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

Posts Tagged ‘Fraud’

Billionaires For Austerity: With Cuts Looming, Wall Street Roots of “Fix the Debt” Campaign Exposed

In Uncategorized on February 26, 2013 at 9:11 pm

https://i2.wp.com/www.sourcewatch.org/images/5/5f/FixTheDebtFlat.pngOldspeak:The tried and true Problem Reaction Solution method is being used to attempt to manufacture consent for austerity measures favored only by the fabulously wealthy. The problem is the across the board government spending cuts soon to take effect and the major political parties inability to compromise to avoid them. The reaction courtesy of corporate controlled media broadcasting certain doom is a panicked populace, fearful of job losses, insecurity and instability in their daily lives. The solution is cutting spending on social programs, public services  and the military while preserving tax breaks for wealthy individuals and corporations that pay negative tax rates.  We are told that entitlements are the biggest drivers of our deficits (when in fact social security is solvent, and medicaid/aid has been shown to be less costly that privatized heath care) The reality is deficits are being driven by massive waste, fraud in government and the private sector, particularly banking  & the many trillions of  taxpayer dollars dollars being printed by Federal Reserve and shipped to banksters, foreign and domestic to keep up the illusion of a functioning financial system. The oligarchy that pay our government are controlling the range of “the sequester” debate.  It’s just as The Oracle Dr. Chomsky said : “The smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow a very lively debate within that spectrum“.

Related Stories:

By Amy Goodman @ Democracy Now:

AARON MATÉ: We begin with the Capitol Hill showdown over the $85 billion across-the-board budget cuts taking effect this Friday. The White House and analysts fear the so-called “sequester” could jeopardize hundreds of thousands of jobs. While Republicans and Democrats largely agree the cuts are ill-advised, they are far from reaching any sort of agreement. President Obama wants Republicans to end tax breaks, mostly for the wealthy; Republicans are insisting government spending be cut first. This is House Speaker John Boehner.

SPEAKER JOHN BOEHNER: The president says we have to have another tax increase in order to avoid the sequester. Well, Mr. President, you got your tax increase. It’s time to cut spending here in Washington. Instead of using our military men and women as campaign props, if the president was serious, he’d sit down with Harry Reid and begin to address our problems. The House has acted twice. We shouldn’t have to act a third time before the Senate begins to do their work.

AMY GOODMAN: Today President Obama plans to travel to a major military community in Newport News, Virginia, to highlight the impact of Pentagon cuts on a shipbuilding facility. On Monday, Obama urged a gathering of governors to push Congress into action to avert the looming sequester showdown.

PRESIDENT BARACK OBAMA: Now, these impacts will not all be felt on day one, but rest assured, the uncertainty is already having an effect. Companies are preparing layoff notices. Families are preparing to cut back on expenses. And the longer these cuts are in place, the bigger the impact will become. So, while you are in town, I hope that you speak with your congressional delegation and remind them, in no uncertain terms, exactly what is at stake and exactly who is at risk, because here’s the thing: These cuts do not have to happen. Congress can turn them off any time with just a little bit of compromise.

AMY GOODMAN: Well, joining us now are two guests who have uncovered how billionaire investors such as Pete Peterson have helped reshape the national debate on economy, the debt and social spending. Between 2007 and 2011, Peterson personally contributed nearly $500 million to his Peter G. Peterson Foundation to push for Congress to cut Social Security, Medicare and Medicaid, while providing tax breaks for corporations and the wealthy. Peterson served as secretary of commerce under Richard Nixon and went on to serve as chair and CEO of Lehman Brothers. He co-founded the private equity firm The Blackstone Group.

Joining us from Madison, Wisconsin, is John Nichols, The Nation magazine’s political correspondent. His latest piece is “The Austerity Agenda: An Electoral Loser.” It’s part of a major exposé based on a new website called “Pete Peterson Pyramid.” Lisa Graves of the Center for Media and Democracy is editor of the site, which links billionaires like Peterson to the Campaign to Fix the Debt.

We welcome you both to Democracy Now! John Nichols, why don’t you lay out who Pete Peterson is and how he fits into this picture of sequester that we look like we’re about to see by the end of the week?

JOHN NICHOLS: Sure. Pete Peterson is an old-school moderate Republican. He’s not some sort of hard-line conservative. He’s a very expensive suit, private jet, mineral water kind of guy. And he has been obsessed, for a number of years, with restructuring the U.S. economy, and particularly restructuring U.S. fiscal policy. This is an important thing to understand. Pete Peterson and the people around him do not want—or aren’t, I would suggest, particularly interested in fixing the debt or dealing with deficits. What they’re really interested in is taking advantage of a moment when the United States is looking at these issues to establish a very different approach to a host of issues. And at the core of this is changing the way that we look at retirement in this country, definitely undermining Social Security, Medicare and Medicaid, changing those earned benefit programs into something very different than what they’ve been and something far less reliable, but also making an awfully lot of other cuts in programs that serve the great mass of Americans, while at the same time continuing and even advancing the tax breaks for billionaires and corporations that have helped to make Pete Peterson a very, very wealthy man.

He sold this idea to around 125 other CEOs and very wealthy people. They’ve all chipped in a whole bunch of money, millions and millions, perhaps as much as $60 million for the current campaign, to this “Fix the Debt” group. And this Fix the Debt group is the primary proponent in the United States today of austerity. They want to, quote-unquote, “cut our way to progress,” as President Obama suggested, but in reality, it’s cutting the way toward progress for them and cutting the way toward a real hard hit for the average working American and potentially a slowing of the economy that begins with the sequester but does not end there.

AARON MATÉ: Well, let’s turn to Pete Peterson in his own words. This is from a video posted on the YouTube page of his foundation.

PETE PETERSON: We live in a society of special interests of various kinds. The organizations that are lobbying for expanding benefits and making the problems worse are unbelievably powerful. But who’s representing you? And why don’t you then get organized in young organizations? And I’ve had a dream. And my little dream is that one day there’d be 100,000 young people and their parents parading in Washington, saying, “I’m madder than hell, and I don’t intend to take it anymore.”

AARON MATÉ: That’s billionaire Pete Peterson talking about his dream of a revolt in favor of austerity. Lisa Graves, you’ve come up with the Peterson Pyramid.

LISA GRAVES: That’s right. We—our team at the Center for Media and Democracy has worked hard to expose the conflicts of interest by a number of the people who are leaders of the Fix the Debt operation. When Pete Peterson talks about the bevy of special interests in Washington, he’s one of them, and he has helped—he’s helped seed an organization that’s filled with special interests. And so, what we’ve done at PetersonPyramid.org is document that. So we talk about how Erskine Bowles, who’s famous for the Bowles-Simpson plan, which is the—another version of the austerity plan, how he’s on the board of Morgan Stanley and gets paid over $300,000 a year for a couple hours of work on that board, how he’s been paid over $600,000 on the board of Facebook, which recently had a huge tax giveaway. And so, that’s just one example that’s the tip of the iceberg, and we document it on our site because the people of the United States need to know that this is sort of a Pied Piper operation by Pete Peterson and his buddies to try to claim that the real crisis is the debt, when in fact the real crisis is our economy and the lack of focus on jobs. And as Dean Baker, the great economist, said, you can’t cut your way to prosperity. And, in fact, it’s like saying, when a house is on fire, stop putting so much water on the fire to put it out.

AMY GOODMAN: Tell us more about who Pete Peterson is, Lisa Graves. And also, have they responded? Has he or his organization responded to Peterson’s Pyramid, what you have just laid out?

LISA GRAVES: Well, I think Pete Peterson has an unhealthy obsession with Social Security—and, you know, as a man who’s never actually going to really need it. But most Americans in fact do need Social Security. One of the things you see with the Pete Peterson organizations that he has seeded or created over time is this obsession with Social Security. In fact, Social Security is solvent. It’s solvent for at least the next 20 years. It’s more solvent than you or I or probably anyone who’s watching this show. And yet they want to make sure that cuts to Social Security, changes to Social Security, the retirement age and the benefits, having those decrease over time as people age, is part of a so-called balanced deal or a package. That’s a terrible idea. And that’s part of the Pete Peterson legacy.

He’s also seeding these groups to have this sort of youth group element to it, which is really—it would be funny if it weren’t so worrisome, where they have put a lot of money into this notion that the youth of America are having this uprising, the dream that he said in that video, when in fact most American students are deeply concerned about the jobs in this country. And cutting our—cutting our government budget in the ways that Peterson and his buddies propose will make that job climate even worse for those students. Those students are far more concerned about their own personal debt and student loans than the debt that is supposedly being levied on them by Social Security, which does not actually contribute to the debt.

AMY GOODMAN: Has Peterson responded, Lisa, to Peterson’s Pyramid?

LISA GRAVES: Fix the Debt’s communications director has responded. He called our office to claim that their organization never claimed that they were trying to raise $60 million, he said. Their vice president of communications said that they were trying to raise any amount, not just $60 million. I pointed out we had it on their letterhead, in fact, that they were marking out a campaign worth $60 million to push these issues this year. He basically said that wasn’t true. We’ve got it on paper. You know, I said, you know, that’s why we don’t really quote the press secretaries, because they’re not obligated to tell the truth. We’ve got the documentary evidence.

And so, they pushed back a little, but, quite frankly, we have them—we have the goods on them. And that’s why this material is just streaming through the Internet, to show these conflicts of interest; to show the Democrats who are former members of Congress who have left and cashed out and work as lobbyists for some of these big firms; to show the Republicans that continue to do the bidding of some of the big firms that they’ve joined since leaving office; to show the conflicts of some of these huge firms that are part of Fix the Debt who have a negative tax rate—who have a negative tax rate—not 35 percent like you or me, not 20 percent, not 10 percent, not 5 percent, but a negative tax rate. And on top of that—

AMY GOODMAN: Like which ones?

LISA GRAVES: —we show how many of these firms are underfunding their pension programs.

AMY GOODMAN: Like which ones?

LISA GRAVES: Oh, sure. So we have documented how General Electric is one of those firms that has had a negative—a negative tax rate. A number of the firms that are part of the Fix the Debt operation have negative tax rates. We’ve got about a dozen of them that we document on the site, including, you know, major defense contractor General Electric. We have other firms that, we have documented, are underfunding their pension programs. And we also show how much they’re—how well they’re funding their CEO pensions, while underfunding their worker pensions, and pushing this operation of Fix the Debt, which is trying to underfund every other Americans retirement, basically, pension programs through Social Security.

AMY GOODMAN: Isn’t the head of GE President Obama’s job czar?

LISA GRAVES: Yes, that is in fact the case. And so, you know, we do think that this is a huge, important part of this exposé, is to show how this bipartisan—this bipartisan pitch from these guys, from these CEOs, and from Democrats and Republicans, is unfortunately not a grand bargain, but really a grand swindle.

AARON MATÉ: Well, Lisa, speaking of bipartisan, of course, we had the Simpson-Bowles Commission. In December, former Wyoming Senator Alan Simpson went on The Daily Show with Jon Stewart to discuss his budget proposal.

SEN. ALAN SIMPSON: Our corporate tax rate is the highest in the world. And so—

JON STEWART: But not actually.

SEN. ALAN SIMPSON: Well, 36 percent is where we’re at. What we did, we took away all of these tax expenditures, all of these deductions, all of this stuff. This is just earmarks by any other name, and it’s spending by any name, and it’s at one trillion one hundred billion bucks a year. And only 20 percent of the American people use 80 percent of the stuff in that tax code. Does that give you the wake-up call of who’s gimme-ing the system?

JON STEWART: Right.

SEN. ALAN SIMPSON: OK.

JON STEWART: But see, that brings up an interesting point.

SEN. ALAN SIMPSON: And so we got rid of all of that—

JON STEWART: Yeah, mm-hmm.

SEN. ALAN SIMPSON: —and we say now give the American people from zero to 70 grand, they pay 8 percent; from 70 grand to $210,000, they pay 14; anything over that, 23. Take the corporate rate to 26 from 36 and not tax them twice when they bring it back. And when they bring it back, the Democrats, as Erskine says, a Democrat, the Democrats will say, “Well, they’ll just use it for dividends and to buy stock.” And he said, “Well, hell, at least they’ll be using it in the United States of America instead of sticking it over there and leaving it.”

AARON MATÉ: That was former Senator Alan Simpson of the Simpson-Bowles Commission speaking on The Daily Show in December. John Nichols, if you could talk about Alan Simpson and the Simpson-Bowles Commission and how they fit into this Campaign to Fix the Debt.

JOHN NICHOLS: Sure. I think the best way for folks to understand the Simpson-Bowles Commission is that it is a classic example of how, if you have wealthy people behind you, you can fail miserably and still continue to be at the center of the debate. The Simpson-Bowles Commission was established by President Obama with the purpose of coming up with some debt and deficit solution ideas. I think it was a bad idea from the start, and I think it was an example of President Obama bowing to arguments of the austerity caucus, if you will, in Washington, which includes both Democrats and Republicans.

But they were put in charge of this. They came up with a plan. It was such an unpopular and unappealing plan that the commission itself did not recommend its report. Only Simpson and Bowles came out with their proposal. Then they tried to peddle it in Congress. They could only find 38 members of the House who would actually vote for their ideas. Then they went out into the November elections. They actually started endorsing candidates. The candidates that Simpson and Bowles endorsed, not only did they lose, but often you could tie the defeats of the candidates they endorsed to the fact that they were linked to Simpson and Bowles. So, if you want to see an example of two figures in American politics, career political types, who have been absolutely rejected by the American people, it’s Simpson and Bowles. And yet, interestingly enough, they’re back at the center of the debate, getting huge amounts of media coverage now. And one of the reasons for it is they’re tied to Fix the Debt.

When Fix the Debt was launched last summer, it wasn’t launched at a kitchen table of some working family or in an abandoned factory; it was launched in Sun Valley, Idaho, at a retreat for CEOs and billionaires. And Simpson and Bowles said, “We’re going to go out and launch a grassroots campaign to get the American people to force Congress to act on the ideas that we’ve put forward,” which are an American austerity agenda. And they said they were going to get 10 million signatures on petitions to do this. Amazingly enough, for this big grassroots campaign, all this millions and millions in spending, they still only got about 300,000 signatures. And most of those signatures appear to be tied to either bought lists or people who work for companies allied with the Fix the Debt operation. So the bottom line is, Simpson and Bowles are arguing for austerity and being held up by much of the media as legitimate players, when in fact they are advocating for zombie ideas, ideas that have been slain by the voters and, frankly, even by Congress, and yet they walk among us.

AMY GOODMAN: Let’s go to another clip, this one uploaded to YouTube by a new group called “The Can Kicks Back.” It features Alan Simpson addressing, quote, “the youth.”

SEN. ALAN SIMPSON: Stop Instagraming your breakfast and tweeting your first-world problems and getting on YouTube so you can see “Gangnam Style.” And start using those precious social media skills and go out and sign people up on this, baby. Three people a week. Let it grow. And don’t forget: Take part or get taken apart. Boy, these old coots will clean out the Treasury before you get there.

AMY GOODMAN: That was Alan Simpson of the Simpson-Bowles Commission. Lisa Graves, what is this Can Kicks Back group?

LISA GRAVES: Well, it’s interesting. Simpson has talked about the Can Kicks Back as if it was some sort of grassroots operation that emerged on college campuses nationwide. In fact, it operates out of the Fix the Debt offices in Washington, and it is another arm of their operation. Internally, in essence, they call it the “millennial” part of their operation. This is a well-funded, very slick, glossy campaign with T-shirts and videos, featuring people like Simpson and others, claiming that your grandparents are ruining your future. It’s quite an audacious set of claims by these guys, especially when Social Security actually isn’t contributing to the debt currently and could easily be fixed 20 years from now by cutting out the loophole for all—for Social Security taxes on income above $110,000. And so, it’s quite a scam. It’s a gimmick. It’s part of the gimmick of their campaign. And it’s something that I think people ought to be very wary of.

AARON MATÉ: And quickly, John Nichols, the cuts are supposed to take effect on Friday. Their potential effect on working people?

JOHN NICHOLS: Their potential effect on working people is severe. First off, there are the direct effects. You have an across-the-board austerity cut in federal programs, and that will have service impacts right away, things like flying, just traveling in this country. Also, there are very credible estimates that this will lead to at a base line of 700,000 job losses. And so we’re talking, over the coming months, if this sequester goes forward, of a significant slowing of the U.S. economy.

This is classic austerity: cuts at a time when the economy is weak, followed by job losses. And the tragedy of it, the really significant thing to be conscious of, is that Simpson and Bowles and Fix the Debt are waiting on the sidelines here to jump in and say, “Well, this is so disorderly. You know, we don’t want to have across-the-board cuts.” And what they are really arguing for is a systematized austerity, one where you have very, very wealthy people deciding what sort of fixes we will have for our economy. And at the end of the day, invariably, the fix will be to lower their tax rates while at the same time taking deep cuts out of the earned benefit programs that Americans desperately need.

AMY GOODMAN: We’re going to leave it there, but we’re going to continue to follow this, of course. John Nichols, political writer for The Nation; his latest piece for The Nation is “The Austerity Agenda: An Electoral Loser.” And thanks to Lisa Graves, executive director of the Center for Media and Democracy and editor of “Pete Peterson Pyramid,” a new website that connects the dots between billionaire Pete Peterson and the Campaign to Fix the Debt campaign. The website is PetersonPyramid.org.

 

 

 

 

 

Top Economists Agree: The U.S. Is In A Depression

In Uncategorized on May 8, 2012 at 2:07 pm

Oldspeak:”You know it’s grim when the prevailing debate among economists and historians is whether the world economy faces the “Great” depression of the 1930s or the “Long” depression of the 1870s.” I like to call it a “Stealth Great Depression” The bread lines have been replaced with EBT cards, and the banks are too bigger to fail, but many of the other conditions that existed in the 1930’s and 1870’s exist today. Tent cities, high unemployment, high poverty, high homelessness, wage stagnation, high debt, mass bankruptcy etc, etc, etc… A profound difference between today’s depression and those of the past is the propaganda. It’s so exquisitely and insidiously crafted that people actually believe it over what it happening all around them in the real world. Meanwhile “Institutions (banks) that know how and why to prevent things from falling apart and which nonetheless sit back and do nothing. A global collapse is being engineered. We need a radically new way forward to avert catastrophe but all we’re being offered by our political classes is tried and false ways of the past that are clearly leading to catastrophe. A ‘sustainable future’ is being monetized. More and more people awakening to the reality that those old ways are no longer acceptable. Our civilization needs a new operating system. Or a crash is not a matter of if, but when. Greed will be our downfall.

By Washington’s Blog:

Paul Krugman released a new book yesterday called “End This Depression Now“. In the introduction, Krugman writes:

The best way to think about this continued slump, I’d argue, is to accept that we’re in a depression …. It’s nonetheless essentially the same kind of situation that John Maynard Keynes described in the 1930s: “a chronic condition of subnormal activity for a considerable period without any marked tendency either towards recovery or towards complete collapse.”

Robert Shiller said yesterday that the world is in a state of “late Great Depression”.

Many other top economists also say that were in a Depression.

We are stuck in a depression because the government has done all of the wrong things, and has failed to address the core problems.

For example:

  • The government is doing everything else wrong. See this and this

This isn’t an issue of left versus right … it’s corruption and bad policies which help the top .1% but are causing a depression for the vast majority of the American people.

U.S. Federal Reserve “Emergency” Bank Bailout Totaled $29 TRILLION Over 3 Years, Most Went To Rescue ‘Shadow Banks’

In Uncategorized on December 19, 2011 at 11:11 am

Oldspeak:$29.616 trillion is the total ’emergency assistance’ provided by the Fed to foreign and domestic international banks, shadow banks, central banks, & some non-financial institutions during the Global Financial Crisis. Shadow banks are highly leveraged financial institutions (largely unregulated and unsupervised) that perform functions historically relegated to the commercial banking system. “They are the infrastructure and practices which support financial transactions that occur beyond the reach of existing state sanctioned monitoring and regulation. It includes entities such as hedge fundsmoney market funds and Structured investment vehicles. Investment banks may conduct much of their business in the shadow banking system (SBS), but they are not SBS institutions themselves. The core activities of investment banks are subject to regulation and monitoring by central banks and other government institutions – but it has been common practice for investment banks to conduct many of their transactions in ways that don’t show up on their conventional balance sheet accounting and so are not visible to regulators.” So Twice the U.S. GDP was given to unregulated and unsupervised bankers who recklessly, irresponsibly and fraudulently gambled with trillions in food, homes, pensions, industries and jobs, after they wrecked the global financial system, and Bernie Madoff is the only guy in jail. And 1 in 2 Americans are poor. Financial oligarchy in action.”

Related Stories:

U.S. Federal Reserve Audit Reveals $16 TRILLION In Secret Loans To Bailout U.S. And Foreign Bankers

Government Accountability Office Federal Reserve Audit Reveals Numerous Intimate Ties To Financial Industry; Disturbing Conflicts Of Interest

Wall Street Aristocracy Got $1.2 Trillion In Secret Loans From Private “Federal” Reserve Bank

Federal Reserve Bank Plans “Social Listening Platform” To Identify “Key Bloggers”, Monitor Billions Of Conversations Online Via Social Media

By  J. Andrew Felkerson @ Alter Net:

Speculation about the Fed’s actions during the financial crisis has made headlines on and off again over the last several years.  The latest drama occurred on November 27 when Bloomberg published an article, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” which gives an account of the news agency’s struggle to bring to light the details of the Fed’s emergency programs. Bloomberg throws out some very large numbers, revealing that as of March 2009, the Fed lent, spent, or committed $7.77 trillion worth of aid to the financial system and that banks used the low-interest rates charged on these loans to make an estimated $13 billion in income.

On December 6, the Fed struck back, issuing a four page unsigned memo intended to correct recent “egregious errors and mistakes” found in various reports of its emergency lending facilities.  The Fed argues that the “total credit outstanding under liquidity programs was never more than about $1.5 trillion.”  While Bloomberg wasn’t mentioned explicitly in the Fed memo, it was fairly clear to whom the response was directed.  The following day Bloomberg defended its reporting, and the Wall Street Journal’s David Wessel came to the Fed’s defense, characterizing Bloomberg’s methodology as a “great story,” but ultimately not “true.”

All this may sound like controversy, but it’s little more than a tempest in a teacup.

Here’s the hurricane: In reality, no less than $29.616 trillion is the total emergency assistance provided by the Fed to foreign and domestic entities during the Global Financial Crisis. Let’s repeat that: $29 trillion. This astounding number is over twice U.S. gross domestic product, the nominal value of all goods and services produced for the year 2010.  This is the total of the bailout as calculated by Nicola Matthews and myself as part of the Ford Foundation project, A Research And Policy Dialogue Project On Improving Governance Of The Government Safety Net In Financial Crisis. We will be presenting the results of our analysis in a series of papers published by the Levy Economics Institute, the first of which, “29,000,000,000,000: A Detailed Look at the Fed’s Bailout by Funding Facility and Recipient,” is already available here.

The results we have calculated are presented below, and it is important to note that the totals are cumulative and in billions of U.S. dollars. (The numbers in parentheses indicate amounts still outstanding as of November 10, 2011).

Facility Total Percent of Total
Term Auction Facility $3,818.41 12.89%
Central Bank Liquidity Swaps 10,057.4(1.96) 33.96
Single Tranche Open Market Operations 855 2.89
Term Securities Lending Facility and Term Options Program 2,005.7 6.77
Bear Stearns Bridge Loan 12.9 0.04
Maiden Lane I 28.82(12.98) 0.10
Primary Dealer Credit Facility 8,950.99 30.22
Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility 217.45 0.73
Commercial Paper Funding Facility 737.07 2.49
Term Asset-Backed Securities Loan Facility 71.09(10.57) 0.24
Agency Mortgage-Backed Security Purchase Program 1,850.14(849.26) 6.25
AIG Revolving Credit Facility 140.316 0.47
AIG Securities Borrowing Facility 802.316 2.71
Maiden Lane II 19.5 (9.33) 0.07
Maiden Lane III 24.3(18.15) 0.08
AIA/ ALICO (AIG) 25 0.08
Totals $29,616.4 100.0%

 

I want to be clear. These are the totals of Fed lending and asset purchases actually undertaken since the bail-out began. There is no double-counting. And we do not include any credit facilities created by the Fed unless they were actually used. These figures accurately reflect the cumulative totals over the approximately three years actually used by the Fed to prop-up domestic and international banks, shadow banks, central banks, and even some non-financial institutions.

Banks in the Shadows

The programs above constitute the crisis prevention machinery rolled out by the Fed to combat the worst financial panic since 1929. All the programs above were designed and implemented to target domestic financial and nonfinancial corporations or foreign central banks or markets, or both. Only one of the facilities, the Term Auction Facility, can be viewed as being consistent with the Fed’s mandate to protect the commercial banking system from systemic failure. The rest are the result of the increasing relevance of the “shadow banking” to our economy—and of the Fed’s attempt to rescue the shadow banking sector.

Shadow banks are highly leveraged financial institutions that perform functions historically relegated to the commercial banking system. It is important to note that these financial concerns do not have access to the conventional means of Fed support. Nor were they ever really regulated or supervised by the Fed. They engaged in extremely risky behavior that in large part led to the global financial crisis. And when it hit, the Fed spent and lent $29 trillion, much of it devoted to rescuing the shadow banking system.

Thus, we see a host of unconventional programs designed to aid these institutions rather than the Fed’s traditional patrons. The information used to calculate the totals above is freely available (thanks in large part to the valiant efforts of a group of lawmakers led by Senator Bernie Sanders) as the result of an amendment inserted into the Dodd Frank bill. Moreover, this information has been freely available since December 10, 2010 on the Fed’s website.

So why didn’t someone else already put the data together in this way?

The Fed’s Secrets

Obviously, $29 trillion is much bigger than the previous estimates of $7.77 trillion (Bloomberg) or $1.5 trillion (the Fed and the Wall Street Journal). An in-depth account of each of the facilities above is a rather lengthy process as the Levy working paper attests. The main difference in our analysis is the variables we identify as essential in understanding the Fed’s response. In our paper we report three measures that we view as critical to capturing the size and magnitude of the bailout. Each of the three measures deals exclusively with programs put into place by the Fed that transcend its conventional “lender of last resort” (LOLR) function. That is, we only include the emergency facilities the Fed created. We agree with the Fed that only facilities which were actually made operational should be considered in any account of the Fed’s actions. But we take the side of Bloomberg regarding the general lack of transparency by the Fed—the Fed fought tooth and nail to keep the details of its programs secret.

At any given moment inspection of the amount owed to the Fed resulting from nonconventional lender of last resort actions provides a reasonable account of what the Fed was doing in the period leading up to that time. However, looking at this number over time and in the context of the weekly amount lent provides insight into how the Fed’s efforts evolved over the run of the crisis. These two approaches to measurement (a “stock” or outstanding balance and a “flow” or cumulated amount spent and lent weekly) only provide us with details regarding the scope of the Fed’s bailout. To get a clear picture we need some account of the magnitude. We believe that this is captured by looking at the cumulative totals of all programs.

Perhaps the largest difference in our analysis is that we learned our money and banking theory from the late Hyman Minsky. He taught us that the modern economy is essentially financial, and as such, is prone to systemic financial crises that if left unchecked can lead to “bone crunching depressions.” Therefore it is essential to have a LOLR. Thus, any transaction between the Fed and the markets which is not part of conventional monetary operations, such as lending from the discount window or open market operations, represents an instance in which private markets were not able to or were unwilling to engage in the normal financial intermediation process. If it any point in time the private markets were capable (or willing) to carry out business as usual, Fed intervention would not have been required. Thus, we need to account for each extraordinary event, and the best way that we know to do this is by summing each instance–which results in a cumulative total of over $29 trillion dollars.

Who does the Fed serve?

A figure as large as $29.616 trillion should not be taken lightly, but focus on the specific magnitude of the figure diverts our attention from a larger issue that is at stake: how should the LOLR responsibility to be discharged in the future? With unemployment remaining persistently high and millions continuing to lose their homes to foreclosure as the result of lost income from a poor economy or outright fraud in the mortgage lending and foreclosure process, it becomes increasingly difficult to justify the ability of a single institution staffed by unelected officials to carry out such a targeted commitment of the obligations of the United States citizenry. Thanks to the actions of Senator Sanders and other individuals possessing the temerity to question the authority of the Fed we now have access to much of the data regarding what the Fed did during the recent crisis.

But we still need to go through the data from the past three years of bail-outs to answer the following questions: Who got funds from the Fed? How much did they get? And why did they get them? The Fed has not adequately explained why its emergency lending and asset purchases went on for so long and accumulated to such a large number.

J. Andrew Felkerson is a Interdisciplinary PhD student at the University of Missouri- Kansas City

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.


“Lure People Into That Calm and Then Just Totally F–k ‘Em”: How All of Us Pay for the Derivatives Market

In Uncategorized on June 17, 2010 at 8:04 am

Oldspeak: “”You can use derivatives to get into any business you want,” says Michael Masters, an incredibly successful hedge fund manager who has worked  on derivatives reform proposals. “If a bank wants to get into the iron ore business, they can do that. They can get into the coal transportation business. You can say, ‘I’m going to be in the shoe business now,’ and concoct some derivatives based on shoes, and all of a sudden, you come to dominate the shoe industry. Banks are supposed to be banks. They’re supposed to facilitate commercial activity, not directly compete with commercial enterprises. That taxpayer subsidy gives them a leg up on every other industry, financial or otherwise, when they can deploy it on derivatives.”‘

From Zach Carter @ Alter Net:

For the Wall Street reform package currently making its way through Congress to work, it has to accomplish two broad goals: It must take a huge bite out of banking profits and end the too-big-to-fail oligopoly that encourages megabanks to take megarisks and stick taxpayers with the tab. Neither of these goals can be accomplished without taking on derivatives — the wild, unregulated market that brought down AIG. Right now, the U.S. government pays big banks for operating derivatives casinos. If we’re going to clean up the derivatives mess, we have to move taxpayer money out of the market.

“The dirty little secret here is that the American government has been subsidizing the derivatives market through the Fed and other avenues since its inception,” says Adam White, director of research for White Knight Research and Trading. “That’s crazy.”

What kind of business is the American taxpayer subsidizing? One with a history of deception and abuse that dates back to its earliest years. Back in 1993 when derivatives casino was first getting off the ground, a Wall Street titan called Bankers Trust Co. sold a derivatives package to drug and chemical giant Procter & Gamble. At the time, Bankers Trust was a powerful, well-respected financial player, which was how it scored big-time clients like P&G. But P&G ultimately took a huge loss on the deal with Bankers Trust, and took the bank to court, where it obtained more than 6,500 tape recordings of horrific derivatives strategizing.

The public release of those tapes was not enough to compel Congress to actually do anything as a matter of public policy, but it was more than sufficient to utterly ruin Bankers Trust. One quote from the tapes, in particular, has become infamous among the nation’s financial establishment, but remains obscure to the general public. It’s a Bankers Trust salesman, describing the Procter & Gamble deal:

“Funny business you know? Lure people into that calm and then just totally fuck ’em.”

To this day, such techniques remain a central part of the derivatives business, as the SEC’s recent fraud suit against Goldman Sachs has made clear. These operations are ugly enough as purely private-sector enterprises. But the real disgrace is that ordinary taxpayers are actually helping to fund it. That taxpayer payout, in turn, creates market distortions that encourage fraud, abuse and bailouts.

“In the fall of 2008, when the derivatives market-making of the five big banks lead to a systemic catastrophe, the banks all proudly walked back to the Fed window to get assistance to prop up their derivatives market-making,” says Michael Greenberger, who served as the chief deputy to Commodity Futures Trading Commissioner Brooksley Born during her unsuccessful attempt to rein in the derivatives market in 1998. “The central question is whether we want this to be part of the basic business of derivatives. That seems insane.”

As the Wall Street reform bill moves into its final stage of negotiations, the only proposal still on the table that would actually move taxpayer money out of the derivatives sinkhole comes from the unlikely source of Sen. Blanche Lincoln, D-Ark., a career corporatist who has never shown much interest in regulating anything. But it’s a whopper of a proposal, one that comes free of any loopholes and goes straight to the heart of Wall Street’s bubble machine.

The plan is simple: If you want to be dealing the crazy, complex financial products that toppled AIG, Enron and Long-Term Capital Management, then you can’t receive any funding from the Federal Reserve. No bank can operate without access to the Federal Reserve’s money supply, so the five megabanks would have to choose — do they want to be derivatives houses or do they want to be banks? If they want to be banks, they have to move all of their derivatives operations to an independently capitalized subsidiary — a company that raises money on its own and has no access to taxpayer perks.

While several policymakers close to the financial industry like Fed Chairman Ben Bernanke and Treasury Secretary Timothy Geithner oppose the Lincoln language — known on Capitol Hill as “Section 716”– many top economists agree that getting taxpayers out of the derivatives business is the most important Wall Street reform still on the table for 2010.

“To me, preserving section 716 is really the critical issue,” Nobel laureate economist Joseph Stiglitz said on a June 9 conference call with reporters. “It protects the taxpayer.” Top economic thinkers like Nouriel Roubini, former IMF chief economist Simon Johnson, Dean Baker and Jane D’Arista have also offered support for the measure.

If banks can’t pump taxpayer money into the derivatives machine, that machine becomes much less profitable. Instead of booking fictitious profits based on perpetual government aid, derivatives dealers will have to price their risks as they exist in the real world. Market forces would shrink the casino, putting the entire economy in a better place.

Most followers of the Wall Street collapse know that derivatives are dangerous — but even some dedicated reformers can find themselves wondering just what the hell a derivative actually is. The answer: just about anything a banker wants it to be. Derivatives are used to for everything from straightforward insurance to outrageous accounting fraud. Any financial contract whose value is derived from some other asset can be classified as a derivative. They can be derived from just about any asset imaginable, which is why derivatives scandals are so diverse in nature. Enron used derivatives to loot the California electricity market. AIG used them to loot the U.S. mortgage market, J.P. Morgan Chase used them to loot Jefferson County, Alabama and Goldman Sachs used them to loot the European Union.

“You can use derivatives to get into any business you want,” says Michael Masters, an incredibly successful hedge fund manager who has worked closely with White on derivatives reform proposals. “If a bank wants to get into the iron ore business, they can do that. They can get into the coal transportation business. You can say, ‘I’m going to be in the shoe business now,’ and concoct some derivatives based on shoes, and all of a sudden, you come to dominate the shoe industry. Banks are supposed to be banks. They’re supposed to facilitate commercial activity, not directly compete with commercial enterprises. That taxpayer subsidy gives them a leg up on every other industry, financial or otherwise, when they can deploy it on derivatives.”

A bloated financial sector is bad for the economy. Instead of acting as a catalyst for broader economic growth, oversized financial sectors actually devour other productive activity. By 2007, finance accounted for about 40 percent of corporate profits, according to the Bureau of Labor Statistics. After taking a dive during the crash of 2008, finance was back to 36 percent of profits by the end of 2009, almost all of that rebound carried by derivatives operations. If we cannot shrink bank profits, our economic recovery is going to be unnecessarily weak. The rest of the economy will be suffering at the expense of our financiers.

But the very fact that most people need to ask the question — what is a derivative? — is part of this market’s profit magic. By injecting needless complexity into otherwise straightforward financial transactions, banks can game their balance sheets, deceive investors and defraud their own clients. The recent examples are nauseating — Goldman Sachs setting up its own customers to fail and then betting against them; Lehman Brothers using derivatives to hide mountains of debt from its own investors; and on and on.

Taxpayers have subsidized banking since the 1930s by providing both deposit insurance from the FDIC and cheap emergency lending from the Fed. There’s a damn good reason for providing this aid: If a bank fails, its depositors don’t lose their savings. This keeps ordinary people from being directly wiped out by a financial crisis, and it also makes financial crises less likely by preventing bank runs.

These guarantees also help banks. Since there is no risk of loss, banks do not have to pay depositors very much to win their money. That makes financing the everyday operations of the bank very cheap, and allows the bank to book bigger profits. So the flip side of that subsidy is regulation. Up until the 1990s, that regulation meant that banks couldn’t do any risky securities trading while receiving taxpayer perks. By 1999, Congress and regulators had ripped away all of those restrictions.

But the explosion of the derivatives market in the 1990s may have been even more significant than the repeal of the Depression-era restrictions on what banks could do. Derivatives did not become a significant part of the banking business until the 1990s. At the end of 1992, at the dawn of the Clinton administration, the total face value of the derivatives market was $12.1 trillion, according to the Government Accountability Office. That sounds like a lot, and it is, but by the end of George W. Bush’s reign in 2008, the derivatives market had exploded to $683 trillion, according to the Bank for International Settlements. In today’s banking industry, just five U.S. banks control nearly $300 trillion of that international market: Goldman Sachs, J.P. Morgan Chase, Citigroup, Bank of America and Morgan Stanley.

This explosion didn’t happen by accident. The surest way to feed a destructive market in anything — finance, oil, junk food, whatever — is to deregulate it, and then subsidize it. Fraudsters love to specialize in products the government doesn’t scrutinize, and everybody likes free money from Uncle Sam. The Bankers Trust scandal was a major event in financial circles, but it didn’t spark a systemic freak-out. But in 1998, one of the world’s largest hedge funds, Long-Term Capital Management, found itself on the brink of collapse after getting in way over its head on derivatives. The scare was so severe that the Federal Reserve orchestrated a bailout for the hedge fund, albeit one financed by the private sector rather than taxpayers. Brooksley Born, already targeting strengthened regulations after the Bankers Trust fiasco, took the Long-Term Capital Management collapse to heart and pushed to rein in derivatives, but was blocked by a coalition of Alan Greenspan, Robert Rubin and Lawrence Summers. In 2000, a Republican Congress passed legislation that further deregulated the market with the blessing of both Clinton and Summers. Suddenly, bankers had carte blanche to do whatever they wanted with derivatives, and get subsidized by the American public.

Derivatives are a fundamentally risky business, much more so than lending. Loans provide a much more direct economic function, their risk is much more easily ascertained, and they can be put to productive uses — buying a home, investing in new inventory, whatever.

“The whole point of government guarantees is to avoid bank runs and establish confidence so that they can lend money out,” says White. “You don’t want to give your money to a bank and have them stick it in the mattress. They’re not lending it out any more. These days, every time they get a dollar from the Fed, they have to make a choice: Are we going to make a loan, are we going to conduct derivatives trades, or are we use it to do proprietary trading. Generally, making a loan is third on that list.”

Even when they are not fraudulent or abusive, derivatives are usually purely speculative instruments. They often do not serve any productive economic function, but instead allow clever opportunists to cash in on some economic event (say, the collapse of the subprime mortgage market). That doesn’t actually help anybody create jobs or bring a great new product into the economy — it just lets somebody get rich at the economy’s expense.

Speculation in small amounts is not an economic disaster. Indeed, some degree of speculation is necessary for a financial system to function at all. But when speculation is subsidized by the government, the rewards offered by raw gambling very easily outweigh the risks. Subsidizing speculators results in way too much speculation in the economy, and puts the economy at large in serious danger.

This is essentially what happened in the subprime mortgage market. As Nomi Prins has detailed, only about $1.4 trillion in subprime mortgages were issued between 2002 and 2008, while about $14 trillion in securitized bets were derived from these mortgages. When the subprime market cratered, the economy’s problem was several trillion dollars larger than it needed to be thanks to derivatives.

The derivatives dealing problem is different from the matter of proprietary trading — banks simply gambling for their own accounts. By dealing derivatives, banks act as a go-between for other speculators. The bank is not betting for its own account, but the taxpayer subsidies for the operation make acting as this go-between much more profitable, and, as a result, speculation throughout the entire financial system becomes cheap and rampant. A strong Volcker Rule — something not yet included in the Wall Street reform package — would end the subsidies for prop trading. But we shouldn’t be subsidizing speculationanywhere, and so long as banks are allowed to deal derivatives, that’s exactly what we’ll be doing.

“They should be seen as complementary,” Stiglitz said. “What is obviously clear is that the current Volcker Rule needs to be strengthened, but even after it’s strengthened…the two are dealing for the most part with different issues, different kinds of activities, different risks, different distortions.”

But there is another still deeper problem in derivatives beyond the subsidization of recklessness, abuse and speculation. By allowing derivatives dealers to operate within the commercial banking system, taxpayers are directly subsidizing too-big-to-fail. Banks deliberately wrap themselves in extremely complex webs of derivatives trades in an effort to insulate themselves from regulatory scrutiny. The current Wall Street reform package tries to end too-big-to-fail by giving regulators new powers to shut down failing financial behemoths. But if banks can still deal derivatives, those powers are likely to prove meaningless. As a subsidized derivatives dealer, a bank can conduct millions of dollars worth of derivatives trades every day, making it impossible for regulators to predict the fallout from shutting the bank down. When push comes to shove, the regulator won’t shut down the bank — it will just bail it out.

“Without OTC derivatives reform enhanced resolution powers for dealing with insolvent institutions could well be rendered impotent and future crises in the credit allocation system will likely be longer and deeper than is necessary,” former Senate Banking Committee economist Robert Johnson told the House Financial Services Committee in November 2009.

Everybody in Washington who has bothered to be educated in derivatives knows that banks use derivatives to make themselves too big to fail, and key politicians have taken direct steps to prevent the public from getting the message. When Johnson testified in November 2009, he was cut off early by Rep. Melissa Bean, D-Ill., and Congress refused to post his testimony online until outrage from the financial blogosphere reached a fever-pitch several weeks later. The House was in the middle of a plan to gut the already timid derivatives reforms offered by the administration of President Barack Obama, and the House ultimately offered an incredibly weak plan to cope with the catastrophe.

But the overarching lesson is clear: you cannot end too-big-to-fail without divorcing taxpayer subsidies for derivatives from the banking industry. Insane profitability carries with it extreme political power. Every other aspect of Wall Street reform hinges on the willingness of Congress to defuse derivatives profits. So long as megabanks can rake it in on derivatives, it will be extremely difficult to rein in other aspects of their business, regardless of what rules are actually on the books.

Fortunately, the political winds are shifting. Kansas City Federal Reserve President Thomas Hoenig offered strong support for the plan to end derivatives subsidies in a June 10 letter to Sen. Blanche Lincoln. Lincoln herself decided to run with the derivatives crackdown when she realized that her primary challenger Bill Halter had both the funding and the support from progressives to unseat her. While Obama remains opposed to the Lincoln proposal, Lincoln’s sudden ferocity on derivatives was championed by both Obama and former President Bill Clinton as reasons for her relevance in the November elections, and this support led Lincoln to a narrow victory in the Democratic primary last week. After watching so-called “moderate” Democrats spend a full year watering down reforms to please their Wall Street backers, at least one Blue Dog finally realized that Americans want real reform, and that real political gain could be realized by providing it.

Organized labor, major boosters of financial reform, poured $10 million into Halter’s campaign against Lincoln. Even though Halter didn’t win, the return on this investment is beginning to look very strong. J.P. Morgan Chase CEO Jamie Dimon expects the current derivatives language to cost his company $2 billion a year in profits. Multiply that figure by the number of major dealer-banks, and it comes to $10 billion a year. Over the course of a decade, $100 billion in Wall Street profits will remain in the real economy instead of being distributed as dividends and bonuses. Scoring $100 billion for the economy on a $10 million investment is a return of 1,000,000 percent — easily the greatest single trade in history.

Our megabanks have used derivatives dealing and proprietary trading to secure big profits and big bonuses in the years since the major financial collapse of 2008. Without the profits from these risky businesses, there is no question that many of the largest U.S. banks would be utterly bankrupt today. Critics of Section 716 say this is reason alone not to support the provision. But think about that — our largest banking institutions are only making money by running speculative casinos (derivatives dealing) and gambling themselves (prop trading). These activities do not support broader economic growth; that’s why the banking sector can be doing so well while the unemployment rate is hovering around 10 percent. Multi-trillion-dollar obscenities don’t do anything to improve the effective or efficient functioning of the economy, especially when they’re converting that economy into the Las Vegas strip. Speculation can’t fuel a financial sector indefinitely– we can’t allow banks to drive themselves off a cliff with speculative operations, bail them out, and then let them go back to speculating like maniacs as if nothing had happened.

Forcing banks out of the derivatives business is by no means a done deal. Only continued public pressure can keep politicians from selling out to Wall Street (again).

Call Congress today and tell them you’re sick of seeing your money go to financial predators.

Zach Carter is an economics editor at AlterNet. He writes a weekly blog on the economy for the Media Consortium and his work has appeared in the Nation, Mother Jones, the American Prospect and Salon.

Flash Crash — The Machines Are in Control Now. Trading Glitch Suspected in ‘Mayhem’ as Dow Falls Nearly 1,000, Then Bounces

In Uncategorized on May 7, 2010 at 12:15 pm

Oldspeak: Somebody made ALOT of money yesterday, and it’ll be week before the “regulators” figure out what went “wrong”.  By then all that money will be safe in some offshore bank account. It’s a safe bet that after the trader’s initial error, high-frequency trading computers remorselessly running their algorithms took over.

From the Wall Steet Journal:

By TOM LAURICELLA

The stock market plunged Thursday in a harrowing five-minute selloff that appeared to be triggered by a breakdown of trading systems. After dropping nearly 1,000 points, the market rebounded but still closed down 3.2%, leaving Wall Street struggling to figure out what happened.

Investors already were jittery about the ripple effects of the crisis in Greece when the market went into free fall at 2:42 p.m. By 2:47, the Dow Jones Industrial Average had crossed 10000 in the biggest intraday point drop in its history. By 3:07, the market had regained 500 points, ultimately staggering to a close at 10520.32, down 347.80 points.

The Securities and Exchange Commission and the Commodity Futures Trading Commission said they were working with other regulators to review “unusual trading activity.” The major U.S. stock exchanges said they were looking for trading glitches and examining potentially erroneous trades in multiple stocks. Major exchanges said they will cancel erroneous trades that occurred during the selloff.

Multiple stocks, ranging from Accenture PLC to Boston Beer Co., momentarily lost nearly 100% of their value, changing hands for just one penny. Exchange-traded funds, which are index funds that trade like stocks on exchanges, were also temporarily vaporized. The $9.5 billion iShares Russell 1000 Value Index Fund went from $59 to around 8 cents in the blink of an eye.

“It happened so quickly, it was like a torpedo,” said Scott Redler, chief strategic officer at T3 Capital Management, a hedge fund. “It was mayhem.”

Unnerved traders frantically searched for an explanation, scouring the trade blotters for clues to the cause. Many pinned the blame on an erroneous trade for a basket of stocks which caused shares for companies such as Procter & Gamble Co., one of the market’s most stable blue-chip stocks, to fall 35% in two minutes.

The market was already down some 500 points when the selloff began. Televisions showed images of standoffs between Greek police and protesters, and the European Central Bank declined to step up its effort to stabilize government debt markets.

Traders immediately said a market glitch must have contributed to the decline. They theorized that high-frequency trading firms, which use computer programs to trade and account for about two-thirds of the market’s overall volume, might have contributed to the speed of the decline, although they offered no specifics.

Several high-frequency firms, including Tradebot Systems Inc., which says it often accounts for 5% of the U.S. market’s volume, stopped trading when the market grew volatile. With these traders on the sidelines, there were fewer potential buyers, which may have contributed to the plunge.

Greenspan Wanted Housing Bubble Dissent Kept Secret

In Uncategorized on May 4, 2010 at 1:19 pm

Oldspeak:  “Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders.”

– The Honorable Louis McFadden, Chairman of the House Banking and Currency Committee in the 1930s

Brooksley Born, Jack Guynn, Don Kohn, Cathy Minehan, Tim Geitner… How many warnings went unheeded before the housing collapse? Something has to change at the Fed, perhaps make it an actual gov’t run agency, not a market manipulation tool of the international banking cartels.

From Ryan Grim at The Huffington Post:

As top Federal Reserve officials debated whether there was a housing bubble and what to do about it, then-Chairman Alan Greenspan argued that dissent should be kept secret so that the Fed wouldn’t lose control of the debate to people less well-informed than themselves.

“We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand,” Greenspan said, according to the transcripts of a March 2004 meeting.

At the same meeting, a Federal Reserve bank president from Atlanta, Jack Guynn, warned that “a number of folks are expressing growing concern about potential overbuilding and worrisome speculation in the real estate markets, especially in Florida. Entire condo projects and upscale residential lots are being pre-sold before any construction, with buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on ‘flipping’ the properties–selling them quickly at higher prices.”

Had Guynn’s warning been heeded and the housing market cooled, the financial collapse of 2008 could have been avoided. But his comment was kept secret until Friday, when the central bankreleased the transcripts of Federal Open Market Committee meetings for 2004 and CalculatedRiskspotted it. The transcripts for 2005 to the present are still secret.

“The substantial run-up in house prices, which we have followed in Florida and also see in the populous Northeast and West Coast of the United States, may be at least partially attributable to unusually low mortgage rates influenced by our very accommodative policy,” Guynn warned.

But when the Fed released contemporaneous minutes of the meeting, the bank downplayed Guynn’s concerns.

“Reports from some contacts suggested that speculative forces might be boosting housing demand in some parts of the country, with concomitant effects on prices, suggesting the possibility that house prices might be moving into the high end of the range that could be consistent with fundamentals,” reads the minutes, which were released to the public several weeks after the meeting.

Note the qualifiers “might be,” “suggesting the possibility,” “might be,” “could be.” In the real world that Guynn described there is nothing whatsoever “consistent with fundamentals” that could explain “buyers freely admitting that they have no intention of occupying the units or building on the land but rather are counting on ‘flipping’ the properties.”

The release of the transcripts comes at a bad time politically for the Federal Reserve, as it works to prevent Congress from authorizing the Government Accountability Office to audit the central bank.

The audit language has already passed the House, despite White House and Fed opposition, anda Senate amendment by Bernie Sanders (I-Vt.) is gaining momentum, cosponsored as of Monday morning by ten Republicans and five Democrats.

But the Fed also benefits from the timing. “Transcripts of meetings for an entire year are released to the public with a five-year lag,” according the Fed’s own policy. Had the transcripts been released on time, they could have influenced the confirmation of Ben Bernanke for a second term as chairman. Meanwhile, the Fed policy of releasing a full year at once deprives the public of transcripts from the first four months of 2005, which are now five years old. A Fed spokeswoman tells HuffPost those transcripts will be available at roughly this time next year.

At the same March meeting, Bernanke said that he had reviewed the transparency policies of foreign central banks and found that other banks were more forthcoming. “It seems to me that we might want to consider the possibility of providing the public with some type of regular financial stability report, perhaps as part of the Monetary Policy Report to the Congress or in some other existing venue or perhaps as a stand-alone document,” Bernanke suggested. More than five years later, with Bernanke now chairman, that report has yet to be made public, though the Fed did create an inter-divisional internal working group on financial stability.

Other than the passing mention of speculation, the March minutes imply that the meeting participants had a rosy outlook on the housing bubble. “Activity in the housing market moderated in January and February from its elevated pace in the fourth quarter. Single-family housing starts and permits stepped down, although both measures remained above their average levels of the first three quarters of 2003,” the minutes read. “Overall, expenditures were supported by sizable gains in real disposable personal income and increases in household wealth owing to rising home and equity prices. … Committee members noted that activity in the housing sector, while still quite elevated, had fallen back from its extraordinary pace of late last year.”

But there were indications from others that housing prices were getting out of hand. “A second concern is that policy accommodation — and the expectation that it will persist — is distorting asset prices. Most of this distortion is deliberate and a desirable effect of the stance of policy,” said Federal Reserve Board Vice Chairman Don Kohn, meaning that low interest rates were artificially propping up housing prices. “But as members of the Committee have been pointing out, it’s hard to escape the suspicion that at least around the margin some prices and price relationships have gone beyond an economically justified response to easy policy. House prices fall into this category.”

The suspicion that Kohn says is hard to escape doesn’t appear in the minutes; rather, it only appears in the transcripts that were released on Friday. While the House debated a measure to authorize an audit of the Fed, Kohn personally lobbied against it. He has since announced his resignation.

The president of the Federal Reserve Bank of Boston, Cathy Minehan, also voiced concerns. “New England’s rate of inflation, as measured by the Boston CPI, is rising much faster than the nation’s, largely because of a 6.3 percent increase in shelter costs versus a year ago. The high price of housing worries many in the region who find that hiring the skilled workers they need in health care, for example, is made even more difficult by high housing costs,” she said. While conceding that raising interest rates could come with its own risks, she argued: “I think the costs to us in terms of credibility would be greater if the situation got out of hand on the upside.”

Even Tim Geithner, then president of the New York Fed, raised concerns. “[T]he issue has been raised by [Federal Open Market Committee] Vice Chairman Geithner and others that our current policy stance may contribute to potential financial imbalances down the road,” then-Vice Chairman Ben Bernanke said, according to the transcript, before dismissing such concerns. (“Imbalance,” of course, is a gentle term to describe what the housing crash ultimately wrought.)

Three months later, participants at the June meeting were still concerned. Stephen Oliner, the Fed’s associate research director, showed the committee a chart of the growing disparity between home and rent prices, the most obvious indication of a housing bubble. Roger Ferguson, a Fed vice chairman, asked about a footnote in the chart that said the graph had been adjusted to reflect biases in the trends, according to the transcript. Oliner described the adjustments as “technical.”

“Had we not adjusted for them, the rent-to-price ratio would have been much lower at the end point. So it would have looked more alarming,” he said. Oliner also flipped the housing line upside down so that it’s not shooting off into the sky and is instead descending. “I don’t want to leave the impression that we think there’s a huge housing bubble. We believe a lot of the rise in house prices is rooted in fundamentals. But even after you account for the fundamentals, there’s a part of the increase that is hard to explain,” said Oliner.

Jeff Lacker, president of the Richmond Federal Reserve Bank, was also curious about the chart. “Just to follow up on what Roger was asking about the panel in chart three on housing valuations. In that panel the relative movement of the two measures is somewhat key to at least the intuitive persuasiveness of the argument that housing might be overvalued,” said Lacker. A laugh was then had by Greenspan and the other committee members about the confusing chart.

“You can’t trust them to do it right!” Greenspan cracked, according to the transcript. No reference to the chart appears in the June minutes.

Instead, the minutes reflect Greenspan and Bernanke’s position that the rise in housing prices was nothing to worry about. Here’s what the Fed’s minutes told the public: “In housing markets, activity had remained at generally high levels, with only a few signs that rising mortgage rates were beginning to hold down sales and construction. There was evidence in some areas that inventories of unsold homes had risen. Members noted that persisting overall strength in housing might to some extent be a response to expectations of further increases in mortgage rates, implying that a slowdown might be likely later in the year.”

The 2004 transcripts can be found here. If you spot anything else worth highlighting, let me know at ryan@huffingtonpost.com.

UPDATE: Felix Salmon and Annie Lowrey think that the Greenspan quote above is taken out of context. “Greenspan is weighing in on a debate about Fed transparency — that is, how much the Fed wants to reveal about its thinking on inflationary pressures and monetary policy at that particular moment. He is not talking about whether to let the public in on whether there might be a housing bubble,” writes Lowrey. “This was a meta-discussion about how much to discuss discussions,” writes Salmon. That’s true, but it’s unrealistic to separate general discussions about monetary policy and specific talk about a housing bubble, especially given that it was just aired moments earlier. Indeed, knowledge that there was concern in the Fed about the run-up in housing prices in 2004 is directly and obviously relevant to the debate over monetary policy in general and the debate over transparency. If Greenspan’s best defense is that he would broke no public airing of any dissent, then he can make it. But the fact remains that Greenspan wanted all dissent kept from the public, which includes the housing dissent. His comment is a window into Fed thinking that persists today.

Specifically, Greenspan was debating how quickly the Fed minutes should be released and how detailed they should be about the discussions that led to the decisions made. “Providing a full and accurate record of the meeting seem[s] to require describing the different aspects of your discussion about the risk assessments, the minutes, and economic forecasts,” Fed official Vincent Reinhart tells Greenspan.

The debate was over how transparent to be on all discussions, not just how transparent to be about the debate they were having over transparency. The transcript also shows that the Fed was aware the discussion it was having about transparency in general was a controversial one. “I would also add that reducing the discussion to its bare bones would offer more than a few commentators the opportunity for irony about the Committee’s views on transparency, something I certainly wouldn’t pass up! If you do, I take that as direction on preparing the next set of minutes. That is, I should downplay today’s discussion of your prior discussion of transparency,” Reinhart says, to laughter, according to the transcripts.

Greenspan then responds: “Let me first follow up on your transparency assessment. I think Cathy Minehan has raised an interesting point. I would say this: We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand. We have a ratchet in here where, if we were to move forward, we can’t go back. So the concept of transparency is a very important concept but one that should be approached with a recognition that we cannot move back and forth on it. I’m a little concerned here that by raising certain issues we may not be able to backtrack.”

But even more to the point, the minutes of the March and June meetings do not accurately reflect the concerns raised in the transcripts about housing that were released more than five years later.

BP Told to Stop Distributing Oil Spill Settlement Agreements

In Uncategorized on May 3, 2010 at 4:20 pm

Oldspeak: Sociopathic Corporate Behavior, in all it’s splendor.

From CBS News:

BP is financially responsible for the devastatingly massive oil spill off the Gulf of Mexico, but some are concerned the oil company isn’t giving residents along the affected coastline or emergency relief crews a fair shake.

Alabama Attorney General Troy King said Sunday night that he has told BP they should stop circulating settlement agreements among coastal Alabamians, the Mobile Press-Register reports. King reportedly said the agreements stipulate that residents will give up their right to sue the company in exchange for a payment of up to $5,000.

“People need to proceed with caution and understand the ramifications before signing something like that,” said King, who noted that he is prohibited from giving legal advice to private citizens. “They should seek appropriate counsel to make sure their rights are protected.”

The Press-Register reports that BP spokesman Darren Beaudo responded, “To the best of my knowledge BP did not ask residents of Alabama to waive their legal rights in the way that has been described.”

U.S. Homeland Security Secretary Janet Napolitano and Interior Secretary Ken Salazar are holding a conference call with BP executives later today to discuss the claims process for people impacted by the oil spill, CBS News White House Correspondent Peter Maer reports.

Meanwhile, BP has agreed to alter waivers signed by fishermen responding to the disaster, after a fisherman complained to a U.S. District judge. Commercial fisherman George Barasich on Sunday asked a federal court to stop BP from forcing the volunteer corps of oil-spill responders to sign a waiver that compromised their right to sue the company in the case of an accident and required confidentiality about the clean up.

According to the Globe and Mail, the waiver read, “I hearby agree on behalf of myself and my representatives, to hold harmless and indemnify, and to release, waive, and forever discharge BP Exploration and Production Inc., its subsidiaries, affiliates, officers, directors, regular employees and independent contractors…”

After a judge said the waiver was too broad, BP said it would strip out the offending provisions and would not enforce the waivers already signed.

BP CEO Tony Hayward told CBS’ “The Early Show” Monday that “This is not our accident, but it’s our responsibility.” On the company’s website, BP says it will pay compensation for “legitimate and objectively verifiable” claims for property damage, personal injury and commercial losses.

President Obama this weekend said the oil spill is a “massive and potentially unprecedented environmental disaster.”