taxpayer

Charles Gasparino: Goldman Sachs, the Tallest Midget in the Room

by on April 19, 2011

Huffington Post…

What passes for top-notch financial journalism these days is an in depth report in the New York Times about why Goldman Sachs, the most successful of all Wall Street firms, is so modest. Amid billions of dollars in profits, a rising share price, the big Wall Street firm doesn’t like to take full credit for its success. The Times seems to think the Goldman brass, led by CEO Lloyd Blankfein, is being too modest mainly because the firm is afraid to flaunt its brilliance at making money during a time of economic hardship. The writer implores Blankfein & Co. to remember that making money is good for shareholders and taxpayers, and thus they should “take a bow. Don’t hide behind the curtain” and starting telling the world how great they really are. Far be it for me to give my “friends” at Goldman advice (we’re so friendly that Blankfein once described me as a “thug”). but the last thing Goldman should be doing right now is taking a bow and telling the world it’s a great firm, because when it comes down to it, Goldman isn’t really a great firm. What is it then? Well, in the words of a drinking buddy who is a frequent consumer of financial news, “Goldman is like the tallest midget in the room.” For the record, I’m not and never have been in the Goldman is the root-of-all-evil-camp, though I’ve gone my rounds with some of the senior people there, including its top flack, Lucas van Praag, who recently tried to deny my story on the Fox Business Network several weeks ago that the last two years of regulatory and media scrutiny into how the firm has made money, often by screwing its clients, has left Blankfein so tired and exhausted that friends say he now appears ready to leave at the end of the year. It baffles me as to how van Praag can deny someone’s impression from a private conversation (his denial in the Times follow-up story was less forceful, it should be noted). But Goldman has done dumber things, including telling the world that the firm didn’t need a bailout during the dark days of the financial crisis in late 2008, all of which gets me back to the reason the firm should remain as modest as possible: Its status as a midget, albeit the largest one on Wall Street. As much as the nation’s big banks want you to think that they’re the heart of our free market system, they’re not. In fact they never have been. For decades they’ve been feasting off of subsidies and mini-bailouts granted to them by the Fed and the Treasury, often from government bureaucrats who have worked on Wall Street and return there once their “public service” is complete. The hundreds of billions in cash and guarantees handed the banks in 2008 was just the latest, albeit the largest of the bailouts and subsidies the big banks have received over the years. In other words the banks may be big in size and “too big to fail” as far as the government is concerned, but in terms of innovators and creators of wealth, they’re actually quite small, because unlike the guy who does your laundry or owns your favorite restaurant, they couldn’t and didn’t survive on their own. Standing the tallest among these little men is Goldman, the firm most adept at exploiting the corrupt system that puts the government in bed with the big banks. Just today, Goldman announced that it earned $1.64 billion in the first quarter of 2011 even after repaying Warren Buffett the $5 billion he lent them in 2008 when the firm was teetering with the rest of Wall Street. Seems like a pretty amazing feat until you consider how Goldman earned all that cash. Low interest rates from the Fed over the past two-plus years means Goldman can basically borrow at next to nothing to place its market bets. Those bets, it turns out, really aren’t bets at all. Firms like Goldman began buying depressed mortgage bonds in 2009 because they knew prices would rise. How did they know something like that? The Fed instituted a program to buy these bonds in the open market as a way to support the housing market. Like most things tried by the Obama administration to jump-start the economy, the plan didn’t work for Main Street. But not long after the buy-back program commenced, Wall Street — and Goldman in particular — began announcing record profits and bonuses to its bankers and traders. All of which transpired as Blankfein and his team tried to convince the world that Goldman really didn’t need all that bailout money in late 2008 and that they accepted the $10 billion in cash from then Treasury Secretary Hank Paulson because they were forced to do so by a government more worried about the health of entire financial system than the financial condition of Goldman Sachs. Sounds like a very modest gesture until you calculate how the taxpayer bailout of the giant insurer AIG was in actuality a back-door bailout of Goldman Sachs . Just before Paulson signed over the $10 billion bailout check, AIG handed Goldman a check for $13 billion a direct result of the Fed’s bailout of the insurance company. The money was for “collateral payments” AIG owed Goldman, that once the bailouts commenced, became collateral payments owed to Goldman by the US taxpayer. In other words, the day the Fed decided to make good on all of AIG commitments — 100 cents on the dollar for contracts banks like Goldman held to insure their portfolio of risky debt — it also bailed out Goldman. Without the taxpayer bailout of AIG, those Goldman’s shareholders that the Times cares so much about, would have been without a $13 billion cushion during the darkest days of the 2008 financial crisis. More than that, they would have been forced to take losses on the firm’s portfolio of toxic debt. So much for Goldman’s modesty in the face of such greatness. As all this came to light back in late 2009, I wrote a column here on HuffPost saying Blankfein should just resign and save the world the trouble of holding him accountable for explaining why Goldman is such a large midget. Now that would have been the modest thing to do.

View original post here:
Charles Gasparino: Goldman Sachs, the Tallest Midget in the Room

Find our Weekly Commercial Real Estate, Private Equity and Fund Newsletters at www.WeeklyBrief.net

Tagged as: , , , , , , , , , , ,

{ 0 comments }

House Debates Blocking Funds For Health Care Law

by AP on February 18, 2011

WASHINGTON — Republicans aimed their budget-cutting at President Barack Obama’s health care law on Friday as the House plowed through a final stack of amendments to a huge spending bill that would impose sweeping cuts on domestic programs. Following through on the GOP’s goal of dismantling last year’s health care overhaul, Rep. Denny Rehberg, R-Mont., proposed blocking funds to implement the measure, arguing that it was a budget-busting overreach by government. Democrats fought back, saying the law has been a boon to families and will create health care jobs and reduce the federal deficit. The overall bill is the first step in an increasingly bitter struggle between Democrats and Republicans over how much to cut federal agencies’ funding over the second half of the budget year that ends Sept. 30. Current funding runs out March 4 and a temporary spending bill will be needed to avoid a government shutdown. As Friday’s debate began, the focus was on the health care overhaul, which dominated Congress’ work in 2009 and early 2010. Bitter partisan differences over it remain unabated. The GOP has virtually no chance of killing the law because of support for the program from Obama and the Democratic-run Senate. But Republicans plan to try chipping away at it relentlessly. “It’s a law designed by those who wish to control every health care decision made by health care providers and patients, by every employer and employee, by every family and individual,” Rehberg said. Rep. Rosa DeLauro, D-Conn., said the GOP effort would “put insurance companies back in charge, further demonstrating the majority’s special-interest priorities and hypocrisy on job creation and deficit reduction.” Action expected Friday also included votes on a proposal to block federal aid to Planned Parenthood, bar the Pentagon from spending taxpayer money to sponsor NASCAR race teams; to reverse a proposed Obama administration rule that seeks to crack down of for-profit colleges and vocational schools; and to strip the Environmental Protection Agency of its authority to issue regulations on global warming. With a government shutdown possible if the spending measure isn’t extended at least temporarily, House Speaker John Boehner, R-Ohio, inflamed the situation Thursday by insisting that the GOP-controlled House would refuse to approve even a short-term measure at current spending levels. “Read my lips: We’re going to cut spending,” Boehner declared. Democrats immediately charged that Boehner was maneuvering Congress to the precipice of a government shutdown. The GOP would reduce spending to about $60 billion below last year’s levels, mixing an increase of less than 2 percent for the Pentagon with slashing cuts averaging about 12 percent from non-Pentagon accounts. Such cuts would feel almost twice as deep since they would be spread over the final seven months of the budget year. The Environmental Protection Agency and foreign aid accounts would be especially hard hit, while GOP leaders orchestrated just a modest cut to Congress’ own budget. Some of the most politically difficult cuts, to grants to local police and fire departments, special education and economic development grants, were reversed. Amtrak supporters easily withstood an attempt to slash its budget. But with the fiscal framework of the measure already saddled with a veto threat, Republicans mounted an assault on the administration’s regulatory agenda. By a 244-181 tally Thursday, Republicans voted to block the Federal Communications Commission from enforcing new rules that prohibit broadband providers from interfering with Internet traffic on their networks. The new “network neutrality” rules are opposed by large Internet providers. Republicans then moved, on a 250-177 vote, to stop the Environmental Protection Agency from imposing limits on mercury pollution from cement factories. Supporters said the new rules would send American jobs overseas, where air quality standards are more lax or non-existent. Republicans also turned back Democratic attempts to boost funding for the Securities and Exchange Commission and the Commodities Futures Trading Commission, whose budgets would be cut sharply under the measure, to pay for responsibilities added in last year’s overhaul of federal financial regulations. Social issues also came into play. Thursday night’s action was dominated by a lengthy debate on an amendment by Rep. Mike Pence, R-Ind., a strong foe of abortion, to block Planned Parenthood from receiving any federal money. The organization provides a variety of women’s health services. “It is morally wrong to take the taxpayer dollars of millions of pro-life Americans and use them to fund organizations that provide and promote abortion, like Planned Parenthood of America,” Pence said. Democrats said Planned Parenthood provides much-needed access to contraception, medical exams and counseling to women and that federal law already prohibits the use of government funds for abortions in most circumstances. Rep. Nita Lowey, D-N.Y., said the GOP proposal would “make it harder to access pap tests, breast exams, routine gynecological examinations, flu vaccinations, smoking cessation services, cholesterol screening, contraceptives, and all of the other services that Planned Parenthood provides.” Liberal Minnesota Democrat Betty McCollum hoped to team up with tea party-backed GOP freshmen to bar the Pentagon from spending taxpayer dollars to sponsor NASCAR race teams. She said such sponsorships can cost millions of dollars, simply for placing decals on race cars and for a few driver appearances. The Army, the Air Force and the National Guard each sponsor cars with the aim of boosting military recruitment, but the Navy and Marine Corps dropped their NASCAR sponsorships in recent years, saying they didn’t know whether they were effective.

Read the original here:
House Debates Blocking Funds For Health Care Law

Tagged as: , , , , , , , , ,

{ 0 comments }

Les Leopold: Wall Street Wins Big in Deficit Battle

February 18, 2011

Maybe it’s something in the water. Some potent little parasite has wormed its way into Washington, and now everyone’s coming down with the disease: certifiable deficit hysteria. Politicians and pundits are all marching in lockstep chanting “Cut, Cut, Cut,” fearing that if they don’t they’ll be assaulted by the right-wing budget police. They rationalize the madness with the slogan “equality of sacrifice,” a platitude that is supposed to make us feel better about destroying our public sector. For all the pompous pontifications, the real argument politicians are having is over which group of working Americans they should screw first. No one’s asking Wall Street to sacrifice. The bankers and hedge fund gamblers are getting a free ride — again. You’d think this would be a good moment to mention that we wouldn’t even be having these budget deficit hysterics right now if Wall Street hadn’t just destroyed over $13 trillion dollars in wealth as well as wiping out several hundred billion dollars in yearly government tax revenues. Do we even remember that the reason 30 million Americans can’t find full-time jobs is that Wall Street’s reckless gambling crashed the economy? (If you still have any doubt about this, please see The Looting of America for the sad tale of how we got here.) Instead, even NPR reporters (who may soon feel the sharp edge of the budget-cutting guillotine themselves) command us again and again to “Text, Twitter or Facebook us about what you think ought to be cut.” PBS News Hour’s Gwen Ifill seems to be on a righteous mission as she presses White House budget director Jack Lew over and over: “What about the entitlements, Mr. Lew? What about the entitlements, Mr. Lew?” Yes, Serious People everywhere know that Social Security and Medicare cuts are inevitable and that their job is to nail those slippery pols down: How much? When? But suggesting that perhaps Wall Street should sacrifice something is too ludicrous even to mention. Serious People don’t bring up issues that have been quarantined by deficit hysteria. New Taxes on Wall Street to Help Reduce the Deficit? But hold on, deep in the bowels of the president’s budget you can actually find new Wall Street taxes. If you look real hard you’ll see a category called “Total Reform Treatment of Financial Institutions and Products.” Hmm, looks promising. Maybe they’re proposing to finally tax the hell out of the derivative products that destroyed our economy a couple of years ago. So, let’s see. It says the total tax increases in 2012 come to … $159 million? Million, not billion? Is that a typo? Is the decimal point in the wrong place? Or is this the new definition of “equality of sacrifice”? Let’s do the math: John Paulson, the hedge fund manager who earned $2.4 million an HOUR in 2010, could pay off the proposed tax increases for the entire financial industry personally — by working less than two weeks. But not to worry, Mr. P. You and your fellow hedge fund elites have been saved yet again by the deficit fanatics’ exclusive focus on squeezing middle- and low-income Americans instead of you. No one’s talking about closing the shameless tax loophole that allows hedge fund managers to pay only a 15 percent “capital gains” tax on their enormous incomes instead of the top income tax rate of 35 percent. Closing that tax loophole on just the 25 top hedge fund managers — just 25 individuals! — would pull in twice the revenue compared to freezing the wages of 2 million federal employees. Apparently the new math of “equality of sacrifice” means that 25 people equals 2 million. To be fair, the president’s budget does propose gradually raising financial taxes by a total of $33 billion over the next decade. Unfortunately that only amounts to 3.3 percent of the trillion dollars he’s proposing to cut — more Orwellian equality. The nauseating ironies abound. The hedge fund managers are likely to pay a lower income tax rate than the families who find out they can’t send their kid to college because Congress cut their Pell tuition grant. It’s one thing to have an in-depth debate over steeper taxes on financial billionaires and lose. It’s quite another to see the entire debate buried by Democrats, Republicans, the media and just about every other force in society. Buried under great heaping mounds of deficit drivel. Wall Street owes the American people. And the American people, I am sure, would love Wall Street to make restitution for the damage it has done. In a saner world, we’d be considering a wider menu of real financial industry tax increases. Taken together these would raise more money than all of Obama’s proposed budget cuts combined: Close the hedge fund loophole so that hedge fund managers have to pay the top income tax rate. Enact a 50 percent surcharge on financial sector profits and bonuses until the unemployment rate drops below 5 percent. Impose a small financial transaction tax on all short-term financial transactions. This would both raise revenue and tap the brakes on reckless financial gambling. Together these taxes could raise federal revenues by $100 to $200 billion a year. In the process they would: a) reduce the size of Wall Street’s dangerous casino economy; b) reduce the outsized pay packages of financiers, whose “innovations” contribute next to nothing to the real economy; and c) make our economy more stable by reining in the reckless gambling. (This would be a return to the post WWII practice of keeping Wall Street salaries in line with salaries of those in other fields with similar educational levels.) But instead of looking for constructive solutions to our budget challenges, politicians are using deficit hysteria as an excuse to gut and privatize the public sector, invade the few remaining union strongholds, and turn working people against each other. The budget axes are flying, but on Wall Street all is peaceful and calm. The new financial oligarchs are quietly collecting the happy returns from all the taxpayer dollars we gave them. They’re back to flying high on their financial trapeze, making reckless bets in the hopes of outrageous returns. But no worries: Now more than ever, they’ve got a net. It comes in the form of an enormous implicit federal guarantee: If you fall, we will catch you (or actually, the taxpayers will). Because the institutions that were too big to fail in the last round are now way too big to fail. Remember, there now are even fewer of them and they are much bigger. The obsessive focus on budget cuts keeps us from noticing that we, the people, now own billions of dollars of toxic assets (via the Federal Reserve) that once were rotting on the books of our largest financial institutions. We’re the ones who are paying off the largest Ponzi scheme ever created. (If you want to really get a rage on, read the Financial Crisis Inquiry Report’s account of how banks traded the most toxic slices of CDOs back and forth to create a make-believe market in toxic assets. You’ll either want to free Bernie — the sacrificial lamb — or throw the whole bunch of them in jail with him.) “Equality of sacrifice?” There ought to be a law against any politician uttering that phrase. But despite it all, something good is percolating. Financial billionaires are whining more and more about the criticism they are receiving for bankrupting our economy. One plutocrat even waved legal action at me for suggesting that maybe his financial “genius” involved some fraudulent activities. Think about it. If our financial titans are coming after lowly bloggers, maybe they’re just a tiny bit worried. Maybe events in Tahrir Square or Madison have them spooked. Maybe they fear the sparks could ignite into a massive conflagration of demands for financial billionaires finally to pay up for the damage they have done. Let’s blow harder on those sparks. Les Leopold is the author of The Looting of America: How Wall Street’s Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009. He is currently working on a new book, How to Earn $900,000 an Hour: The Rise of Wall Street Billionaires and the One-sided Class War, (hopefully to be published in 2011).

Read the full article →

Lawrence G. McDonald: Fannie Mae and Freddie Mac’s Days Are Numbered, But It’s a Big Number

February 3, 2011

In my New York Times Best Selling book, A Colossal Failure of Common Sense — The Inside Story of the Collapse of Lehman Brothers , I make a strong case. Our government allowed Fannie Mae and Freddie Mac to become a giant mortgage backed security hedge fund, complete with 70-1 taxpayer funded leverage. They had sub Libor financing, meaning the luxury of borrowing money at one of the lowest interest rates in the world, all risks backed by the US taxpayer. To understand this kind of leverage imaging walking into the most profitable casino in Las Vegas, all you have is $100 in your pocket. Yet, because of your good credit, the casino allows you to play blackjack with $7000 at risk on the table. The slightest loss and your equity is wiped out. That’s exactly what happened to Fannie and Freddie and today the US taxpayers have lost well over $360 billion in this reckless risk taking bonanza. That’s over half the cost of the entire war in Iraq. It wasn’t always this way but as Samuel Johnson once said, the road to hell is paved with good intentions. In the 90′s Fannie and Freddie only used 30-1 leverage but the great enabler, US Congress, was there all they way either ignoring or clueless as to the real risks lurking below the surface. I know a thing or two about risk and leverage. My former employer was levered 40-1, that was before we filed Chapter 11 bankruptcy. Uncle Sam chose not to save Lehman yet letting her fail cost the taxpayer dearly. When that $660 billion domino fell, she obliterated the value of Fannie and Freddie’s $5 trillion mortgage portfolio, crushing the US taxpayer in the process. Thank you Hank Paulson. Where We Stand Today The recent conferences in Washington debating reform of Fannie Mae and Freddie Mac are filled with political mud slinging, it’s the ultimate blame game. Last week’s release of the Financial Crisis Inquiry Commission’s (FCIC) Report and Dissents are making big headlines. Yet, the story within the story is how political infighting tore this dysfunctional commission apart, ten million dollars spent and we have very little to show for it. I am outraged that President Obama has not stepped in here. I think he blew a golden opportunity to lead and protect billions of US taxpayer dollars at stake. The FCIC report is a joke, it’s the rehash of all rehashes. It looks like my book, Andrew Ross Sorkin’s Too Big to Fail and Michael Lewis’ The Big Short . All thrown into one 700 page document. Is there anything new we have learned in the Commission’s report? Are there clear recommendations that will help prevent another financial crisis? No. The commission was divided by politics and their conclusions are as messed up as a Brett Farve retirement party, his 7th one no less. Ironically the most hapless part of the commissions report is probably the most important. What really went wrong with Fannie and Freddie and how do we fix them? The real battles are being fought within the Obama Administration, among regulators over smaller related housing issues, and between Republicans in the new Congress. The next few weeks will show significant developments in some of these areas, but the process for reforming Fannie and Freddie, the housing finance system more broadly, lags far behind the deficit and job creation in the minds of Congress and the Obama Administration. It’s a shame but look for this battle to take years, not months, dragging out the uncertainty and sclerosis which has plagued the housing markets for the past several years. The Obama Administration has recently leaked reports to the press that their report outlining suggested reforms to Fannie Mae and Freddie Mac, will be delayed till mid-February, from the statutory due date of January 31. The Deadly Divide? My friends at DCTripwire [firewalled] tell me the likely causes of this delay are twofold: (1) A lack of senior staff at Treasury and the Federal Housing Finance Agency (FHFA)–the same over loaded team responsible for implementing many of the rules and regulations of the Dodd-Frank Act. Guess what? They’re also in charge of Fannie and Freddie reform. (2) The fact that there is a divide within the Obama Administration, both substantively and politically on any reform efforts. One side is determined to maintain some sort of government (and hence taxpayer) guarantee of mortgage securities, providing support of middle class homeowners. The other side seeks to remove the government from having either an explicit or even implied guarantee. Instead they hope to trade this removal of the government from the market for the creation of a fund to assist low-income citizens in attaining affordable rental housing. We all know President Lincoln once said “A house divided against itself cannot stand.” Well, this one can’t even roll over. Why? Because Treasury Secretary Geithner (and former National Economic Council Director Larry Summers) are in the former group, while Housing and Urban Development (HUD) Secretary Shaun Donovan and other progressive members of the Administration are in the latter. This might explain President Obama’s silence over the politically handicapped Financial Crisis Inquiry Commission. Even with the Administration’s move back towards the political center, I think the President’s chum Tim Geithner wins and their report, whenever it is issued, will maintain some government role in the mortgage market. I’m told the report will also spell out several options for housing finance reform, in very broad terms, and will not be in legislative language. The Obama Administration wants this report to add to the discussions on Fannie and Freddie, but for political reasons, they want to allow Republicans in the House of Representatives to launch the first salvo in this legislative battle. Inside the Reform Process Despite the lack of concrete action by the Administration, there are several regulatory actions that are being discussed or implemented at present. The first actions have been taken internally by Fannie and Freddie. They each have improved their balance sheets since conservatorship began. Credit standards have been raised, and both they are refusing to purchase mortgages from borrowers with poor credit scores. Fees that each entity charges to banks to guarantee their loans have also been increased and this income has helped to rebuild their balance sheets. Fannie and Freddie still owe a substantial quarterly payment to the Treasury Department in the form of a 10% dividend on the Treasury’s preferred stock. If this dividend was lowered, it would allow the them to begin to repay the billions in taxpayer support and simplify any future restructuring. Any change to the dividend would need to be approved by both Treasury and the Federal Housing Finance Administration (FHFA) which is the GSEs conservator. Expect that any changes will be subjected to heavy Congressional scrutiny. In a move I support, Fannie and Freddie are contemplating is a shift in the ways that servicers are compensated. This is crucial because the incentives in the mortgage servicing business are all screwed up and have hurt the foreclosure process. According my DCTripwire, a Federal Housing Finance Administration / HUD study is being made of future mortgage servicing structures and compensation for single-family conforming mortgage loans. Servicer compensation at present is based on a minimum servicing fee that is included in the mortgage rate, and thus decreases the flexibility of servicing non-performing loans, which has the potential to affect negatively both borrowers and guarantors. Democrats will continue to hammer on mortgage servicers and the lack of investigation and sanctions by the Obama Administration on servicers. Special Inspector General for TARP, Neil Barofsky has assured the Congressional Oversight Committee that criminal investigations and audits of the largest servicers are currently underway, in addition to the 50 state attorneys’ general investigation, though he also emphasized that the Administration could and should do more in this area. Fannie and Freddie Reform Efforts in Congress After the release of the White House report on options for the future of housing finance, look for Congress, especially Republicans in the House of Representatives, to take the lead in proposing GSE reforms. The House Financial Services Committee has already scheduled four hearings on housing and GSE-related topics. When following these developments, it is important to note that the Committee’s rules have reverted to “regular order” whereby the Subcommittee Chairs will hold all, or nearly all, of the hearings on individual topics and investigations , leaving the full Committee hearings, led by Chairman Spencer Bachus (R-AL), for marking up legislation and receiving prominent figures, such as Federal Reserve Chairman Bernanke. Reading between the lines, in my opinion I don’t think House Speaker Boehner and House Finance Committee chair Bachus are all that close these days, especially on reform of Fannie and Freddie. Boehner’s Boys This Subcommittee move is significant change and will introduce important new names and characters into the contentious world of housing finance, including the Rep. Neugebauer (R-TX); Rep. Jeb Hensarling (R-TX), Committee Vice-Chair; Rep. Scott Garrett (R-NJ), Chairman of the Subcommittee on Capital Markets & GSEs (Fannie and Freddie). The list of hearings shows that housing finance and GSE reform are the main focus of the Committee, save Dodd-Frank oversight and macroeconomic policy. What has also become apparent is that Committee Republicans are no further along in devising a credible plan for reform of the GSEs than they were during Dodd-Frank Act negotiations. After conversations with House staff, it is likely that Vice-Chairman Hensarling’s bill from the 11th Congress remains the starting point for Republican legislative reforms. The bill was widely derided in the 111th Congress as “unserious,” since it remains ideologically pure, and refuses to acknowledge the fact that the GSEs currently represent nearly 100% of the mortgage securitization market, alongside an extremely weak housing market. With this in mind, look for the Obama Administration, despite their internal disagreements, to acknowledge this reality and allow Republicans to take the lead in this contentious area as part of a delaying tactic, hoping to push reform off for as long as possible. As mentioned earlier, House Republicans have painted themselves into a corner, consistently and eagerly proclaiming that any government guarantee or involvement in the housing finance markets, save perhaps the Federal Housing Administration and Veterans Administration (for providing assistance to first-time moderate income homebuyers), is unacceptable. Look for any House Republican bill to draw heavily from the work of Peter Wallison, who along with Alex Pollock and Edward Pinto, have recently released a White Paper entitled : “Taking the Government Out of Housing Finance: Principles for Reforming the Housing Finance Market.” Rep. Garrett, who is expected to lead the way on this issue, has been quoted this past week saying definitively, “There can’t be any explicit guarantee. The main problem has been that the taxpayer has been on the hook for this credit risk for a long time. We are adamant there should be no more bailouts.” This will make any compromise with the Democrat-controlled Senate very difficult, if not impossible, let alone with the Obama Administration. Although Garrett and his fellow House Republicans are often portrayed as sympathetic to the financial services industry, the Congressman has also been quick to pour his scorn on an industry proposal, from the Financial Services Roundtable, which proposes to replace the GSEs with several privately capitalized firms that would package mortgage-backed securities, while the federal government would guarantee the interest and principal for investors. In theory the very same entities securitizing nonconforming and private label securities would also be the co-owners of the guaranteeing entities, but these would only be allowed to work with traditional, conforming, 30 year mortgages. The Federal guarantee would not apply to the new entity itself, or any debts or securities issued by them to cover the costs of their operation. The Long Road Ahead The problem for Garrett and other Republicans will be the presence of a “federal catastrophic insurance fund,” similar to that which was put in place after 9/11 for terrorism reinsurance. This fund would support the guarantee only if one of these firms fell into financial trouble. The guarantee firms would contribute to the insurance fund and several layers of capital would need to be used up before the government was responsible. Even this level of taxpayer exposure is unacceptable to many Republicans. Instead of any government support, the Republican school of thought espouses a housing finance sector where the government operates only on the margins, by setting and enforcing standards for what types of mortgages can be securitized, what are appropriate servicing standards and procedures, and potentially by explicitly offering rental assistance for affordable housing. Most plans for privatization of the GSEs are implemented chiefly through the gradual reduction in the size of the conforming loan limit (at a rate of around 20% per year), so that in theory, the private sector is able to securitize more and more newly originated mortgages, and/or an alternative such as covered bonds are introduced. Due to the problems that may result from such a plan, it is likely that the Senate Banking Committee will proceed on GSE reform at a far more deliberate pace than the House akin to the recent Dodd-Frank Act preparations. The Senate Committee (which has yet to hold its first organizational hearing) also will have several new personalities, including a new Chairman, Tim Johnson (D-SD). Its increased Republican presence, which is increasingly made up of conservative-leaning members, will likely echo the House Republicans. Two Senate Republicans are likely to emerge as key thought-leaders in this debate, Senator Mike Crapo (R-ID) and Bob Corker (R-TN). Early indications are that although they each consistently show concern for taxpayers, they both recognize the inherent risks of rushing though a privatization of the GSEs with a weak housing market and without deep and serious reforms of the other aspects of housing finance, such as the rules regarding securitization (including servicing standards, representations and warranties.) It is doubtful that any substantive legislation will be introduced before the summer and even then, it will likely only be in the House, with the Senate months, if not nearly a year behind. For more info go to www.lawrencegmcdonald.com or www.dctripwire.com

Read the full article →

Richard (RJ) Eskow: Afghanistan’s "Too Big to Fail" Bank Is Failing — Guess Our System Doesn’t Work There, Either

February 2, 2011

The collapse of Afghanistan’s largest bank will seem familiar to Americans, and so will the upcoming reports of its bailout. We’ve heard the story before: Unheeded warnings. Lax (or nonexistent) law enforcement. An American auditor who said nothing as the books imploded. Sloppy, reckless, and greedy lending. Politicians in bed with banks. And a corporate crime wave led by bankers who can break the law with impunity, knowing they won’t be punished even if they’re caught. The Kabul Bank story is a sad inversion of nation-building. It might have provided some moments of black humor for the recession-ravaged middle class, if only Americans and Afghans weren’t paying for it with their lives. We promised to teach the Afghans everything we know about running a modern economy. Apparently we did. Exporting hypocrisy The financial collapse of 2008 discredited an economic philosophy which had dominated both political parties for decades. That philosophy created a toxic cocktail of deregulation, ineffective oversight, concentrated wealth, and incentives to cheat. The end result cost the economy trillions in lost wealth, ongoing hardship for tens of millions of people, and a bailout whose true cost is still being hidden from the public. And what did we learn from all of that? Not very much, judging by the evidence. The list of institutions advising the Afghans includes the US Treasury Department and the Department of Justice — both of whom have, shall we say, underperformed when it comes to regulating banks and prosecuting financial crimes. And the consulting group that was awarded nearly $100 million to help the Afghans develop sound financial practices went bankrupt in the middle of its assignment. That’s right — bankrupt. But the source of our failure in Afghanistan isn’t in the government’s choice of advisors or its failure to manage its developmental efforts properly, as harmful as those things have been. The real problems in Afghanistan are philosophical, not managerial, and they’re the same ones that have plagued us at home: a continued belief in failed economic theories; indifference or hostility toward regulation and regulatory agencies; a too-cozy relationship between banks and politicians; and, worst of all, the willingness to tolerate (and therefore condone) a list of bank crimes that includes fraud, forgery, and laundering drug money. “Thin Tightrope” Cables released by WikiLeaks reveal that U.S. Ambassador Karl Eikenberry considered it necessary to walk a ” thin tightrope ” when working with corrupt officials. The cable indicated that Eikenberry collaborated with an “allegedly corrupt official because he could serve as a “stabilizing… force” (militarily, in this case.) This official’s “illicit (drug) trafficking” was not to be tolerated in the interests of security. That philosophy extended to banking, where the now-failing Kabul Bank and other banks were widely understood to be helping Afghans get illicit drug money out of the country. Kabul Bank is no different from Wells Fargo, either in its willingness to handle drug money or its apparent impunity from the law. As Bloomberg News originally reported, Wells Fargo’s internal screening unit repeatedly turned a blind eye to money laundering on behalf of mass-murdering Mexican drug cartels. Regarding these drug laundering charges, Bloomberg reported that “no big U.S. bank — Wells Fargo included — has ever been indicted. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.” As Bloomberg explains, “Large banks are protected from indictments by a variant of the too-big-to-fail theory.” In other words, once a bank is big enough to pose a threat to the economy it receives effective immunity for past and future criminal behavior — a license to commit crime. Yet “too big to fail” provisions were removed from last year’s US financial reform law by lawmakers on Capitol Hill whose own favorite investments included Bank of America, Goldman Sachs, and JPMorgan Chase. And Afghanistan’s largest bank, a corrupt collaboration between its president and the bank’s principal owners, grew large enough to become a “systemic risk” to the nation’s economy… as our own government stood and watched. Meanwhile, here at home, corporate lawbreakers like Bank of America, Wells Fargo, Goldman Sachs, and JPMorgan Chase are apparently still considered a “stabilizing force.” Too big to fail As the New York Times reported this week: Fraud and mismanagement at Afghanistan’s largest bank have resulted in potential losses of as much as $900 million — three times previous estimates — heightening concerns that the bank could collapse and trigger a broad financial panic in Afghanistan, according to American, European and Afghan officials. The extent of these losses make it clear that keeping the bank afloat — something the government has said it is determined to do — would require large infusions of cash from an already strained budget. The crisis was a long time coming. As the Times reported last September , Afghan President Hamid Kharzai has family ties and a personal financial interest in the bank, and agreed to bring the brother of one of the bank’s principals into the government as his Vice Presidential running mate. (But then, American Administrations from both parties (including the current one) have hired a string of senior bank officials and watched others leave government to join big banks — not as egregious, perhaps, but a clear conflict of interest.) If an institution is allowed to become “too big to fail,” it’s rarely an accident. The corruption has already taken place somewhere along the line. Austerity and Deregulation We’re told that Deloitte, the auditor in place at Kabul Bank, was not specifically tasked with reviewing its accounts. Deloitte apparently acquired the contract when it purchased BearingPoint, the consulting firm that went bankrupt. But unless there are more contracts being awarded than have been widely reported, the original BearingPoint contract (worth a reported $98 million) was designed to help banks “improve economic governance.” There were reports as far back as 2005 that some of the consultants on the project were “subpar” and that US contractors were receiving widespread criticism locally. BearingPoint has promoted a privatization-oriented approach during its richly (and, let’s not forget, publicly ) funded tenure in Afghanistan, as it has in other countries. The firm and its successor unit within Deloitte have done some good work, but remain part of a well-paid consultant nexus that emphasizes the same set of shared values that undermined the US economy. In other words, BearingPoint and like-minded vendors have been faithful in the execution of an austerity-minded philosophy — a philosophy that can sometimes become anti-government in many ways, and whose philosophy of “austerity” rarely extends to its own practitioners. The Afghan Research and Evaluation unit, a group set up by the international aid community in Afghanistan, assessed Afghan aid as follows: “Consistent with the current consensus on development held by the donor community and international financial institutions (IFIs), the privatisation process has gained increased momentum in Afghanistan … Fifty four fully state-owned enterprises (SOEs) have been slated for privatisation as going concerns or through liquidation by the end of 2009.” In BearingPoint’s case, their sympathy for this downsizing-government approach isn’t surprising. Alice Rivlin, the economist best-known for relentlessly advocated Social Security cuts, was a member of the Board and the company’s leading economic figure — before it went bankrupt. They say they weren’t doing the bank’s books. But if they were there to “improve the economic governance” of Kabul Bank, an institution whose misdeeds were well-known and whose implosion could topple the economy, then it’s certainly fair to say that their work has been “subpar.” Toxic Assets A report commissioned by the International Monetary Fund got the problems right. “As of March 2008,” the report noted, “the two largest domestic private banks accounted for almost 50 percent of total banking system assets. The combined loans of these two banks were 70 percent of total commercial bank lending.” The mayor of Kabul was indicted by the Afghan government on corruption charges, but U.S. officials wound his explanation credible: He was arrested by corrupt officials after he exposed their own misdeeds. Specifically, he told officials that he found files for more than 30,000 applicants who paid for “nonexistent plots of land in Kabul.” These toxic assets were part of a larger get-rich-quick schemes for officials who apparently found his investigations inconvenient. The IMF report also included this observation: “Most banks did not attach particular importance to analysis of borrowers’ balance sheets, cash flow, or business plans.” That kind of lax underwriting will be familiar to observers of American lending practices. The report also noted, somewhat laconically, that “banks that lend extensively domestically engage in extra-judicial, non-traditional contract enforcement. ” Extra-judicial? As in illegal? It sounds like we’ve exported foreclosure fraud, too. Do as we say, not as we do The procurement process for USAID projects in Afghanistan seems to be a mess. Sen. McCaskill was surprised to learn that major contractors there were not being asked to file the usual tracking reports . The Obama Administration was criticized for awarding a major contract to a Democratic party donor , and for using the “no-bid” process it has criticized in the election campaign to do it. After Kabul Bank’s impending failure was reported, the US government insisted that the Times update its story to include a quote from a Treasury Department spokesperson saying that “no American taxpayer funds will be used to prop up Kabul Bank.” But that doesn’t have any more credibility than Treasury Department claims that bank bailouts in this country have been fully repaid — a claim that doesn’t count aid funneled through the Federal Reserve, the cash value of low- and zero-interest bank loans, and other taxpayer-funded measures. Ninety percent of Afghanistan’s national budget was financed by foreign countries last year, with the US assuming a significant chunk of the cost. When the Afghans conduct their first bank bailout, under United States supervision, the funds will undoubtedly come from the Afghan treasury. And then funds from ours will help make up the shortfall elsewhere. Yes, corruption among politicians and other officials is a much greater problem there. They’re a drug-based economy whose principal export is poppies. Their country is divided, impoverished, and largely illiterate. But economic behavior is universal. Their bankers are subject to the same “moral hazard” as bankers everywhere: When “too big to fail” banks can gamble with absolute certainty that they’ll be rescued, that’s exactly what they’ll do. When bankers know they can commit crimes go unpunished, they’ll commit crimes. And they won’t stop until people start going to jail — in both countries. “You complete me …” A jargon-laden report from the Congressional Research Service addressed what it called “ROL,” an acronym that stands for the “rule of law,” and concluded: “Helping Afghanistan build its justice sector … suffers from the same difficulties that have complicated all efforts to expand and reform governance in that country: lack of trained human capital; traditional affiliation patterns that undermine the professionalism, neutrality, and impartiality of official institutions; and complications from the broader lack of security and stability in Afghanistan.” In other words, they’re saying that Afghans are too tribal and primitive to do things the American way. But that’s not true. Yes, education and training is needed. But their lack of law enforcement, especially in the financial sector, directly reflects the level of emphasis we’ve placed on it ourselves — in their country and here at home. We’ve lavishly funded privatization efforts and the unrestrained growth of private and morally corrupt banks, while at the same time devaluing the role of regulation and law enforcement. The problem with the Afghans isn’t that they’re not like us. The problem is that we’re too much alike. People everywhere are, pretty much, especially where money’s concerned. So until we change the way we govern, the results are likely to be the same wherever we go. Crimes will still be committed, banks will still fail, and we’ll all keep paying the price for a moral, legal, and economic blindness that keeps leading us off the same cliff over and over again. Richard (RJ) Eskow, a consultant and writer (and former insurance/finance executive), is a Senior Fellow with the Campaign for America’s Future. This post was produced as part of the Curbing Wall Street project. Richard also blogs at A Night Light . He can be reached at “rjeskow@ourfuture.org.” Website: Eskow and Associates

Read the full article →

Terry Newell: The Debt Tax

January 2, 2011

Don’t look now, but Congress just raised your taxes. How can that be? Didn’t they just approve a bill that will keep Bush-era tax cuts in place, lower the inheritance tax, and lower the Social Security tax for a year? Call it the “debt tax.” Whenever the federal government enacts a bill that it does not pay for, we go further into debt — in this case $900 billion. When you buy something you can’t afford, you borrow the money and pay interest on what you borrow. The interest the government has to pay on its debt has to come from you, the taxpayer, and thus it acts just like a tax — your tax dollars pay it. In 1940, the federal government paid $10.3 billion in interest on the debt, $78 for every man, woman and child in America at the time. In 1980, the government paid $111.6 billion in interest, or $491 for every American. Fast-forward to 2010, where the comparative figures were $168.4 billion and $545. Chump change. According to the President’s Budget for 2011, interest on the debt will be $474 billion by 2015, a per capita cost of $1,454. In short, the “debt tax” will increase nearly 300 percent in just five years. If this sounds like “so what, I don’t actually have to pay more,” think about it another way. If the federal government had no debt in 2015, it could lower your taxes by $1,458. For a family of four, that would amount to a tax bill nearly $6,000 less. According to the bipartisan Congressional Budget Office (CBO, in 2020, when net interest on the debt is projected to cost $937 billion, that net interest will be 14 percent of federal spending, nearly as much as we will spend on Defense (15 percent) and Medicare (17%). Oh, and the per capita cost of the interest will by then be $2,789. In 1985, the entire federal budget was $946 billion. By 2020, based on CBO’s estimates, we’ll pay nearly that just in interest. In short, the “debt tax” in 2020 will equal what the federal budget was in 1985. One more thing. When you pay the debt tax, you might at least take comfort in the fact that your tax dollars are doing back to good old Uncle Sam, right? Well, only partially. The U.S. government owes nearly a third of its debt to foreign creditors (over $4 trillion). So, roughly 30 cents of each “debt tax” dollar goes to a list of countries that includes China (our biggest creditor by dollar volume), Japan, the U.K, Russia, the oil exporting countries of the Middle East and Brazil. Isn’t it comforting to know that our “debt tax” dollars are financing the growth of our competitors? On the brighter side of all this, you might think: well, Republicans, Democrats, and the White House finally stopped shouting at each other and agreed on something. They compromised. But how hard is it really to compromise on spending more money? Maybe each bill coming before Congress should have to report what impact it will have on the “debt tax.”

Read the full article →

Richard (RJ) Eskow: Which of These Banks Was 2010′s Most Shameless Corporate Outlaw?

December 30, 2010

Bankers. The red carpet’s still being rolled out for them in Washington, but if there’s a stain on it they’ll pout for days. Jason Linkins documents the latest set o f cheap white whines from very wealthy white men . This time they’re upset because nobody from the six largest banks in America was invited to the President’s CEO Roundtable. They’re offended because they didn’t meet with the President? From the looks of things they’re lucky not to be meeting with the warden . Let’s review the record for these corporate malefactors, and then decide: Which of these six banks was “America’s Most Shameless Corporate Outlaw” in 2010? #1. Bank of America Here are some recent headlines for the country’s largest bank: ” Bank of America Ends Year With Flurry of Lawsuits ” ” Arizona Sues Bank of America ” ” Arizona Wants Bank of America Held in Contempt ” ” Nevada, Arizona sue Bank of America over failed mortgage aid ” ” Allstate Sues Bank Of America For Selling ‘Toxic’ MBS ” ” Bank of America Hit With Missouri Class Action Over Loan Modifications ” Here are the details: Associated Press : “Attorneys general in Arizona and Nevada filed civil lawsuits Friday against Bank of America Corp., alleging that the lender is misleading and deceiving homeowners who have tried to modify mortgages in two of the nation’s most foreclosure-damaged states.” Courthouse News Service : “Bank of America violated a consent judgment it signed almost 2 years ago to provide loan modifications and help relocate borrowers, the Arizona attorney general claims … Bank of America has continued to misrepresent ‘to Arizona consumers whether they were eligible for modifications of their mortgage loans, when Bank of America would make a decision on their modification requests, whether Bank of America had approved their modification requests, why Bank of America declined their modification requests, and whether and when Bank of America would foreclose upon their homes.’” Consumer Affairs : “The bank is also facing at least three suits claiming that it reneged on duties it undertook by accepting $25 billion under the Troubled Asset Relief Program (TARP).” In total, Bank of America’s last annual report lists 29 pending lawsuits against the company. Lawsuits are not proof of guilt, of course. But the bank has already paid a fine for illegally concealing $6 billion in payouts to employees, and another fine for concealing major losses at its Merrill Lynch subsidiary. ( Both fines were low – not much more than a slap on the wrist – because Bank of America was on taxpayer-funded life support at the time.) BofA also confessed to committing fraud as part of a settlement this month, which the Justice Department noted was restitution “for its participation in a conspiracy to rig bids in the municipal bond derivatives market.” The Bank was also ordered to pay Lehman $590 million for illegally seizing its deposits , in violation of bankruptcy law. Bank of America has been one of the worst offenders during the foreclosure crisis, with documented case of widespread abuse and legal violations. From the Associated Press : “A document obtained last week by the Associated Press showed a Bank of America official acknowledging in a legal proceeding that she signed thousands of foreclosure documents a month and typically didn’t read them. The official, Renee Hertzler, said in a February deposition that she signed 7,000 to 8,000 foreclosure documents a month.” How generous has the taxpayer been to Bank of America? There was the TARP money, of course. And BofA, like other banks, has been suckling at the teat of Federal Reserve’s discount money window throughout the crisis. And, as Zach Carter noted, the bank was also one of two institutions that were the main beneficiaries of a special Fed program called the Primary Reserve Credit Facility. There were those cushy settlements with the SEC. BofA stock was trading at $53 at the end of 2006. As of this writing the stock is trading for $13.30. But its executives have been wasting corporate money and resources buying up 419 web URLs with insulting phrases and the names of their senior executives – most of whom nobody’s ever heard of – to protect their personal reputations. No company’s ever done that before. Bob Scully “blows” (bobscullyblows.com) and Bill Boardman “sucks” (billboardmansucks.com)? Who knew? Last year two senior executives received $9.9 million and two others received $6 million in total compensation. If they’re really worried about their reputations they should stop running their company in a way that “sucks” and “blows.” The guy who robbed a Bank of America branch in West Palm Beach is going to prison . The bank’s senior executives are hurt that they didn’t get invited to the Rose Garden for tea. Rap Sheet: BofA has probably committed more foreclosure offenses than any other single institution. It deceived stockholders, and the public, about the $6 million in bonuses it paid out (during the rescue process). It was equally deceptive about Merrill Lynch’s financial status. And it admitted to rigging bids for municipal bond derivatives. Shameless Quotes: CEO Brian Moynihan’s response toward demands that his bank comply with HAMP’s legal requirements? “Sure,” he sneered,” we’ll go back and check our homework again.” And he says he won’t accept anything but “constructive criticism.” #2. JPMorgan Chase ” We don’t think there are cases where people were evicted out of homes when they shouldn’t have been .” JPM Chase CEO Jamie Dimon. From the Washington Post : “J.P. Morgan Chase, one of the nation’s leading banks, announced Wednesday that it will freeze foreclosures in about half the country because of flawed paperwork.” As we learned recently, Jamie Dimon doesn’t feel loved or admired enough. Small wonder, given the way his bank treats customers. Even as he was making arrogant statements like this one, papers like the New York Times were telling the truth about the sleazy operation he’s running at JPMorgan Chase: “At JPMorgan Chase & Company, they were derided as ‘Burger King kids’ — walk-in hires who were so inexperienced they barely knew what a mortgage was … revelations that mortgage servicers failed to accurately document the seizure and sale of tens of thousands of homes have caused a public uproar …” Failure to accurately document home foreclosures is illegal. I’s lousy management, too. Chief Executive Dimon oversaw a sloppy operation that’s going to cost his shareholders a lot of money : “JPMorgan set aside $2.3 billion of reserves to cover mortgage repurchases or litigation expenses, including some for ‘mortgage-related matters,’ the lender said Oct. 13.” A whistleblower complaint alleges that the bank “sold to third party debt buyers hundreds of millions of dollars worth of credit card accounts. . .when in fact Chase Bank executives that many of those accounts had incorrect and overstated balances.” According to the complaint, “Chase Bank executives routinely destroyed information and communications from consumers rather than incorporate that information into the consumer’s credit card file … mass-executed thousands of affidavits in support of Chase Banks collection efforts … (and) did not have personal knowledge of the facts set forth in the affidavits.” It also claims that “when senior Chase Bank executives were made aware of these systemic problems, senior Chase Bank executives — rather than remedy the problems — immediately fired the whistleblower and attempted to cover up these problems.” There are also multiple lawsuits against Chase for allegedly manipulating the price of silver, and there is at least one report that the bank is being probed by several Federal agencies (including the Justice Department) over its trading activities in precious metals. JPMorgan Chase is also one of several banks that are being sued over the handling of Bernie Madoff funds . JPMorgan Chase “agreed to pay $25 million to settle allegations it sold unregistered securities, many of which defaulted, to the state of Florida,” as the Orlando Sentinel reported. That’s a crime. Chase was also one of several banks that paid to settle charges that it illegally propped up a failed mortgage lender . (These settlements have typically allowed the banks to “admit no wrongdoing” – a practice which should be stopped. These are crimes.) JPMorgan Chase’s behavior in Jefferson County, Alabama made Huey Long look like a piker. The bank spread more than $8 million around the county through local interediaries to secure highly lucrative deals on municipal derivatives. As Bloomberg News put it, ” JPMorgan, the second-largest U.S. bank by assets, used fees on the unregulated derivative contracts — and a trip to a New York spa for one elected official — to curry political favor, a decade after the SEC adopted rules to drive out pay-to-play from the $2.8 trillion municipal bond market.” The bank conducted this criminal behavior under Dimon’s watch. And while it “neither admitted nor denied wrongdoing,” as usual, it had to pay a three-quarters-of-a-billion dollar settlement to wrangle its way out of this snakepit of illegality. Rap Sheet: Corruption in Alabama; widespread violation of foreclosure laws; sale of unregistered securities. Also under investigation for illegal manipulation of the precious metals market; mishandling of Madoff funds; deliberate lawbreaking in credit card processing, concealment of criminality. Shameless quotes: “Judy Dimon says the crisis took a toll on him. He used to stand up to bullies who threatened his smaller twin; now he felt as if he, and bankers in general, were being bullied.” (from a New York Times profile of Dimon) 3. Citigroup Citi’s being sued for gender discrimination by its own employees. Citi settled a class action lawsuit after illegally raising rates for credit card customers . The bank’s being sued by an independent trustee for allegedly “aiding and abetting” a Ponzi schemer . Citi executives were given slap-on-the-wrist fines for lying to investors about $40 billion in subprime exposures, which is a criminal act. It should also be remembered that Citigroup paid $2.65 billion in 2004 to settle class action lawsuits over its alleged illegal actions in propping up WorldCom stocks in return for enormous fees. As Citi’s annual report notes, “Citigroup and Related Parties have been named as defendants in numerous legal actions and other proceedings asserting claims for damages and related relief for losses arising from the global financial credit and subprime-mortgage crisis that began in 2007.” Citi is still being investigated by Italian courts for possible criminal behavior in the Parmalat case, and it’s being sued by a Norwegian bank for misrepresenting its financial condition and failing to disclose material information. It’s being sued by investors for misrepresenting its underwriting of mortgage backed securities. Rap Sheet : Violation of SEC law regarding corporate disclosures; illegal rate activity toward credit card customers. Under investigation for aiding and abetting a Ponzi scheme. Shameless quotes: “Almost all of us … missed the powerful combination of forces at work and the serious possibility of a massive crisis.” (Robert Rubin) “On November 3, 2007, I sent an email to Mr. Robert Rubin and three other members of Corporate Management. In this email I outlined the business practices that I had witnessed and attempted to address. I specifically warned about the extreme risks that existed within the Consumer Lending Group.” (Former Citi exec Richard Bowen) 4. Wells Fargo They illegally laundered drug money for the Mexican cartels – and nobody went to jail. Here’s a suggestion: Read stories “War Torn Mexico: A Population in Terror ,” which begins: “Massacres, beheadings, YouTube videos featuring cartel torture sessions and even car bombs are becoming commonplace in Juarez.” Study the statistics on the violent murders – which include Federal agents , children, and “penniless immigrants ” – and then remind yourself: These are Wells Fargo’s business partners. Rap Sheet: What can anyone add to that? Shameless quotes: “We’re more of a Main Street bank than a Wall Street bank.” “”Of all the decisions I’ve had to make, few have been as difficult as cutting the dividend.” (Wells Fargo CEO John Stumpf) 5. Goldman Sachs Goldman is Goldman. The SEC charged them with fraud, and they settled the suit by admitting their marketing materials contained lies – they called them “mistakes.” They were fined by Great Britain for illegally concealing US fraud investigations. Goldman has a gender discrimination lawsuit, too, and theirs comes complete with strippers and racist emails . Goldman’s being sucked for deceiving its clients over an offering its own people privately (and thanks to Sen. Levin, famously) bragged was ” a shitty deal .” Goldman paid $60 million in Massachusetts to settle charges of predatory loan practices. After mismanagement drove Goldman into impending doom, the firm was saved by TARP funds and Federal Reserve’s Emergency Liquidity Programs. Total taxpayer lending to Goldman exceeded three-quarters of a trillion dollars. Goldman also received $13 billion in backdoor payouts through the AIG liquidation (under Tim Geithner’s supervision). Rap Sheet: Fraudulent misrepresentation; predatory loan practices; illegal concealment of an investigation. And God know what else. They’re Goldman, man! S hameless Quotes: “”We’re very important … We do God’s work.” (Goldman CEO Lloyd Blankfein) “If I whet My glittering sword, and Mine hand take hold on judgment; I will render vengeance to Mine enemies.” (God) 6. Morgan Stanley Earlier this year the Wall Street Journal reported that “U.S. prosecutors are investigating whether Morgan Stanley misled investors about mortgage-derivatives deals it helped design and sometimes bet against.” The firm’s also being sued by US Bank for fraudulently misleading it and other investors over a structured residential investment called “Tourmaline.” A group of investors in Singapore is suing the firm for designing CDOs to fail and then selling them as “conservative investments.” The Financial Industry Regulatory Authority fined Morgan Stanley this year for failing to disclose material conflicts of interest to investors. The same agency hit the firm with a $12.5 million fine in 2007 for illegally concealing emails during customer arbitration hearings. In a particularly sleazy move, Morgan Stanley claimed that the emails had been lost on 9/11, when they were all safely stored in backup copies elsewhere. MS was also sued by the EEOC for gender discrimination . The firm was able to beat back an investors’ lawsuit over bloated executive pay – it set aside 62% of net revenue for employee compensation – so its executives get to keep fat bonuses for driving the company into the ground. Greed and stupidity aren’t illegal, after all. On the other hand, their portfolio of lawsuits including one that says they defrauded nuns in Europe . Rap Sheet: Despite numerous violations and charges, Morgan Stanley is a relatively minor player compared to its bigger colleagues. On the other hand, it illegally concealed evidence from arbitrators by using the World Trade Center attack as an excuse, and six of its own employees died in that attack. That’s simply vile. On top of that, they’re being sued by nuns . Shameless Quotes: “When we think back on 2001, we are filled with deep sorrow and outrage over the events of September 11. Who among us will ever forget the shock and horror of that day?” (Morgan Stanley Annual Report, 2001) “When you come that close to really going out of business, call it near death, death experience, the end of the line, whatever you want to call it, your only focus is to make sure your company survives.” (former CEO John Mack) __________________ We rescued these six banks. They’ve all broken the law, and they’re all under a cloud of suspicion regarding even more possible illegalities. And yet they’re all pouting because they weren’t invited to the White House. Which is our most shameless corporate lawbreaker? Bank of America’s the biggest, and it has probably committed the most widespread foreclosure fraud. JPMorgan Chase has played fast and loose with the law, and Dimon’s unwarranted arrogance raises their shamelessness quotient dramatically. It’s hard to top Wells Fargo and the drug cartels (although getting sued by nuns comes pretty close). Citi had Chuck Prince and Robert Rubin, two pretty shameless individuals. And Goldman … well, as we were saying, they’re Goldman . In any normal period of history all of these organizations would be recognized as corrupt institutions, and their leaders would be ashamed to show their faces among respectable people. But these aren’t normal times, are they? Frankly I’m stumped. You guys decide. They all deserve the title as far as I’m concerned.

Read the full article →

Richard (RJ) Eskow: The GOP and the Banks: Cutting the Garlic Budget as the Vampires Attack

December 22, 2010

Van Helsing: “The strength of the vampire is that nobody will believe in him.” America’s debt to Wall Street has soared since 1945 — and although the banks were rescued at the public’s expense, the public’s been left holding the bag for the recent drop in housing prices: Hmm… How many times has the word “vampire” appeared in books during the same period [1]? What does this mean? Does it reflect the public’s subconscious response to predatory banking? Or is it just some guy having nerdy fun with data sets by juxtaposing two trend lines that have nothing to do with one another? We report, you decide. Here’s what we do know: Like their fictional counterparts, America’s banks are revenants, re-animated creatures who were brought back from the dead through the public’s generosity. Now they’re feasting on the rest of us again, while politicians in Washington work to rob us of the few tools we can use to defend ourselves. With some Democratic complicity, Republicans are fulfilling the promise of Rep. Spencer Bachus, who said that “Washington and the regulators are there to serve the banks .” And what they’re serving them is you . The Count: “Listen to them! The creatures of the night. What music they make… ” The rap sheet against America’s banks grows longer and longer. They keep stringing people along with phony foreclosure negotiations, and then foreclose anyway. And we’re hearing more and more stories about bank agents who, as they’re invading and padlocking illegally foreclosed homes, also steal the private property inside them. In

Read the full article →

David Isenberg: Miles to Go Before the PMC Industry Rests

December 7, 2010

When reading about private military contractors there are two pieces of supposed conventional wisdom to keep in mind. The first, which is especially touted by PMC advocates, is that media coverage of their sector is frequently shallow, inaccurate, incomplete, out of context or wildly sensationalistic. The second is that while there may be problems things are a lot better than they used to be and are getting better yet. Those assertions are, at least partly, true. For example, the tired old canard that private security contractors are just mercenaries in drag is scurrilous and should have been laid to rest many years ago. And yes, thanks to the efforts of legislators, non-governmental organizations, reporters, academicians, lawyers, groups like the Special Inspector General for Iraq Reconstruction and the Commission on Wartime Contracting and even some executive branch officials the overall environment, from an oversight and accountability perspective, is somewhat better. But that is not the entire truth. To paraphrase Robert Frost’s famous poem, “Stopping by Woods on a Snowy Evening,” the PMC industry has promises to keep and miles to go before it rests. As a case in point, consider the remarks made last week by Sen. Byron Dorgan (D-ND), He is Chairman of the Senate Democratic Policy Committee (DPC). He is retiring after 30 years in Congress. On December 2 he addressed the Senate and reviewed the 21 hearings the DPC has conducted on contracting waste, fraud and corruption in Iraq and Afghanistan since 2003. You can see a listing of past DPC hearings here . Sadly, none of the media seems to have covered Dorgan’s remarks. Here is a case where PMC advocates are right; media coverage is lacking. As far as I know I am the first to write on this. But his remarks merit careful reading as they illustrate how far the government has to go before it reaches a level of reasonably effective oversight of PMC. Note that I wrote reasonably effective, not perfect. You can find Dorgan’s remarks in the Congressional Record for December 2, 2010 (Senate)] [Page S8377-S8380]. I recommend you read the whole thing as it is not very long. Here are a few excerpts. I believe I have held 21 hearings as chairman of the Democratic Policy Committee over recent years–21 separate hearings on the subject of waste, fraud, and abuse in contracting in the wars in Iraq and Afghanistan. Much of it still goes on in terms of the work with the Pentagon on this contracting issue. I have just received a letter from the inspector general at the Pentagon, who is looking into one of the issues of the last hearings– the issue of soldiers and contractors who were exposed to sodium dichromate, a chemical that was the subject of the movie “Erin Brockovich,” soldiers who were exposed and not told they were exposed to that deadly carcinogen and some of whom have already died. They were both National Guard and Regular Army soldiers. In the context of doing a lot of these hearings, I have discovered and I believe that throughout the last decade, we have seen the greatest waste and fraud and abuse in the history of this country. It has contributed immeasurably to this overspending and deficits and debt. I wanted to talk about that work we did, myself and my colleagues, over 21 separate hearings. At one of the hearings we held, we had testimony from a man who, in Iraq, was responsible for rooting out corruption in the Iraqi Government. His name was Judge al-Radhi. I have a photograph of Judge al-Radhi. He testified in this country. He testified that in his work as head of the anticorruption unit in Iraq, he found that $18 billion was missing, most of it American money, most of it coming from the American taxpayer. Just missing. Now, why was he here in the country testifying at a hearing I held? Because he got booted out of Iraq, and he got no support from the U.S. Government as he was booted out of Iraq, and he ended up in this country. But he is the person who was supposed to be rooting out and investigating and prosecuting waste and fraud and abuse. His investigations and the investigations of his staff–some of whom were assassinated, some of whose families were killed–show there was $18 billion–$18 billion–missing, and most of it was American money. Well, that is the story about Judge al-Radhi. We had a hearing early on in this process and talked about the issue of contractors and contracting. As you know, in the early part of the war in Iraq and in Afghanistan, money was just shoved out the back door of the Pentagon, hiring contractors, very large contracts, in most cases no-bid, sole-source contracts. A very courageous woman came to testify before our committee. Her name was Bunnatine Greenhouse . She was the highest civilian official at the Army Corps of Engineers, the highest civilian official in the Pentagon in charge of contracting. Here is what she said. She objected to the way the Pentagon was doing these contracts, massive contracts, sole-source, a massive amount of money, and she watched as the normal processes were avoided and ignored. She testified in public: I can unequivocally state that the abuse related to contracts awarded to Kellogg, Brown & Root represents the most blatant and improper contract abuse I have witnessed during the course of my professional career. This is an extraordinary woman, the highest civilian person in the Army Corps of Engineers. She was in charge of contracting. Two master’s degrees, came from a family in Louisiana. All three kids have advanced degrees. Her brother, by the way, was one of the 50 top professional basketball players in the last century, Elvin Hayes. Bunnatine Greenhouse. Remember that name. A very courageous woman, she saw abuses, spoke about it publicly, and for that she lost her career. She gave up her career. She was told: Resign or be fired. Let me talk about what she meant when she said the most unbelievable abuses she had seen in contracting. I want to do it starting small because then I am going to talk about billions of dollars. But at one of our hearings, we had a man who kind of looked like a bookkeeper at a John Deere dealership in a small town. He was kind of a good old guy with glasses, and he had been in charge of purchasing for Kellogg, Brown & Root or Halliburton over in Kuwait, purchasing the things our troops needed in Iraq. He came and testified, and he said: You know, as I was purchasing things, I was told by my employer, Halliburton: Don’t worry what the cost is, the taxpayer pays for this. This is cost-plus. So he told us a number of examples, big examples, but he brought a small one that I thought reflected the entire attitude. This is a towel. I ask unanimous consent to show the towel on the floor of the Senate. The PRESIDING OFFICER. Without objection, it is so ordered. Mr. DORGAN. This is a towel. Halliburton was to purchase towels for the troops, hand towels. You know, they were purchasing hand towels to be awarded to the troops. So he ordered some white hand towels for the troops, and his boss said: Well, you can’t order those white hand towels. You have to order the hand towels that have the logo of our company, “Kellogg, Brown & Root,” on the hand towel. Mr. Bunting said: Yes, but that would quadruple the cost. His boss said: That doesn’t matter. This is a cost-plus contract. Order the towels. Put our company name on them. I mean, this is such a small but important symbol of the behavior that went on for most of the decade that fleeced the American taxpayers. … We heard from witnesses about the Parsons Corporation, which got a $243 million contract to build or repair 150 health clinics in Iraq. Two years later, the money was all gone, and there weren’t 150 health clinics, there were 20. I had a doctor, a very brave, courageous physician, come to this country to testify to what he saw of the ones that were completed. Unbelievable. So what happened to the money? The American taxpayers lost the money. Did this improve the health of the Iraqis? The physician who came to testify said he went to the Minister of Health in Iraq and said to the Minister of Health: Where are those clinics, because I am told the Americans have spent $243 million to build health clinics. Where are the clinics? The Iraqi Health Minister said: Well, most of them are imaginary clinics. Yes, but the money was not imaginary. The American taxpayers’ money is gone. We had several hearings on the issue of Kellogg, Brown & Root. And I mention them because they got the biggest contract, sole-source contract. That is why they are the ones that are mentioned the most. They were providing water treatment to the military facilities in Iraq. So our solders are in military camps in Iraq, and KBR gets the water treatment contract. It turns out that the nonpotable water they were providing to soldiers in the camps that we had a hearing on was more contaminated than raw water from the Euphrates River. We actually had, from a whistleblower, the internal memorandum from Kellogg, Brown & Root, by the guy who was in charge of the water contract in Iraq, and in his memorandum, he said this was a near miss. It could have caused mass sickness or death. But publicly, they said it didn’t happen. The Defense Department said it did not happen. But it did happen, and I asked the inspector general to investigate it. He did. He did a report and said that both the Defense Department and Kellogg, Brown & Root were wrong. It did happen, in fact. That kind of contaminated water was being served to the troops because the contract was a contract that was not provided for appropriately by the company. The company was taking the money and not doing what it was supposed to do with the water. By the way, in the middle of these hearings, while the Department of Defense, Department of the Army, as well as Kellogg, Brown & Root were denying it all, I got an e-mail here in the Senate from an Army doctor, a captain, and she wrote to me and said: I am a physician in the camp. I had my lieutenant follow the water line to find out what was happening because I had patients here who showed that they were suffering diseases and suffering problems as a result of contaminated water. So that came from the physician who was in Iraq on the ground. So despite all of the denials, the inspector general finally issued a report saying: No, no, the Defense Department was wrong, as was Kellogg, Brown & Root. A contract to provide water to these soldiers across Iraq at the Army camps was not being appropriately handled, and very contaminated water was going to those camps. The list is almost endless. I know there is a photograph I have shown on the floor previously because it is another contract to provide electrical capabilities to the Army camps. When you put up an Army camp, you have the need to provide electricity. And I held two hearings on this subject. This is a photograph of SGT Ryan Maseth–quite a remarkable young man, a Green Beret from Pennsylvania. He is shown there with his mother, who is a very courageous woman as well. He was killed in Iraq, but Sergeant Maseth wasn’t killed by a bullet from an enemy gun; Sergeant Maseth was killed taking a shower. He was electrocuted in a shower. And it wasn’t just Sergeant Maseth; others lost their lives as well–electrocuted in a shower, power-washing a Jeep. The fact is, what we discovered when we held the hearings was that the work that was done to provide electricity and to wire these camps was done in some cases by people who didn’t have the foggiest idea what they were doing. Third-country nationals who couldn’t speak English and didn’t know the first thing about electricity were working on these issues. The Army originally told Mrs. Maseth that her son died, they thought, because he took an electrical appliance into the shower. No, he didn’t. He was killed because shoddy electrical work was done that ended up killing this soldier. Now, Kellogg, Brown & Root denied that, as did the Defense Department. The inspector general did the report and said: Oh, yeah. Yeah, that sure did happen. In fact, let me show you what the inspector general has said. This is from Jim Childs, master electrician hired by the Army Corps of Engineers, to inspect this electrical work for which the American taxpayer paid a bundle. Jim Childs, master electrician, went in after I held the hearings. He said: [T]he electrical work performed by KBR in Iraq was some of the most hazardous, worst quality work I have ever inspected. Let me show what Kellogg, Brown & Root said: The assertion that KBR has a track record of shoddy electrical work is simply unfounded. The inspector general did the inspection. We had to redo much of the work in Iraq and Afghanistan, inspect it all and redo much of it. In the meantime, people died. We have demonstrated that there is evidence of shoddy work in a range of areas. Yet the contractors continue to be given additional contracts. For the shoddy electrical work for which some soldiers gave their lives, this contractor was not only given the money from the contract but bonus awards for excellent work. I have tried very hard to get the Pentagon to take back those bonuses, unsuccessfully. But the reason I am going through this is to point out that we have for a decade now been shoveling money out the door at a time when we are deep in debt, spending a great deal of money on the defense of this country, on the Defense Department, on the war effort, and so on. A substantial portion of that which goes out the back of the Pentagon in the form of contracts has represented the most egregious waste in the history of the country. … I started by talking about the issue of sodium dichromate. We think about 1,000 soldiers were at risk at a place in Iraq that is called Qarmat Ali. Some have died. Those soldiers who were at Qarmat Ali told of seeing something like sand blowing all over the place. It was red, however. That was the sodium diechromate, a deadly carcinogen. It is the subject over which a movie was made called “Erin Brockovich.” We have tried for a long time to get the Pentagon to be as active and involved as they should be with respect to the health and safety of those 1,000 soldiers who were potentially exposed. Like most of these issues, they have been very slow to respond. My point is twofold. One is about supporting America’s fighting men and women, doing what is right for them. There have been a number of people in the Pentagon–one of whom testified before the Armed Services Committee in the Senate and who I strongly believe knew he was not telling the truth. He was a general, as a matter of fact. There have been a number who have denied virtually all of these circumstances. Yet inspectors general have investigated and said they are wrong. Obviously, the contractor denies these things. The contractors have gotten wealthy doing this. We have had whistleblowers come in. A woman came in and told us she was working at a recreational facility in the war theater, and that is at the base. There is a facility where you can play pool and ping-pong and do various things. It was a facility with many different rooms. She worked for Kellogg, Brown & Root and she was to keep track of how many people came in because they got paid based on how many people came in. She said: What they told me to do was to keep track of how many people came in to each room, and that is what we billed the government for. If somebody came in and went through three rooms, the government was billed for three visits. I went to the people in charge and said: This is fraud. We can’t do this. We are defrauding the government. They immediately put me in detention in a room under guard and sent me out of the country the next day. It is the story of virtually all the hearings we have held. … This has been an abysmal record. In this decade, the amount of money spent on contractors–in many cases with no-bid, sole-source contracts that were negotiated under the most abusive conditions and in violation, in many cases, of rules, according to the highest civilian official in charge of contracting–has been a disgrace. This country needs to do much better. The work I and a number of my colleagues did holding these hearings has in many ways held up a spotlight and tried to shine it on the same spot. We have cajoled, embarrassed, and pushed, and I think we have made some progress. But so much more needs to be done and can be done.

Read the full article →

Charles Gasparino: GM IPO Continues Trend of Rewarding Those Who Failed

November 18, 2010

What do the General Motors and the nation’s big banks have in common? They’ve both been bailed out by the federal government and, were it not for government largess, neither would be here today celebrating the automaker’s largely successful stock offering. It’s an irony that has escaped most of the media amid all the hoopla over GM’s “initial public offering,” which is an odd way to describe what is happening now regarding GM’s return to the public markets. IPOs, of course, are usually reserved for relatively new companies that have created new products or services in such a way that investors see promise in their future. GM, on the other hand, is a washed up maker or inferior cars. Its laundry list of problems — from failing to compete with Japanese brands to a bloated work force — pushed the company into bankruptcy in 2009, from which it emerged only after a $50 billion bailout from the government. Thanks to yesterday’s stock sale, GM is about 2/3 the way through paying back the money it owes the taxpayer. The rest is expected to be paid back over the next few years. So far, it’s unclear if the taxpayers will benefit from any of this; now stripped of many of its liabilities and flush with government handouts, GM is marginally profitable again. The stock opened at a healthy $33 a share (it “popped” on the opening a couple bucks before coming down a bit in price). But some analysts say it will have to double in value over the next year or so for the taxpayer to be made whole. While it’s unclear whether taxpayers will make money out the GM fiasco, it’s pretty clear Wall Street already has. Yesterday’s rally in the stock market was attributed to strong demand for the IPO of a company designated Too Big To Fail. Traders who managed to get their hands on the new GM shares were “flipping” them or selling them sometime after the market opened, which is why the price shot up at the opening before settling down as investors took profits on the initial run up. Even worse were the fees raked in by the big Wall Street firms that underwrote the stock issue. Let’s not forget that GM has company on the government’s Too Big To Fail list, and it’s the big Wall Street firms like Morgan Stanley, JP Morgan, Bank of America, Goldman Sachs and Citigroup, the top underwriters of the deal. Combined, the banks received $135 billion in bailout money during the 2008 financial crisis, and that doesn’t consider the countless billions they received through guarantees and other subsidies over the past two years. They are said to split a little under $120 million in fees, which we are all told is low compared to some other corporate deals. Recently some people at the Wall Street firms have complained not just about the relatively low fees but also about the fact that they had to split those fees with several minority-owned firms, which also have positions in the underwriting group. These outfits, of course, received a much smaller portion of the deal, so they made less money than the big firms. But executives at the large banks noted that many of the minority firms and their executives have made political donations to President Obama, which given the government’s ownership stake in the company, accounted for their presence on the deal. Give me a break. The saddest part about this nonsense is that it actually made its way into the deal’s coverage by a financial news television station (hint: it’s not the one I now work for now). Why is it such nonsense? Aside from the fact that many of GMs’ employees are in fact minorities, that all of the big firms in the main underwriting group were also big contributors to the Obama presidential campaign (for more on this check out my new book Bought and Paid for ), or that in just one example of political cronyism, Tom Nides, the No. 2 executive at lead underwriter Morgan Stanley has been appointed for a top position in the Obama White House, not one minority-owned firm needed a bailout in 2008. In other words, maybe it should be the minority-owned firms running the deal instead of the likes of Morgan Stanley and Goldman Sachs?

Read the full article →

Ellen Brown: To Nationalize or Bail Out?

November 8, 2010

For two years, politicians have danced around the nationalization issue, but ForeclosureGate may be the last straw. The megabanks are too big to fail, but they aren’t too big to reorganize as federal institutions serving the public interest. In January 2009, only a week into Obama’s presidency, David Sanger reported in The New York Times that nationalizing the banks was being discussed. Privately, the Obama economic team was conceding that more taxpayer money was going to be needed to shore up the banks. When asked whether nationalization was a good idea, House speaker Nancy Pelosi replied: “Well, whatever you want to call it… If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization. “I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ” Noted Matthew Rothschild in a March 2009 editorial: [T]hat’s the problem today. The word “nationalization” shuts off the debate. Never mind that Britain, facing the same crisis we are, just nationalized the Bank of Scotland. Never mind that Ronald Reagan himself considered such an option during a global banking crisis in the early 1980s. Although nationalization sounds like socialism, it is actually what is supposed to happen under our capitalist system when a major bank goes bankrupt. The bank is put into receivership under the FDIC, which takes it over. What fits the socialist label more, in fact, is the TARP bank bailout, sometimes called “welfare for the rich.” The banks’ losses and risks have been socialized but the profits have not. The bankers have been feasting on our dime without sharing the spread. And that was before the foreclosure crisis — the uncovering of massive fraud in the foreclosure process. Investors are now suing to put defective loans back on bank balance sheets. If they win, the banks will be hopelessly under water. “The unraveling of the foreclosure-gate could mean banking crisis 2.0 ,” warned economist Dian Chu on October 21, 2010. Banking Crisis 2.0 Means TARP II The significance of foreclosure-gate is being downplayed in the media, but independent analysts warn that it could be the tsunami that takes the big players down. John Lekas , senior portfolio manager of the Leader Short Term Bond Fund, said on The Street on November 2, 2010, that the banks will prevail in the lawsuits brought by investors. The paperwork issues, he said, are just “technical mumbo jumbo”; there is no way to unwind years of complex paperwork and securitizations. But Yves Smith , writing in The New York Times on October 30, says it’s not that easy: The banks and other players in the securitization industry now seem to be looking to Congress to snap its fingers to make the whole problem go away, preferably with a law that relieves them of liability for their bad behavior. But any such legislative fiat would bulldoze regions of state laws on real estate and trusts, not to mention the Uniform Commercial Code. A challenge on constitutional grounds would be inevitable. Asking for Congress’s help would also require the banks to tacitly admit that they routinely broke their own contracts and made misrepresentations to investors in their Securities and Exchange Commission filings. Would Congress dare shield them from well-deserved litigation when the banks themselves use every minor customer deviation from incomprehensible contracts as an excuse to charge a fee? Chris Whalen of Institutional Risk Analytics told Fox Business News on October 1 that the government needs to restructure the largest banks. “Restructuring” in this context means bankruptcy receivership. “You can’t prevent it,” said Whalen. “We’ve wasted two years, and haven’t restructured the top banks, but for Citi. Bank of America will need to be restructured; this isn’t about the documentation problem, this is because [of the high] cost of servicing the property.” Profs. William Black and Randall Wray are calling for receivership for another reason — the industry has engaged in flagrant, widespread fraud. “There was fraud at every step in the home finance food chain,” they wrote in The Huffington Post on October 25: [T]he appraisers were paid to overvalue real estate; mortgage brokers were paid to induce borrowers to accept loan terms they could not possibly afford; loan applications overstated the borrowers’ incomes; speculators lied when they claimed that six different homes were their principal dwelling; mortgage securitizers made false reps and warranties about the quality of the packaged loans; credit ratings agencies were overpaid to overrate the securities sold on to investors; and investment banks stuffed collateralized debt obligations with toxic securities that were handpicked by hedge fund managers to ensure they would self destruct. Players all down the line were able to game the system, suggesting there is something radically wrong not just with the players but with the system itself. Would it be sufficient just to throw the culprits in jail? And which culprits? One reason there have been so few arrests to date is that “everyone was doing it.” Virtually the whole securitized mortgage industry might have to be put behind bars. The Need for Permanent Reform The Kanjorski amendment to the Banking Reform Bill passed in July allows federal regulators to preemptively break up large financial institutions that pose a threat to U.S. financial or economic stability. In the financial crises of the 1930s and 1980s, the banks were purged of their toxic miscreations and delivered back to private owners, who proceeded to engage in the same sorts of chicanery all over again. It could be time to take the next logical step and nationalize not just the losses but the banks themselves, and not just temporarily but permanently. The logic of that sort of reform was addressed by Willem Buiter , chief economist of Citigroup and formerly a member of the Bank of England’s Monetary Policy Committee, in The Financial Times following the bailout of AIG in September 2008. He wrote: If financial behemoths like AIG are too large and/or too interconnected to fail but not too smart to get themselves into situations where they need to be bailed out, then what is the case for letting private firms engage in such kinds of activities in the first place? Is the reality of the modern, transactions-oriented model of financial capitalism indeed that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the tax payer taking the risk and the losses? If so, then why not keep these activities in permanent public ownership? There is a long-standing argument that there is no real case for private ownership of deposit-taking banking institutions, because these cannot exist safely without a deposit guarantee and/or lender of last resort facilities, that are ultimately underwritten by the taxpayer. Even where private deposit insurance exists, this is only sufficient to handle bank runs on a subset of the banks in the system. Private banks collectively cannot self-insure against a generalised run on the banks. Once the state underwrites the deposits or makes alternative funding available as lender of last resort, deposit-based banking is a license to print money. [Emphasis added.] Nearly all money today is created as bank credit or debt. (That includes the money created by the Federal Reserve, a bank, and lent to the federal government when it buys federal securities.) Credit or debt is simply a legal agreements to pay in the future. Legal agreements are properly overseen by the judiciary, a branch of government. Perhaps it is time to make banking a fourth branch of government. That probably won’t happen any time soon, but in the meantime we can try a few experiments in public banking, beginning with the Bank of America, predicted to be the first of the behemoths to be put into receivership. Leo Panitch , Canada Research Chair in comparative political economy at York University, wrote in The Globe and Mail in December 2009 that “there has long been a strong case for turning the banks into a public utility, given that they can’t exist in complex modern society without states guaranteeing their deposits and central banks constantly acting as lenders of last resort.” Nationalization Is Looking Better David Sanger wrote in The New York Times in January 2009: Mr. Obama’s advisers say they are acutely aware that if the government is perceived as running the banks, the administration would come under enormous political pressure to halt foreclosures or lend money to ailing projects in cities or states with powerful constituencies, which could imperil the effort to steer the banks away from the cliff. “The nightmare scenarios are endless,” one of the administration’s senior officials said. Today, that scenario is looking less like a nightmare and more like relief. Calls have been made for a national moratorium on foreclosures. If the banks were nationalized, the government could move to restructure the mortgages, perhaps at subsidized rates. Lending money to ailing projects in cities and states is also sounding rather promising. Despite massive bailouts by the taxpayers and the Fed, the banks are still not lending to local governments, local businesses or consumers. Matthew Rothschild, writing in March 2009, quoted Robert Pollin, professor of economics at the University of Massachusetts at Amherst: Relative to a year ago, lending in the U.S. economy is down an astonishing 90 percent. The government needs to take over the banks now, and force them to start lending. When the private sector fails, the public sector needs to step in. Under public ownership, wrote Nobel Prize winner Joseph Stiglitz in January 2009, “the incentives of the banks can be aligned better with those of the country. And it is in the national interest that prudent lending be restarted.” For a model, Congress can look to the nation’s only state-owned bank, the Bank of North Dakota. The 91-year-old BND has served its community well. As of March 2010 , North Dakota was the only state boasting a budget surplus; it had the lowest default rate in the country; it had the lowest unemployment rate in the country; and it had received a 2009 dividend from the BND of $58.1 million, quite a large sum for a sparsely populated state. For our newly-elected Congress, the only alternative may be to start budgeting for TARP II.

Read the full article →

Tab For Fannie, Freddie Could Soar To $363 BILLION

October 21, 2010

WASHINGTON — The government spelled out Thursday just how much the most expensive rescue of the financial crisis will end up costing taxpayers – as much as $259 billion for mortgage buyers Fannie Mae and Freddie Mac. That figure would be nearly twice the amount Fannie and Freddie have received so far. By contrast, the combined bailouts of financial companies and the auto industry have cost taxpayers roughly $50 billion, according to the Treasury Department’s latest projections. And the bailouts of Wall Street banks alone, which sparked public fury, have so far brought taxpayers a $16 billion return. Fannie and Freddie were battered by losses on loans they backed, once the housing bubble burst and foreclosures soared. The two companies buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors. On Thursday, the government provided a broad estimate of the costs of bailing out Fannie and Freddie, because their losses depend on home values over the next few years. If prices fall sharply, as some analysts forecast, Fannie and Freddie won’t be able to recover as much money on foreclosures. And they would require more taxpayer aid. Fannie and Freddie’s rescue has cost $135 billion so far. Their bailout could end up costing taxpayers between $142 billion and $259 billion through 2013, the Federal Housing Finance Agency projected. Those figures take into account dividends that the agency estimates the two companies will end up repaying. The terms of their rescue require them to pay a 10 percent annual dividend to the Treasury Department. The two companies have paid $13 billion in dividends so far. That amount is expected to balloon in the coming years. Regulators expect the companies to repay an additional $67 to $91 billion in dividends over the next three years. The two mortgage finance companies have been operating under federal control for more than two years. When the government stepped in to take them over in September 2008, their rescue was expected to cost only a combined $200 billion. Thursday’s estimate was the first time the housing agency has released a public estimate of the taxpayer tab. The combined bailout of the two mortgage companies is on track to be the largest of the financial crisis. Compare that with what was once the most expensive single bailout – American International Group Inc. That is now projected to cost taxpayers only $5 billion. Even that bailout could turn a profit, Treasury said this month, if its sale of AIG shares succeeds. The Obama administration’s rescue of the U.S. auto industry is projected to cost $17 billion, Treasury has said. Fannie and Freddie own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. Over the next year, lawmakers plan to review the nation’s mortgage-lending system and consider a potential replacement for Fannie and Freddie. The financial overhaul law didn’t address that issue. ___ AP Business Writers Christopher S. Rugaber and Daniel Wagner contributed to this report.

Read the full article →

David Isenberg: Let’s Tell It Like It Is

October 21, 2010

I have, on occasion, in the past been critical of IPOA (formerly the International Peace Operations Association and now the Association of the Stability Operations Industry), the Washington, DC-based trade association for private military and security contractors. So it is only fair to mention them when they do something inarguably right. That something was their three day 2010 Annual Summit that took place earlier this week. To go to the event and listen to the panels on such subjects as international standards and accountability, logistics and support in contingency operations, regulatory evolutions in the industry was to see both private companies and public officials seriously grappling with issues of oversight and accountability at a practical, not a rhetorical, level. There was some serious reflection going on. At the beginning of the first day Chris Taylor, CEO of Mission Essential Personnel, an IPOA member company, and a main sponsor of the summit, said the following in his opening remarks: All of us have been asked to testify or to speak about a great many issues. And deservedly so. Spending the taxpayer’s money is an important task that comes with a great responsibility [Note: Let's call this the Peter Parker principle: with big contracts comes big responsibility] But one of the things that we can’t let it do is force the industry to be transactional instead of transformational. We do bring a certain value to the government and to taxpayers. Because of the scrutiny I don’t believe that – I think it can actually be our finest hour for the industry; not a reason to hunker down and not be cooperative, not be forthcoming with people who may have questions about what it is that we do. As a matter of fact I think it should be quite the opposite. I think it should be an opportunity for us to tell it like it is; to inform people of the facts about our abilities, about the complexities of working in contingency operations, and working in development operations, and working in security operations. I don’t think we should, we shouldn’t miss that opportunity whatsoever. We certainly should not shy away from it. … I would encourage all of us to ask tough questions of each other first… To me that reflects the emergence of a mindset that is self-confident but not boastful, proud of its accomplishments but mature enough to understand that legitimate questions can be raised about their operations. It is hard to imagine a CEO of a traditional military-industrial company, such as Lockheed Martin or Northrop Grumman, saying something similar. For those people who think that PMC or the U.S. government don’t take seriously issues of oversight and accountability they should view the video of the panel on international standards and accountability. I recorded it with a Flip camcorder and you can watch the segments on my YouTube page. I had to break them up due to Youtube’s size limit on what can be uploaded at one time but you can view them here. Part 1 Part 2 Part 3 Part 4 Part 5 Part 6 Part 7 One of the more interesting parts of that panel was the discussion of the forthcoming International Code of Conduct for Private Security Providers. Among other things it: – Sets out clear obligations and operational standards for PSCs based on international human rights standards – Launches a process to establish effective oversight and compliance mechanisms. There will be a high-level signing ceremony for it on 9 November 2010 in Geneva, Switzerland. You can find the code online here . As IPOA taped the entire summit it will, hopefully, transcribe and post online the proceedings as soon as possible. Hint, hint.

Read the full article →

David Isenberg: Let’s Have Reality Based Discussion on PSC Use

October 19, 2010

Periodically I am contacted by a radio or television show booker to see if I can talk about private security contractors in Iraq or Afghanistan. Often they ask me if I can talk about the lack of accountability over PSC. At that point I take a breath and patiently try to explain that A) yes, there have obviously been problems with the use of PSC; B) there are still some problems and C) the situation is significantly better than it was. Some bookers and interviewers want to argue the point. After all so many people have said or written that PSC are a bunch of thinly veiled mercenaries that surely there must be something to it. Well,, that has about as much credibility as the Bush administration’s original rationale for invading Iraq, i.e., that it was close to developing nuclear weapons. While I have not been reluctant to criticize PSC when they merit it I am also not inclined to scapegoat them. Sometimes their client, i.e., our taxpayer supported government is as much at fault as the PSC itself. As I wrote a book on the use of PSC in Iraq let’s consider a bit of what has been going on the past few years there. When we talk about guys with guns the message is a bit mixed but the trend line is upwards. While there is much more regulation on the acquisition, storage, and use of small arms and light weapons by PSC in Iraq than commonly assumed much of the most important processes for ensuring oversight and accountability is of fairly recent origin. In the early days after the United States invaded Iraq, the CPA issued two orders: COALITION PROVISIONAL AUTHORITY ORDER NUMBER 3 [REVISED] [AMENDED] stated: “Small Arms and Defensive Weapons” means Small Arms as defined in CPA Order 3 including pistols, shotguns, and rifles firing ammunition up to an including 7.62mm and Defensive Weapons including crew-served machine guns, non-lethal weapons and riot control agents. … Private security firms may be licensed by the Ministry of the Interior to possess and use licensed Firearms and Military Weapons, excluding Special Category Weapons , in the course of their duties, including in public places. COALITION PROVISIONAL AUTHORITY ORDER NUMBER 17 [REVISED] stated: Notwithstanding any provisions in this Order, Private Security Companies and their employees operating in Iraq must comply with all CPA Orders, Regulations, Memoranda, and any implementing instructions or regulations governing the existence and activities of Private Security Companies in Iraq, including registration and licensing of weapons and firearms. In addition, the U.S. Combatant Commander provided specific guidance on arming contractor personnel and private security contractors in the USCENTCOM area of responsibility through a series of Fragmentary Orders [FRAGO] and other authoritative guidance. One can find a listing of PSC relevant FRAGO at the Contractors Operations Centre Cells. ( CONOC ) The U.S. Department of Defense [DOD] has made significant efforts to improve the management, oversight, and coordination of PSC]. DOD established CONOC in Iraq and in Afghanistan to coordinate the movement of PSCs. Early in 2008, MNC-I established six CONOC throughout Iraq to coordinate the movement of DOD and DoS PSCs with military units; the central CONOC is located at MNC-I headquarters at Camp Victory, and the other five are located at the five divisions that control the battle spaces in Iraq. These CONOC also respond to incidents involving PSCs. Under DOD’s new rules, PSCs are required to give the central CONOC at least 72-hours advance notice prior to entering its area of responsibility. Additionally, DOD gave field commanders the authority to approve, alter, or deny most PSC mission requests in their area of responsibility. In November 2007 DOD established the ACOD [Armed Contractor Oversight Division] in Iraq (later renamed ACOB – Armed Contractor Oversight Bureau) which became fully operational in May 2008. This directorate is responsible for developing policies for and investigating incidents of the use of force by PSC. Before the creation of ACOD, the Army Corps of Engineers Gulf Regional Division had Reconstruction Operations Centers [ROC] that provided a similar role to the CONOC. Prior to the shootings of Iraqi civilians by Blackwater contractors in Baghdad in September 2007, the U.S. military lacked a single structure for managing its PSCs in Iraq. ACOD was to serve as MNF-I’s overall point of contact for policy issues relating to PSCs hired by DOD as well as to provide broad oversight over these contractors. According to MNF-I officials, the office’s goals include [1] working to reduce the number of incidents of PSCs discharging weapons or behaving in a manner that undermines the credibility of U.S. efforts; [2] developing a mechanism for holding PSCs accountable for their actions; [3] reducing the time that elapses between the occurrence of an incident and the reporting of that incident; and [4] minimizing the impact of an incident on the credibility of U.S. efforts in Iraq. One of the key efforts of ACOD is to monitor, review, and report all PSC incidents. These incidents include those involving injuries; deaths; negative reports in the media; weapons discharges; complaints from U.S. military commanders, local Iraqi citizens or the government of Iraq; and other allegations of PSC misconduct. PSCs are required to report these incidents in writing to the MNC-I CONOC. The CONOC would review the report for completeness, then forward to ACOD. The office then reviews each incident report to determine whether the incident requires additional investigation. After an investigation is completed by the appropriate unit commander, ACOD tracks corrective or disciplinary actions initiated by the commander or the PSC. According to MNF-I officials, prior to December 2007 there were between 40 and 50 separate fragmentary orders relating to regulations applicable to PSCs in Iraq. As such, contracting officers as well as military commanders rotating into Iraq may not have been aware of all of the regulations covering PSCs. In December 2007, MNF-I issued Fragmentary Order 07-428, to consolidate the previous fragmentary orders and establish authorities, responsibilities and coordination requirements for MNC-I to provide oversight for all armed DOD contractors and civilians in Iraq including PSCs. The establishment of the consolidating fragmentary order creates a single source for CENTCOM mandated orders, regulations and mandatory contract clauses relating to requirements, procedures, and responsibilities for control, coordination, management, and oversight of PSCs in Iraq. Specifically, the order addresses PSC requirements including arming procedures and responsibilities, rules for the use of force and mandates strengthened serious incident reporting procedures and responsibilities. For example, under the new order when a PSC observes, suspects, or participates in a serious incident such as a weapons discharge, PSCs are required to submit an immediate incident report at the earliest opportunity via the most secure means available to MNC-I and then submit an initial written report of the incident not later than 4 hours after the incident in contrast to the previous 48 hour reporting requirement. The order requires the initial report to contain a highlighted version of the incident, including critical information such as who was involved and when and where the incident occurred. PSCs are required to file a final report with 96 hours of the incident. The above is hardly a complete list of everything that has been done since Nisoor Square to improve accountability over PSC. Yes, one can argue the situation is not perfect but what is in life? While I’m all for legitimate criticism it should be grounded in reality, and not on a frozen in time depiction of PSC.

Read the full article →

As TARP Ends, Small Banks Still Struggling To Repay

September 30, 2010

Reuters) – The U.S. government’s $700 billion bailout of the financial system has become a form of long-standing aid for many of the nation’s small and regional banks, even as the program officially expires on Sunday. The banks are eager to repay the taxpayer money, but the meek economic recovery has gotten in the way.

Read the full article →

Al Franken: Foreclosure Paperwork Scandal Shows Need To Strengthen HAMP

September 23, 2010

The revelation that massive numbers of foreclosures may be tainted by bogus paperwork from mortgage servicers is further evidence that the Obama administration’s anti-foreclosure efforts need a pro-homeowner boost, says Sen. Al Franken (D-Minn.). “Millions of families are losing their homes in the current housing crisis so I’m outraged when I hear stories that show how broken the mortgage services industry is,” said Franken in a statement to HuffPost. “The actions of Ally Financial are just another example of why we need to strengthen the Home Affordable Modification Program.” Ally Financial, the nation’s fourth-largest home lender, halted evictions in 23 states this week after it was revealed that a document processor signed off on thousands upon thousands of foreclosure documents every week without verifying any of the information in the paperwork. The story of the Home Affordable Modification Program, known as HAMP, has been a story of bogus paperwork ever since the program launched in 2009. President Obama said that the program would “enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.” Treasury Department officials now shy from that pledge as fewer homeowners have been given “permanent” five-year modifications as have been booted from the program. Unsatisfied homeowners say that their servicers constantly ask them to re-send documents they should already have on file. To address that problem, Franken proposed creating an Office of the Homeowner Advocate within the Treasury Department, similar to the IRS Office of the Taxpayer Advocate. “I’m pushing to establish an Office of the Homeowner Advocate at the Department of Treasury that would assist borrowers in the HAMP program who believe their mortgage servicer is breaking the rules,” said Franken. “Right now, these families have nowhere to turn when wrongly denied from the assistance program or when they encounter difficulties in navigating an incredibly complicated system of avoiding foreclosure.” Franken’s proposal is currently tucked into a “tax extenders” bill facing an uncertain path through the Senate. Consumer advocates say the bogus paperwork problem is industry-wide, not just at Ally Financial (formerly known as GMAC). “This has been a story we’ve been looking at for the last couple years. GMAC’s not the only one by any shred of the imagination,” said Ira Rheingold, director of the National Association of Consumer Advocates. “This is a system that’s broken. It is a product of the way the mortgage industry was built…. It’s the result of creating a marketplace of a voluminous amount of mortgages. They want it computerized, creating these massive scales, and so if they can get away with reducing costs, then they do it.”

Read the full article →

Obama Homeowner Program Hits 10-Month Low As Prices Drop And Foreclosures Surge

September 22, 2010

The number of homeowners receiving permanent relief under the Obama administration’s primary foreclosure-prevention initiative hit a 10-month low as home prices dropped and repossessions jumped, threatening more homeowners just as the administration’s aid program winds down. Just over 33,000 homeowners had their monthly mortgage payments reduced in August for the next five years as part of the administration’s Home Affordable Modification Program, Treasury Department data released Wednesday show. Obama promised in 2009 that some 3 to 4 million homeowners would be helped. About 449,000 borrowers have thus far received mortgage modifications. The program, sold as a $50-billion effort, is unlikely to spend that much helping delinquent homeowners keep their homes. Nearly one and a half years into the program, only 1 percent of that money has been spent. The effort, known as HAMP, was meant to keep homeowners from losing their homes while the subprime mortgage crisis was decimating property values and bank balance sheets. While the banking sector has stabilized, the housing market is still weak. The Federal Housing Finance Agency reported Wednesday that home prices fell 3.3 percent in July compared to last year. Lenders repossessed more than 95,000 homes in August, according to California-based data provider RealtyTrac — the highest monthly total the firm has ever recorded and a 25-percent jump from August 2009. And experts, including mortgage giant Fannie Mae, predict that home prices will keep dropping. As repossessions mount, those prices will drop further. That will lead in turn to an uptick in delinquencies and foreclosures — especially if the unemployment rate stays near 10 percent — necessitating further aid. But while HAMP is winding down, the administration “will continue to monitor the market closely in case more is needed,” Raphael Bostic, an assistant secretary at the Department of Housing and Urban Development, said in a statement. Analysts and homeowner advocates had expected more from the administration. Thus far, experts agree the program has been a disappointment . Meanwhile, less than 18,000 new homeowners entered HAMP last month for three-month trial plans — the third straight month the number of new entrants failed to reach 20,000. In sum, about 51,000 homeowners in August received either permanent or temporary reductions in their mortgage payment. But nearly 53,000 homeowners were bounced from the program, the fifth-straight month more homeowners were tossed from HAMP than new ones were helped. Through August, more than 651,000 homeowners remain in HAMP. Yet more than 682,000 borrowers have been booted — over 95 percent of them during the trial stage, Treasury data show. A senior administration official last month likened the situation to a tax cut without cost to the taxpayer. But for those who remain, the median reduction in monthly payments is about $515, or 36 percent of the median original payment. Borrowers overall have saved about $3.1 billion in lower monthly mortgage payments through HAMP. ************************* Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

Read the full article →

Larry Beinhart: Recessions & Recoveries, The Real Story

September 2, 2010

There appear to be, roughly, three types of recessions. There are post-war recessions. These are easy to understand. There’s an abrupt decline in military spending, demobilization reintroduces a large number of people into the work force, and businesses supplying the war machine need time to switch to consumer products. We’ve had them after World War One, World War Two, Korea, and Vietnam. They tend to end more or less by themselves as society adjusts to a peacetime economy. There are recessions due to fiscal policy. Either cuts in government spending, as in 1937 and 1973, or a hike in interest rates to tighten the money supply, as was done in 1949, 1958, 1960, 1969, and 1980. Historically, these have been relatively brief and shallow. They end when the deliberate policies that brought them on are reversed. Finally, there is the sequence of boom and crash. The first of these was in 1929, and the collapse that followed was called the Great Depression. The others were 1990, 2000, and 2007, the one we’re in now, starting to be called the Great Recession. Except for 2,000, these also included massive bank failures. Economists, historians, and, as we move into the present, journalists and pundits, offer a mixed multitude of reasons for each of them. But now that we’ve had four of them (including the crash of 2,000), we can see a pattern emerging. Coming out of World War One we had a top marginal tax rate over 70%. From 1921-25 it was cut, in steps, down to 25%. There was a boom, particularly in the fiscal sector. The crash came in 1929. When Ronald Reagan came into office in 1981, the top marginal rate was, once again, 70%. Reagan started cutting in 1982, down to 50%, then to 38.5% in 1987, and 28% in 1988. There was a boom in the fiscal sector. In the mid-eighties the collapse began, and over 1,600 banks failed. There was a huge bailout. It was followed by the recession of 1990. George H.W. Bush raised the rate to 31%. It cost him re-election. Then, under Bill Clinton, the top rate went up to 39.6%. That was followed by the longest sustained period of economic growth in modern times. However, in 1997, the Republican congress pushed Clinton into cutting the capital gains tax from 28% down to 20%. It was called The Taxpayer’s Relief Act. It marks the moment when the dot.com boom turned into the dot.com bubble. It burst in 2,000, and, along with the 9/11 attacks, there was another recession. George W. Bush launched another round of tax cuts. The top rate went down to 35%. Capital gains rates were cut to 5%. This was followed by the Bush boom. There was huge growth in the fiscal sector, but “mysteriously,” it was a jobless recovery. The boom was hollow. It was a bubble. It led to the Crash of 2007, with massive bank failures, followed by our current recession. How does this type of recession end? In 1932, Herbert Hoover raised taxes. He did it to balance the budget. In 1933 the economy changed direction and began moving upward. In 1991, George H.W. Bush, disturbed by the huge deficits that followed Reagan’s cuts, raised taxes. The economy subsequently turned around. After the 2,000 recession there was no tax hike. There were tax cuts. Corporate profits rose, there was a boom in real estate and in the fiscal sector generally. But there was no recovery. The recession continued for normal people. There were no new private sector jobs. Median income went down. Manufacturing continued to decline. The historical record suggests that this recession won’t end until there is a tax increase. Economies are complex. There are always a multitude of factors that effect booms and busts, growth and recessions. It is also a commonplace that conjunction does not necessarily imply causality. Nonetheless, if the same sequence takes place a multitude of times in different circumstances and the sequence takes place four out of five times — tax cut, fiscal sector boom, bubble, crash, bank failures and recession or depression — it makes a very good case for causality. The one exception — the fifth significant tax cut — took place in 1964 and 1965. Tax cut enthusiasts always refer to them as the Kennedy tax cuts, but they took place under Lyndon Johnson. They also always cite them as a great stimulus to the economy. They certainly didn’t improve anything. The economy stayed flat . The Dow Jones stayed flat . It’s possible that the difference between 90% and 70% was not enough to unleash a search for short term profits over long term growth and an ensuing frenzy of speculation. Those cuts do mark the moment when economic improvements in the life of ordinary people began to slow down, then flatten out, and, in the very long term, begin to decline. Our public policy dialogue has little basis in fact or rationality. Much of it, even in universities, is bought and paid for. There is no interest group willing to pay foundations, endow universities, buy radio ads for commentators, who will advocate higher taxes. But there’s lots of money willing to invest in propaganda that calls for lower taxes and claim that they’re good for the economy. So you won’t hear calls for higher taxes. You won’t find politicians who dare to propose higher taxes. Hopefully the expiration of the Bush tax cuts will work as tax hikes. That will mark the beginning of a real recovery. My primary qualification to write about these things is that I am not an economist. Most economists, as Paul Krugman recently observed, are theologians. They put theory first and then look for, or imagine, facts that will fit them. There is a lot of debate at the moment about what will end the recession and what effect tax policy has. Untutored as I am, I was free to look up the history and put historical charts of recessions, GDP, the Dow Jones average, fiscal policy, and tax policy in parallel columns. The historical facts are that high top marginal tax rates correlate with a very healthy economy. That high tax rates on the rich don’t impede growth. For whatever reasons, they promote growth. Low taxes on the rich are unhealthy. Tax cuts for the rich are dangerous.

Read the full article →

Michael Sandel: Obama Must Assert Democratic Control Over Economic Forces

August 30, 2010

From the Spring Democracy: A Journal of Ideas symposium, “What Happened?”: Obama can still redefine liberalism, but he must bring economic power to heel. Imagine a president, or a presidential candidate, taking on Wall Street in blunt language such as this: “We have been dreading all along the time when the combined power of high finance would be greater than the power of the government. Have we come to a time when the president of the United States or any man who wishes to be the president must doff his cap in the presence of this high finance, and say, ‘You are our inevitable master, but we will see how we can make the best of it’?” Or this: “The supreme political task of our day is to drive the special interests out of our public life.” Or this: “Through new uses of corporations, banks, and securities,” a privileged economic elite has “reached out for control over government itself,” rendering political equality “meaningless in the face of economic inequality. A small group [has] concentrated into their own hands an almost complete control over other people’s property, other people’s money, other people’s labor — other people’s lives.” Today, mainstream commentators and editorial writers would disparage such talk as irresponsible populist rhetoric. But American political leaders have not always been as deferential toward economic power as they are expected to be today. The statements quoted above were not made by far-out radicals, but by Woodrow Wilson (1912), Theodore Roosevelt (1910), and Franklin D. Roosevelt (1936). It is striking to notice the difference between their liberalism and ours. For these icons of twentieth-century liberalism, the first question of politics was how to subject economic power to democratic control. When Louis D. Brandeis spoke of “the curse of bigness,” he meant that monopolies and big banks posed a danger to democracy. Today, we still worry about bigness, but not in the same way. When we say that Citigroup, Bank of America, Goldman Sachs, and AIG are “too big to fail,” we mean that their failure would wreak havoc with the economy, so the government must bail them out rather than let them go down. The problem with having banks that are too big to fail is that it violates the rules of the capitalist game. When times are good, they make outsized profits, but when things go badly, the taxpayer has to pick up the tab. …. During the second half of the twentieth century, the focus of liberalism changed. Liberals stopped regarding bigness as a curse, and they made their peace with concentrated economic power. The agenda of postwar American liberalism was set out by FDR in 1944, when he called for an “economic bill of rights.” True individual freedom required more than the political rights enumerated in the Constitution, he argued. Under modern conditions, it also required basic social and economic rights, including “the right to a useful and remunerative job…the right of every family to a decent home, the right to adequate medical care…the right to adequate protection from the economic fears of old age, sickness, accident, and unemployment” and “the right to a good education.” Unlike the anti-bigness liberalism of the progressive era and early New Deal, the social-welfare liberalism of FDR in 1944 is recognizable as the liberalism of our time. The great liberal causes of the 1950s, ’60s, and ’70s — civil rights, Medicare and Medicaid, racial and gender equality, federal support for education, a more generous welfare state — were about using government to provide equal opportunity and a social safety net, not about using government to rein in the political influence of big banks and corporations. Social-welfare liberalism seems a more practical doctrine than the anti-bigness version of earlier progressives. It is hard to imagine how to break up the large financial institutions and corporations that dominate modern economic life. And yet I believe it’s a mistake for contemporary liberals to give up on the old progressive project of exerting democratic control over economic institutions. In fact, it’s a mistake that has backfired on the Obama presidency. The initial reluctance of Barack Obama and his economic advisers to take a tougher line on the banks has led to a populist backlash that now threatens his agenda. Click here to read what Obama needs to do to live up to this tradition.

Read the full article →

Dr. Philip Neches: Uncle Sam’s Turn-Around Fund

August 24, 2010

You and I hold an investment in the most unlikely turn-around fund. It is about to realize a huge profit with the upcoming public offering of General Motors. Yes, Uncle Sam is a very successful turn-around manager – with an enviable track record. You and I, along with every other taxpayer, are limited partners in this one-of-a-kind turn-around fund. There is no more difficult situation in business than a turn-around. Management must do three very hard things at once: close the unsuccessful parts of the business with minimum loss to shareholders stabilize the good parts of the business with minimum loss of customers, and re-ignite growth with minimum resources. The company must simultaneously lay off some people, retrain and redeploy other people, and hire new people. All this must happen in the vortex of negative publicity, poisonous morale, and customer cynicism. A raw start-up from nothing is a piece of cake by comparison. In my career in business, I’ve been involved with a number of turn-around situations. More ultimately failed than succeeded, but the ones that made it were some of my most gratifying experiences. Also some of the most remunerative. Former Wall Street Journal editor Paul Ingrassia gives a highly readable account of the decades-long run-up to the GM turn-around effort in Crash Course: The American Automobile Industry’s Road from Glory to Disaster . As GM prepares to leave public ownership by taxpayers for public ownership by investors, it is well to review the trail of short-sighted self-absorbed folly by generations of auto industry management, labor leadership, and the GM Board itself. Ingrassia’s book ends with the reluctant passage through Congress of the legislation enabling the government to become the active turn-around investor and manager of GM. But what an active manager Uncle became! GM shed the historic Oldsmobile and Pontiac brands, and sold off Hummer, Saab, and Saturn, reducing its domestic line-up from 9 labels to 4. Over 900 dealers, 7 plants, and 22,500 employees went away. $77.7 billion in debt was restructured: that’s more than the GDP of Iraq. The government even restructured the once-passive Board of Directors, bringing in interim Chairmen with stellar track records. Kent Kressa led Northrup-Grumman through the massive consolidation of the aerospace industry following the end of the Cold War. Ed Whitacre led SBC through the years of chaos and consolidation following the 1996 telecommunications industry deregulation. In the process, SBC acquired AT&T and took the name of the more recognized but less powerful company. Now, as GM primps to go back to the stock market, the Board brought in telecomm veteran Dan Ackerman to give a sense of permanence to the new potential investors. Any good turn-around manager searches its Rolodex for new leadership. But no private turn-around firm can match Uncle’s reach. Any good turn-around manager will give the new leadership a strong incentive to do a good job. But none can match the psychic reward that comes from serving your country. Only Uncle Sam can do that. When one adds the closures and divestitures GM made during bankruptcy with those made in the years leading up to the final crisis (Delco, GMAC, EDS, Hughes, Detroit Diesel), it looks like the first mission of a turn-around was accomplished. The company, though smaller, is now actually focused on making and selling motor vehicles. The distractions are gone. While the larger economy is still struggling to get out of recession/depression, GM is growing: sales, profits, and employment are up. The second goal of the turn-around may be in sight: stability of the core business. A lot of excitement, fueled by hope and hype, surrounds the introduction of GM’s electric vehicle, the Chevy Volt. We will know soon enough if the Volt will electrify GM customers and shareholders, but they already feel the tingle. It is too soon to call the third leg of the turn-around, an exciting new product, a success. But it is clear that GM made the investment while going through its other wrenching transitions. Uncle Sam has been here before. The government played a less hands-on role in the revival of Chrylser under Lee Iaccoca a generation ago. Before that, the government restructured the freight rail industry when it was in collapse. It is hard to imagine a modern economy without freight rail! So why is Uncle Sam such a good restructuring manager? Probably because nobody — liberal or conservative, labor or management, government or private sector — wants Uncle in the turn-around business on a permanent basis. We create a turn-around team for each effort, and disband it as soon as the industry in question shows signs of returning health. We refuse to build “institutional knowledge” of such things, as Japan does in its infamous Ministry of International Trade and Industry (MITI). We do it only when we are desperate, our back to the wall, time running out, disaster for the economy and the people just inches away. How very American.

Read the full article →

Student Loan Debt Outpaces Credit Card Debt

August 9, 2010

Credit cards are no longer the largest source of debt for Americans — according to the Wall Street Journal, student loans have taken the crown . The Journal reports: Americans owe some $826.5 billion in revolving credit, according to June 2010 figures from the Federal Reserve. (Most of revolving credit is credit-card debt.) Student loans outstanding today — both federal and private — total some $829.785 billion, according to Mark Kantrowitz, publisher of FinAid.org and FastWeb.com. The change is due in part to Americans paying down credit card debt and increased credit card regulations, according to the Journal. The Student Aid and Fiscal Responsibility Act , passed in March, promises to regulate the student loan industry by omitting private lenders in hopes of saving the government and the taxpayer money. Still, many struggle under the weight of student loans — and there’s no easy out. As the San Francisco Chronicle reports, bankruptcy is not an automatic option: To discharge student loans in any bankruptcy filing, you need to prove “undue hardship.” What does undue hardship mean in non-legal terms? According to bankruptcy judge John Ninfo, you or your dependent has to have a mental or physical condition that prevents you from working. Just not being able to afford your payments doesn’t cut it. And as for using credit cards to pay for college — not such a great idea. According to TheStreet.com : 84% of college students had at least one credit card in 2009, up from 76% in 2004. The average amount of debt carried by college cardholders is $3,173 which represents a 46% increase over the 2004 figure of $2,169. The average number of cards per student is 4.6. Only 17% pay off their entire balance each month and 22% make just the minimum payment. The Huffington Post compiled stories of those in debt earlier this year . What’s your debt story? E-mail college@huffingtonpost.com to share.

Read the full article →

HAMP Report Revised After Analysts Question New Metric

July 27, 2010

This story was updated at 8:00 p.m. ET to include two comments from a Treasury Department official. The Obama administration has revised its latest monthly report on its signature foreclosure-prevention plan, deleting a heavily-criticized performance metric used to measure whether assisted homeowners are re-defaulting on their taxpayer-financed mortgages. The Treasury Department claims that Fannie Mae, which administers its Home Affordable Modification Program, screwed up. As a consequence, the public can no longer tell whether homeowners with HAMP modifications, which limits monthly payments to 31 percent of income, are being placed in sustainable mortgages. A voicemail message left on the cellphone of a Fannie Mae spokesman seeking comment was not returned. The report on the Home Affordable Modification Program — an effort promised to lower mortgage payments for three to four million Americans — details the number of homeowners who have signed up for trial modifications, how many have received five-year mods, the number of homeowners bounced from the program, also known as HAMP, and the amount of money the affected homeowners are saving, among other metrics. However, one key detail — the pace at which HAMP homeowners are falling behind on their new lower monthly payments and re-defaulting — had been missing until last week, when the administration unveiled it in its report on the program’s progress through June. The rate was remarkably low, which raised eyebrows among some housing analysts. While about 42 percent of homeowners in mortgages modified prior to HAMP had fallen at least 60 days delinquent six months after their mortgages were altered, the administration reported that just under six percent of HAMP homeowners were at least 60 days late six months after their mortgages were modified, according to data maintained by federal bank regulators and the Treasury Department. Six months is considered to be a key metric for judging homeowners’ ability to keep up with payments. Herbert M. Allison Jr., Treasury’s assistant secretary for financial stability, highlighted the rate on a conference call with reporters last week, praising it as “very low.” In an otherwise bleak report on the state of the program — more homeowners have been bounced from HAMP than have received permanent relief — the re-default rate was seen as overwhelmingly positive. But economists and Wall Street analysts weren’t impressed. In a Wednesday note to clients, Sandeep Bordia and Jasraj Vaidya of Barclays Capital wrote that the data was “misleading.” Celia Chen, an economist and specialist in housing for Moody’s Economy.com, said in an interview that the incredibly low re-default rate “just doesn’t sound right to me.” The problem they identified had to do with how Treasury was calculating the rate. In the report, Treasury stated that a “HAMP permanent modification is canceled for nonpayment if it is more than 90 days delinquent.” To the Barclays Capital analysts, it appeared that Treasury was thus not including those homeowners with five-year modifications who were kicked out of the program. More than 8,600 homeowners have been bounced from HAMP. The Barclays analysts said the move made the re-default rate look “too low” and “fail[s] to capture the full magnitude of re-defaults from these modifications.” Treasury caught on. “Subsequent to releasing the report, Treasury received inquiries regarding the calculation methodology used in this table,” spokesman Mark Paustenbach said Tuesday. “These inquiries were related to the treatment of modifications that are cancelled from HAMP and ultimately become ineligible for TARP incentives after 90 days delinquency. “In an effort to review and better explain the methodology, we learned from our program administrator, Fannie Mae, that not all cancelled loans were included in the underlying information provided to Treasury,” Paustenbach continued. “The error caused inconsistent reporting of permanent modifications during the snapshots reported. These omissions have impacted our previous analysis… with respect to the performance of HAMP permanent modifications.” A Treasury official added that the agency had approved a methodology that included cancelled modifications, but Fannie Mae’s coding error led to those mods not being included in their calculation of re-default rates. The official added that Treasury will release the revised data when it’s confident in its accuracy. Some dated figures are available, though. Through March, federal bank regulators report that about 7.7 percent of HAMP homeowners were 60 or more days delinquent on their modified mortgages three months after the modified mortgage took effect. Overall, 11.3 percent of modifications completed during the last three months of 2009 were at least 60 days late after three months, according to the June 23 report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Mortgages modified during the fourth quarter of 2009 have exhibited lower re-default rates, bank regulators note. By comparison, homeowners with reworked loans during the fourth quarter of 2008 were falling at least 60 days behind on their payments after three months at a 29.9 percent clip. Regulators attribute the lower re-default rates to the significantly lower payments newly-modified loans require, according to their June 23 report. Experts say HAMP played a large role in the change. In place of the now-deleted table, in a revised report posted Monday to their FinancialStability.gov Web site, Treasury said: “Since the Making Home Affordable report was posted on July 20th, Fannie Mae, which administers the program, has reported to Treasury an issue in its implementation of the delinquency statistic methodology used to report performance of permanent modifications. Fannie Mae is now revising the data, and Treasury has retained a third-party consultant to provide additional review and validation. Upon completion of that independent review, a revised table will be provided.” Meanwhile, last month analysts at Fitch Ratings projected that as many as 75 percent of HAMP modifications will ultimately result in re-default — despite the lower monthly payments. In their note last week, the Barclays analysts said they’re sticking to their original re-default projection of about 60 percent. ************************* Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail ; bookmark his page ; subscribe to his RSS feed ; follow him on Twitter ; friend him on Facebook ; become a fan ; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.

Read the full article →

Neel Kashkari, TARP Guru, Supports Cutting Entitlements, Citing ‘Me-First’ Attitude Of Beneficiaries

July 26, 2010

Remember Neel Kashkari? Back during the financial crisis, Kashkari sat at the U.S. Treasury’s Office of Financial Stability, where he was in charge of implementing the Troubled Asset Relief Program — the fancy name for a wheelbarrow full of $700 billion in taxpayer money that went to revive the do-not-resuscitate banks of the world, which is exactly what those banks asked the government to do. Well, the whole experience made Kashkari terribly, terribly sad! So he went out into the woods to build himself a Cabin Of Emotions , where he could grieve over the fact that Washington, DC had lost the lustrous glamour that attracted him in the first place — during the Iran-Contra hearings. But since then, he was rescued from his doldrums by bond giant PIMCO, where he became its managing director of investment management. Now he’s on the op-ed pages of the Washington Post , with a message for the olds: STOP BEING SO “ME-FIRST” and let us cut your entitlements! A nation’s culture can have a profound impact on its competitiveness. Our shared beliefs in free markets, fair play and the rule of law inspire entrepreneurs to pursue their dreams and give global investors confidence to bring their money to America. These beliefs have passed from citizen to citizen, from generation to generation. They have strengthened over our history and brought an important competitive edge to the United States. Hey, let’s remember some basic things before we go any further, shall we? “Free markets” equals “too big to fail banks will never be allowed to fail.” “Fair play” equals “bailing out these too big to fail banks when they nearly destroy the economy while small banks die by the hundreds.” “Rule of law” equals “big banks using derivatives to get around capital rules.” Okay? Moving on! Our belief in free markets is founded on the idea that each individual acting in his or her self-interest will lead to a superior outcome for the whole. The financial crisis has reminded us that free markets are not perfect — but they do allocate capital better than any other system we know. A “me first” mentality usually makes markets more efficient. Okay! So, a person who retires today probably entered the workforce in the mid to late 1960s. They acted in their self-interest, let’s say, and this led to some “superior outcomes for the whole.” It was so “me-first” of those people to not consider the possibility that decades after they started contributing to the nation’s wealth, that another generation of idiots would come around and destroy it, leaving us with no other choice than to push those aging former societal contributors out onto ice floes to die! What jerks! Where was their foresight? Why weren’t they smart enough to get way into toxic mortgage-backed securities? They could be the ones holding America hostage today! Cutting entitlement spending requires us to think beyond what is in our own immediate self-interest. But it also runs against our sense of fairness: We have, after all, paid for entitlements for earlier generations. Is it now fair to cut my benefits? No, it isn’t. But if we don’t focus on our collective good, all of us will suffer. Well, Neel Kashkari isn’t going to suffer, because he works for PIMCO, remember? And PIMCO’s brilliance was the way it strictly adhered to a “me-first” philosophy: From the December 31, 2008, Talking Points Memo : As of June 30th, 61 percent of PIMCO’s holdings — $500 billion — were in the very mortgage backed securities that it’s now being hired by the Fed to buy back on behalf of US taxpayers, according to a September Bloomberg report that cited data on PIMCO’s own website. That could explain why, as financial blogger Rolfe Winkler pointed out earlier today, PIMCO chief Bill Gross was sounding the alarm in early September about the disastrous fate that would befall the US economy unless the government started buying up troubled mortgage assets. In a September 4 post on PIMCO’s website, Gross warned : If we are to prevent a continuing asset and debt liquidation of near historic proportions, we will require policies that open up the balance sheet of the U.S. Treasury. Within days, Treasury did what Gross was asking . In other words, as Peter Cohan, a professor of management at Babson College, put it at the time in a post on Bloggingstocks.com: Bill Gross, who manages $830 billion, has convinced the U.S. Treasury to use your taxpayer dollars to bail him out of his bad investments. And Gross seems to have had his eye on the endgame for a while here too. Later that month, he argued in a Washington Post op-ed that a broader bailout — what became TARP — was also desperately needed, and he seemed to suggest that his own PIMCO would be a perfect candidate to manage the funds. And now, Neel Kashkari is in the Washington Post today, arguing that cutting entitlements is akin to TARP because both are “unpopular decisions that are in our collective best interest.” Except that TARP benefitted PIMCO greatly and, having been done a good turn, PIMCO rescued Kashkari from his sad little cabin in the woods. Some pigs are more collectively best-interested than others. But Kashkari says we have to act now now now! Cut entitlements before it’s too late! If we wait until the bond market shuns Treasurys, the economic consequences could be dire. Virtually overnight, we could have far less money to spend on priorities such as defense, education and research. Once confidence in U.S. Treasury bonds is lost, it could take years to return. Let’s take a look at the bond market, shall we? That red line indicates the interest rate yield on 2-year T-Bills, currently at about 0.6%. Now, there are plenty of market experts who will be willing to debate the fine points of this, but doesn’t it seem like the world’s investors a) find 2-year T-Bills to be one of the safest investments around and b) are really unconcerned about the U.S. deficit? When, exactly, is the confidence going to be lost? Will it be soon? Fun fact: Right now, the 2-year T-Bill is seen as so safe that, judging by the yields, it’s apparently riskier to get a 2-year CD from a bank. The average yield on a 2-year CD is about DOUBLE that of a 2-year T-bill, according to Bankrate.com . So investors are passing up double the yield in order to buy Treasuries. Kashkari says, “Our leaders need to make the case for cutting entitlement spending by tapping into our shared beliefs of sacrifice and self-reliance.” That word — “our” — seems awfully ironic! Pare back now, America, so there’s money on hand to save the banks again! Shacks in the woods for everyone else. [Would you like to follow me on Twitter ? Because why not? Also, please send tips to tv@huffingtonpost.com -- learn more about our media monitoring project here .]

Read the full article →

Kristie Arslan: Own a Small Business? Say Hello to Your New Best Friend: IRS Form 1099

July 19, 2010

Found deep within the new health reform law is a little known provision that will increase tax regulation on all of America’s businesses beginning in 2012. Who will be hardest hit? You got it…small business. The IRS currently has a reporting requirement for businesses who hire independent contractors. If a business hires a contractor, and pays them more than $600 in a tax year for services, the business must file a Form 1099. One copy of the Form 1099 goes to the contractor to remind him/her that taxes must be paid on the amount of income received. Another copy goes to the IRS which utilizes the form to ensure that the contractor accurately complies with the tax code by paying the proper amount of taxes on income. In their rush to find funding to pay for their health reform efforts, Congress decided to expand this form 1099 reporting requirement which will heap additional paperwork and fines onto the backs of our nation’s job creators. As of 2012, every business — big and small — will be required to issue a Form 1099 to any vendor of services or property to which the business has paid more than $600 in a tax year for those services or property, regardless of the method of payment. A copy of the Form 1099 must also be sent to the Internal Revenue Service. According to the Small Business Legislative Council , basic business expenses such as airlines, hotels, rental cars and restaurants will all be subject to this new reporting requirement. Also, if you are in the business of selling or distributing goods, all of your suppliers of inventory are also vendors under the new law. What does this mean to a small business in terms of paperwork? According to a survey conducted by the National Association for the Self-Employed (NASE), micro-businesses (fewer than ten employees) issue approximately two to three Form 1099′s to independent contractors under the current reporting requirement. Under the new expanded regulation, these businesses have estimated that they will have to issue roughly twenty-seven Form 1099s, mostly to large corporations. This is a 1250% increase in the amount of paperwork that will be required of small business come 2012. In addition to issuing form 1099s, a business will have to get Taxpayer Identification Numbers (TINs) from all qualifying vendors. Should the business owner be unable to do so, they would be required to withhold a portion of that vendor payment and send it to the IRS. With over 40 percent of NASE’s survey respondents still preparing their taxes on their own, this added administrative workload will significantly increase the time business owners spend on paperwork and/or force them to hire an accountant, adding to the cost of doing business in this difficult economic time. Should a business not file or inaccurately file their form 1099s, significant penalties will apply. It seems some Members of Congress have begun to see the error of ways and have taken steps to introduce legislation (Small Business Paperwork Mandate Elimination Act of 2010, S.3571/ H.R. 5141) which would repeal or modify this onerous regulation. Let’s hope this debacle serves as a good lesson to our policymakers that it is imperative they fully examine the impact of their funding mechanisms and other legislative provisions prior to rushing to pass their policy priorities. Quite simply — Read the bill and make sure you know what it does before you vote YEA!

Read the full article →

Christopher Weber: Why the GM and Chrysler Bankruptcies Foreshadow Big Problems for the Gulf Cleanup

July 16, 2010

After BP’s financial travails — falling stock, mounting claims — financial analysts everywhere are uttering the dreaded B word. Incredibly, it seems that an energy company recently valued at $200 billion could go bankrupt. As BP executives reiterate pledges to pick up the tab for stained beaches and soiled pelicans, another messy industrial cleanup is unfolding a thousand miles to the north, in the Midwest’s auto-manufacturing belt. General Motors and Chrysler are the chief culprits there. The automakers own hundreds of contaminated properties where they once made cars and car parts. Like so many oil-stained communities along the Gulf, former auto towns throughout the Midwest are waiting for a thorough going environmental cleanup. And like the Gulf communities, they hope that cleanup will help bring about a full economic recovery. Some have been waiting for years, even decades, for GM and Chrysler to finish the job. Will the communities of the Gulf Coast ultimately fall into a similar state of limbo? Right now, the daily stress and uncertainty demands their energy, but in the months ahead, many may learn a lesson that Midwesterners have known for a long time: The difficulty of making a big corporation pay for its mess increases exponentially once it declares bankruptcy. Herein lies a cautionary tale for Congress, environmentalists, and the people of the Gulf Coast. As much as they want BP to pay through the nose, they should beware a bankrupt BP, which could use bankruptcy laws to shed its responsibility to pay for environmental cleanup. “If GM doesn’t pay, there’s a real danger that the cleanup costs will fall back on the taxpayer.” That’s Kevin Smith speaking. He’s the former mayor of Anderson, Indiana, a city of 50,000 that made millions of starting motors, horns, and headlamps for GM. Smith worked closely with GM to clean up nearly a dozen former plants, but work stopped when GM went bankrupt. Now, the city is seeking $9.2 million from the automaker to finish the job. The court handling GM’s bankruptcy may award the funds; it may not. Either way, someone has to clean up the polluted 90-acre field where that headlamp plant once stood. A former auto plant does not look much like a white-sand beach, but the net effect is the same: An asset converted to a costly albatross. An oily albatross, if you want to mix metaphors. Unlikely Pairing: A bankrupt BP might delay or seek to avoid paying for environmental cleanup along the Gulf Coast (below, AP), just as General Motors has left this contaminated factory site in Anderson, Indiana, untouched (above). “When companies leave huge environmental pollution from their operations, local governments suffer the brunt of the problems,” says Matt Ward. He’s the policy director for the Mayors Automotive Coalition, a group of 50 municipalities that have banded together to rebuild communities devastated by plant closures. “Local communities have to deal with the contaminated property as well as lost jobs, lost tax revenue, increasing foreclosures, demands for social and poverty services, and the stigma that drives away future economic development.” When the companies responsible go bankrupt, cleanup efforts are often put on hold, prolonging the crisis. “When the company has no resources, it is bad news for communities,” Ward concludes. BP is plenty different than the American automakers, of course. For one thing, it has no problem making a profit. And unlike GM and Chrysler, it never owned the waters and beaches its crude has fouled. But when it comes to the all-important question of who pays, a bankrupt BP may quickly start to resemble GM and Chrysler, which have been widely criticized for insufficiently funding their cleanup obligations. “We’re still trying to calculate the environmental cleanup costs that GM and Chrysler have left to be borne by the public,” notes Jackie Gardina, an attorney, professor at Vermont Law School, and authority on the environmental consequences of bankruptcy. If BP declares bankruptcy, its oft-repeated promise to “pay all reasonable claims” goes out the window. “If BP were to file for bankruptcy, the government will be unable to hold the company fully accountable for the as-yet-unknown costs of this unprecedented environmental catastrophe,” Gardina says. “Bankruptcy courts struggle to find a balance between the ‘polluter pays’ principle of our environmental laws versus the bankruptcy.” Gardina says that only Congress, not the courts, can truly make corporate polluters accountable. It can arrange liens on BP’s assets or revise the bankruptcy code to provide less wiggle room for corporate polluters. Moreover, she notes that the Obama administration can request a “security interest” in BP’s property to guarantee the costs associated with the spill. Bottom line, Congress and President Obama must close the loophole that makes bankruptcy so useful for BP and other corporate polluters. Otherwise, we may one day speak of the Gulf Coast as the new Rust Belt — the Tar Belt, if you will.

Read the full article →

Ayo Adeyeye: PolitiFact’s Truth-O-Meter in Need of Tune-Up

July 8, 2010

Last month, Arianna Huffington, HuffPost Editor-in-Chief, appeared on ABC’s This Week on a panel with Liz Cheney, a former Bush Administration official. In an exchange over the BP oil disaster in the Gulf, Huffington accused Halliburton, the behemoth oil company who’s one-time CEO was Ms. Cheney’s father and former Vice President, Dick Cheney, of “defraud[ing] the American taxpayer hundreds of millions of dollars.” In characteristically caustic Liz Cheney style, Cheney objected to the charge by questioning Huffington’s citizenship as a resident of Planet Earth. PolitiFact, a fact-checking website and project of the St. Petersburg Times whose site proclaims a mission to “help you find the truth in politics” joined the debate and labeled Huffington’s claim ” Half True ” on its six-pronged “Truth-O-Meter,” denoting that “the statement is accurate but leaves out important details or takes things out of context.” While PolitiFact concedes that all evidence suggests that Halliburton wasted hundreds of millions of taxpayer dollars, whether the waste amounts to fraud “is still being examined,” they report. Let’s see if we can’t speed up that examination. In November 2003, just less than one year after the start of the War in Iraq, Newsweek ran an article entitled ” The $87 Billion Money Pit ,” reporting numerous allegations of “overspending, favoritism and corruption” against Halliburton and other US contractors engaging in Iraq reconstruction. In the article, Halliburton was accused of gouging prices on imported fuel to the tune of $300 million. Citing the Newsweek piece in her opening statement at a Senate Democratic Policy Committee (DPC) hearing that same month, then-Senator Hillary Clinton (D-NY) touted the need for transparency and greater oversight in Iraq reconstruction contracting, saying “we need to assure the American people that their money is being spent wisely, assure the Iraqi people that it is being spent in their interest and assure the world that it is not being spent for profiteering by American companies.” Since the start of the Iraq War, the DPC, a Senate Leadership Committee established by law in 1947 concurrently with a Republican Policy Committee, has held more than two dozen oversight hearings on waste, fraud, and abuse in Iraq reconstruction contracting. Halliburton and its subsidiary Kellog, Brown and Root (KBR) have been the subject of many of them. Chaired by Senator Byron Dorgan (D-ND), these hearings have “unearthed numerous examples of contracting abuse, including the inappropriate awarding of major contracts to Halliburton; billions of dollars in unsubstantiated costs and overcharges on everything from fuel, to meals for the troops, to hand towels; and the delivery of unsafe water to our troops in Iraq, with which the troops showered and brushed their teeth,” Dorgan said in a statement back in 2008. Throughout its investigations into Halliburton, the Committee also uncovered efforts by the Pentagon and the Bush Administration to protect Halliburton from close scrutiny and criticism of its dubious practices including, but not limited to, retaliation against whistleblowers. Charles Smith, the senior civilian overseeing a multi-billion dollar contract awarded to KBR by the Pentagon, was forced out of his job when he refused to approve payment to KBR of more than $1 billion in questionable spending for which Army auditors had determined KBR lacked credible data or records. Bunnatine Greenhouse, once the most senior civilian contracting official at the Army Corps of Engineers, was removed from her job after raising concerns over the award of a $7 billion sole source, no compete, cost plus contract to KBR to restore Iraq’s oil production. Greenhouse testified at a 2007 DPC hearing that the award of the contract to KBR represented the worst abuse she had witnessed in her 23-year career. Still unsatisfied? Halliburton’s transgressions continue. In April 2007, the Pentagon misled Congress about multiple allegations that KBR was providing contaminated water to US troops which, according to KBR’s own internal reports, could have caused “mass sickness or death.” Interestingly, the General whose testimony at a Senate Armed Services Committee hearing misled Members was the same official who ordered the removal of Charles Smith from his post after he objected to KBR’s questionable $1 billion paycheck. In March of 2008, then-Senator Barack Obama (D-IL), along with Senator John Kerry (D-MA) introduced a bill aimed at preventing government contractors like KBR from setting up shell companies in foreign jurisdictions to avoid payroll taxes. Then-Rep. Rahm Emanuel (D-IL) and Rep. Brad Ellsworth (D-IN) introduced companion legislation in the House. In a press release, Obama said, “This legislation would close a tax loophole that has been exploited by Kellogg Brown & Root (KBR), a former subsidiary of Halliburton Corp. This loophole allowed KBR and potentially other government contractors to set up shell companies in the Cayman Islands in order to avoid paying payroll taxes for their American employees.” In his press release, Senator Kerry said “KBR is abusing the public trust at the taxpayer’s expense, and our reform will close the loophole that enables big corporations to take advantage of the American people.” According to Kerry’s office, the loophole that the legislation was intended to close enabled KBR to fleece American taxpayers by nearly $100 million a year. The Fair Share Act of 2008, which was co-sponsored by then-Senator Hillary Clinton was not reported out of the Senate Finance Committee. Arguably, the most reckless example of KBR’s abuse was the subject of a May 2009 DPC hearing, where Senators heard testimony and received internal Pentagon documents showing that in 2007 and 2008, KBR received multi-million dollar bonuses for work that led to the electrocution deaths of US soldiers. In 2008, a Staff Sergeant was electrocuted to death while showering at a US military installation in Baghdad. The Committee obtained testimony based on internal KBR inspection records that KBR had been aware of the electrocution hazard and claimed to fix the problem, meanwhile hiring unqualified third-country electricians and permitting the shocks to persist. Despite the harm done to our troops, KBR was awarded its $83.4 million bonus for the shoddy electrical work done in Iraq in 2007, more than half of which came after the Defense Contract Management Agency warned about ongoing problems with the electrical work. KBR’s infamously reckless conduct throughout the reconstruction process in Iraq is egregious and fundamentally undermines the US mission there. Each time Congress appropriates funds toward war efforts, the government solicits a commitment from the American taxpayer. The American people deserve to have their commitment met with responsible stewardship. Similarly, if it is to live up to its mission statement, PolitiFact has a responsibility to its readers to unambiguously separate fact from fiction and avoid the pitfall of equivocation in the face of controversy by misguided attempts at reaching some artificial middle ground. At this point, it is plain that KBR’s practices have traversed the realm of the wasteful, waded beyond that of the fraudulent, and are now comfortably into the abyss of the outright criminal, so unless PolitiFact’s Truth-O-Meter takes into account understatement, its rating of Huffington’s charge as “Half True” is unjustified and places it squarely on a long and unsavory list of characters who have deferred to KBR in the face of persistent and well-documented abuse.

Read the full article →

Charles Gasparino: Is the Financial Crisis Inquiry Commission Wimping Out on JP Morgan?

June 30, 2010

Of all the events that led up the great financial collapse of 2008, in my mind, one truly stands out: The decision by super-bank JP Morgan to demand billions of dollars in collateral from the troubled Lehman Brothers in mid-September of that year. The move, according to senior Wall Street executives, was akin to a death knell for the firm, which was just about on life support already. JP Morgan demanded some $8 billion, it said, for clients that traded with Lehman. It didn’t even matter that Lehman couldn’t make the full payment. Once word went out that JP Morgan was nervous about Lehman’s ability to survive, a bank run ensued. Lenders pulled lines of credit; Lehman couldn’t trade with its counter-parties. In less than a week, Lehman had declared bankruptcy and the entire financial system began to implode, and would have, were it not for a massive government-led bailout. You would think if you were investigating the root causes of the financial crisis and were ordered to prepare the definitive account of the collapse of Lehman (and the rest of Wall Street), investigating the circumstances behind JP Morgan’s collateral call would be high on your list, right? Well not if you’re Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, the Congress-mandated body led by the former treasurer of California. The Commission’s website boasts a “nonpartisan mission to examine the causes of the financial crisis that has gripped the country and to report our findings to the Congress, the President, and the American people”; all of which makes it so irresponsible that the commission has no plans to seek testimony from senior officials at JP Morgan, including its CEO Jamie Dimon, about the now infamous collateral call that sent Lehman into oblivion, and nearly the rest of Wall Street as the markets crumbled during those dark days in the Fall of 2008. Instead, the commission has been busy, of late, beating up on everyone’s favorite financial collapse villain, Goldman Sachs. Angelides and his people made headlines a few weeks ago when they disclosed that Goldman at first didn’t want to turn over documents to his committee, and then when it did, it basically backed up the truck and dumped thousands of pages of notes, emails and whatever else the firm kept records of during the past 10 years right on its doorstep. Okay, that was a little bit of an exaggeration. But Angelides, according to senior people at Goldman, asked for a lot of stuff, and then asked Goldman to give his committee a road map on the most incriminating emails and records. Goldman kind of refused, and Angelides went public with that refusal. And that makes Goldman a bunch of crooks, at least in the eyes of the committee, which today is taking testimony from the firm’s No. 2, the famously testy Gary Cohn. Both Cohn and CEO Lloyd Blankfein built the modern Goldman Sachs, the firm that doesn’t think twice about selling “crappy” investments to its clients; the firm that made gazillions shorting the housing market when everyone else was still buying those crappy mortgage bonds; and the firm that received a backdoor bailout from the AIG bailout. Goldman –despite its spin to the press and public statement to the contrary– really was bailed out because when AIG received public assistance, the insurance policies held by Goldman to cover its toxic debt investments were now money goods. As a result, Goldman was reimbursed 100 cents on the dollar for those policies, known as credit default swaps, after the taxpayer bailout of AIG. All of this sounds like pretty sleazy stuff (Goldman has counter-arguments to each and every point I just made, which I won’t bore you with in this column), but it’s also ground that’s been covered time and time again; by the Angelides committee earlier in the year, but also by more than a handful of other investigative bodies not to mention just about every major news organization. I’m not exactly an apologist for Blankfein & Co. In fact, late last year when it became clear that despite the company’s spin, Goldman was indeed bailed after the AIG rescue, I called for Blankfein’s resignation in a column for the Huffington Post, which didn’t exactly endear me to my former employer, particularly when I went on air and said basically the same thing. Today, Blankfein is clearly in a more precarious state given the myriad of investigations swirling around the firm, the recent civil charges filed by the SEC accusing Goldman of civil securities fraud, and the non-stop bashing of the firm’s business practices under his watch by the press, Congress and now Angelides. My dad, a former Marine, would Goldman and its top executives “open wounds.” Unlike the great Jamie Dimon — the notoriously hot-headed King of Wall Street who has the ear of the president and takes no shit from anyone — the people who run Goldman are a beaten and bruised bunch, and given the media frenzy surrounding the firm, very easy to pick on. But then again what’s the point? And that’s my problem with the Angelides Commission–there really isn’t any point to it. The commission’s hearings are nearly universally boring and bereft of new information. Blankfein testified earlier in the year, but if he said anything interesting, I can’t remember. A couple of weeks ago, he called Jimmy Cayne, the former CEO of Bear Stearns, to testify about the firm’s 2008 implosion only to hear tell Cayne that there “does seem to me that there was an extraordinary level of risk taken” by his firm. Cayne’s response: “That was business.” Quick, stop the presses! Maybe the commission, which has to conclude its work and provide its findings to the president and Congress, by December, should just start over, and begin to ask questions that matter. The JP Morgan collateral call might not sound sexy, but it was important. People at JP Morgan say they were simply doing their jobs, and holding Lehman financially accountable for its poor investment decisions. But people at just about every other firm I know of say JP Morgan was being heavy handed; it didn’t need to turn the screws when it did, and only did so because Lehman wasn’t just a creditor who owed the bank money, but also a competitor, which vied for business with JP Morgan in the markets. (JP Morgan made a similar collateral call at that time on Merrill, also leading to that firm’s forced sale to Bank of America.) It’s one of the many downsides of the dissolution of the Glass-Steagall law, which once separated investment banking from commercial banking. Once the financial supermarkets were created, firms like Citigroup and JP Morgan could squeeze competitors like Bear Stearns and Lehman by refusing to lend them money. I met Phil Angelides once, and he seems like a smart guy, but a little too nice, and kind of a wimp, which is why I will wager a nice meal anywhere in New York, that there’s a greater chance of Jimmy Cayne making a comeback on Wall Street, than Angelides’ commission forcing Jamie Dimon to testify about the Lehman collateral call.

Read the full article →

Cenk Uygur: Why Washington Is More Right-Wing Than the Rest of the Country

June 28, 2010

We recently had John Avlon on the program and he is a devout “centrist.” That used to mean that you were somewhere on the political spectrum between the left and the right. It now means that you set up false equivalencies between the left and the right and call everything even no matter what. I’m an actual centrist. I used to be a liberal Republican from the North East. Of course, no such thing exists anymore. I’m against affirmative action. I’m a deficit hawk (except I believe we should balance the budget by not just cutting “entitlements” but also by cutting the Pentagon and raising taxes). I was for the Persian Gulf War but against the Iraq War. I am against Bush or Obama violating civil liberties or abusing executive authority. So, in the country I’m right in the middle of the political spectrum. There is hardly a national poll that doesn’t agree with my political position. Hence, I am now considered a raging liberal in Washington. Apparently, I am so far left now that Obama is significantly to the right of me. How does that make sense? It doesn’t, in any place outside of DC. But what’s maddening is that no one acknowledges two things: 1. How far to the right of the country Washington is. 2. How far the political spectrum has moved to the right. Why is Washington more right-wing than the rest of the nation? Because that’s where power and the establishment reside. Power is by nature conservative — it wants to protect its current privileged position. That’s not nefarious, it’s natural. But not acknowledging that is silly. The establishment loves the status quo, because that’s what got them their current position. Why would they want to change that? And how can anyone consider themselves a political analyst and not see how far to the right we have moved as a country? Eisenhower warned us of the military industrial complex. If he had said that now, people would say he’s weak on national security and doesn’t support the troops. And he was a Republican. Truman ran on single payer healthcare — Obama wouldn’t even consider that. Nixon started the Environmental Protection Agency. Reagan sold arms to terrorists, negotiated with the evil empire, raised taxes eleven times , ran from Lebanon. Are you absolutely sure that Obama is to the left of Reagan? Watch this debate with John Avlon, the author of Wingnuts, How the Lunatic Fringe is Hijacking America , and see if you really think there is such a thing as the hard left in this country and whether they are anywhere near as extreme as the hard right: One other thing that we touched on in this conversation was the idea of corporatism . Being against corporatists doesn’t mean you’re anti-business. There is this absurd myth that liberals are anti-business. What does that mean? Liberals don’t want there to be any more businesses? Does anyone really believe that? Liberals, centrists and conservatives have no problem with business as long as they are not taking our taxpayer money! Do conservatives want trillions of taxpayer money going to Wall Street banks? My understanding was that they hated the bailouts. Do conservatives want taxpayers rather than BP to pay for the clean up of the oil spill in the Gulf? Well, I hope not. Maybe some of the conservative leaders who take money from oil companies want that to happen — but that’s the whole point. The politicians aren’t working for us anymore, liberals or conservatives. They are not driven by ideology. They’re driven by whoever pays them, which is the lobbyists. Seventy percent of campaign contributions come from corporations. Now who do you think the politicians are going to work for? Being against corporate control of our democracy shouldn’t be a liberal position. It should be a universal position. It’s not that multi-national corporations are evil, it’s just that they’re amoral. They are unconcerned with American taxpayers or citizens; they are concerned only with profits. That is what they have to be by law. It’s absurd to argue otherwise. Yet, the conventional wisdom in DC is that people who are worried about corporatist influence on American politics are far left crazies. They’re not crazy, they’re awake. And they’re not even liberals, they’re every American who is sick of their politicians being bought by the highest bidder. That’s all of us, except the “centrists” in DC. Watch The Young Turks Here

Read the full article →

AIG to Be Final Insurer With U.S. Aid as Lincoln National Set to Exit TARP

June 14, 2010

By Andrew Frye June 14 (Bloomberg) — American International Group Inc. , recipient of the first and the biggest of U.S. insurer bailouts, will become the last carrier with public funds now that Lincoln National Corp. plans to repay its rescue. AIG Chief Executive Officer Robert Benmosche , who promised taxpayers full redemption and a profit, is selling units and counting on a revival at the businesses that remain. His stewardship got a vote of confidence from Federal Reserve Chairman Ben S. Bernanke on June 9, while the following day Congressional Oversight Panel Chairman Elizabeth Warren said taxpayers were still saddled with “a lot of risk.” “They’re going to owe their ability to repay the taxpayer to capital-market conditions that are not in the hands of Robert Benmosche or Ben Bernanke,” said Bill Bergman , an analyst at Morningstar Inc. in Chicago. Lincoln plans to sell shares and notes to fund repayment of its $950 million in aid, the Philadelphia-based insurer said today. AIG owes about $26.6 billion on a Fed credit line and $49 billion to the Treasury. Its bailout, which dates from September 2008, swelled to as much as $182.3 billion. “AIG remains committed to repaying the taxpayer,” Mark Herr , a company spokesman, said today in an e-mailed statement. Herr cited Benmosche’s testimony on repayment before Warren’s committee last month, when the CEO said “AIG will do so with interest.” Emergency Aid Lincoln and Hartford Financial Services Group Inc. , the Connecticut-based carrier that repaid $3.4 billion in U.S. aid in March, won relief funds in 2009 after appealing to Treasury for the same support offered to banks during the 2008 financial crisis. Emergency funds for New York-based AIG were provided a day after the Lehman Brothers Holdings Inc. bankruptcy to protect the insurer’s trading partners. “Except for AIG, every other major institution has repaid, with interest and dividends,” Bernanke told the House Budget Committee. “And AIG, I believe, will repay.” Lincoln Chief Executive Officer Dennis Glass is focusing on U.S. insurance operations after striking deals to sell a U.K. business and an asset manager. Last year, Lincoln reduced the workforce by 15 percent to 8,208 employees. “We ended the year in a strong capital position, and our first-quarter results reflected the strength of our business model,” Glass said in the statement. “We appreciate the critical role the government and the American taxpayers have played in stabilizing the financial markets.” Lincoln Gains Lincoln advanced $1.55, or 5.9 percent, to $27.91 at 1:04 p.m. in New York Stock Exchange composite trading. The insurer has climbed about 57 percent in the past 12 months, compared with a gain of 16 percent by AIG. JPMorgan Chase & Co. will lead the offerings. Credit Suisse Group AG, Morgan Stanley and Wells Fargo & Co. will help manage the equity sale, while Bank of America Corp., Deutsche Bank AG and U.S. Bancorp will assist on the debt offering. Life insurers were cut off from traditional sources of funding after stock and bond markets fell in late 2008, and at least 12 carriers applied to Treasury for bailouts. As markets began to improve in April 2009, MetLife Inc. , the biggest U.S. life insurer, announced that it wouldn’t take U.S. funds. No. 2 Prudential Financial Inc. and Principal Financial Group Inc. turned down bailouts in June of last year. Lincoln took the bailout last year after agreeing in late 2008 to buy a Goodland, Indiana-based savings and loan with $7.3 million in assets to qualify for aid under the Troubled Asset Relief Program. The insurer reported three straight quarterly losses in the nine months ended June 30 as bond holdings slipped and the cost of guaranteeing minimum returns on retirement products called variable annuities increased. Lincoln sold $600 million in stock to private investors a year ago for $15 each. That offering was part of an effort to raise capital that included the U.S. bailout and the sale of $500 million in debt. To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net .

Read the full article →

Grant Cardone: Job Numbers are Synthetic

June 7, 2010

While the government makes claims of a job recovery the markets don’t agree. The governments hiring of 411,000 temporary census workers made a small dent in our enormous jobs crisis but should those jobs even be counted? These jobs don’t produce revenue, they don’t create new products or services, they can not be sustained and are funded on the shoulders of tax payers. While these jobs make the numbers look like they are improving they will not produce revenue. Why are businesses not yet hiring? Because they are not being rewarded to add jobs and will not do so until they can justify the added expense that comes with an expanded payroll. In the ‘real world’ additional payroll demands additional revenue produced from increases sales. The government’s only revenue is taxes and when they create jobs you get taxed. Those jobs that were used to pump up the jobs numbers are expenses to each of us. I don’t know about you but if I am going to pay for job creation I would like to get something for my money like, roads, bridges and infrastructure. Until businesses are rewarded for adding employment, job numbers will continue to suffer. Add to this, extended unemployment, again funded by the taxpayer- and the situation only worsens. The reality is most businesses are making more money today but the individual worker is not! Fast forward to when the unemployment benefits finally cease, taxes are increased on all of us and watch middle class American continue to suffer despite the recovery. Despite the impact of temporary census jobs more than 29 million Americans are still without work or forced into part-time work — that’s a real jobless rate of 16.6% (BLS U6). (Leo Hindery Jr.’s more precise estimate is 30.16 million for a jobless rate of 18.8 percent.) Nearly 7 million people have been jobless for over 26 weeks (the “long-term unemployed”) — more than at any time since the Great Depression. We still need more than 22 million new jobs to get us anywhere near full-employment. Businesses are making money but not hiring. Why? Because the reward is not there. Until government provides rewards for hiring rather than rewards for unemployment and funding jobs that don’t produce revenue the job numbers will be problematic. In the ideal free market, the price of labor determines the amount of employment, or so the theory goes. The new reality is the ability to added employment to produce new revenue not the price of labor determines the amount of employment. The old formula was if the price of labor goes down, jobs will be increase but who wants to take a lower paying job when they can stay home. Businesses don’t care how inexpensive the employment is but how much revenue additional employment can create! Quick fixes like adding 411,000 non-revenue creating census workers cost 90 million and will not change the economic conditions because nothing new is being created. Health care and unemployment benefits don’t create jobs they just cause us to increase taxes. If you are going to fund activities make sure you are funding activities that actually create products, services, roads, bridges, infrastructure, and new industry. How much infrastructure could 3 trillion build? It’s time to square up to the jobs crisis as it won’t go away by itself. The key to solving the crisis? Move money from handout programs to creation programs. Reward businesses for hiring rather than rewarding people to remain unemployed. If the government is going to spend massive amounts of tax dollars lets make sure it actually creates something and is not just a handout. Grant Cardone, Best Selling Author

Read the full article →

Mary Bottari: Bank Fight Continues: Now It’s Lincoln vs. Obama

May 23, 2010

This week, the U.S. Senate passed a financial reform bill that was far stronger that what had been proposed by the Obama administration and passed by the House. Now it’s time to hold President Obama’s feet to the fire to ensure the strongest possible bill. Not long after the financial crisis, it was clear that the “solutions” that would emerge from the administration would be weak. With Tim Geithner and Larry Summers in the driver’s seat it was clear that there would be no bold transformative vision, no “New Deal” for the 21st century, but tweaks like a “systemic risk regulator” that would somehow endow failed regulatory bodies with the foresight needed to predict the next crisis and the back bone needed to take decisive action. The Obama team set such a low bar on structural reform that public interest groups despaired. But a funny thing happened on the path to weak-kneed financial reform, democracy got in the way. Voters Strengthen the Bank Bill Two critical elections were held that raised the bar on financial reform. The first was the special election held to replace Massachusetts Senator Ted Kennedy. Republican Scott Brown swept into power in this democratic stronghold with a populist appeal against big bank bailouts. The very next day, Obama declared his support for the “Volcker Rule,” a measure to crack down on risky proprietary trading. Even though the rule was opposed by Geithner and Senate leadership, it miraculously worked it’s way into the Senate reform bill without a vote. The second election is still underway. On June 8th, U.S. Senator Blanche Lincoln (D-Ark.) faces a run-off election against Lt. Governor Bill Halter in the democratic primary. Halter was inspired to enter the race because of Lincoln’s destructive role in the health care debate, where she blocked progressive reforms. Halter’s meteoric rise in the polls and his successful fund raising among unions, MoveOn and other progressive groupings demonstrated that he was a serious contender. And when he took to the airwaves pounding Lincoln on her cozy relationship with the big banks, the Lincoln campaign needed a compelling response. She canceled fundraisers and denounced Goldman Sachs. More importantly, she used her position as chair of the Senate Agriculture Committee to put forward the most radical reform to the banking bill yet proposed. Lincoln decided that the best way of separating big bank gambling from the taxpayer guarantee is to force the big banks that are responsible for most derivatives trades, to spin off their trading desk into a separate corporate entity. They can continue to gamble, but the taxpayers will not be on the hook for their bad bets. In one fell swoop, her language restores much of the firewall between Wall Street gambling and Main Street banks, reins in reckless derivatives trading and shrinks the size of behemoth banks. Lincoln herself said she thought her proposal would get stripped out in the Senate, but it stuck due not only to her tenacity but also to the fact that she and Halter were engaged in a tight primary. (In the end Lincoln won by a narrow margin of 44-42 forcing a run off). If her proposals survive conference committee, it will be due in large part to the fact that she is still facing the voters. Win or lose, Halter’s legacy may well be the best financial reform measure put forward by any nation in response to the crisis that devastated the lives of so many. The Obama Administration Wants to Kill the Best Provisions Lincoln’s proposal has come under fire from all fronts. Big bank lobbyists went ballistic of course and they will admit that getting her language pulled from the bill is still their top priority. Behind the scenes, it is also the top priority of the administration and the Federal Reserve. Believe it or not the administration is fighting to preserve its ability to bailout any financial institutions that gets in trouble, not just commercial banks. Yep that is right. Instead of clamping down Wall Street gambling, the administration wants to keep reckless institutions on the teat of the Federal Reserve. The battle lines are drawn. The biggest threat to the Lincoln language now is the Obama administration and the Federal Reserve. There will no doubt be a move to strip out the strong Lincoln language in conference committee where the House and Senate versions of the bank reform bill now go to be aligned. On the surface, Congressional leadership is making all the right noises. “This is one of those rare occasions when the two bills really are very close to each other,” said Mr. Dodd, a Connecticut Democrat. “There’s not a great deal of difference. We need to take the best parts of both bills and marry them together and present our colleagues in both chambers with our final product.” Great, perfect. The easy way forward of course is to take the best provisions in both bills and advance the measure for a final vote, but this will not happen if the Obama administration continues to oppose the Lincoln language. Taxpayers must refuse to back the Wall Street casino and tell Congress in no uncertain terms that a bank bill without strong derivatives reform is not a bank bill worth having. We need to make sure that the conference committee is televised and every change is subject to a roll call vote. With all eyes on financial reform, we may yet achieve structural reforms worth celebrating.

Read the full article →

Rosalia Gitau: Where Is the Corruption Rhetoric in the US?

May 21, 2010

I was having a few drinks with friends the other night at a dark bar in Paris. Much like my last HP posting, my company was principally African. We were talking about all sorts of things, from how much we loved one of our co-hort’s, Parselelo Kantai’s, new fiction (his story, “You Wreck Her” was just short-listed for the Caine Prize) to how no matter how long we live in Paris there will still be things we never quite understand (we debated this after having been moved from one section of the bar to another, for no apparent reason). However, like all my conversations with my African friends all roads lead inevitably to one topic: corruption. Parselelo, a writer, journalist and Nairobi stalwart lamented: “Everyone talks about corruption such that it doesn’t even mean anything anymore!” What he said struck me because it was as true as it was untrue, its veracity depending on which part of the world one resides. It is true that for most Africans, corruption is so often discussed, debated and denounced by our politicians that it has literally lost its meaning. Whereas, the World Bank defines it as “the abuse of public office for private gain”, for many Africans, corruption is merely a moral proxy. On a survey conducted by a team I was working with in Sierra Leone, we found that the many Sierra Leoneans thought corruption comprised of litany of bad deeds ranging from adultery to divorce. Pick up any newspaper in a cosmopolitan African city and corruption allegations are flung at one politician against another, the same way the American media uses infidelity to gauge the integrity of the country’s political leadership. In the wake of the global financial crisis, however, there is a notable absence of corruption mud-slinging in the American press. The unscrupulous conduct of a few costs many their jobs, homes, and security. These raiders were rewarded, as big banks got even bigger bailouts, courtesy of you, the taxpayer. As an African with corruption constantly on the brain, I was perplexed: where was corruption rhetoric in the US? If this were Nairobi, the media would have been in an absolute frenzy. The crisis would have been dissected within the context of corruption: from the revolving door between the Department of Treasury and Wall Street, to the choice of bailed-out banks and SEC indictments. Instead, a quick Google search will reveal that the phrase ‘corruption’ + ‘global financial crisis’ (and its variants) renders just one result from a major American media source, namely Forbes magazine which commissioned an article from economist Daniel Kaufman. Daniel Kaufman has a long and illustrious career in anti-corruption work and research. He is a current senior fellow at the Brookings Institute and the former World Bank good governance director. With extensive South America experience, Kaufman has been figuratively screaming for the anti-corruption movement to take notice of what he terms legal corruption or legal acts committed by private entities to gain undue influence. In a Forbes exclusive, Mr. Kaufman explains the link between corruption and the financial crisis . Kaufman breaks down what he has been arguing for years, namely that corruption is more than just handing a politician an envelope filled with cash. Rather, it also includes private persons or companies gaining undue influence over public decision-makers in a range of ways — most of which are perfectly legal albeit unscrupulous. Daniel Kaufman argues that when legal corruption is allowed to continue unfettered, state capture results, where politicians find themselves accountable to private entities rather than their constituencies. Kaufman argues that if current corruption indices accounted for legal corruption, the US would substantially drop in the rankings, given the amount of influence corporations currently exercise over American politicians. Whereas current corruption indices position the US as one of the least corrupt countries in the world, when accounting for legal corruption, the US would rank among the bottom half of countries, below Colombia, Botswana, and South Africa. The US exercises one of the most aggressive anti-corruption agendas in the world, with the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) executing the Foreign Corrupt Practices Act (FCPA) to the limits of this law. Record-breaking fines grab head-lines as do recent moves to pursue jail-time for individual perpetrators. However, these efforts are limited, since even the FCPA equates corruption to bribery. Without those suitcases stuffed with cash, there is no smoking gun to tie the architects of the global crisis to the FCPA and pursue them accordingly — unless, we move for a broader definition of corruption. Americans are not oblivious to corruption, rather we just discuss it narrowly within the context of politicians receiving cash bribes. When such events occur, there is significant media interest, as evinced by the attention former US Congressman William Jefferson (D-La) received for hiding thousands of dollars in illicit funds in his freezer. That got people talking. Undeniably, the US sets the pace for creating international legal frameworks, anti-corruption law being one of them. Indeed, the internationalization of corruption law was largely due to US efforts to export FCPA provisions abroad in order to level the playing field for US businesses. Arguably, a more appropriate definition to address corruption today would be the abuse of public trust for private gain. The US has the resources and leverage to pursue such a definition both at home and abroad, and it would be in the interest of both businesses and consumers around the world if they did so. What do you think?

Read the full article →

BP, Deepwater Drillers Unprepared for Oil Leaks, Senate’s Lieberman Says

May 17, 2010

By Jim Efstathiou May 17 (Bloomberg) — BP Plc and drillers operating in deep water are unprepared to deal with leaks like the well gushing at least 5,000 barrels of oil a day in the Gulf of Mexico, U.S. Senator Joseph Lieberman said. A spill prevention plan filed with the U.S. anticipates the use of booms, skimming vessels and chemicals to collect more than 490,000 barrels a day, mostly on the surface, Lieberman said. BP is unprepared to control an undersea oil plume that may be 10 miles long, 3 miles wide and 300 feet thick. Transocean Ltd. ’s $365 million Deepwater Horizon rig, leased by BP, exploded April 20 and sank two days later, killing 11 workers and triggering a spill that threatens the Gulf Coast from Louisiana to Florida. At least eight congressional committee hearings are scheduled this month. “I still remain to be convinced one, that we did enough to prevent this spill from occurring, and two that we’re able to deal with the unbelievable consequences of it under water,” Lieberman, a Connecticut independent, said today at a hearing of the Senate Homeland Security Committee. BP America Inc. Chairman Lamar McKay said there is “no major government regulation” requiring plans to deal with subsea intervention. The well is leaking at an estimated rate of 5,000 barrels a day, according to BP, the U.S. Coast Guard and the National Oceanic and Atmospheric Administration. That estimate was challenged May 14 by U.S. Representative Edward Markey , a Massachusetts Democrat, citing analysis by independent researchers that it may be more than 10 times higher. Capturing Oil BP today said it is capturing 1,000 barrels of oil a day from a mile-long pipeline connected to the well, about a fifth of the estimated flow rate. The company plans to inject drilling fluid into the well 5,000 feet beneath the surface in a bid to seal it, and is drilling two relief wells that will take about 90 days to complete. An initial plan to place a steel dome over the leak to capture the oil and funnel it to a ship on the surface failed when gas hydrates clogged the device. “To me, the tragedy of this is when that dome was first lowered over the leak and it was rendered ineffective by high pressure,” Lieberman said. “If you had been asked by our government to test that system before an actual blowout, you would have known.” BP will be held accountable for the costs and damages associated with its leaking well, including government employees working on the cleanup, Homeland Security Secretary Janet Napolitano said. More than 17,000 federal, state and local government employees are involved in protecting the Gulf Coast from a spill that followed the sinking of the rig, Napolitano said at today’s hearing. In addition, more than 550 vessels and dozens of aircraft have been called into the cleanup. Middle of Crisis “We’re in the middle of this crisis,” Napolitano said. “Our job is to just keep moving, just keep assembling, deploying, preparing, cleaning and keeping tabs of what we’re spending because ultimately the taxpayer shouldn’t have to pay for this.” Napolitano cautioned that early estimates of the size of the undersea oil plume “weren’t verified” or confirmed. BP’s plan to deal with spills contemplates a scenario in which more than 250,000 barrels would be discharged every day, much more than the current leak, Lieberman said. BP said it could collect more than 490,000 barrels a day, mostly from the surface. “As far as I can tell, those methods don’t effectively deal with the enormous accumulation of oil forming now underwater in the Gulf.” Napolitano and Interior Secretary Ken Salazar sent a letter May 14 to BP Chief Executive Officer Tony Hayward saying BP is required to provide compensation to claimants even if it exceeds a $75 million statutory cap, and that the company shouldn’t seek reimbursement from U.S. taxpayers. BP has paid more than $13 million out to individuals and small business owners hurt by the spill, McKay told the panel. To contact the reporters on this story: Jim Efstathiou Jr . in New York at jefstathiou@bloomberg.net . To contact the reporters on this story: Catherine Dodge in Washington at cdodge1@bloomberg.net

Read the full article →

Mary Bottari: USAA Changes its Tune on Financial Reform

May 17, 2010

As rumors swirl on Capitol Hill that Republicans are getting set to filibuster a strong amendment to the financial services reform bill which would crack down on Goldman Sachs-style conflict of interest trading, reformers picked up a new ally in the respected insurance firm USAA. USAA is an insurance company that was set up in 1922 to assist military families and their dependents. USAA is a Fortune 500 firm, but it has an unusual structure under Texas law that allows it to be an insurance company with a banking arm and an investment arm. Since there are no shareholders, profits are retained to maintain the institutions financial strength or they are returned to the members. USAA garners tremendous loyalty from its clients and great respect on Capitol Hill. The institution’s support of financial reform, and specifically the amendment offered by Sens. Merkley and Levin on proprietary trading, should give pause to Senators considering a filibuster of this critical amendment. USAA’s position in support of Merkley-Levin is a new one. Some weeks ago, USAA sent out an unusual email to its members asking them to call their Senator about the finance reform package and protest an aspect of the bill called the Volcker rule. The idea was developed by former Federal Reserve chairman Paul Volcker as a modern way to crack down on the Wall Street vultures who use their proprietary trading desks to “bet against America.” You will recall that some Wall Street firms bet for their own accounts that the housing market would collapse and they won. In the process however, they mislead investors and their reckless trading amplified the crisis for the rest of us. The SEC and the Department of Justice are investigating some of these trades. Now those same firms are backed by the federal government and the taxpayer guarantee. When they gamble, taxpayers are on the hook for their lousy bets. While the Volcker rule was geared toward protecting taxpayers by cracking down on the reckless proprietary trading of the big Wall Street firms, it would also impact USAA. USAA was concerned about the limitations the rule places on the type of investments an insurance/bank firm could engage in and urged its member to call their Senators over the matter. Thousands did, but many members took up a heated debate on the company’s website and Facebook page. Many USAA clients wanted to find a way to support reform and support USAA. Last week, USAA decided it could do both by supporting the Merkley-Levin amendment to the Senate reform bill. In a message on its webpage and its Facebook page USAA takes credit for the Merkley-Levin amendment and urges passage of the measure: “Senators Merkley and Levin recognize the value and highly regulated nature of insurance portfolio investments made by entities like USAA and have crafted an amendment that will allow USAA to continue to serve our members as we do today. We need your support to ensure that this critical amendment is included in the final bill.” Merkley-Levin strengthens the Volcker rule provisions by including more types of trading in the definition of proprietary trading, and by explicitly banning Goldman Sachs-style conflict of interest trading. The Merkley-Levin amendment was not created just to aid USAA, but it was crafted to allow an insurance company like USAA whose trading desk is subject to state-level insurance regulation to continue its insurance business without being subject to the Volcker rule restrictions on holding a bank. However, if an insurance company also has a separate hedge fund, private equity fund, or some other Wall Street entity that is not regulated by the state insurance regulator like AIG did, then it would be subject to the restrictions. Merkely-Levin may come to a vote as early as Monday and a filibuster is threatened. Now we will see which Senators stand with the Goldman Sachs’ of the world and which Senators stand with USAA against unethical and possibly illegal proprietary trading.

Read the full article →

Mort Zuckerman: Breaking the Public Sector Unions’ Stranglehold on State and Local Governments

May 14, 2010

The American public feels it is drowning in red ink. It is dismayed and even outraged at the burgeoning national deficits, unbalanced state and local budgets, and accounting that often masks the extent of indebtedness. There is a mounting sense that taxpayers are being taken for an expensive ride by public sector unions. The extraordinary benefits the unions have secured for their members are going to be harder and harder to pay. The political backlash has energized the Tea Party activists, put incumbents at risk in both parties, and already elected fiscal conservatives such as Republican Gov. Chris Christie of New Jersey. Over the next fiscal year, the states are looking at deficits approaching hundreds of billions of dollars. The Center on Budget and Policy Priorities, a liberal think tank, estimates that this coming year alone states will face an aggregate shortfall of $180 billion. In some states the budget gap is more than 30 percent. The result is a crowding out of the state role as the supporter of adequate infrastructure, education, and health care. How did we get into such a mess? States have always had to cope with volatility in the size and composition of their populations. Now we have shrinking tax bases caused by recession and extra costs imposed on states to pay for Medicaid in the federal health care program. The straw (well, more like an iron beam) that breaks the camel’s back is the unfunded portions of state pension plans, health care, and other retirement benefits promised to public sector employees at a time when federal government assistance to states is falling — down by roughly half in the next fiscal year beginning Oct. 1. It is galling for private sector workers to see so many public sector workers thriving because of the power their unions exercise. Take California. Investigative journalist Steve Malanga points out in the City Journal that California’s schoolteachers are the nation’s highest paid; its prison guards can make six-figure salaries; many state workers retire at 55 with pensions that are higher than the base pay they got most of their working lives. All this when California endures an unemployment rate steeper than the nation’s. It will get worse. There’s an exodus of firms that want to escape California’s high taxes, stifling regulations, and recurring budget crises. When Cisco’s CEO, John Chambers, says he will not build any more facilities in California, you know the state is in trouble. The business community and a growing portion of the public now understand the dynamics that discriminate against the private sector. The public sector unions organize voting campaigns for politicians who, on election, repay their benefactors by approving salaries and benefits for the public sector, irrespective of whether they are sustainable. And what is happening with California is happening in slower motion in the rest of the country. It must be one of the reasons the Pew Research Center this year reported that support for labor unions generally has plummeted “amid growing public skepticism about unions’ power and purpose.” There has been a transformation in the nature of our employment. Labor is no longer dominated by private sector industrial workers who were in large part culturally conservative and economically pro-growth. Over recent decades public sector employment has exploded and public workers have come to dominate the labor movement. These public sector employees have a unique and powerful advantage in contract negotiations. Quite simply it is their capacity to deliver political endorsements and votes for the very people who are theoretically on the other side of the negotiating table. Candidates who want to appear tough on crime will look to cops, sheriffs’ deputies, prison guards, and highway patrol officers for their endorsement. These unions will naturally back a candidate willing to support better pay and benefits for their members, and this means as much as, or more than, the candidate’s views on law enforcement. The result has been soaring pay and the ability of state police and other safety officers to retire with pensions that place an increasingly unbearable financial burden on the states. In California, such retirees at age 50 often receive pensions at 90 percent of their pay; comparable retirees in most other states get about half their final working salary. In New York, public service employees have received gold-plated perks for much of the 20th century, especially generous health insurance benefits. Indeed, where once salaries were lower in the public sector, the salary gaps in the public and private sectors have disappeared in the last two decades, or even reversed for most job categories. A Citizens Budget Commission report in 2005 showed that for most job categories in the greater New York City region, public sector workers received higher hourly wages than private sector workers. And according to a 2009 survey by the same group, this doesn’t even count the money that New York City pays in full premiums for comprehensive health insurance policies for workers and their families. Only 8 percent of workers in private firms enjoy that subsidy. Moreover, in virtually all cases, the city also pays the full health care premium costs for retirees and their spouses. And the city pensions are “defined benefit” plans, which are more expensive since they guarantee specific benefits on retirement. On the other hand, private sector workers in the survey were mostly in “defined contribution” plans, which means that, unlike their cushioned brethren in the public sector, they do not have a pre-determined benefit at retirement. If New York City were to require its current workers to pay contributions toward health insurance equal to the amounts paid by the employees of local private sector firms, the taxpayer savings would approximate $628 million a year. In New Jersey, Christie says government employee health benefits are 41 percent more expensive than those of the average Fortune 500 company. What we suffer is a ruinously expensive collaboration between elected officials and unionized state and local workers, purchased with taxpayer money. “Scratch my back and I’ll scratch yours.” No wonder the Service Employees International Union has become the nation’s fastest-growing union: It represents government and health care workers. Half of its 700,000 California members are government employees. More and more, it wins not on the picket line but at the negotiating table, where it backs up traditional strong-arming with political power. It spends vast amounts of money on initiatives that keep the government growing–and the gravy flowing. Similarly, for the teachers unions–with the result that California and its various municipalities, especially Los Angeles, face budget shortfalls in the hundred of millions of dollars. California can no longer rely on a strong economy to support this munificence. Its unemployment rate runs about several points higher than the national rate and its high-tech companies are choosing to expand elsewhere. Why stay in a state with such higher taxes and a cumbersome regulatory environment? California is a horrible warning for the nation of how dreams can turn to dust. In most states, politicians face a contracting local economy and shortfalls in tax receipts. Naturally, they look to cut expenses but run into obstruction from politically powerful unions that represent state and local government employees, teachers, and health care workers who have themselves caused pension and health care insurance costs to soar. It is not an accident that in framing the national stimulus program, Congress directed a stunning percentage of the $787 billion to support public service employees. The lopsided subsidies for pension and health costs are a large part of the fiscal crises at the state and local levels. The subsequent squeeze on education and infrastructure investment is undermining the very programs that have made it possible for our economy to grow — thousands upon thousands of teachers let go, schools closed, mass transit slashed. Between New York and California, the projected deficits run about $40 billion — and that doesn’t account for projected billions of dollars in the operating deficits in the states’ mass transit systems or the multibillion-dollar unfunded liability in many of the state pension plans. New York is badly hit because it is being deprived of tax revenues by the government’s indiscriminate attack on the securities industry, which has been so critical to the economy of New York State and to the United States. City government was developed to serve its citizens. Today the citizenry is working in large part to serve the government. It is always hard to shrink government spending. It is particularly difficult when public sector unions have such a unique lever of pressure. We have to escape this cycle or it will crush us. One way is to take labor negotiations out of the hands of vulnerable legislators and assign them to independent commissions. They would have a better shot at achieving a fair balance between appropriate salary increases and the revenues and services of local municipalities. The electorate won’t swallow any more red ink.

Read the full article →

Kathleen Reardon: It Doesn’t Take an Einstein to Figure Out Whose Pocket Has All The "Change"

May 10, 2010

Albert Einstein observed: “No problem can be solved from the same consciousness that created it.” Why is it then that as a country we continue to give extraordinary power to bring about change to people who created the very problems we need solved? And here’s a perfect example of that dysfunctional pattern of poorly placed trust. As we learned recently, Citigroup profits for the first three months of this year totaled $4.4 billion and Goldman Sachs pulled in $3.5 billion, JPMorgan Chase $3.3 billion and Bank of America $3.2 billion. Are these guys smart or what? How could it not be a form of vile genius to get The Fed to hold short-term interest rates to less than one-half of a percent? And this while The Treasury Department is paying up to 4 percent on longer-term loans that banks make to the government. Simply put: If such observers as Barry Ritholz and Jim Hightower are right, we give via The Fed loans to banks at say a half-a-percent interest and the banks turn right around and lend that money to the Treasury Department (that’s us again) at a much higher interest rate. The geniuses get a fat profit for zero risk while Americans lose their homes. That’s not earned profit; it’s simply welfare for Wall Street. Why should they bother getting involved in lending to regular people? They aren’t crazy! People who play this kind of game and win aren’t about to change. And it is indeed a game to them. How long do we need to be confronted by this reality of the Wall Street rich getting richer — with the help of such friends in Washington as Bernanke, Summers and Geithner, to name a few? Sure, our government stands up some bankers in front of angry-looking senators, who themselves take industry money, in what amounts to no more than a let-them-think-we’re-doing-something-to-stop-this carnival act. The bankers put up a little fuss and look perturbed. They must laugh all the way back to the bank. It doesn’t take an Einstein to see that the same people who brought us record home foreclosures only to reap the rewards of even more blockbuster bonuses aren’t going to lift a finger to change things. Where’s the incentive? That’s right: there is none. And the guys running things for the feds know that after they finish working with President Obama they’ll be back on Wall Street so the more favors they do now, the better for them later. Until President Obama sends packing the geniuses whose mindset led us into an economic mess of epic proportions, how can we trust him? How can we not wonder about his judgment? How meaningful is “change” when the very people tasked with leading it are busy gaming our taxpayer money to line the pockets of their friends? This isn’t the blind leading the blind. That would at least be somewhat forgivable. They know what they’re doing, and we’d better get smarter quick. If we keep voting into office people who slide one by us at every opportunity, we’re going to be more like Greece than was ever imaginable before “change” came our way.

Read the full article →

Former Fed Chairman Volcker Opposes Forcing Banks To Spin Off Swaps Desks

May 7, 2010

The establishment is lining up against Blanche Lincoln. As chairman of the Senate Agriculture Committee, the Arkansas senator authored a bipartisan bill to reform the derivatives market. Its centerpiece is a provision banning banks from also acting as derivatives dealers. Banking Committee Chairman Christopher Dodd (D-Conn.) incorporated Lincoln’s bill into the pending financial reform legislation. Because banks enjoy explicit taxpayer support through federal deposit insurance and access to cheap funds via the Federal Reserve’s discount lending window, Lincoln doesn’t want taxpayers to implicitly support derivatives dealing. Derivatives, traditionally used as a risk-management tool, amplified and exacerbated the financial crisis because their use was abused by firms that simply used them to place bets. This bound financial firms together in ways that weren’t fully understood until the height of the crisis, necessitating further taxpayer support. But her proposal, widely supported by reformers, has met fierce opposition from Wall Street, its supporters in the Senate and the Obama administration, including pro-reform voices like Paul Volcker and Sheila Bair. Wall Street argues that it’s too costly — forcing banks to spin off their derivatives desks into non-taxpayer supported affiliates compels firms to raise additional cash to support them. Bank regulators such as Federal Deposit Insurance Corporation Chairman Sheila Bair and Obama administration officials such as Timothy Geithner argue that it’s safer to keep swaps desks inside banks because bank regulation is tougher than the regulatory regime over nonbanks. Better to keep these units inside better-regulated institutions, they argue. Lincoln counters with an argument that resonates among reformers: let banks be banks. Dealing in derivatives and other complex securities should be left to investment firms and other specialists that don’t enjoy taxpayer protection. In short, taxpayers shouldn’t backstop speculation. But now, former Federal Reserve Chairman Paul Volcker has thrown his weight behind those trying to kill Lincoln’s proposal. “The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited,” Volcker wrote in a letter dated Thursday to Dodd, Geithner, and Sens. Shelby (R-Ala.), Merkley (D-Ore.), Levin (D-Mich.) and Lincoln. Volcker wrote that other parts of Dodd’s bill, plus an amendment by Merkley and Levin that attempts to rein in banks’ trading activities, sufficiently address his concerns about taxpayer-supported banks leveraging that support to speculate in the markets. His letter comes on the heels of comments made by Geithner during a Thursday appearance before the Financial Crisis Inquiry Commission. “When people look back at this crisis, when they look at the excessive risks taken by large financial institutions, the natural inclination is to move those risky activities elsewhere. To create stability, some argue, we should just separate banks from ‘risk.’ “But, in important ways, that is exactly what caused this crisis. “The lesson of this crisis, and of the parallel financial system, is that we cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for businesses and help businesses hedge risk, and move them outside banks, and outside the reach of strong regulation,” Geithner said in his prepared remarks. It’s unclear how the issuance of anything beyond basic derivatives contracts that seek to minimize risk to fluctuations in interest rates, currency exchange rates, and commodity prices is “central to the business of banking.” READ Volcker’s letter below: Volcker Letter Regarding Lincoln Swaps Provision

Read the full article →

Senate Opens Debate on Financial-Overhaul Bill, Including Derivative Rules

April 29, 2010

By Alison Vekshin and Phil Mattingly April 29 (Bloomberg) — The U.S. Senate began debate on Democrats’ financial-overhaul bill today, including a provision to create the first formal regulatory structure for the $605 trillion over-the-counter derivatives market. Senate Republicans agreed yesterday to let debate begin on the legislation, which is based on a proposal from President Barack Obama and is aimed at strengthening oversight of Wall Street in response to the worst financial crisis since the Great Depression. “The status quo, as we all know, is unacceptable,” Senate Banking Committee Chairman Christopher Dodd , a Connecticut Democrat who offered the legislation, said today as debate began. “We cannot leave the American people vulnerable to the present construct of our financial regulatory system.” Republicans decided to allow debate after Democrats agreed to change a section of the bill aimed at preventing future bailouts of Wall Street banks similar to the $700 billion bailout Congress approved in 2008 for firms including Citigroup Inc. and American International Group Inc. Earlier this week, Republicans blocked Democrats from starting debate on the measure in three procedural votes. At issue is a provision that would give the government new power to take apart failing financial firms whose collapse would shake the economy. It would create a $50 billion industry- supported fund that regulators would use to pay the cost of dissolving a firm. Republicans say the language contains loopholes that wouldn’t end bailouts. No Taxpayer Funds Dodd acknowledged the concern and said the Senate would consider an amendment offered by Senator Barbara Boxer , a California Democrat, to require that no taxpayer funds be used to disassemble a failed company. “My goal during consideration of this legislation will be to reshape this bill so that it actually ends bailouts, protects consumers without jeopardizing our small-community banks and brings transparency to the world of derivatives,” said Alabama Senator Richard Shelby , the top Republican on the Senate Banking Committee, which approved the bill last month on a party-line vote. Shelby, who yesterday broke off talks with Dodd that had been aimed at crafting a bipartisan compromise, said he would “seek to remove dozens of provisions that unnecessarily expand the reach of the federal government into the private affairs of Americans.” Consumer Protection The legislation would create a consumer financial protection bureau at the Federal Reserve and a council of regulators to monitor the economy for systemic risk. It would strengthen oversight of hedge funds and ban proprietary trading at U.S. banks. Democratic Senators Sherrod Brown of Ohio and Ted Kaufman of Delaware introduced an amendment aimed at keeping banks from becoming so big that their collapse could harm the financial system. The amendment would limit the size of banks by imposing a 10 percent cap on a bank holding company’s share of U.S. insured deposits and set a 6 percent leverage limit for those firms and some nonbank financial firms. To contact the reporters on this story: Alison Vekshin in Washington at avekshin@bloomberg.net ; Phil Mattingly in Washington at pmattingly@bloomberg.net

Read the full article →

Buffett Has `Great Confidence’ in Goldman Sachs, Berkshire’s Murphy Says

April 22, 2010

By Betty Liu and Andrew Frye April 23 (Bloomberg) — Berkshire Hathaway Inc. ’s Warren Buffett , who injected $5 billion into Goldman Sachs Group Inc. in 2008, remains comfortable with his investment after regulators sued the bank for fraud, said Berkshire Director Thomas Murphy . “He’s not concerned with the investment at all,” Murphy, 84, said in a Bloomberg Television interview, citing a telephone conversation with Buffett, Berkshire’s chief executive officer. “He has to see what’s going to happen on it, but I think he has great confidence in Goldman,” Murphy said. The two men spoke after the Securities and Exchange Commission announced its lawsuit on April 16, Murphy said. Buffett, a longstanding Wall Street critic, has supported a firm that’s become a lightning rod for politicians and people who feel cheated by the recession. Public regard for Goldman Sachs , the most profitable firm in Wall Street history, has plummeted in the year and a half since Buffett, 79, provided the company with capital in the depths of the financial crisis. “I think he’s awfully secure” in Berkshire’s Goldman Sachs holdings, said Glenn Tongue , a partner at T2 Partners LLC, which invests in Buffett’s firm. “He assessed the culture of Goldman Sachs when he made the investment. He had known the company for decades.” The SEC accused Goldman Sachs and an employee of misleading clients on the sale of mortgage-related investments. The case focuses on a collateralized debt obligation that yielded a $1 billion payout for hedge fund Paulson & Co. when the CDO lost value. Investor IKB Deutsche Industriebank AG lost money. ‘Very Sophisticated’ A Goldman Sachs director tipped off Galleon Group founder Raj Rajaratnam about Buffett’s investment before it became public knowledge, the Wall Street Journal reported, citing a person it didn’t identify. Connie Ling , a spokeswoman for Goldman Sachs in Hong Kong, declined to comment. Goldman Sachs, led by Chief Executive Officer Lloyd Blankfein , has called the claims in the lawsuit unfounded. Investors who took the opposite position to Paulson were aware of the risk, Goldman Sachs has said. “The people on the other side, I am told, and I am not a pro on this at all, are very sophisticated buyers or sellers,” Murphy said. “They knew exactly what they were doing.” Murphy’s son, also named Thomas, is a former partner at Goldman Sachs. “I also have great respect for Goldman,” Murphy said. Buffett may be called on to address criticism of Goldman Sachs on May 1 when tens of thousands of investors gather in Omaha, Nebraska, for Berkshire’s annual meeting. At last year’s meeting, he countered public anger over the taxpayer-funded bank bailouts by touting Wells Fargo & Co. , one of Berkshire’s top holdings and the recipient of $25 billion in aid. Goldman Sachs Integrity Buffett’s prestige as the world’s preeminent stock picker and his reputation for ethics boosted Berkshire to first place this month in Harris Interactive’s annual survey of corporate reputations. The financial crisis dragged the nation’s biggest banks toward the bottom of the list with Goldman Sachs coming in 56th out of 60. Berkshire gets 10 percent annual interest on the Goldman Sachs preferred shares that Buffett bought in 2008. Buffett’s investment was partly a bet on the “integrity” of Goldman Sachs, Berkshire director Ronald Olson said last week before the lawsuit. “When Warren and Berkshire stepped up to make this investment, it was a very strong statement of its belief, his belief, in not just the strength of Goldman but its integrity,” Olson said in an interview with Bloomberg Television. Murphy, a Berkshire director since 2003, is a former chairman and CEO of Capital Cities/ABC, one of Buffett’s most successful investments in the 1990s. To contact the reporters on this story: Betty Liu in New York at bliu17@bloomberg.net ; Andrew Frye in New York at afrye@bloomberg.net .

Read the full article →

Bondholders Would Share Costs of Bank Bailouts Under EU Crisis Proposals

April 15, 2010

By Ben Moshinsky April 15 (Bloomberg) — Bondholders would bear some of the cost of future bank bailouts under proposals being drawn up by the European Union’s top financial services regulator. Financial Services Commissioner Michel Barnier will present the plan, part of a paper on EU crisis management, at a meeting of European Union finance ministers on April 17. Under the plan, bond investors would forfeit some of what they are owed if a lender fails and must be rescued with public funds. “The idea is to set the terms of the debate, to look at more than bank resolution,” Barnier’s spokeswoman, Chantal Hughes , said in a telephone interview yesterday. So-called haircuts that would trim payouts to bond investors are part of the plan which covers “the whole approach to crisis prevention and management,” she said. The Brussels-based European Commission has already proposed laws to overhaul financial regulation following the worst crisis since the Great Depression. These include plans to establish Europe-wide supervisors for banking, securities and insurance along with a European Systemic Risk Board to monitor threats to financial stability. If creditors “are forced to take a look at the practices of some institutions then it will lead to better risk management,” Erik Berggren , banking analyst at BusinessEurope, a trade group for European companies, said in a telephone interview in Brussels. European governments approved about $5 trillion of aid, more than the annual gross domestic product of Germany, to support banks during the credit crunch. Shared Costs Governments should share the cost of rescue plans for banks with operations in numerous countries through a “European resolution fund,” Barnier said in a speech in Brussels last month. The commission is working on draft rules to coordinate the way that the EU’s 27 member states deal with bank crises in the future, including living wills for banks and a unified insolvency law for the bloc. Barnier said in the March speech there is “some reticence” from EU states to the idea of a resolution fund “because they don’t want to relinquish sovereignty.” He proposed that banks contribute to the fund with a special tax on their balance sheets. “We have to ensure that those involved assume their responsibility,” Barnier said in Brussels last month. “Why should the taxpayer foot the bill?” International Monetary Fund Managing Director Dominique Strauss-Kahn said at the same event he also supports a “robust” EU system to handle bank failures. To contact the reporters on this story: Ben Moshinsky in Brussels at bmoshinsky@bloomberg.net ;

Read the full article →

Dan Dorfman: The Taxman Comes Up Short

April 8, 2010

Call them tax delinquents, tax cheats, or what you will. You may be one of them. No great solace, but if you are a culprit, you’re not alone. The ranks of non and tardy tax filers are rapidly on the ascendancy, judging from conversations with a number of tax attorneys and accountants. At the beginning of 2009, the Internal Revenue Service was saddled with slightly more than four million delinquent tax accounts, which, on average, represented between $2,000 and $3,000 per account. Current delinquencies, according to estimates from some tax experts, have risen to roughly 4,250,000, a number, it’s thought, that could easily expand to 450,000 to one million before year end. In less than a week, April 15, to be precise, about 135 million Americans are expected to file their 2009 tax returns, which is an average of what the number has run in recent years. Not this year; like death and taxes, a shortfall in tax filings is considered to be almost a sure thing. Tax pros say it’s not a case of people knowingly trying to cheat Uncle Sam — which is a criminal obfense — but raxher an inability to come up witd the necessary bunds to meet their tax bill beciuse of tough ecknomic times.!0A In partacular, the ri{ing tax liabilixies are said to’largely reflect high unemploymebt, huge 2008 dosses in the stock market, the need to shell cut big bucks fo~ family illnessas, a determinmtion to reduce heavy debtloads to beef up credip standings, tde necessity of ieeting mortgage/payments and thm ballooning numner of personal bankruptcy filincs (

Read the full article →

Ron Ashkenas: Does Tax Time Need To Be So Taxing?

April 7, 2010

Cross-posted from Harvard Business Online If there is anything that unites politicians and the general public it’s the belief that the U.S. tax system is too darn complicated. Yet somehow the process of paying taxes has resisted almost every attempt at simplification. It’s an amazing paradox: The one thing we all agree on seems to be the one area where it is virtually impossible to make progress. What’s going on? Let me start by saying that I am not referring to fundamental changes in tax policy, such as the introduction of a “flat tax” or replacing incomes taxes with a national sales tax. While these proposals may simplify the process, for this post I’m assuming that we will continue to have a tax system with different rates for different income levels. However, within our current system, even the Commissioner of Internal Revenue Service, Douglas Shulman, admits that he uses a professional tax preparer for his returns because the tax code is too complex. Thus it is no surprise that virtually every president and every Congress for the last 20 years has vowed to simplify taxes, including President Obama. Almost a year ago, he condemned what he called the “monster tax code,” which has grown to more than 5600 pages and 3.7 million words. To slay this monster, he asked Paul Volcker, chairman of the President’s Economic Recovery Advisory Board , to appoint a tax reform task force that would develop recommendations by the end of 2009. But to date the task force has not presented anything. Meanwhile, other proposals have been tossed on the table, the latest a bipartisan plan by Senators Judd Gregg (R-NH) and Ron Wyden (D-OR). And the chances of this bill passing? You get the point. So, I ask again, what’s going on? Here’s one possibility: Over the years, the government turned the tax code over to technical experts, who wrote the regulations, forms, and processes in their own language without regard for the end-user, the citizen, who would be required to use them. As the language and process became more and more arcane, fewer end-users could actually do their own taxes, so an industry of “tax preparers” formed to provide an interface between the tax payer and the taxing authorities. It is estimated that there are at least one million tax preparers in the United States; and that this year 60% of all taxpayers will use a professional and another 20% will use tax preparation software (another industry). In essence, the government has created a process for citizens that most citizens can’t navigate. Now if the government was a private sector company, and there were competitive alternatives, many of the alienated and disenfranchised customers would have gone elsewhere. But there is no alternative to paying taxes — so the pressure for reform doesn’t really exist as it would with a private company. At the same time, the industries that the technical tax process has spawned are now very powerful, with significant lobbying and communication ability. It’s in their best interest for the tax process to continue to be complex, and therein lies the cause for the stalemate. There is, however, a glimmer of hope for simplification. Oddly enough, it comes from the IRS itself. There is nothing to stop the IRS, if it has the will and courage, to simplify the language and process of paying taxes. And in the past year, under the leadership of Commissioner Shulman, positive steps have indeed been taken in that direction. For example, more than half of all 2009 returns will be filed electronically, a process that the IRS has finally embraced. The IRS has also set up a permanent “Office of Taxpayer Correspondence,” which identifies and acts on ideas for simplifying communication and has already streamlined various tax collection “notice letters” and inserts. The IRS also is beginning a process of certifying professional tax preparers, which is probably a good thing (even if it reinforces the power of the technical industry). To be sure, filing taxes is still a long way from simple. But a little bit of progress is certainly better than no progress at all. What’s been your experience this tax season?

Read the full article →

Robert Reich: Break Up the Banks

April 5, 2010

A fight is brewing in Washington — or, at the least, it ought to be brewing — over whether to put limits on the size of financial entities in order that none becomes “too big to fail” in a future financial crisis. Some background: The big banks that got federal bailouts, as well as their supporters in the administration and on the Hill, repeatedly say much of the cost of the giant taxpayer-funded bailout has already been repaid to the federal government by the banks that were bailed out. Hence, the actual cost of the bailout, they argue, is a small fraction of the $700 billion Congress appropriated. True, but the apologists for the bailout leave out one gargantuan cost — the damage to the economy, which we’re still living with (witness the latest unemployment figures). Leave it to the Brits to calculate this. Andrew Haldane, Bank of England’s Financial Stability Director, figures the financial crisis brought on by irresponsible bankers and regulators has cost the world economy about $4 trillion so far. So while the bailout itself is gradually being repaid (don’t hold your breath until AIG and GM repay, by the way), the cost of the failures that made the bailout necessary totals vast multiples of that. Needless to say, the danger of an even bigger cost in coming years continues to grow because we still don’t have a new law to prevent what happened from happening again. In fact, now that they know for sure they’ll be bailed out, Wall Street banks — and those who lend to them or invest in them — have every incentive to take even bigger risks. In effect, taxpayers are implicitly subsidizing them to do so. (Haldane figures the value of that implicit subsidy to be about $60 billion a year for each big bank.) Congress and the White House tell us not to worry because financial reform legislation will contain what’s called a “resolution” mechanism allowing regulators to wind down any big bank that gets into trouble. (Think bankruptcy with more safeguards against runs on bank by creditors wanting to get their money out right away.) By virtue of this resolution authority, they say, future bank creditors will have to price in the possibility of the bank being allowed to fail. Hence, the implicit subsidy for risk-taking will disappear. At least that’s the theory. But the theory isn’t likely to work in practice. Do you really believe bank regulators will use the resolution authority — especially if two or more giant banks are endangered at the same time? Multiple threats are almost certain because each big bank races to copy any gambling technique that pays off big for any other. The reality is, they’ll get bailed out. Even if the resolution authority were combined with an array of new regulations designed to cover all the “shadow banking” operations of the giant banks — requiring that they put up more capital and thereby limit their leverage — there’s no way such regulations can succeed. The giant banks already hire fleets of lawyers, accountants, and financial entrepreneurs to find loopholes in every existing regulation. Finally, consider the political power of the big Wall Street banks. They and their executives and employees are now among the biggest contributors to both parties. Wall Street lobbyists are crawling over Capitol Hill. The banks and their lobbyists will ensure that regulatory loopholes are built into regulations from the start. Remember: They dismembered Glass-Steagall (with the help of their friends in the Fed, on the Hill, and in the Clinton White House), and fought off derivative regulation (ditto). As long as the big banks are allowed to remain big, their political leverage over Washington will remain big. And as long as their political leverage remains big, the taxpayer and economic tab for the next mess they create will be big. By all means, give regulators resolution authority and also impose the tightest regulations possible. But Congress and the White House shouldn’t stop there. Limits should be placed on how big big banks can become. How big? No one has been able to show significant efficiencies over $100 billion in assets. Make that the outside limit. To be sure, smaller banks might still be subject to runs. That’s why the Federal Deposit Insurance Corporation was created in the 1930s – to ensure depositors in the event a bank gets into trouble, so they won’t have to run to protect their savings. And why the Glass-Steagall Act was passed – to separate commercial banking (where depositors put their money) from investment banking (where betting is done). We could expand insurance to certain categories of bank creditor, and we should resurrect Glass-Steagall. But the only way to make sure no bank it too big to fail is to make sure no bank is too big. If Congress and the White House fail to do this, you have every reason to believe it’s because Wall Street has paid them not to. Cross-posted from RobertReich.org

Read the full article →

Leighton Woodhouse: WellPoint Still Doesn’t Get It

April 3, 2010

If you want to understand why Americans are so outraged by obscene executive compensation levels in a time of severe economic malaise, consider not just the 51% bump awarded to WellPoint CEO Angela Braly for her performance at a time when the insurance behemoth prepared to raise rates on policyholders in California by as much as 39%. Consider, as well, the pro forma excuses offered by her company flacks. According to the Los Angeles Times , Braly’s total compensation shot up from $8.7 million to $13.1 million last year. At least three other executives there did just as well, with raises of up to 75 percent. Meanwhile, 800,000 individual policyholders in California are learning of this good news for WellPoint executives a month before their own insurance rates are set to spike by double digits – an unprecedented rate increase initiated on Angela Braly’s watch. WellPoint, of course, is merely doing what it must to pursue the gold standard of excellence in its service to shareholders and customers, according to company spokesman Jon Mills: WellPoint wants to attract and retain top talent. In order to be the best, to be innovative, to continue delivering the best service, we do have to retain the best quality.” He added: “We are in no way trying to inflate the salaries and compensation figures but trying to maintain a high level of talent at the organization. It’s all just a big misunderstanding, see. The problem is that all of us amateur, casual observers, with our pious concerns about “fairness” and “right and wrong,” just don’t understand the entirely rational and ultimately equitable dynamics of the free market system for labor compensation. Companies have to find and keep talented leaders, and if it takes $6.2 million in restricted stock, a $1.1 million salary increase, a $1.5 million performance bonus, $4 million in stock options and $292,036 in “other expenses” (including over $150,000 in “security-related improvements” to protect Angela Braly from us, the angry, overcharged, underinsured hordes) to retain a CEO who had the wisdom to force hundreds of thousands of Californians off the company’s rolls or into bankruptcy-threatening situations in order to buoy WellPoint stock prices (which rose by close to 40% last year), then that’s just how the free market works, which is nobody’s fault, really, when you think about it. Except the reality is, there is no misunderstanding. Ordinary Americans understand exactly how the free market works. In fact, it’s precisely this understanding that infuriates everyone from your longtime local union activist to your freshly-minted Tea Party revolutionary. It’s the Jon Millses of the world that don’t get it. Their explanations illuminate nothing, except insofar as they confirm exactly what everyone suspects: that there are in fact two economic realities in America today – one that Angela Braly occupies along with Wall Street CEOs, corporate lobbyists and corrupt politicians, and the other that the rest of us experience. In the former, forcing hundreds of thousands of everyday people to spend thousands more on their premiums to pay for the mess you’ve made of the health care system, then pointing to the increased revenue as proof of your leadership and profit-making abilities, is called “taking responsibility” and is rewarded with a $4.4 million raise. It’s market meritocracy at work. In the latter, it really doesn’t matter how hard you work or how great of a job you do — if the executives at the helm steer your company over rocky shoals, you stand a good chance of losing your wage increases, your benefits, or your job altogether. If you’re not “top talent,” you simply don’t need to be “attracted and retained.” The world doesn’t work that way for you. Or to take another example, if the executives at your insurance carrier decide they didn’t make enough money last fiscal quarter, you better cough up thousands of dollars more this year or lose your coverage. Never mind that you had exactly nothing to do with WellPoint’s problems with rising medical costs, or its shareholder’s demands for 40% increases in their stock values. It really doesn’t matter who you are or what you’ve done or what you haven’t done; you don’t control your destiny, the “market” does. That’s just basic economics. We don’t need a WellPoint spokesman to explain that; everyone knows it already. With the economy in turmoil, we’re all getting our noses rubbed in it every single day. What’s incredible is that even after witnessing the public’s reactions to the taxpayer-financed AIG bonuses, the auto company CEOs flying on private jets to DC to beg Congress for bailouts, and Goldman Sachs’ record profits a year after benefiting from $62 billion in publicly-financed AIG pass-throughs, corporate executives like Braly and their PR handlers still can’t comprehend the outrage. But then, that points to something else we already know: that from a mansion on a hill, the riot below can sound like a distant and dull roar, or like nothing at all.

Read the full article →

Simon Johnson: Jamie Dimon: The Most Dangerous Man In America

April 3, 2010

There are two kinds of bankers to fear. The first is incompetent and runs a big bank. This includes such people as Chuck Prince (formerly of Citigroup) and Ken Lewis (Bank of America). These people run their banks onto the rocks — and end up costing the taxpayer a great deal of money. But, on the other hand, you can see them coming and, if we ever get the politics of bank regulation straightened out again, work hard to contain the problems they present. The second type of banker is much more dangerous. This person understands how to control risk within a massive organization, manage political relationships across the political spectrum, and generate the right kind of public relations. When all is said and done, this banker runs a big bank and — here’s the danger — makes it even bigger. Jamie Dimon is by far the most dangerous American banker of this or any other recent generation. Not only did Mr. Dimon keep JP Morgan Chase from taking on as much risk as its competitors, he also navigated through the shoals of 2008-09 with acuity, ending up with the ultimate accolade of “savvy businessman” from the president himself. His letter to shareholders, which appeared this week, is a tour de force – if Machiavelli were a banker alive today, he could not have done better. (You can access the full letter through the link at the end of the fourth paragraph in this WSJ blog post; for another assessment, see Zach Carter’s piece.) Dimon fully understands — although he can’t concede in public — the private advantages (i.e., to him and his colleagues) of a big bank getting bigger. Being too big to fail – and having cheaper access to funding as a result — may seem unfair, unreasonable, and dangerous to you and me. But to Jamie Dimon, it’s a business model — and he is only doing his job, which is to make money for his shareholders (and for himself and his colleagues). Dimon represents the heavy political firepower and intellectual heft of the banking system. He runs some of the most effective — and tough — lobbyists on Capitol Hill. He has the very best relationships with Treasury and the White House. And he is determined to scale up. The only problem he faces is that there is no case at all for banking of the size and form he proposes. Consider the logic he presents on p.36 of his letter. He starts with a reasonable point: Large global nonfinancial companies are an integral and sensible part of the American economic landscape. But then he adds three more steps: 1. Big companies need big banks, operating across borders, with large balance sheets and the ability to execute a wide variety of transactions. This is simply not true – if we are discussing banking at the current and future proposed scale of JP Morgan Chase. We go through this in detail in 13 Bankers – in fact, refuting this point in detail, with all the evidence on the table, was a major motivation for writing the book. There is simply no evidence – and I mean absolutely none – that society gains from banks having a balance sheet larger than $100 billion. (JP Morgan Chase is roughly a $2 trillion bank, on its way to $3 trillion.) 2. The US banking system is not particularly concentrated relative to other OECD countries. This is true – although the degree of concentration in the US has increased dramatically over the past 15 years (again, details in 13 Bankers) and in key products, such as credit cards and mortgages, it is now high. But in any case, the comparison with other countries doesn’t help Mr. Dimon at all – because most other countries are struggling with the consequences of banks that became too large relative to their economies (e.g., in Europe; see Ireland as just one illustrative example). 3. Canada did fine during 2008-09 despite having a relatively concentrated financial system. Mr. Dimon would obviously like to move in the Canadian direction – and top people in the White House are also very much tempted. This is frightening. Not only does it represent a complete misunderstanding of the government guarantees behind banking in Canada (which we have clarified here recently), but this proposal – at its heart – would allow, in the US context, even more complete state capture than what we have observed under the stewardship of Hank Paulson and Tim Geithner. Place this question in the context of American history (as we do in Chapter 1 of 13 Bankers): If the US had just five banks left standing, would their political power and ideological sway be greater or less than it is today? For a long time, our leading bankers hid behind their lobbyists and political friends. It is most encouraging to see Mr. Dimon come out from behind those layers of protection, to engage in the intellectual fray. It is entirely appropriate — and most welcome — to see him make the strongest case possible for keeping banks at their current size and, in fact, for making them bigger. We should encourage such engagement in public discourse, but we should also examine carefully the substance of his arguments. As we point out in the Washington Post Outlook section this week, Theodore Roosevelt carefully weighed the views of J.P. Morgan and other leading financiers in the early twentieth century – when they pushed back against his attempts to rein in their massive railroad and industrial trusts. Roosevelt was not at that time against big business per se, but he insisted that big was not necessarily beautiful and that we also need to weigh the negative social impact of monopoly power in all its economic and political forms. If we don’t find our way to a modern version of Teddy Roosevelt, Jamie Dimon — and his successors — will lead us into great harm. It’s true that, after another crash or in the midst of a Second Great Depression, we can reasonably hope to find another Roosevelt — FDR — approach. But why should we wait when such a disaster is completely preventable?

Read the full article →

Fed Reveals Bear Stearns Assets Swallowed to Get JPMorgan to Rescue Firm

April 1, 2010

By Craig Torres, Bob Ivry and Scott Lanman April 1 (Bloomberg) — After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout. In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information. The Fed’s vehicle known as Maiden Lane LLC has securities backed by mortgages from lenders including Washington Mutual Inc. and Countrywide Financial Corp., loans that were made with limited borrower documentation. More than $1 billion of them are backed by “jumbo” mortgages written by Thornburg Mortgage Inc., which now carry the lowest investment-grade rating. Jumbo loans were larger than government-sponsored mortgage buyers such as Fannie Mae could finance — $417,000 at the time. “The Fed absorbed that risk on its balance sheet and is now seen to be holding problematic, legacy assets,” said Vincent Reinhart , a resident scholar at the American Enterprise Institute in Washington who was the central bank’s monetary- affairs director from 2001 to 2007. “There is both an impairment to its balance sheet and its reputation.” The Bear Stearns deal marked a turning point in the financial crisis for the Fed. By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury, said Marvin Goodfriend , a former Richmond Fed policy adviser who is now an economist at Carnegie Mellon University in Pittsburgh. ‘Panic’ Cause “Lack of clarity on the boundary between responsibilities of the Fed and of the Congress as much as anything else created panic in the fall of 2008,” Goodfriend said. “That created a situation in which what had been a serious recession became something near a Great Depression.” Central bankers also created moral hazard, or a perception for investors that any financial firm bigger than Bear Stearns wouldn’t be allowed to fail, said David Kotok , chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. Policy makers’ resolve was tested months later by runs against the largest financial companies. Lehman Brothers Holdings Inc. collapsed into bankruptcy in September 2008. The ensuing panic caused the Fed to take even more emergency measures to push liquidity into markets and institutions. It rescued American International Group Inc. from collapse and allowed Goldman Sachs Group Inc. and Morgan Stanley to convert into bank holding companies, putting them under greater oversight by the central bank. Early Failure “Letting somebody fail early would have been a better choice,” Kotok said. “You would have ratcheted moral hazard lower and Lehman wouldn’t have been so severe.” The Bear Stearns assets include bets against the credit of bond insurers such as MBIA Inc., Financial Security Assurance Holdings Ltd. and a unit of Ambac Financial Group, putting the Fed in the position of wagering companies will stop paying their debts. The Fed disclosed that some of Maiden Lane’s assets were portions of commercial loans for hotels, including Short Hills Hilton LLC in New Jersey, Hilton Hawaiian Village LLC in Hawaii, and Hilton of Malaysia LLC, in addition to securities backed by residential mortgages. More than a year after Washington Mutual, the largest U.S. savings and loan, was purchased by JPMorgan Chase in a distressed sale arranged by the Federal Deposit Insurance Corp., the home loans that helped bring down the Seattle-based thrift live on in the Maiden Lane portfolio. Lending Standards For example, 94 percent of the mortgages in one security, called WAMU 06-A13 2XPPP, required limited documentation from borrowers, meaning the lender often didn’t ask customers for proof of their incomes. Almost 10 percent of the borrowers whose mortgages make up the security have been foreclosed on, and almost a quarter are more than two months late with payments, according to data compiled by Bloomberg. The portfolio also includes $618.9 million of securities backed by Countrywide, mortgages now rated CCC, eight levels below investment grade. All the underlying loans are adjustable- rate mortgages, with about 88 percent requiring only limited borrower documentation, according to Bloomberg data. About 33.6 percent of the borrowers are at least 60 days late. Countrywide is now part of Charlotte, North Carolina-based Bank of America Corp. CDO Holdings Maiden Lane has $19.5 million of securities from a series of collateralized debt obligations called Tropic CDO that are backed by trust preferred securities of community banks and thrifts. CDOs are investment pools made up of a variety of assets that provide a flow of cash. Trust preferred securities, or TruPS, have characteristics of debt and equity and their interest payments are tax- deductible. The securities created by Bear Stearns are rated C, one level above default, by Moody’s Investors Service and Fitch Ratings. CDO securities have tumbled in value as banks are failing at the fastest rate in 17 years, according to data compiled by Bloomberg. The average price of TruPS CDO debt of this rating is pennies on the dollar, according to Citigroup Inc. “The trust of the taxpayer was abused,” said Janet Tavakoli , president of Chicago-based financial consulting firm Tavakoli Structured Finance Inc. CDOs rated CCC and lower “have a high likelihood of default,” she said. Bernanke Defense Chairman Ben S. Bernanke defended the Bear Stearns deal as a rescue of the financial system. He said in a speech at the Kansas City Fed’s annual Jackson Hole, Wyoming conference in August 2008 that a sudden Bear Stearns failure would have caused a “vicious circle of forced selling” and increased volatility. “The broader economy could hardly have remained immune from such severe financial disruptions,” Bernanke said in the speech. The Fed chief, who took office in 2006 and began his second term as chairman this year, also has repeatedly called for an overhaul of financial regulations that would allow authorities to take over a failing financial institution and oversee an orderly unwinding of its positions. Bernanke said last year that nothing made him “more angry” than the AIG case, blaming the insurer for making “irresponsible bets” and a lack of regulatory oversight for the debacle. Officials “had no choice but to try and stabilize the system” by aiding the firm in September 2008, he said. Yesterday’s release by the Fed, through its New York regional bank, also identified securities acquired in the bailout of AIG held in vehicles known as Maiden Lane II and III. Market Value Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed. Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades. “The Federal Reserve recognizes the importance of transparency to its financial stability efforts and will continue to review disclosure practices with the goal of making additional information publicly available when possible,” the New York Fed said in yesterday’s statement. Deal With Chase The central bank said it reached agreement on “issues of confidentiality” for the assets with JPMorgan Chase, which bought Bear Stearns in 2008, and AIG. New York-based JPMorgan and AIG would incur the first losses on the portfolios. Joe Evangelisti , a spokesman for JPMorgan, and Mark Herr , a spokesman for AIG, declined to comment. In April 2008, Bloomberg News requested records under the federal Freedom of Information Act from the Fed’s Board of Governors related to JPMorgan’s acquisition of Bear Stearns. The central bank responded that records retained by the New York Fed “were proprietary records of the Reserve Bank, and not Board records subject” to the request, court records show. Bloomberg filed suit in November 2008 in U.S. District Court in New York, challenging the Fed’s denial, as well as the denial of a separate request made in May 2008, seeking records of four other emergency lending programs. The district court held that the Fed should release documents related to those four programs, and should search documents held by the New York regional bank to determine whether any of them should be considered records of the board of governors. The U.S. Court of Appeals on March 19 upheld the district court’s ruling on the lending programs. Representative Darrell Issa of California said in a statement that yesterday’s disclosure may “signal a new willingness to cooperate with Congress as we investigate how these bailout deals were structured and what the decision making process entailed.” To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Read the full article →

Fed Reveals Bear Stearns Assets Swallowed in Rescue

April 1, 2010

By Craig Torres, Bob Ivry and Scott Lanman April 1 (Bloomberg) — After months of litigation and political scrutiny, the Federal Reserve yesterday ended a policy of secrecy over its Bear Stearns Cos. bailout. In a 4:30 p.m. announcement in a week of congressional recess and religious holidays, the central bank released details of securities bought to aid Bear Stearns’s takeover by JPMorgan Chase & Co. Bloomberg News sued the Fed for that information. The Fed’s vehicle known as Maiden Lane LLC has securities backed by mortgages from lenders including Washington Mutual Inc. and Countrywide Financial Corp., loans that were made with limited borrower documentation. More than $1 billion of them are backed by “jumbo” mortgages written by Thornburg Mortgage Inc., which now carry the lowest investment-grade rating. Jumbo loans were larger than government-sponsored mortgage buyers such as Fannie Mae could finance — $417,000 at the time. “The Fed absorbed that risk on its balance sheet and is now seen to be holding problematic, legacy assets,” said Vincent Reinhart , a resident scholar at the American Enterprise Institute in Washington who was the central bank’s monetary- affairs director from 2001 to 2007. “There is both an impairment to its balance sheet and its reputation.” The Bear Stearns deal marked a turning point in the financial crisis for the Fed. By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury, said Marvin Goodfriend , a former Richmond Fed policy adviser who is now an economist at Carnegie Mellon University in Pittsburgh. ‘Panic’ Cause “Lack of clarity on the boundary between responsibilities of the Fed and of the Congress as much as anything else created panic in the fall of 2008,” Goodfriend said. “That created a situation in which what had been a serious recession became something near a Great Depression.” Central bankers also created moral hazard, or a perception for investors that any financial firm bigger than Bear Stearns wouldn’t be allowed to fail, said David Kotok , chief investment officer at Cumberland Advisors Inc. in Vineland, New Jersey. Policy makers’ resolve was tested months later by runs against the largest financial companies. Lehman Brothers Holdings Inc. collapsed into bankruptcy in September 2008. The ensuing panic caused the Fed to take even more emergency measures to push liquidity into markets and institutions. It rescued American International Group Inc. from collapse and allowed Goldman Sachs Group Inc. and Morgan Stanley to convert into bank holding companies, putting them under greater oversight by the central bank. Early Failure “Letting somebody fail early would have been a better choice,” Kotok said. “You would have ratcheted moral hazard lower and Lehman wouldn’t have been so severe.” The Bear Stearns assets include bets against the credit of bond insurers such as MBIA Inc., Financial Security Assurance Holdings Ltd. and a unit of Ambac Financial Group, putting the Fed in the position of wagering companies will stop paying their debts. The Fed disclosed that some of Maiden Lane’s assets were portions of commercial loans for hotels, including Short Hills Hilton LLC in New Jersey, Hilton Hawaiian Village LLC in Hawaii, and Hilton of Malaysia LLC, in addition to securities backed by residential mortgages. More than a year after Washington Mutual, the largest U.S. savings and loan, was purchased by JPMorgan Chase in a distressed sale arranged by the Federal Deposit Insurance Corp., the home loans that helped bring down the Seattle-based thrift live on in the Maiden Lane portfolio. Lending Standards For example, 94 percent of the mortgages in one security, called WAMU 06-A13 2XPPP, required limited documentation from borrowers, meaning the lender often didn’t ask customers for proof of their incomes. Almost 10 percent of the borrowers whose mortgages make up the security have been foreclosed on, and almost a quarter are more than two months late with payments, according to data compiled by Bloomberg. The portfolio also includes $618.9 million of securities backed by Countrywide, mortgages now rated CCC, eight levels below investment grade. All the underlying loans are adjustable- rate mortgages, with about 88 percent requiring only limited borrower documentation, according to Bloomberg data. About 33.6 percent of the borrowers are at least 60 days late. Countrywide is now part of Charlotte, North Carolina-based Bank of America Corp. CDO Holdings Maiden Lane has $19.5 million of securities from a series of collateralized debt obligations called Tropic CDO that are backed by trust preferred securities of community banks and thrifts. CDOs are investment pools made up of a variety of assets that provide a flow of cash. Trust preferred securities, or TruPS, have characteristics of debt and equity and their interest payments are tax- deductible. The securities created by Bear Stearns are rated C, one level above default, by Moody’s Investors Service and Fitch Ratings. CDO securities have tumbled in value as banks are failing at the fastest rate in 17 years, according to data compiled by Bloomberg. The average price of TruPS CDO debt of this rating is pennies on the dollar, according to Citigroup Inc. “The trust of the taxpayer was abused,” said Janet Tavakoli , president of Chicago-based financial consulting firm Tavakoli Structured Finance Inc. CDOs rated CCC and lower “have a high likelihood of default,” she said. Bernanke Defense Chairman Ben S. Bernanke defended the Bear Stearns deal as a rescue of the financial system. He said in a speech at the Kansas City Fed’s annual Jackson Hole, Wyoming conference in August 2008 that a sudden Bear Stearns failure would have caused a “vicious circle of forced selling” and increased volatility. “The broader economy could hardly have remained immune from such severe financial disruptions,” Bernanke said in the speech. The Fed chief, who took office in 2006 and began his second term as chairman this year, also has repeatedly called for an overhaul of financial regulations that would allow authorities to take over a failing financial institution and oversee an orderly unwinding of its positions. Bernanke said last year that nothing made him “more angry” than the AIG case, blaming the insurer for making “irresponsible bets” and a lack of regulatory oversight for the debacle. Officials “had no choice but to try and stabilize the system” by aiding the firm in September 2008, he said. Yesterday’s release by the Fed, through its New York regional bank, also identified securities acquired in the bailout of AIG held in vehicles known as Maiden Lane II and III. Market Value Assets in Maiden Lane II totaled $34.8 billion, according to the Fed, which set their current market value in its weekly balance sheet at $15.3 billion. That means Maiden Lane II assets are worth 44 cents on the dollar, or 44 percent of their face value, according to the Fed. Maiden Lane III, which has $56 billion of assets at face value, is worth $22.1 billion, or 39 cents on the dollar, according to the Fed’s weekly balance sheet. A similar calculation for the Bear Stearns portfolio couldn’t be made because of outstanding derivatives trades. “The Federal Reserve recognizes the importance of transparency to its financial stability efforts and will continue to review disclosure practices with the goal of making additional information publicly available when possible,” the New York Fed said in yesterday’s statement. Deal With Chase The central bank said it reached agreement on “issues of confidentiality” for the assets with JPMorgan Chase, which bought Bear Stearns in 2008, and AIG. New York-based JPMorgan and AIG would incur the first losses on the portfolios. Joe Evangelisti , a spokesman for JPMorgan, and Mark Herr , a spokesman for AIG, declined to comment. In April 2008, Bloomberg News requested records under the federal Freedom of Information Act from the Fed’s Board of Governors related to JPMorgan’s acquisition of Bear Stearns. The central bank responded that records retained by the New York Fed “were proprietary records of the Reserve Bank, and not Board records subject” to the request, court records show. Bloomberg filed suit in November 2008 in U.S. District Court in New York, challenging the Fed’s denial, as well as the denial of a separate request made in May 2008, seeking records of four other emergency lending programs. The district court held that the Fed should release documents related to those four programs, and should search documents held by the New York regional bank to determine whether any of them should be considered records of the board of governors. The U.S. Court of Appeals on March 19 upheld the district court’s ruling on the lending programs. Representative Darrell Issa of California said in a statement that yesterday’s disclosure may “signal a new willingness to cooperate with Congress as we investigate how these bailout deals were structured and what the decision making process entailed.” To contact the reporter on this story: Craig Torres in Washington at ctorres3@bloomberg.net

Read the full article →

Bank Chief’s Fall From Grace Leaves Irish Taxpayer With $30 Billion Bill

March 31, 2010

By Dara Doyle April 1 (Bloomberg) — Sean Fitzpatrick was feted as Ireland’s top business person in 2002. Eight years later, the taxpayer is facing a $30 billion bill to salvage the bank he built and the authorities are asking questions. Dublin-based Anglo Irish Bank Corp. yesterday reported a loss of 12.7 billion euros ($17.2 billion) for the 15 months to the end of 2009. The bank may need 18.3 billion euros to survive, in addition to the 4 billion euros it got from the state in 2009, Finance Minister Brian Lenihan said on March 30. “It’s improbable that the Irish taxpayer will get anymore than a small fraction back,” said John Fitzgerald, an economist at the Economic and Social Research Institute in Dublin. “It’s impossible to see it being worth anything.” Few people personify the fall from grace of Ireland’s “Celtic tiger” economy more than Fitzpatrick. Under his stewardship, Anglo Irish bankrolled many of the property developers behind the building boom that drove economic growth to an average 6 percent in the first half of the decade. As property prices sank last year, the government seized control of the bank a month after Fitzpatrick resigned as chairman because he failed to disclose some borrowings to investors. “It’s reasonable to say Anglo was at the heart of the boom and bust,” said Karl Whelan , a professor at University College Dublin and a former economist at the Federal Reserve in Washington. “You can draw a line from aggressive lending practices in Anglo and what happened later during the boom.” ‘Irregularities’ Police officers quizzed Fitzpatrick, 61, on March 18 about “financial irregularities” at Anglo Irish before releasing him without charge. When contacted on his mobile phone yesterday, Fitzpatrick said he wasn’t able to comment. Fitzpatrick has denied any wrongdoing and said when resigning in December 2008 his activities “did not in any way breach banking or legal regulations.” He stepped down because some transactions “were inappropriate and unacceptable from a transparency point of view,” he said. Irish banks need 31.8 billion euros in new capital after “appalling” lending decisions left them on the brink of collapse, Lenihan said March 30. Fitzpatrick ran Anglo Irish for a quarter century before becoming chairman in 2005. He joined the bank in April 1974 because he was rejected for a loan for a house that cost 6,800 punts, the equivalent to $11,680, according to an interview published in the Irish Farmers Journal five years ago. “That was the only reason I joined the bank: to get a loan,” he told the publication. During his tenure, he transformed Anglo Irish into the country’s third-biggest bank from a 20-client operation by focusing on lending to business. The company’s shares soared more than 3,000 percent in the 10 years through 2006, 10 times the growth of the country’s benchmark ISEQ index. ‘Corporate McCarthyism’ In 2002, Fitzpatrick was named business person of the year by Dublin-based Business & Finance magazine. Five years later, he warned about the dangers of “corporate McCarthyism,” referring to the threat from overzealous regulators. At the same time, from its headquarters overlooking St. Stephen’s Green in Dublin’s heart, Anglo was building its exposure to real estate developers. The bank set aside 15.1 billion euros for risky loans, it said yesterday. Prices for malls and offices were down 56 percent in December from their peak in 2007, according to London-based Investment Property Databank Ltd. “There was a total failure of oversight by both the regulator and shareholders,” said Brian Lucey , associate professor of finance at Trinity College Dublin. “But when things are going well, no-one wants to raise concerns.” Borrowing Euros The surge in real-estate prices was fueled in part by Ireland’s entry into the euro area in 2000, which gave banks greater access to international money markets. Net borrowing overseas by Irish banks amounted to 10 percent of gross domestic product by 2003, and by 2008 the figure was more than 60 percent, according to Central Bank Governor Patrick Honohan . Anglo Irish’s strategy unraveled as credit dried up in the wake of the bankruptcy of Lehman Brothers Holdings Inc. in September 2008. Three months later, Fitzpatrick resigned after a public revelation that he obtained a series of loans from the bank that had previously not been disclosed to investors. Now, the taxpayer is left with the bill. The cost of the Anglo Irish bailout may run to 22.3 billion euros, equivalent to about 14 percent of the economy , based on sums the government has injected or pledged to inject since its collapse. Lenihan has said it would cost 30 billion euros to wind down the bank. Fitzpatrick foresaw some, if not, all the problems back in 2005, especially when it came to the Irish borrowing money to invest in property abroad. “Will it end in catastrophe?” Fitzpatrick said in the interview with the Farmers Journal . “Without question, there will be casualties and the banks may be part of that. Do I think it’s going to be wholesale? No I don’t.” To contact the reporter on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net

Read the full article →

New York Fed Transparency: Bank To Disclose Which Securities Were Bought In AIG Bailout

March 31, 2010

WASHINGTON — The Federal Reserve Bank of New York is disclosing new details about billions of dollars of securities it bought while rescuing insurance giant American International Group Inc. and supporting the sale of failed investment bank Bear Stearns. The New York Fed said Wednesday it will name the mortgage-related bonds for the first time, and reveal more about their financial strength. The assets are held by three companies the Fed created in 2008 to hold assets that most banks wouldn’t touch amid the worst financial crisis in generations. It is a sharp reversal for the New York Fed. The bank told a lawmaker this month that naming the assets would make it harder to recoup the taxpayer money spent on them. Critics have said the Fed has been too secretive about bailout details.

Read the full article →

Irish Banks Need $43 Billion After `Appalling’ Lending

March 31, 2010

By Dara Doyle and Colm Heatley March 31 (Bloomberg) — Ireland’s banks need $43 billion in new capital after “appalling” lending decisions left the country’s financial system on the brink of collapse. The fund-raising requirement was announced after the National Asset Management Agency said it will apply an average discount of 47 percent on the first block of loans it is buying from lenders as part of a plan to revive the financial system. The central bank set new capital buffers for Allied Irish Banks Plc and Bank of Ireland Plc and gave them 30 days to say how they will raise the funds. “Our worst fears have been surpassed,” Finance Minister Brian Lenihan said in the parliament in Dublin yesterday. “Irish banking made appalling lending decisions that will cost the taxpayer dearly for years to come.” Dublin-based Allied Irish needs to raise 7.4 billion euros to meet the capital targets, while cross-town rival Bank of Ireland will need 2.66 billion euros. Anglo Irish Bank Corp. , nationalized last year, may need as much 18.3 billion euros. Customer-owned lenders Irish Nationwide and EBS will need 2.6 billion euros and 875 million euros, respectively. ‘Truly Shocking’ The asset agency aims to cleanse banks of toxic loans, the legacy of plunging real-estate prices and the country’s deepest recession. In all, it will buy loans with a book value of 80 billion euros ($107 billion), about half the size of the economy. Lenihan said the information from NAMA on the banks was “truly shocking.” “The regulator is taking the bank system by the scruff of the neck,” said James Forbes , senior equity strategist at Irish Life Investment Managers in Dublin. “Allied Irish has a lot of work to do to avoid majority state ownership, Bank of Ireland less so.” Allied Irish rose 10 percent to 1.37 euros as of 9:06 a.m. in Dublin. Bank of Ireland surged 26 percent to 1.62 euros. Credit-default swaps insuring both banks’ debts declined. Allied Irish will sell its stakes in banks in the U.S. and Poland and said late yesterday this will meet a “substantial part” of its capital needs. It also plans a share sale. Bank of Ireland said today it’s working to fill the capital deficit after posting a net loss of 1.46 billion euros in the nine months through December 2009. The lender expects to be able to raise most of the new capital privately, Chief Executive Officer Richie Boucher said. Capital Target Lenders must have an 8 percent core Tier 1 capital ratio, a key measure of financial strength, by the end of the year, according to the regulator. The equity core Tier 1 capital must increase to 7 percent. AIB’s equity core tier 1 ratio stood at 5 percent at the end of 2009 and Bank of Ireland’s at 5.3 percent. Those ratios exclude a government investment of 3.5 billion euros in each bank, made at the start of 2009. “The banks are undergoing major surgery via NAMA,” financial regulator Matthew Elderfield said at a press conference in Dublin. “They need a transfusion now to speed their recovery and that of the economy.” Credit-default swaps insuring Allied Irish Bank’s debt against default fell 6.5 basis points to 195.5, according to CMA DataVision prices at 8:45 a.m. Contracts protecting Bank of Ireland’s debt fell 7 basis points to 191 and swaps linked to Anglo Irish Bank’s bonds were down 3.5 basis points at 347.5. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A decline signals improving perceptions of credit quality. State Aid If Allied Irish can’t raise enough funds privately, the state will step in with aid, Lenihan said. It is “probable” the government will then end up with a majority stake, he said. The banks “are in a better position today, but we also have to be cautious about thinking we are done and dusted here,” Forbes said. Ireland may not be able to afford to pump more money into the banks. The budget deficit widened to 11.7 percent of gross domestic product last year, almost four times the European Union limit, and the government spent the past year trying to convince investors the state is in control of its finances. The premium investors charge to hold Irish 10-year debt over the German equivalent was at 139 basis points today compared with 284 basis points in March 2009, a 16-year high. Ireland’s debt agency said it doesn’t envisage additional borrowing this year related to the bank recapitalization. It is sticking to its 2010 bond issuance forecast of about 20 billion euros, head of funding Oliver Whelan said in an interview. “The bank losses, awful as they are, represent a one-off hit. It’s water under the bridge,” said Ciaran O’Hagan , a Paris-based fixed-income strategist at Societe Generale SA. “What’s of more concern for investors in government bonds is the budget deficit. Slashing the chronic overspending and raising taxation by the Irish state is vital.” To contact the reporters on this story: Dara Doyle in Dublin at ddoyle1@bloomberg.net ; Colm Heatley in Belfast at cheatley@bloomberg.net

Read the full article →

← Previous Entries