law enforcement officials also discovered something else.

The smugglers had bought the DC-9 with laundered funds they transferred through two of the biggest banks in the U.S.: Wachovia Corp. and Bank of America Corp., Bloomberg Markets magazine reports in its August 2010 issue.

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers — including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

The admission came in an agreement that Charlotte, North Carolina-based Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.

‘Blatant Disregard’

Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history — a sum equal to one-third of Mexico’s current gross domestic product.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” says Jeffrey Sloman, the federal prosecutor who handled the case.

Since 2006, more than 22,000 people have been killed in drug-related battles that have raged mostly along the 2,000-mile (3,200-kilometer) border that Mexico shares with the U.S. In the Mexican city of Ciudad Juarez, just across the border from El Paso, Texas, 700 people had been murdered this year as of mid- June. Six Juarez police officers were slaughtered by automatic weapons fire in a midday ambush in April.

Rondolfo Torre, the leading candidate for governor in the Mexican border state of Tamaulipas, was gunned down yesterday, less than a week before elections in which violence related to drug trafficking was a central issue.

45,000 Troops

Mexican President Felipe Calderon vowed to crush the drug cartels when he took office in December 2006, and he’s since deployed 45,000 troops to fight the cartels. They’ve had little success.

Among the dead are police, soldiers, journalists and ordinary citizens. The U.S. has pledged Mexico $1.1 billion in the past two years to aid in the fight against narcotics cartels.

In May, President Barack Obama said he’d send 1,200 National Guard troops, adding to the 17,400 agents on the U.S. side of the border to help stem drug traffic and illegal immigration.

Behind the carnage in Mexico is an industry that supplies hundreds of tons of cocaine, heroin, marijuana and methamphetamines to Americans. The cartels have built a network of dealers in 231 U.S. cities from coast to coast, taking in about $39 billion in sales annually, according to the Justice Department.

‘You’re Missing the Point’

Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year — enough to cover health care for 30.9 million Americans — in overburdened courts, prisons and hospitals and lost productivity, the department says.

“It’s the banks laundering money for the cartels that finances the tragedy,” says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network.

“If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.

Cleansing Dirty Cash

Wachovia is just one of the U.S. and European banks that have been used for drug money laundering. For the past two decades, Latin American drug traffickers have gone to U.S. banks to cleanse their dirty cash, says Paul Campo, head of the U.S. Drug Enforcement Administration’s financial crimes unit.

Miami-based American Express Bank International paid fines in both 1994 and 2007 after admitting it had failed to spot and report drug dealers laundering money through its accounts. Drug traffickers used accounts at Bank of America in Oklahoma City to buy three planes that carried 10 tons of cocaine, according to Mexican court filings.

Federal agents caught people who work for Mexican cartels depositing illicit funds in Bank of America accounts in Atlanta, Chicago and Brownsville, Texas, from 2002 to 2009. Mexican drug dealers used shell companies to open accounts at London-based HSBC Holdings Plc, Europe’s biggest bank by assets, an investigation by the Mexican Finance Ministry found.

Following Rules

Those two banks weren’t accused of wrongdoing. Bank of America spokeswoman Shirley Norton and HSBC spokesman Roy Caple say laws bar them from discussing specific clients. They say their banks strictly follow the government rules.

“Bank of America takes its anti-money-laundering responsibilities very seriously,” Norton says.

A Mexican judge on Jan. 22 accused the owners of six centros cambiarios, or money changers, in Culiacan and Tijuana of laundering drug funds through their accounts at the Mexican units of Banco Santander SACitigroup Inc. and HSBC, according to court documents filed in the case.

The money changers are in jail while being tried. Citigroup, HSBC and Santander, which is the largest Spanish bank by assets, weren’t accused of any wrongdoing. The three banks say Mexican law bars them from commenting on the case, adding that they each carefully enforce anti-money-laundering programs.

HSBC has stopped accepting dollar deposits in Mexico, and Citigroup no longer allows noncustomers to change dollars there. Citigroup detected suspicious activity in the Tijuana accounts, reported it to regulators and closed the accounts, Citigroup spokesman Paulo Carrenosays.

Criminal Empires

On June 15, the Mexican Finance Ministry announced it would set limits for banks on cash deposits in dollars.

Mexico’s drug cartels have become multinational criminal enterprises.

Some of the gangs have delved into other illegal activities such as gunrunning, kidnapping and smuggling people across the border, as well as into seemingly legitimate areas such as trucking, travel services and air cargo transport, according to the Justice Department’s National Drug Intelligence Center.

These criminal empires have no choice but to use the global banking system to finance their businesses, Mexican Senator Felipe Gonzalez says.

“With so much cash, the only way to move this money is through the banks,” says Gonzalez, who represents a central Mexican state and chairs the senate public safety committee.

Gonzalez, a member of Calderon’s National Action Party, carries a .38 revolver for personal protection.

“I know this won’t stop the narcos when they come through that door with machine guns,” he says, pointing to the entrance to his office. “But at least I’ll take one with me.”

Subprime Losses

No bank has been more closely connected with Mexican money laundering than Wachovia. Founded in 1879, Wachovia became the largest bank by assets in the southeastern U.S. by 1900. After the Great Depression, some people in North Carolina called the bank “Walk-Over-Ya” because it had foreclosed on farms in the region.

By 2008, Wachovia was the sixth-largest U.S. lender, and it faced $26 billion in losses from subprime mortgage loans. That cost Wachovia Chief Executive Officer Kennedy Thompson his job in June 2008.

Six months later, San Francisco-based Wells Fargo, which dates from 1852, bought Wachovia for $12.7 billion, creating the largest network of bank branches in the U.S. Thompson, who now works for private-equity firm Aquiline Capital Partners LLC in New York, declined to comment.

As Wachovia’s balance sheet was bleeding, its legal woes were mounting. In the three years leading up to Wachovia’s agreement with the Justice Department, grand juries served the bank with 6,700 subpoenas requesting information.

Not Quick Enough

The bank didn’t react quickly enough to the prosecutors’ requests and failed to hire enough investigators, the U.S. Treasury Department said in March. After a 22-month investigation, the Justice Department on March 12 charged Wachovia with violating the Bank Secrecy Act by failing to run an effective anti-money-laundering program.

Five days later, Wells Fargo promised in a Miami federal courtroom to revamp its detection systems. Wachovia’s new owner paid $160 million in fines and penalties, less than 2 percent of its $12.3 billion profit in 2009.

If Wells Fargo keeps its pledge, the U.S. government will, according to the agreement, drop all charges against the bank in March 2011.

Wells Fargo regrets that some of Wachovia’s former anti- money-laundering efforts fell short, spokeswoman Mary Eshet says. Wells Fargo has invested $42 million in the past three years to improve its anti-money-laundering program and has been working with regulators, she says.

‘Significantly Upgraded’

“We have substantially increased the caliber and number of staff in our international investigations group, and we also significantly upgraded the monitoring software,” Eshet says. The agreement bars the bank from contesting or contradicting the facts in its admission.

The bank declined to answer specific questions, including how much it made by handling $378.4 billion — including $4 billion of cash-from Mexican exchange companies.

The 1970 Bank Secrecy Act requires banks to report all cash transactions above $10,000 to regulators and to tell the government about other suspected money-laundering activity. Big banks employ hundreds of investigators and spend millions of dollars on software programs to scour accounts.

No big U.S. bank — Wells Fargo included — has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

‘No Capacity to Regulate’

Large banks are protected from indictments by a variant of the too-big-to-fail theory.

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line, until they’re caught.”

Wachovia’s run-in with federal prosecutors hasn’t troubled investors. Wells Fargo’s stock traded at $30.86 on March 24, up 1 percent in the week after the March 17 agreement was announced.

Moving money is central to the drug trade — from the cash that people tape to their bodies as they cross the U.S.-Mexican border to the $100,000 wire transfers they send from Mexican exchange houses to big U.S. banks.

‘Doesn’t Stop Anyone’

In Tijuana, 15 miles south of San Diego, Gustavo Rojas has lived for a quarter of a century in a shack in the shadow of the 10-foot-high (3-meter-high) steel border fence that separates the U.S. and Mexico there. He points to holes burrowed under the barrier.

“They go across with drugs and come back with cash,” Rojas, 75, says. “This fence doesn’t stop anyone.”

Drug money moves back and forth across the border in an endless cycle. In the U.S., couriers take the cash from drug sales to Mexico — as much as $29 billion a year, according to U.S. Immigration and Customs Enforcement. That would be about 319 tons of $100 bills.

They hide it in cars and trucks to smuggle into Mexico. There, cartels pay people to deposit some of the cash into Mexican banks and branches of international banks. The narcos launder much of what’s left through money changers.

The Money Changers

Anyone who has been to Mexico is familiar with these street-corner money changers; Mexican regulators say there are at least 3,000 of them from Tijuana to Cancun, usually displaying large signs advertising the day’s dollar-peso exchange rate.

Mexican banks are regulated by the National Banking and Securities Commission, which has an anti-money-laundering unit; the money changers are policed by Mexico’s Tax Service Administration, which has no such unit.

By law, the money changers have to demand identification from anyone exchanging more than $500. They also have to report transactions higher than $5,000 to regulators.

The cartels get around these requirements by employing legions of individuals — including relatives, maids and gardeners — to convert small amounts of dollars into pesos or to make deposits in local banks. After that, cartels wire the money to a multinational bank.

The Smurfs

The people making the small money exchanges are known as Smurfs, after the cartoon characters.

“They can use an army of people like Smurfs and go through $1 million before lunchtime,” says Jerry Robinette, who oversees U.S. Immigration and Customs Enforcement operations along the border in east Texas.

The U.S. Treasury has been warning banks about big Mexican- currency-exchange firms laundering drug money since 1996. By 2004, many U.S. banks had closed their accounts with these companies, which are known as casas de cambio.

Wachovia ignored warnings by regulators and police, according to the deferred-prosecution agreement.

“As early as 2004, Wachovia understood the risk,” the bank admitted in court. “Despite these warnings, Wachovia remained in the business.”

One customer that Wachovia took on in 2004 was Casa de Cambio Puebla SA, a Puebla, Mexico-based currency-exchange company. Pedro Alatorre, who ran a Puebla branch in Mexico City, had created front companies for cartels, according to a pending Mexican criminal case against him.

Federal Indictment

A federal grand jury in Miami indicted Puebla, Alatorre and three other executives in February 2008 for drug trafficking and money laundering. In May 2008, the Justice Department sought extradition of the suspects, saying they used shell firms to launder $720 million through U.S. banks.

Alatorre has been in a Mexican jail for 2 1/2 years. He denies any wrongdoing, his lawyer Mauricio Moreno says. Alatorre has made no court-filed responses in the U.S.

During the period in which Wachovia admitted to moving money out of Mexico for Puebla, couriers carrying clear plastic bags stuffed with cash went to the branch Alatorre ran at the Mexico City airport, according to surveillance reports by Mexican police.

Alatorre opened accounts at HSBC on behalf of front companies, Mexican investigators found.

Puebla executives used the stolen identities of 74 people to launder money through Wachovia accounts, Mexican prosecutors say in court-filed reports.

‘Never Reported’

“Wachovia handled all the transfers, and they never reported any as suspicious,” says Jose Luis Marmolejo, a former head of the Mexican attorney general’s financial crimes unit who is now in private practice.

In November 2005 and January 2006, Wachovia transferred a total of $300,000 from Puebla to a Bank of America account in Oklahoma City, according to information in the Alatorre cases in the U.S. and Mexico.

Drug smugglers used the funds to buy the DC-9 through Oklahoma City aircraft broker U.S. Aircraft Titles Inc., according to financial records cited in the Mexican criminal case. U.S. Aircraft Titles President Sue White declined to comment.

On April 5, 2006, a pilot flew the plane from St. Petersburg, Florida, to Caracas to pick up the cocaine, according to the DEA. Five days later, troops seized the plane in Ciudad del Carmen and burned the drugs at a nearby army base.

‘Wachovia Knew’

“I am sure Wachovia knew what was going on,” says Marmolejo, who oversaw the criminal investigation into Wachovia’s customers. “It went on too long and they made too much money not to have known.”

At Wachovia’s anti-money-laundering unit in London, Woods and his colleague Jim DeFazio, in Charlotte, say they suspected that drug dealers were using the bank to move funds.

Woods, a former Scotland Yard investigator, spotted illegible signatures and other suspicious markings on traveler’s checks from Mexican exchange companies, he said in a September 2008 letter to the U.K. Financial Services Authority. He sent copies of the letter to the DEA and Treasury Department in the U.S.

Woods, 45, says his bosses instructed him to keep quiet and tried to have him fired, according to his letter to the FSA. In one meeting, a bank official insisted Woods shouldn’t have filed suspicious activity reports to the government, as both U.S. and U.K. laws require.

‘I Was Shocked’

“I was shocked by the content and outcome of the meeting and genuinely traumatized,” Woods wrote.

In the U.S., DeFazio, who had been a Federal Bureau of Investigation agent for 21 years, says he told bank executives in 2005 that the DEA was probing the transfers through Wachovia to buy the planes.

Bank executives spurned recommendations to close suspicious accounts, DeFazio, 63, says.

“I think they looked at the money and said, ‘The hell with it. We’re going to bring it in, and look at all the money we’ll make,’” DeFazio says.

DeFazio retired in 2008.

“I didn’t want anything from them,” he says. “I just wanted to get out.”

Woods, who resigned from Wachovia in May 2009, now advises banks on how to combat money laundering. He declined to discuss details of Wachovia’s actions.

U.S. Comptroller of the Currency John Dugan told Woods in a March 19 letter his efforts had helped the U.S. build its case against Wachovia.

‘Great Courage’

“You demonstrated great courage and integrity by speaking up when you saw problems,” Dugan wrote.

It was the Puebla investigation that led U.S. authorities to the broader probe of Wachovia. On May 16, 2007, DEA agents conducted a raid of Wachovia’s international banking offices in Miami. They had a court order to seize Puebla’s accounts.

U.S. prosecutors and investigators then scrutinized the bank’s dealings with Mexican-currency-exchange firms. That led to the March deferred-prosecution agreement.

With Puebla’s Wachovia accounts seized, Alatorre and his partners shifted their laundering scheme to HSBC, according to financial documents cited in the Mexican criminal case against Alatorre.

In the three weeks after the DEA raided Wachovia, two of Alatorre’s front companies, Grupo ETPB SA and Grupo Rahero SC, made 12 cash deposits totaling $1 million at an HSBC Mexican branch, Mexican investigators found.

Another Drug Plane

The funds financed a Beechcraft King Air 200 plane that police seized on Dec. 29, 2007, in Cuernavaca, 50 miles south of Mexico City, according to information in the case against Alatorre.

For years, federal authorities watched as the wife and daughter of Oscar Oropeza, a drug smuggler working for the Matamoros-based Gulf Cartel, deposited stacks of cash at a Bank of America branch on Boca Chica Boulevard in Brownsville, Texas, less than 3 miles from the border.

Investigator Robinette sits in his pickup truck across the street from that branch. It’s a one-story, tan stucco building next to a Kentucky Fried Chicken outlet. Robinette discusses the Oropeza case with Tom Salazar, an agent who investigated the family.

“Everybody in there knew who they were — the tellers, everyone,” Salazar says. “The bank never came to us, though.”

New Meaning

The Oropeza case gives a new, literal meaning to the term money laundering. Oropeza’s wife, Tina Marie, and daughter Paulina Marie deposited stashes of $20 bills several times a day into Bank of America accounts, Salazar says. Bank employees got to know the Oropezas by the smell of their money.

“I asked the tellers what they were talking about, and they said the money had this sweet smell like Bounce, those sheets you throw into the dryer,” Salazar says. “They told me that when they opened the vault, the smell of Bounce just poured out.”

Oropeza, 48, was arrested 820 miles from Brownsville. On May 31, 2007, police in Saraland, Alabama, stopped him on a traffic violation. Checking his record, they learned of the investigation in Texas.

They searched the van and discovered 84 kilograms (185 pounds) of cocaine hidden under a false floor. That allowed federal agents to freeze Oropeza’s bank accounts and search his marble-floored home in Brownsville, Robinette says. Inside, investigators found a supply of Bounce alongside the clothes dryer.

Guilty Pleas

All three Oropezas pleaded guilty in U.S. District Court in Brownsville to drug and money-laundering charges in March and April 2008. Oscar Oropeza was sentenced to 15 years in prison; his wife was ordered to serve 10 months and his daughter got 6 months.

Bank of America’s Norton says, “We not only fulfilled our regulatory obligation, but we proactively worked with law enforcement on these matters.”

Prosecutors have tried to halt money laundering at American Express Bank International twice. In 1994, the bank, then a subsidiary of New York-based American Express Co., pledged not to allow money laundering again after two employees were convicted in a criminal case involving drug trafficker Juan Garcia Abrego.

In 1994, the bank paid $14 million to settle. Five years later, drug money again flowed through American Express Bank. Between 1999 and 2004, the bank failed to stop clients from laundering $55 million of narcotics funds, the bank admitted in a deferred-prosecution agreement in August 2007.

Western Union

It paid $65 million to the U.S. and promised not to break the law again. The government dismissed the criminal charge a year later. American Express sold the bank to London-basedStandard Chartered PLC in February 2008 for $823 million.

Banks aren’t the only financial institutions that have turned a blind eye to drug cartels in moving illicit funds. Western Union Co., the world’s largest money transfer firm, agreed to pay$94 million in February 2010 to settle civil and criminal investigations by the Arizona attorney general’s office.

Undercover state police posing as drug dealers bribed Western Union employees to illegally transfer money, says Cameron Holmes, an assistant attorney general.

“Their allegiance was to the smugglers,” Holmes says. “What they thought about during work was ‘How may I please my highest-spending customers the most?’”

Smudged Fingerprints

Workers in more than 20 Western Union offices allowed the customers to use multiple names, pass fictitious identifications and smudge their fingerprints on documents, investigators say in court records.

“In all the time we did undercover operations, we never once had a bribe turned down,” says Holmes, citing court affidavits.

Western Union has made significant improvements, it complies with anti-money-laundering laws and works closely with regulators and police, spokesman Tom Fitzgerald says.

For four years, Mexican authorities have been fighting a losing battle against the cartels. The police are often two steps behind the criminals. Near the southeastern corner of Texas, in Matamoros, more than 50 combat troops surround a police station.

Officers take two suspected drug traffickers inside for questioning. Nearby, two young men wearing white T-shirts and baggy pants watch and whisper into radios. These are los halcones (the falcons), whose job is to let the cartel bosses know what the police are doing.

‘Only Way’

While the police are outmaneuvered and outgunned, ordinary Mexicans live in fear. Rojas, the man who lives in the Tijuana slum near the border fence, recalls cowering in his home as smugglers shot it out with the police.

“The only way to survive is to stay out of the way and hope the violence, the bullets, don’t come for you,” Rojas says.

To make their criminal enterprises work, the drug cartels of Mexico need to move billions of dollars across borders. That’s how they finance the purchase of drugs, planes, weapons and safe houses, Senator Gonzalez says.

“They are multinational businesses, after all,” says Gonzalez, as he slowly loads his revolver at his desk in his Mexico City office. “And they cannot work without a bank.”

The New Financial Regulation Bill: A Mountain of Legislative Paper, a Molehill of Reform

In Uncategorized on July 16, 2010 at 12:51 pm

Oldspeak:”It’ basically business as usual for the Banksters. What a fucking joke. The American people will continue to have to foot the bill for the mistakes of Wall Street’s biggest banks because the legislation does nothing to diminish the economic and political power of these giants. It does not cap their size. It does not resurrect the Glass-Steagall Act that once separated commercial (normal) banking from investment (casino) banking. It does not even link the pay of their traders and top executives to long-term performance. In other words, it does nothing to change their basic structure. And for this reason, it gives them an implicit federal insurance policy against failure unavailable to smaller banks — thereby adding to their economic and political power in the future.”

From Robert Reich @ RobertReich.org:

Thursday the President pronounced that “because of this [financial reform] bill the American people will never again be asked to foot the bill for Wall Street’s mistakes.”

As if to prove him wrong, Goldman Sachs simultaneously announced it had struck a deal with federal prosecutors to pay $550 million to settle federal claims it misled investor — a sum representing a mere 15 days profit for the firm based on its 2009 earnings. Goldman’s share price immediately jumped 4.3 percent, and the Street proclaimed its chair and CEO, Lloyd (“Goldman is doing God’s work”) Blankfein, a winner. Financial analysts rushed to affirm a glowing outlook for Goldman stock.

Blankfein, you may recall, was at the meeting in late 2008 when Tim Geithner and Hank Paulson decided to bail out AIG, and thereby deliver through AIG a $13 billion no-strings-attached taxpayer windfall to Goldman. In a world where money is the measure of everything, Blankfein’s power and influence have grown. Presumably, Goldman can expect more windfalls in future years.

Although the financial reform bill may have clipped some of Goldman’s wings — its lucrative derivative business may require Goldman to jettison its status as a bank holding company, and the access to the Fed discount window that comes with it — the main point is that the Goldman settlement reveals everything that’s weakest about the financial reform bill.

The bill contains hortatory language but is precariously weak in the details. The so-called Volcker Rule has been watered down and delayed. Blanche Lincoln’s important proposal that derivatives be traded in separate entities which aren’t subsidized by commercial deposits has been shrunk and compromised. Customized derivates can remain underground. The consumer protection agency has been lodged in the Fed, whose own consumer division failed miserably to protect consumers last time around.

On every important issue the legislation merely passes on to regulators decisions about how to oversee the big banks and treat them if they’re behaving badly. But if history proves one lesson it’s that regulators won’t and can’t. They don’t have the resources. They don’t have the knowledge. They are staffed by people in their 30s and 40s who are paid a small fraction of what the lawyers working for the banks are paid. Many want and expect better-paying jobs on Wall Street after they leave government, and so are shrink-wrapped in a basic conflict of interest. And the big banks’ lawyers and accountants can run circles around them by threatening protracted litigation.

Why do you think Goldman got off so easily from such serious charges of fraud?

Reliance on the discretion of regulators rather than structural changes in the banking system plays directly into the hands of the big banks and their executives and traders who contribute mightily to Democratic and Republican campaigns. The flow of money virtually guarantees that regulatory agencies won’t be adequately staffed to enforce the law, that penalties for violations won’t be overly onerous, and that all loopholes (what’s a “derivative”? what has to be listed on exchanges? exactly how much capital must be on hand for which transactions? How are the various forms of predatory lending to be defined?) will be easily stretched in future years. Wall Street lawyers will have a field day. The profit-for-nothing sector of the economy (law, accounting, finance) will continue to grow buoyantly.

Make no mistake: As long as there’s no fundamental change in the structure of Wall Street — as long as the big banks stay as big and are allowed to grow bigger, and have every incentive to invent new financial gimmicks with which to bet other peoples’ money — they will remain too big to fail, and too politically powerful to control.

Goldman’s share price, as well as those of JP Morgan Chase, Citicorps, Morgan Stanley, and Bank of America, will no doubt soar the basis of the final bill because their future profits are almost guaranteed. The pay of their executives and traders, and of the managers of hedge funds and private-equity funds they deal with, will likewise accelerate. In the short term the economy will benefit, at least to the extent financial entrepreneurship is now the apex of American wealth and innovation. But over the longer term we will be much weaker for it.

Congress has labored mightily to produce a mountain of legislation that can be called financial reform, but it has produced a molehill relative to the wreckage Wall Street wreaked upon the nation.

More Champagne Wishes And Caviar Dreams For Goldman Sachs As Their $550 Million Dollar Settlement w/ S.E.C. Nets $3 Billion In Profit

In Uncategorized on July 16, 2010 at 11:22 am

Oldspeak:“You know you have it made when a $550 million settlement with the SEC boosts your stock by $3 billion. Goldman Sachs’ penalty for selling a fancy investment it secretly bet against was about half what was expected, amounting to just 14 days of earnings. You might say they got away with it.”

From Bloomberg Business Week:

Goldman Sachs Group Inc.’s $550 million settlement with U.S. regulators yesterday will benefit the firm by ending three months of uncertainty at an affordable price. Now the rest of Wall Street begins calculating the cost.

Investors welcomed the deal with the Securities and Exchange Commission, saying the company won key points: The cost was below some analysts’ estimates of at least $1 billion; no management changes were required; and Goldman Sachs said the SEC indicated it doesn’t plan claims related to other mortgage- linked securities it examined. The stock’s late surge on anticipation of a settlement yesterday added more than $3 billion to the company’s market value, and it climbed further after New York trading closed.

“You’d have to look at it as a victory for Goldman,” said Peter Sorrentino, senior portfolio manager at Huntington Asset Advisors in Cincinnati, which manages $13.3 billion including Goldman Sachs shares. “This takes a cloud off the stock.”

In the settlement, unveiled less than two hours after the Senate passed legislation to reform the financial system and avert future crises, Goldman Sachs acknowledged that marketing materials for the 2007 deal at the center of the case contained “incomplete information.” In its April 16 suit, the SEC accused the firm of defrauding investors in a mortgage-backed collateralized debt obligation by failing to tell them that hedge fund Paulson & Co., which was planning to bet against the deal, had helped to design it.

‘One of the Worst Days’

In its original public response, Goldman Sachs had called the SEC’s case “unfounded in law and fact” and maintained that it made all disclosures about the CDOs that should be material to the “sophisticated” investors who lost money on the deal. Chairman and Chief Executive Officer Lloyd Blankfein, who said the day the suit was filed was “one of the worst days in my professional life,” said in May that the bank established a committee to review the firm’s business standards.

The settlement requires the New York-based company to increase training for employees who structure or market mortgage securities, and to bolster the vetting and approval process. Those changes will probably lead to a new industry standard for disclosures in private sales of securities, even to the most sophisticated investors, analysts said.

“All of the firms are going to adjust their internal standards for this,” Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, said in an interview. The agreement means “a private placement doesn’t absolve you from the accuracy of the disclosure and you’d better have very, very good compliance watching what your sales people are saying.”

‘Best Practices’

Robert Khuzami, the SEC’s director of enforcement, said at a news conference yesterday that his agency means to send a signal to the entire industry.

“We would strongly encourage other institutions to adopt any kinds of best practices that they see across the street in order to prevent this kind of wrongdoing,” said Khuzami, 53. “The deterrence, and preventing a fraud before it occurs, is a much better outcome than picking up the pieces afterwards.”

The SEC is still investigating other companies and a range of products that fueled losses during the financial crisis, Khuzami said. Last month, the agency sued New York-based ICP Asset Management LLC on claims that it improperly traded assets in CDOs it managed. ICP has denied wrongdoing.

Goldman Sachs said in a statement that the SEC doesn’t plan to target the firm over any other products that the agency has reviewed.

Case Against Tourre

“We understand that the SEC staff also has completed a review of a number of other Goldman Sachs mortgage-related CDO transactions and does not anticipate recommending any claims against Goldman Sachs or any of its employees,” the firm said.

The SEC’s case continues against Fabrice Tourre, the only Goldman Sachs employee the agency sued over the CDO. Tourre, 31, is due to respond to the complaint by July 19. He told a Senate subcommittee in April that he “categorically” denies the SEC’s allegations and will fight them in court.

The SEC’s deputy enforcement director, Lorin Reisner, said Goldman Sachs agreed to cooperate in the case against Tourre, who is on leave and whose legal expenses are being paid by the company. Tourre’s attorney, Pamela Chepiga at Allen & Overy LLP, didn’t reply to an e-mail and phone message.

Blankfein, 55, and the firm’s other senior managers may not emerge from the SEC case unscathed, even if they weren’t forced to resign.

‘Repair Their Reputation’

“Within a decent interval, you’re probably going to see a new CEO,” said Christopher Whalen, a New York Federal Reserve official in the 1980s and co-founder of Institutional Risk Analytics, in an interview on Bloomberg Television. “They still have a lot of work to do with clients and may face claims and litigation going forward, and they have to repair their reputation.”

William Cohan, an author and former investment banker who is writing a book about Goldman Sachs, said that Blankfein’s position is secure for the “foreseeable future.” Cohan expects the next CEO will come from an investment banking background rather than trading, the business drawing regulators’ scrutiny.

“I will predict that this is the last trading-oriented CEO of Goldman Sachs for a while,” Cohan said in an interview with Bloomberg Television.

SEC Chairman Mary Schapiro, 55, has previously denied speculation that the lawsuit was filed to support financial- reform legislation backed by President Barack Obama by casting Goldman Sachs, the most profitable securities firm in Wall Street history, as a villain. There was “absolutely no consideration” to the bill, Khuzami told reporters, hours after the bill cleared the Senate. Still, the timing raised some eyebrows.

‘Highly Suspicious’

“It is highly suspicious, and it makes the SEC now look like it is totally politicized,” said Paul Atkins, a former Republican SEC commissioner who is now a financial services consultant.

While the SEC touted the $550 million settlement as the largest it ever levied against a Wall Street firm, it fell short of some analysts’ estimates for a $1 billion fine. Hintz, who estimated the agreement will shave 93 cents from the firm’s earnings, said he had predicted it would cost $1.05 per share.

For Goldman Sachs, the cost represents approximately 14 days’ worth of earnings, based on first-quarter profit. Blankfein, who was awarded a record-setting $67.9 million bonus for 2007, has stock in the firm that’s worth almost $490 million, based on the firm’s last proxy statement.

The SEC’s disclosure yesterday that it planned a “significant announcement” fueled speculation that a deal was imminent, sending the firm’s shares up 4.4 percent to $145.22 at the end of New York Stock Exchange composite trading. The stock, which had lost more than 20 percent since the suit was filed, is likely to rise further, said Hintz.

“I’m jumping up and down and telling my dad to buy it,” Hintz said of Goldman Sachs’s stock.

It’s A Big Deal! Behold! The Bank Of Wal-Mart.

In Uncategorized on July 6, 2010 at 12:15 pm

Sam's Club, a division of Wal-Mart, will work with a finance company to offer loans of up to $25,000 to small businesses, the company said today. It's the latest in the company's move into the world of finance.

Oldspeak: “The biggest corporation on the planet is finding new and inventive ways of depriving you of your money, enticing you to buy shit you don’t need, and cheerfully plunging you deeper into debt. And other corporations are hot on their heels. Profit is Paramount.”

From Stephanie Clifford @ The New York Times:

Tired of waiting for spending to rebound on its own, retailers are taking matters into their own hands. Stores like Sam’s Club, Target, Toys “R” Us, Staples and Office Depot are offering unconventional promotions meant not only to attract visitors to stores, but also to get them feeling profligate.

Sam’s Club is introducing a program in which it facilitates loans for shoppers of up to $25,000, backed by the Small Business Administration. Target will give its credit card holders 5 percent discounts. Toys “R” Us is instituting a holiday fund program where it adds to shoppers’ savings, and Staples and Office Depot are giving away office products for a penny or at no cost.

“A lot of the government programs have come to an end,” said David Bassuk, a managing director in the global retail practice at AlixPartners, a financial consultancy. “So retailers are taking it upon themselves to do everything they can to get the consumer to spend, even opening up their own wallets to give money back to the consumer.”

Persistent unemployment nationwide is threatening to inhibit consumer spending. The latest figures from the government on Friday underscored the depth of the problem, with the economy adding only 83,000 private sector jobs.

There was no relief in sight from Washington, either. Congress left on recess Friday having failed to pass legislation that would have extended unemployment benefits for hundreds of thousands of Americans.

On the small-business side, credit concerns are keeping some companies from spending. And on the consumer side, while spending and confidence numbers continue to be weak, personal income has risen for three months straight and savings rates are relatively high. That suggests people now have cash but are just sitting on it.

Against this backdrop of uncertainty, retailers are taking bold steps. Of the over-the-counter stimulus plans, the one at Sam’s Club is the most unusual.

Sam’s began testing the program in May and will soon start marketing S.B.A. loans of $5,000 to $25,000 for its members nationwide. Superior Financial Group, which is managing the loans, gives Sam’s members a $100 discount on the application fee, and lower interest rates, because of how much business it expects through the arrangement.

The company says it does not expect the program to be a big moneymaker, though it earns $50 for each financed loan. The point is to get customers spending more freely — and, it hopes, spending at Sam’s Club.

Michael Golata had been watching his spending carefully. As a contractor in Louisville, Ky., for United Parcel Service, he drives emergency medical equipment to hospitals when M.R.I. or CT scan machines break down.

When he asked U.P.S. if more routes were available, the company told him there was so much work that he should bring on as many drivers as he could afford. There was just one problem: Mr. Golata owned one truck, and he was driving it all the time. Online, he had found a used white Dodge Sprinter for $12,500.

With just a few thousand dollars in cash, he tried to get a bank loan but was denied by two local banks because the truck was too old and had too much mileage. He decided an S.B.A. loan would be too much trouble, and he rejected as absurd a loan from a commercial finance company with a 21 percent interest rate and payments of $450 a month.

About a month ago, Mr. Golata, a Sam’s Club member, clicked through the retailer’s Web site and found a page describing S.B.A. loans offered by the retailer. He filled out an online application, and, by the next day, got a phone call from Superior Financial telling him he was approved for a $10,000 loan, with an interest rate of 7.25 percent over 10 years.

“It made the payment, like, $118 a month. I thought I was dreaming,” Mr. Golata said. Mr. Golata immediately bought the Dodge, and hired three drivers. He went from billing U.P.S. $3,000 a week to $8,000, he said.

A little under half of Sam’s members are small-business customers, and they account for a little more than half of the revenue at the retailer. As its net sales began to slip last fall, Sam’s surveyed small-business customers and found that tight credit was partly to blame.

In the survey, said Catherine Corley, vice president for member services at Sam’s, a division of Wal-Mart, “fully one-third said ‘I didn’t buy what I needed to buy at Sam’s Club because I didn’t have the money.’ It really motivated us to say, ‘We’ve got to find some solutions.’ ”

Sam’s has done only a small test of the S.B.A. loans, and so far about 200 people have applied, with about 45 percent being approved, said Tim Jochner, chief executive and founder of Superior Financial. Sam’s is considering offering other financial products through third parties to help ease customers’ finances, like working-capital loans or peer-to-peer loans, said Hiren Patel, director for financial services at Sam’s.

“We’re not necessarily trying to be a bank, we’re just trying to bring to them, much as we do with products, the things they need,” Ms. Corley said.

Other retailers are taking slightly different routes to economic recovery. Beginning in the fall, Target will offer its holders of its Target-branded credit and debit cards 5 percent off every purchase. Target expects that it will add a percentage point to comparable-store sales in the fourth quarter.

Toys “R” Us is asking consumers to create a sort of grown-up piggy bank, and put money into a holiday fund that can be spent only at the toy store. Toys “R” Us will add 3 percent to the account’s balance in mid-October.

And Office Depot is giving away products. Trying to lure back-to-school shoppers, it will soon sell some supplies, like glue sticks and scissors, for less than $1. It also will give away other items, like markers, free, even without a purchase.

Staples, meanwhile, is offering several products for a nickel or a penny, and when shoppers buy a backpack during the back-to-school period, Staples will give them a gift card equal to the cost of the backpack.

“On that particular one we probably don’t make money, but in general what we’re hoping to do is get customers into our stores,” said Demos Parneros, president of United States stores for Staples, “and then buy everything else that they need.”

Of course, smart shoppers can take advantage of these programs without necessarily improving the stores’ revenues.

Mr. Golata, the truck driver, said he was delighted with the loan program. But if the point of it was to free up his cash at Sam’s, it didn’t quite work.

He is saving again — so he can get another Sam’s Club loan in six months and buy another delivery vehicle.

“It’s not like it made me spend more than I normally would,” he said.

Just Give Money To The Poor. A Surprisingly Effective Solution To Poverty.

In Uncategorized on July 6, 2010 at 10:19 am

Oldspeak:“Not sure what’s so surprising about it. We just give money to the rich,(bailouts, derivatives trading, corporate welfare, tax breaks, loopholes,) and they make out pretty good. Half the world’s population lives below the poverty line, despite extreme free-trade policies that were supposed to “lift all boats.” It’s time to try something new.”

From Melinda Burns @ Miller-McCune:

Who’s responsible for the poor?

Back in the reign of the first Queen Elizabeth, English lawmakers said it was the government and taxpayers. They introduced the compulsory “poor tax” of 1572 to provide peasants with cash and a “parish loaf.” The world’s first-ever public relief system did more than feed the poor: It helped fuel economic growth because peasants could risk leaving the land to look for work in town.

By the early 19th century, though, a backlash had set in. English spending on the poor was slashed from 2 percent to 1 percent of national income, and indigent families were locked up in parish workhouses. In 1839, the fictional hero of Oliver Twist, a child laborer who became a symbol of the neglect and exploitation of the times, famously raised his bowl of gruel and said, “Please, sir, I want some more.”

Today, child benefits, winter fuel payments, housing support and guaranteed minimum pensions for the elderly are common practice in Britain and other industrialized countries. But it’s only recently that the right to an “adequate” standard of living has begun to be extended to the poor of the developing world.

In an urgent new book, Just Give Money to the Poor: The Development Revolution from the Global South, three British scholars show how the developing countries are reducing poverty by making cash payments to the poor from their national budgets. At least 45 developing nations now provide social pensions or grants to 110 million impoverished families — not in the form of charitable donations or emergency handouts or temporary safety nets but as a kind of social security. Often, there are no strings attached.

It’s a direct challenge to a foreign aid industry that, in the view of the authors, “thrives on complexity and mystification, with highly paid consultants designing ever more complicated projects for ‘the poor’” even as it imposes free-market policies that marginalize the poor.

“A quiet revolution is taking place based on the realization that you cannot pull yourself up by your bootstraps if you have no boots,” the book says. “And giving ‘boots’ to people with little money does not make them lazy or reluctant to work; rather, just the opposite happens. A small guaranteed income provides a foundation that enables people to transform their own lives.”

There are plenty of skeptics of the cash transfer approach. For more than half a century, the foreign aid industry has been built on the belief that international agencies, and not the citizens of poor countries or the poor among them, are best equipped to eradicate poverty. Critics concede that foreign aid may have failed, but they say it’s because poor countries are misusing the money. In their view, the best prescription for the developing world is a dose of discipline in the form of strict “good governance” conditions on aid.

Joseph Hanlon, a senior lecturer in development at the Open University in Milton Keynes, and Armando Barrientos and David Hulme, professors of poverty and development studies, respectively, at the University of Manchester, England, and directors of theBrooks World Poverty Institute there, back up their conclusions in Just Give Money with a wealth of studies on cash transfer programs, many of them conducted by the skeptical foreign aid community, including such global micromanagers as The World Bank andInternational Monetary Fund.

According to The World Bank, nearly half the world’s population lives below the international poverty line of $2 per day. As the authors of Just Give Money point out, that’s despite decades of top-down, neo-liberal, extreme free-trade policies that were supposed to “lift all boats.” In Africa, South Asia and other regions of the developing “South,” the situation remains dire. Every year, according to the United Nations, more than 9 million children die before they reach the age of 5, and malnutrition is the cause of a third of these early deaths.

Just Give Money argues that cash transfers can solve three problems because they enable families to eat better, send their children to school and put a little money into their farms and small businesses. The programs work best, the authors say, if they are offered broadly to the poor and not exclusively to the most destitute.

“The key is to trust poor people and directly give them cash — not vouchers or projects or temporary welfare, but money they can invest and use and be sure of,” the authors say. “Cash transfers are a key part of the ladder that equips people to climb out of the poverty trap.”

Brazil, a leader of this growing movement, provides pensions and grants to 74 million poor people, or 39 percent of its population. The cost is $31 billion, or about 1.5 percent of Brazil’s gross domestic product. Eligibility for the family grant is linked to the minimum wage, and the poorest receive $31 monthly. As a result, Brazil has seen its poverty rate drop from 28 percent in 2000 to 17 percent in 2008. In northeastern Brazil, the poorest region of the country, child malnutrition was reduced by nearly half, and school registration increased.

South Africa, one of the world’s biggest spenders on the poor, allocates $9 billion, or 3.5 percent of its GDP, to provide a pension to 85 percent of its older people, plus a $27 monthly cash benefit to 55 percent of its children. Studies show that South African children born after the benefits became available are significantly taller, on average, than children who were born before.

“None of this is because an NGO worker came to the village and told people how to eat better or that they should go to a clinic when they were ill,” the book says. “People in the community already knew that, but they never had enough money to buy adequate food or pay the clinic fee.”

In Mexico, an average grant of $38 monthly goes to 22 percent of the population. The cost is $4 billion, or 0.3 percent of Mexico’s GDP. Part of the money is for children who stay in school: The longer they stay, the larger the grant. Studies show that the families receiving these benefits eat more fruit, vegetables and meat, and get sick less often. In rural Mexico, high school enrollment has doubled, and more girls are attending.

India guarantees 100 days of wages to rural households for unskilled labor, paying at least $1.25 per day. If no work is available, applicants are still guaranteed the minimum. This modified “workfare” program helps small farmers survive during the slack season.

Far from being unproductive, the book says, money spent on the poor stimulates the economy “because local people sell more, earn more and buy more from their neighbors, creating the rising spiral.”

Pensioner households in South Africa, many of them covering three generations, have more working people than households without a pension. A grandmother with a pension can take care of a grandchild while the mother looks for work.

Ethiopia pays $1 per day for five days of work on public works projects per month to people in poor districts between January and June, when farm jobs are scarcer. By 2008, the program was reaching more than 7 million people per year, making it the second largest in sub-Saharan Africa, after South Africa. Ethiopian recipients of cash transfers buy more fertilizer and use higher-yielding seeds.

“In other words,” the book says, “without any advice from aid agencies, government, or nongovernmental organizations, poor people already knew how to make profitable investments. They simply did not have the cash and could not borrow the small amounts of money they needed.”

Just Give Money is lucidly written, but it bogs down when it explores the complex ins and outs of designing cash-transfer programs. In effect, the authors are combining a book for general readers with a book for policymakers. But there are helpful summaries for the layman at the end of every chapter, and some of the debates are fascinating.

For example, there’s the question of whether mothers who receive grants should be required to attend health talks and perform community work, as they are in Mexico and Brazil. On one hand, these rules could be viewed as reinforcing the view that mothers must sacrifice themselves for their children. On the other, studies show that many of the women had been confined at home by their husbands and welcomed the chance to get out.

Just Give Money does not put much stock in micro-credit programs that loan money to the poor in developing countries. Many people are too poor to take on the risk of paying back a loan, the authors say. They find fault with the U.N.’s Millennium Development Goals, too, saying these have “kept governments at arm’s length from the economy.”

A better way for donor countries to help, the authors suggest, is to give aid as “general budget support,” funneling cash for the poor directly into government coffers.

Cash transfers are not a magic bullet. Just Give Money notes that 70 percent of the 12 million South Africans who receive social grants are still living below the poverty line. In Brazil, the grants do not increase vaccinations or prenatal care because the poor don’t have access to health care. A scarcity of jobs in Mexico has forced millions of people to emigrate to the U.S. to find work. Just Give Money emphasizes that to truly lift the poor out of poverty, governments also must tackle discrimination and invest in health, education and infrastructure.

The notion that the poor are to blame for their poverty persists in affluent nations today and has been especially strong in the United States. Studies by the World Values Surveybetween 1995 and 2000 showed that 61 percent of Americans believed the poor were lazy and lacked willpower. Only 13 percent said an unfair society was to blame.

But what would Americans say now, in the wake of the housing market collapse and the bailout of the banks? The jobs-creating stimulus bill, the expansion of food stamp programs and unemployment benefits — these are all forms of cash transfers to the needy.

Just Give Money says cash helps people “see a way out,” no matter where they live.

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