Lords of the Underworld

AIG-Gate: The World's Greatest Insurance Heist

2010-02-10T10:14:00.000-08:00

Remember: A derivative dollar lost on one side, is gained on another side!

http://www.huffingtonpost.com/ellen-brown/aig-gate-the-worlds-great_b_451445.html

Ellen Brown
The Huffington Post
Sat, 06 Feb 2010

Rumor has it that Timothy Geithner is on his way out as Treasury Secretary, due to his involvement in the AIG scandal that is now unraveling in hearings before the House Oversight and Reform Committee. Bob Chapman writes in The International Forecaster:
Each day brings more revelations of efforts of the NY Fed and Goldman Sachs to hide the details of the criminal conspiracy of the AIG bailout ... This is a real crisis on the scale of Watergate. Corruption at its finest.
But unlike the perpetrators of the Watergate scandal, who wound up facing jail time, Geithner evidently has a golden parachute waiting at Goldman Sachs, not coincidentally the largest recipient of the AIG bailout. At least that is the rumor sparked by an article by Caroline Baum on Bloomberg News, titled "Goldman Parachute Awaits Geithner to Ease Fall." Hank Paulson, Geithner's predecessor, was CEO of Goldman Sachs before coming to the Treasury. Geithner, who has come up through the ranks of government, could be walking through the revolving door in the other direction.

Geithner has been under the House microscope for the decision of the New York Fed, made while he headed it, to buy out about $30 billion in credit default swaps (over-the-counter derivative insurance contracts) that AIG sold on toxic debt securities. The chief recipients of this payout were Goldman Sachs, Merrill Lynch, Societe Generale, and Deutsche Bank. Goldman got $13 billion, roughly equivalent to its bonus pool for the first 9 months of 2009. Critics are calling the New York Fed's decision a back-door bailout for the banks, which received 100 cents on the dollar for contracts that would have been worth far less had AIG been put through bankruptcy proceedings in the ordinary way. In a Bloomberg article provocatively titled "Secret Banking Cabal Emerges from AIG Shadows," David Reilly writes:
[T]he New York Fed is a quasi-governmental institution that isn't subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve. This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed's bailout programs. It's as though the New York Fed was a black-ops outfit for the nation's central bank.
The beneficiaries of the New York Fed's largesse got paid in full although they had agreed to take much less. In a November 2009 article titled "It's Time to Fire Tim Geithner," Dylan Ratigan wrote:
[L]ast November . . . New York Federal Reserve Governor Tim Geithner decided to deliver 100 cents on the dollar, in secret no less, to pay off the counter parties to the world's largest (and still un-investigated) insurance fraud -- AIG. This full payoff with taxpayer dollars was carried out by Geithner after AIG's bank customers, such as Goldman Sachs, Deutsche Bank and Societe Generale, had already previously agreed to taking as little as 40 cents on the dollar. Even after the GM autoworkers, bondholders and vendors all received a government-enforced haircut on their contracts, he still had the audacity to claim the "sanctity of contracts" in the dealings with these companies like AIG.
Geithner testified that the Fed's hands were tied and that the bank could not "selectively default on contractual obligations without courting collapse." But if it was all on the up and up, why all the secrecy? The contention that the Fed had no choice is also belied by a recent holding in the Lehman Brothers bankruptcy, in which New York Bankruptcy Judge James Peck set aside the same type of investment contracts that Secretaries Paulson and Geithner repeatedly swore under oath had to be paid in full in the case of AIG. The judge declared that clauses in those contracts subordinating other claims to the holders' claims were null and void in bankruptcy.

"And notice," comments bank analyst Chris Whalen, "that the world has not ended when the holders of [derivative] contracts are treated like everyone else." He calls the AIG bailout "a hideous political contrivance that ranks with the great acts of political corruption and thievery in the history of the United States."

If you tell a lie big enough and keep repeating it, said Joseph Goebbels, people will eventually come to believe it. The bailout of Wall Street initiated in September 2008 was premised on the dire prediction that if major counterparties in the massive edifice of derivative contracts were allowed to fall, the whole interlocking house of cards would collapse and take the economy with it.

A hijacked Congress dutifully protected the derivatives game with taxpayer money while the real economy proceeded to collapse, the financial sector choosing to put their money into this protected form of speculative betting rather than into the more mundane and risky business of making loans to struggling businesses and homeowners. In the end, $170 billion of federal funds went to AIG and the banks feeding at its trough. Meanwhile, a survey of state finances by the Center on Budget and Policy Priorities think tank found that state governments face a collective $168 billion budget shortfall for fiscal 2010. If the money used to bail out AIG and the banks had been used to bail out the states instead, the states would not be facing insolvency today.

There is no law against gambling, but there is a law against fraud. In Watergate, a special prosecutor was appointed to bring criminal charges; but times seem to have changed.

Testy Conflict With Goldman Helped Push A.I.G. to Edge

2010-02-08T07:18:00.000-08:00

http://www.nytimes.com/2010/02/07/business/07goldman.html

Gretchen Morgenson and Louise Story
New York Times
Sat, 06 Feb 2010

Billions of dollars were at stake when 21 executives of Goldman Sachs and the American International Group convened a conference call on Jan. 28, 2008, to try to resolve a rancorous dispute that had been escalating for months.

A.I.G. had long insured complex mortgage securities owned by Goldman and other firms against possible defaults. With the housing crisis deepening, A.I.G., once the world's biggest insurer, had already paid Goldman $2 billion to cover losses the bank said it might suffer.

A.I.G. executives wanted some of its money back, insisting that Goldman - like a homeowner overestimating the damages in a storm to get a bigger insurance payment - had inflated the potential losses. Goldman countered that it was owed even more, while also resisting consulting with third parties to help estimate a value for the securities.

After more than an hour of debate, the two sides on the call signed off with nothing settled, according to internal A.I.G. documents and an audio recording reviewed by The New York Times.

Behind-the-scenes disputes over huge sums are common in banking, but the standoff between A.I.G. and Goldman would become one of the most momentous in Wall Street history. Well before the federal government bailed out A.I.G. in September 2008, Goldman's demands for billions of dollars from the insurer helped put it in a precarious financial position by bleeding much-needed cash. That ultimately provoked the government to step in.

With taxpayer assistance to A.I.G. currently totaling $180 billion, regulatory and Congressional scrutiny of Goldman's role in the insurer's downfall is increasing. The Securities and Exchange Commission is examining the payment demands that a number of firms - most prominently Goldman - made during 2007 and 2008 as the mortgage market imploded.

The S.E.C. wants to know whether any of the demands improperly distressed the mortgage market, according to people briefed on the matter who requested anonymity because the inquiry was intended to be confidential.

In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G. And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received more taxpayer money, $12.9 billion, than any other firm.

In addition, according to two people with knowledge of the positions, a portion of the $11 billion in taxpayer money that went to Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman under a deal the two banks had struck.

Goldman stood to gain from the housing market's implosion because in late 2006, the firm had begun to make huge trades that would pay off if the mortgage market soured. The further mortgage securities' prices fell, the greater were Goldman's profits.

In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth less than A.I.G. estimated - and in many cases, less than the prices at which other dealers valued the securities.

The pricing dispute, and Goldman's bets that the housing market would decline, has left some questioning whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured, said Bill Brown, a law professor at Duke University who is a former employee of both Goldman and A.I.G.

The dispute between the two companies, he said, "was the tip of the iceberg of this whole crisis."

"It's not just who was right and who was wrong," Mr. Brown said. "I also want to know their motivations. There could have been an incentive for Goldman to say, 'A.I.G., you owe me more money.' "

Goldman is proud of its reputation for aggressively protecting itself and its shareholders from losses as it did in the dispute with A.I.G.

In March 2009, David A. Viniar, Goldman's chief financial officer, discussed his firm's dispute with A.I.G. in a conference call with reporters. "We believed that the value of these positions was lower than they believed," he said.

Asked by a reporter whether his bank's persistent payment demands had contributed to A.I.G.'s woes, Mr. Viniar said that Goldman had done nothing wrong and that the firm was merely seeking to enforce its insurance policy with A.I.G. "I don't think there is any guilt whatsoever," he concluded.

Lucas van Praag, a Goldman spokesman, reiterated that position. "We requested the collateral we were entitled to under the terms of our agreements," he said in a written statement, "and the idea that A.I.G. collapsed because of our marks is ridiculous."

Still, documents show there were unusual aspects to the deals with Goldman. The bank resisted, for example, letting third parties value the securities as its contracts with A.I.G. required. And Goldman based some payment demands on lower-rated bonds that A.I.G.'s insurance did not even cover.

A November 2008 analysis by BlackRock, a leading asset management firm, noted that Goldman's valuations of the securities that A.I.G. insured were "consistently lower than third-party prices."

To be sure, many now agree that A.I.G. was reckless during the mortgage mania. The firm, once the world's largest insurer, had written far more insurance than it could have possibly paid if a national mortgage debacle occurred - as, in fact, it did.

Perhaps the most intriguing aspect of the relationship between Goldman and A.I.G. was that without the insurer to provide credit insurance, the investment bank could not have generated some of its enormous profits betting against the mortgage market. And when that market went south, A.I.G. became its biggest casualty - and Goldman became one of the biggest beneficiaries.

Longstanding Ties

For decades, A.I.G. and Goldman had a deep and mutually beneficial relationship, and at one point in the 1990s, they even considered merging. At around the same time, in 1998, A.I.G. entered a lucrative new business: insuring the least risky portions of corporate loans or other assets that were bundled into securities.

A.I.G.'s financial products unit, led by Joseph J. Cassano, was behind the expansion. To reduce its own risks in the transactions, the company structured deals so that it would not have to make early payments to clients when securities began to sour. That changed around 2003, however, when A.I.G. began insuring portions of subprime mortgage deals. A lawyer for Mr. Cassano said his client would not comment for this article. A.I.G. also declined to comment.

Alan Frost, a managing director in Mr. Cassano's unit, negotiated scores of mortgage deals around Wall Street that included a complicated sequence of events for when an insurance payment on a distressed asset came due.

The terms, described by several A.I.G. trading partners, stated that A.I.G. would post payments under two or three circumstances: if mortgage bonds were downgraded, if they were deemed to have lost value, or if A.I.G.'s own credit rating was downgraded. If all of those things happened, A.I.G. would have to make even larger payments.

Mr. Frost referred questions to his lawyer, who declined to comment.

Traders loved Mr. Frost's deals because they would pay out quickly if anything went wrong. Mr. Frost cut many of his deals with two Goldman traders, Jonathan Egol and Ram Sundaram, who had negative views of the housing market. They had made A.I.G. a central part of some of their trading strategies.

Mr. Egol structured a group of deals - known as Abacus - so that Goldman could benefit from a housing collapse. Many of them were actually packages of A.I.G. insurance written against mortgage bonds, indicating that Mr. Egol and Goldman believed that A.I.G. would have to make large payments if the housing market ran aground. About $5.5 billion of Mr. Egol's deals still sat on A.I.G.'s books when the insurer was bailed out.

"Al probably did not know it, but he was working with the bears of Goldman," a former Goldman salesman, who requested anonymity so he would not jeopardize his business relationships, said of Mr. Frost. "He was signing A.I.G. up to insure trades made by people with really very negative views" of the housing market.

Mr. Sundaram's trades represented another large part of Goldman's business with A.I.G. According to five former Goldman employees, Mr. Sundaram used financing from other banks like Société Générale and Calyon to purchase less risky mortgage securities from competitors like Merrill Lynch and then insure the assets with A.I.G. - helping fatten the mortgage pipeline that would prove so harmful to Wall Street, investors and taxpayers. In October 2008, just after A.I.G. collapsed, Goldman made Mr. Sundaram a partner.

Through Société Générale, Goldman was also able to buy more insurance on mortgage securities from A.I.G., according to a former A.I.G. executive with direct knowledge of the deals. A spokesman for Société Générale declined to comment.

It is unclear how much Goldman bought through the French bank, but A.I.G. documents show that Goldman was involved in pricing half of Société Générale's $18.6 billion in trades with A.I.G. and that the insurer's executives believed that Goldman pressed Société Générale to also demand payments.

Goldman's Tough Terms

In addition to insuring Mr. Sundaram's and Mr. Egol's trades with A.I.G., Goldman also negotiated aggressively with A.I.G. - often requiring the insurer to make payments when the value of mortgage bonds fell by just 4 percent. Most other banks dealing with A.I.G. did not receive payments until losses exceeded 8 percent, the insurer's records show.

Several former Goldman partners said it was not surprising that Goldman sought such tough terms, given the firm's longstanding focus on risk management.

By July 2007, when Goldman demanded its first payment from A.I.G. - $1.8 billion - the investment bank had already taken trading positions that would pay out if the mortgage market weakened, according to seven former Goldman employees.

Still, Goldman's initial call surprised A.I.G. officials, according to three A.I.G. employees with direct knowledge of the situation. The insurer put up $450 million on Aug. 10, 2007, to appease Goldman, but A.I.G. remained resistant in the following months and, according to internal messages, was convinced that Goldman was also pushing other trading partners to ask A.I.G. for payments.

On Nov. 1, 2007, for example, an e-mail message from Mr. Cassano, the head of A.I.G. Financial Products, to Elias Habayeb, an A.I.G. accounting executive, said that a payment demand from Société Générale had been "spurred by GS calling them."

Mr. Habayeb, who testified before Congress last month that the payment demands were a major contributor to A.I.G.'s downfall, declined to be interviewed and referred questions to A.I.G. The insurer also declined to comment for this article. Mr. van Praag, the Goldman spokesman, said Goldman did not push other firms to demand payments from A.I.G.

Later that month, Mr. Cassano noted in another e-mail message that Goldman's demands for payment were becoming problematic. "The overhang of the margin call from the perceived righteous Goldman Sachs has impacted everyone's judgment," he wrote to five employees in his division.

By the end of November 2007, Goldman was holding $2 billion in cash from A.I.G. when the insurer notified Goldman that it was disputing the firm's calculations and seeking a return of $1.56 billion. Goldman refused, the documents show.

In many of these deals, Goldman was trading for other parties and taking a fee. As the mortgage market declined, Goldman paid some of these parties while waiting for A.I.G. to meet its demands, the Goldman spokesman said. But one reason those parties were owed money on the deals was that Goldman had marked down the securities.

Adding to the pressure on A.I.G., Mr. Viniar, Goldman's chief financial officer, advised the insurer in the fall of 2007 that because the two companies shared the same auditor, PricewaterhouseCoopers, A.I.G. should accept Goldman's valuations, according to a person with knowledge of the discussions. Goldman declined to comment on this exchange.

Pricewaterhouse had supported A.I.G.'s approach to valuing the securities throughout 2007, documents show. But at the end of 2007, the auditor began demanding that A.I.G. provide greater disclosure on the risks in the credit insurance it had written. Pricewaterhouse was expressing concern about the dispute.

The insurer disclosed in year-end regulatory filings that its auditor had found a "material weakness" in financial reporting related to valuations of the insurance, a troubling sign for investors.

A spokesman for Pricewaterhouse said the company would not comment on client matters.

Insiders at A.I.G. bridled at Goldman's insistence that they accept the investment bank's valuations. "Would we call bond issuers and ask them what the valuation of their bonds was and take that?" asked Robert Lewis, A.I.G.'s chief risk officer, in a message in January 2008. "What am I missing here, so I don't waste everybody's time?"

When A.I.G. asked Goldman to submit the dispute to a panel of independent firms, Goldman resisted, internal e-mail messages show. In a March 7, 2008, phone call, Mr. Cassano discussed surveying other dealers to gauge prices with Michael Sherwood, Goldman's vice chairman. At that time, Goldman calculated that A.I.G. owed it $4.6 billion, on top of the $2 billion already paid. A.I.G. contended it only owed an additional $1.2 billion.

Mr. Sherwood said he did not want to ask other firms to value the securities because "it would be 'embarrassing' if we brought the market into our disagreement," according to an e-mail message from Mr. Cassano that described the call.

The Goldman spokesman disputed this account, saying instead that Goldman was willing to consult third parties but could not agree with A.I.G. on the methodology.

Trouble Grows at A.I.G.

By the spring of 2008, A.I.G.'s dispute with Goldman was just one of its many woes. Mr. Cassano was pushed out in March and the company's defenses against the growing demand for payments faltered. By the end of August 2008, A.I.G. had posted $19.7 billion in cash to its trading partners, including Goldman, according to financial filings.

Over that summer, A.I.G. had tried, unsuccessfully, to cancel its insurance contracts with the trading partners. But Goldman, according to interviews with former A.I.G. executives, would allow that only if it also got to keep the $7 billion it had already received from A.I.G. Goldman wanted to keep the initial insurance payouts and the securities in order to profit from any future rebound.

In addition to offering to cancel its own contracts, Goldman offered to buy all of the insurance A.I.G. had written for several other banks at severely distressed prices, according to three people briefed on the discussions.

Negotiating with Goldman to void the A.I.G. insurance was especially difficult, Federal Reserve Board documents show, because the firm did not own the underlying bonds. As a result, Goldman had little incentive to compromise.

On Aug. 18, 2008, Goldman's equity research department published an in-depth report on A.I.G. The analysts advised the firm's clients to avoid the stock because of a "downward spiral which is likely to ensue as more actual cash losses emanate" from the insurer's financial products unit.

On the matter of whether A.I.G. could unwind its troublesome insurance on mortgage securities at a discount, the Goldman report noted that if a trading partner "is not in a position of weakness, why would it accept anything less than the full amount of protection for which it had paid?"

A.I.G. shares fell 6 percent the day the report was published. Three weeks later, the United States government agreed to pour billions of dollars in taxpayer money into the insurer to keep it from collapsing.

The government would soon settle the yearlong dispute between Goldman and A.I.G., with Goldman receiving full value for its bets. The federal bailout locked in the paper losses of those deals for A.I.G. The prices on many of those securities have since rebounded.

Banks’ Derivatives Activity Falls Under I.R.S. Scrutiny

2010-01-21T11:17:00.000-08:00

http://www.nytimes.com/2010/01/21/business/21tax.html

January 21, 2010
By LYNNLEY BROWNING

Federal authorities are scrutinizing certain financial derivatives that may enable Wall Street banks to avoid collecting billions of dollars in withholding taxes on stock dividends.

The instruments, known as equity swaps, mimic ordinary shares and give investors like hedge funds the benefits of stock ownership, including payments similar to dividends, without actually owning the shares. Big banks also benefit from the swaps because, under federal tax rules, the banks may avoid paying a 30 percent tax that is normally levied on stock trades.

The Internal Revenue Service is examining whether banks are using the swaps to mask who really owns the shares underlying the instruments, thereby avoiding collecting dividend withholding taxes.

In effect, the I.R.S. suspects that the banks are disguising who owns the stock in order to help their offshore hedge fund clients avoid the withholding tax — a tax the banks are supposed to collect.

Mark H. Leeds, a tax lawyer at Greenberg Traurig, said on Wednesday that the scrutiny indicated the I.R.S. increasingly viewed equity swaps as “evidence of tax avoidance.”

In a directive issued last Thursday, the I.R.S. instructed its field agents on how to audit American banks and United States branches of foreign banks with an eye to “uncovering and developing cases” related to certain swap transactions “that may have been executed in order to avoid tax with respect to U.S. source dividend income” paid to offshore hedge funds and foreign investors.

“The audit guidelines reflect suspicion that all cross-border equity swaps are tax-avoidance transactions, even though the I.R.S.’s own regulations treated these transactions favorably,” Mr. Leeds said.

Tax lawyers regard the directive as significant because it concerns a vast, unregulated market and could lead to tax disputes between the I.R.S. and Wall Street banks. The exact size of the equity swaps market is difficult to ascertain, but the Bank of International Settlements puts the notional value of all equity-linked swaps and forwards, which are similar derivatives, at nearly $1.7 trillion as of last June.

The I.R.S. made rooting out abuses with equity swaps a top priority in March. A bill in the Senate, which passed the House last December, would sharply curtail the tax benefits on equity swaps.

In September 2008, a Senate subcommittee issued a scathing report, “Dividend Tax Abuse,” that accused Wall Street banks of marketing and selling complex swaps intended to evade taxes on dividend payments.

The report said trades in equity swaps had flourished over the last 10 years and grown lucrative for Wall Street banks.

A typical equity swap involves a hedge fund agreeing to pay a Wall Street bank’s losses on a stock in exchange for the bank’s promise to pay stock gains and dividends to the fund. Because the swaps are derivatives, no shares actually change hands.

The I.R.S. directive identified four types of swaps: cross in-cross out; cross in-interbroker dealer out; cross in-foreign affiliate out; and synthetic equity transactions.

Former Morgan Stanley Infrastructure & Energy Specialist, Who Was Also Director of Private-Equity Firm EQT Partners, Found Dead in Back of Delivery Va

2010-01-19T15:58:00.000-08:00

http://www.altassets.com/private-equity-news/article/nz17700.html

Alt Assets
Tue, 19 Jan 2010 15:29 EST

A director of private equity firm EQT Partners has been murdered, according to reports. The body of Dirk von Poschinger-Camphausen, who worked at Morgan Stanley before joining EQT last year, was reportedly found in a delivery van in a suburb of Munich over the weekend.

A Munich police spokesman told Bloomberg there was "no doubt" that Poschinger-Camphausen had been murdered.

According to Munich newspaper Abendzeitung, police have made three arrests in connection with the case. The paper said the men may have killed Poschinger-Camphausen as they were attempting to take his high-end Audi car, which he had been seeking to sell for €54,000 online in preparation for a move to the US.

The car was reportedly found near the delivery van where Poschinger-Camphausen's body was discovered on Saturday.

EQT issued the following statement, "It is with great sadness and dismay we learned that our dear colleague Dirk von Poschinger-Camphausen was found dead by the Munich police this weekend."

"This is a horrible tragedy for Dirk's family as well as for EQT and our thoughts go to Dirk's wife and two young daughters. We are doing everything we can to support them at this difficult time."

Regulators Seek to Throw Light on Hedge Fund Impact in Energy Trading

2010-01-16T15:34:00.000-08:00

http://www.opednews.com/articles/Regulators-Seek-to-Throw-L-by-OilGuy-100111-332.html

January 12, 2010
By OilGuy

Do hedge funds have an impact on energy trading?

While the answer might seem intuitive, the debate as to whether they actually do has come to resemble the medieval theological dispute about how many angels can dance on the head of the pin.

Because, like angels, many trades in energy futures are invisible, and it is often not possible to pinpoint where they take place.

And yet, for most of us, including lawmakers on Capitol Hill, it seems obvious that when hedge funds buy and sell billions of dollars worth of oil and gas futures, it must be having an impact on energy prices. While hedge funds and other speculative traders would never dream of taking delivery of a barrel of oil, their trading activity affects the prices for actual consumers of oil and gas and their downstream customers or so it would seem.

When Gary Gensler, a former Goldman Sachs banker and Treasury Department official, was nominated last year as chairman of the Commodity Futures and Trading Commission the chief regulator for energy futures trading he reversed the CFTC party line that speculators don't have an impact on energy trading.

"I believe that excessive speculation in commodity futures can cause sudden or unreasonable fluctuations or unwarranted changes in commodity prices," Gensler said in a written response to lawmakers' questions ahead of his nomination hearing.

Gensler went on to pledge that if confirmed, he would have the CFTC guard against such speculation.

While he stopped short of saying that excessive speculation had taken place in the run-up of energy prices in 2008, he did express the opinion that the rapid growth of commodity index funds and increased hedge fund allocation to commodity assets contributed to the "bubble in commodities prices that peaked in mid-2008."

He noted that non-commercial investors sometimes account for up to 90% of open interest in a contract. (Open interest is a calculation of the number of active trades for a particular market, and is used as an indicator whether trading is becoming more or less active.)

Gensler's answer, enshrined in draft legislation currently before Congress, is to make trades more visible by requiring all over-the-counter derivatives to trade through an approved clearing house. While the thrust of new legislation is to get a better handle on financial derivatives such as credit default swaps, it will give regulators a better picture of all derivatives trading, including energy contracts.

At the same time, the CFTC and the Securities and Exchange Commission both are beefing up their ability to monitor hedge fund activity. The SEC for the first time will require hedge funds to register as investment advisors, and Gensler has pledged closer oversight of the funds that it supervises as commodity pool operators.

The industry, predictably, is pushing back. In congressional testimony on the new legislation, the Chicago Mercantile Exchange, the largest futures exchange in the world, and other exchange operators presented studies based on CFTC data to show that large positions held by index funds and other managed money were not "routinely detrimental" to the commodity markets in the period January 2005 to June 2008.

"All of the trader groups displayed instances of non-optimal behavior (including small traders), but none were consistently harmful to the studied markets," they said.

A task force of the International Organization of Securities Regulators (IOSCO) released a report last March that came to a similar conclusion.

"While reports reviewed by the task force concluded that fundamentals rather than speculative activity was the plausible explanation for price changes, the task force has made a number of recommendations to improve the transparency and supervision of these markets," IOSCO said.

These included suggestions regarding information about the underlying commodities, access to and sharing of information about trading positions, beefing up enforcement powers, and improving global coordination.

The spectacular collapse of the Amaranth Advisors hedge fund in 2006 when it lost $6 billion on natural gas futures did pull back the veil on hedge fund activity in energy markets. Amaranth built up its huge position in natural gas futures through OTC contracts that exactly mirrored the contracts on the New York Mercantile Exchange but remained hidden from regulators, who were unable to enforce position limits designed to rein in speculative trading.

In hearings about Amaranth before various House and Senate committees as well as at the CFTC itself, it became clear, at least to many lawmakers, that contracts on unregulated trading venues can influence prices.

The case was so straightforward that it prompted the Federal Energy Regulatory Commission to flex its new post-Enron mandate to stop manipulation of energy prices by pursuing disciplinary action against Amaranth.

This led to a turf war with the CFTC, which claimed exclusive jurisdiction over futures trading and argued that FERC's mandate extended only to spot trading. FERC countered that when activity in the futures market affected spot prices, it was authorized to act.

Those proceedings ended in a joint settlement last August, before either CFTC or FERC held their administrative hearings and before an appellate court could decide the jurisdictional issue.

But the Amaranth case remains as a reminder of what a hedge fund can do in energy markets if these trades are not more transparent. Legislation bringing more visibility to the market and strengthening the hand of regulators will ensure that hedge fund activity in the energy markets will be more closely monitored and limited.

This article was written by Darrell Delamaide for OilPrice.com who focus on Fossil Fuels, Alternative Energy, Metals, Oil Prices and http://www.oilprice.com/articles-geopolitics.php" target="new">Geopolitics. To find out more visit their website at: http://www.oilprice.com

Tactics that would make a mafia loan shark blush

2010-01-10T04:31:00.000-08:00

The Quiet Coup

2010-01-08T11:39:00.001-08:00

http://www.theatlantic.com/doc/200905/imf-advice

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

by Simon Johnson
The Quiet Coup
May 2009

ONE THING YOU learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Click the chart above for a larger view

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor
Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis
The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out
Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths
To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Cheerleading for Wall Street

2009-12-29T11:59:00.001-08:00

http://www.opednews.com/articles/Cheerleading-for-Wall-Stre-by-David-Glenn-Cox-091228-160.html

December 28, 2009
Cheerleading for Wall Street
By David Glenn Cox

No pom poms or short skirts, but it is all the same game, jumping, cheering, chanting, leering. Gimme an L, Gimme an E, Gimme an N, Gimme a D-I-N-G! Yay, Wall Street! Wall Street! Wall Street!

Dec. 25 (Bloomberg) -- New York Senator Charles Schumer warned Wall Street firms to "live up to your responsibilities" and increase lending, particularly to small businesses, while showing restraint on executives' bonuses. "Get that money out there," Schumer said in an interview Dec. 23 on Bloomberg Television.

Banks should make sure the bonuses aren't "excessive" and are based on merit, Schumer said. The position of firms such as Goldman Sachs Group Inc. that they didn't need the government's help to survive "is just false," he said. --

I wonder what Mr. Schumer considers excessive? Would one million-dollar bonuses to the top, say, twenty-five bankers at Goldman Sachs be excessive? How about the top fifty? Or even the top one hundred bankers? How about the top nine hundred and seventy-three bankers? Goldman Sachs plans to issue bonuses in excess of one million dollars to nine hundred and seventy-three employees. Is that excessive, Senator? I mean, considering the average working family only earns around a million five for a lifetime of work, would a million dollars be excessive for two hundred or so work days?

"At the same time, reinstating the Depression-era Glass-Steagall Act that split investment and commercial banking should be considered, yet is 'easier said than done,' Schumer said. Last week lawmakers, including Senator John McCain, proposed reinstating Glass-Steagall, which was struck in 1999 by the Gramm-Leach-Bliley Act."

Not that I believe John McCain was at all serious about reinstating Glass-Steagall, but I wonder what the Democratic majority thinks of the idea?

"Schumer, who sits on the banking and finance committees, said the proposal is 'something we should look at' because proprietary trading is different from other parts of the business. Some issues include how to square such a change with less-stringent foreign regulation and with 'loophole after loophole' created by the Federal Reserve under former Chairman Alan Greenspan, Schumer said."

Go long! Its called passing the buck! Or in the words of Richard Nixon, "Let me say this about that." Gee, we really need to look at that, but gosh darn it, I don't know if we can fix it because of that darned old Alan Greenspan. And, gee, there's all that less-stringent foreign regulations stuff.

A US Senator, who sits on the banking and finance committees, says um, ah, um, ah, I don't know if we can. If you can't do it, Senator, then who can? You are in government work, you know, that's what you get paid to do. Are you telling us the federal government is powerless to face down Wall Street? Or that they don't want to face down Wall Street because it would be messy and unpleasant?

"With the U.S. unemployment rate of 10 percent close to a 26-year high," Schumer said, "the government needs to find ways to create incentives for banks to increase lending to small businesses." He also urged more spending on infrastructure to boost jobs.

The government needs to find ways to create incentives for banks to increase lending to small businesses? All I can ask Senator is, what the hell are you smoking? The major banks are borrowing money from the Federal Reserve at .25% and lending it out at a minimum four percent, sixteen percent on credit cards. They've changed their fee schedules to allow them to be more profitable than ever, and yet we need to incentivize them to do their job?

The regulation of the Federal Reserve requires that the Fed has to announce beforehand their intention to buy certain securities. This gives the big Wall Street banks time to buy up the securities and pump up the price before the Fed can place their orders. Imagine going to Las Vegas and getting to look at the dealer's cards before you place your bet. It just makes it all that much more galling because these big profits which produce those big bonuses are, for all intents and purposes, government subsidized.

While the big boys on Wall Street show huge profits, the banks on Main Street continue to suffer. But other reports question whether the banks are making any money at all, or just moving piles of chips to make themselves look profitable. Of course the IRS gave Citicorp a free pass on $38 billion in taxes, but other banks have been playing with the figures too. As non-performing assets and net charge-offs climb, the banks are lowering their loan loss ratio. During the Fed's stress test, banks were held to a 63.6% standard but they've lowered that to 60.1%. Had they not, they would have needed and additional $12 billion which would have turned the $2.8 billion in reported profits into horse pucky.

But don't you worry, don't you fear, the bonus checks are going to clear. And Senator Schumer will continue to take a hard line on the banks. He'll be working nights and weekends to come up with incentives to make banks do what they are chartered to do in the first place. And if they don't? Yes, by God, and if they don't, why he'll wag his finger and say, "Well, um, that um, ah, can't be helped," and then he'll wag his finger again and warn the banks, "You better do what we would like for you to do, or I'll wag my finger at you again!"

"In fact, in these last four years, we have made the exercise of all power more democratic; for we have begun to bring private autocratic powers into their proper subordination to the public's government. The legend that they were invincible--above and beyond the processes of a democracy--has been shattered. They have been challenged and beaten." (Franklin D. Roosevelt)

"We of the Republic sensed the truth that democratic government has innate capacity to protect its people against disasters once considered inevitable, to solve problems once considered unsolvable. We would not admit that we could not find a way to master economic epidemics just as, after centuries of fatalistic suffering, we had found a way to master epidemics of disease. We refused to leave the problems of our common welfare to be solved by the winds of chance and the hurricanes of disaster." (Franklin D. Roosevelt)

"But it is not in despair that I paint you that picture. I paint it for you in hope--because the nation, seeing and understanding the injustice in it, proposes to paint it out. We are determined to make every American citizen the subject of his country's interest and concern; and we will never regard any faithful law-abiding group within our borders as superfluous. The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little." (Franklin D. Roosevelt)

Obama's Big Sellout: The president has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway

2009-12-11T13:17:00.001-08:00

http://www.rollingstone.com/politics/story/31234647/obamas_big_sellout

Obama's Big Sellout
The president has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway
MATT TAIBBI
Posted Dec 09, 2009 2:35 PM

Watch Matt Taibbi discuss "The Big Sellout" in a video on his blog, Taibblog.

Barack Obama ran for president as a man of the people, standing up to Wall Street as the global economy melted down in that fateful fall of 2008. He pushed a tax plan to soak the rich, ripped NAFTA for hurting the middle class and tore into John McCain for supporting a bankruptcy bill that sided with wealthy bankers "at the expense of hardworking Americans." Obama may not have run to the left of Samuel Gompers or Cesar Chavez, but it's not like you saw him on the campaign trail flanked by bankers from Citigroup and Goldman Sachs. What inspired supporters who pushed him to his historic win was the sense that a genuine outsider was finally breaking into an exclusive club, that walls were being torn down, that things were, for lack of a better or more specific term, changing.

Then he got elected.

What's taken place in the year since Obama won the presidency has turned out to be one of the most dramatic political about-faces in our history. Elected in the midst of a crushing economic crisis brought on by a decade of orgiastic deregulation and unchecked greed, Obama had a clear mandate to rein in Wall Street and remake the entire structure of the American economy. What he did instead was ship even his most marginally progressive campaign advisers off to various bureaucratic Siberias, while packing the key economic positions in his White House with the very people who caused the crisis in the first place. This new team of bubble-fattened ex-bankers and laissez-faire intellectuals then proceeded to sell us all out, instituting a massive, trickle-up bailout and systematically gutting regulatory reform from the inside.

How could Obama let this happen? Is he just a rookie in the political big leagues, hoodwinked by Beltway old-timers? Or is the vacillating, ineffectual servant of banking interests we've been seeing on TV this fall who Obama really is?

Whatever the president's real motives are, the extensive series of loophole-rich financial "reforms" that the Democrats are currently pushing may ultimately do more harm than good. In fact, some parts of the new reforms border on insanity, threatening to vastly amplify Wall Street's political power by institutionalizing the taxpayer's role as a welfare provider for the financial-services industry. At one point in the debate, Obama's top economic advisers demanded the power to award future bailouts without even going to Congress for approval — and without providing taxpayers a single dime in equity on the deals.

How did we get here? It started just moments after the election — and almost nobody noticed.

'Just look at the timeline of the Citigroup deal," says one leading Democratic consultant. "Just look at it. It's fucking amazing. Amazing! And nobody said a thing about it."

Barack Obama was still just the president-elect when it happened, but the revolting and inexcusable $306 billion bailout that Citigroup received was the first major act of his presidency. In order to grasp the full horror of what took place, however, one needs to go back a few weeks before the actual bailout — to November 5th, 2008, the day after Obama's election.

That was the day the jubilant Obama campaign announced its transition team. Though many of the names were familiar — former Bill Clinton chief of staff John Podesta, long-time Obama confidante Valerie Jarrett — the list was most notable for who was not on it, especially on the economic side. Austan Goolsbee, a University of Chicago economist who had served as one of Obama's chief advisers during the campaign, didn't make the cut. Neither did Karen Kornbluh, who had served as Obama's policy director and was instrumental in crafting the Democratic Party's platform. Both had emphasized populist themes during the campaign: Kornbluh was known for pushing Democrats to focus on the plight of the poor and middle class, while Goolsbee was an aggressive critic of Wall Street, declaring that AIG executives should receive "a Nobel Prize — for evil."

But come November 5th, both were banished from Obama's inner circle — and replaced with a group of Wall Street bankers. Leading the search for the president's new economic team was his close friend and Harvard Law classmate Michael Froman, a high-ranking executive at Citigroup. During the campaign, Froman had emerged as one of Obama's biggest fundraisers, bundling $200,000 in contributions and introducing the candidate to a host of heavy hitters — chief among them his mentor Bob Rubin, the former co-chairman of Goldman Sachs who served as Treasury secretary under Bill Clinton. Froman had served as chief of staff to Rubin at Treasury, and had followed his boss when Rubin left the Clinton administration to serve as a senior counselor to Citigroup (a massive new financial conglomerate created by deregulatory moves pushed through by Rubin himself).

Incredibly, Froman did not resign from the bank when he went to work for Obama: He remained in the employ of Citigroup for two more months, even as he helped appoint the very people who would shape the future of his own firm. And to help him pick Obama's economic team, Froman brought in none other than Jamie Rubin, a former Clinton diplomat who happens to be Bob Rubin's son. At the time, Jamie's dad was still earning roughly $15 million a year working for Citigroup, which was in the midst of a collapse brought on in part because Rubin had pushed the bank to invest heavily in mortgage-backed CDOs and other risky instruments.

Now here's where it gets really interesting. It's three weeks after the election. You have a lame-duck president in George W. Bush — still nominally in charge, but in reality already halfway to the golf-and-O'Doul's portion of his career and more than happy to vacate the scene. Left to deal with the still-reeling economy are lame-duck Treasury Secretary Henry Paulson, a former head of Goldman Sachs, and New York Fed chief Timothy Geithner, who served under Bob Rubin in the Clinton White House. Running Obama's economic team are a still-employed Citigroup executive and the son of another Citigroup executive, who himself joined Obama's transition team that same month.

So on November 23rd, 2008, a deal is announced in which the government will bail out Rubin's messes at Citigroup with a massive buffet of taxpayer-funded cash and guarantees. It is a terrible deal for the government, almost universally panned by all serious economists, an outrage to anyone who pays taxes. Under the deal, the bank gets $20 billion in cash, on top of the $25 billion it had already received just weeks before as part of the Troubled Asset Relief Program. But that's just the appetizer. The government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets, many of them those toxic CDOs that Rubin had pushed Citi to invest in. No Citi executives are replaced, and few restrictions are placed on their compensation. It's the sweetheart deal of the century, putting generations of working-stiff taxpayers on the hook to pay off Bob Rubin's fuck-up-rich tenure at Citi. "If you had any doubts at all about the primacy of Wall Street over Main Street," former labor secretary Robert Reich declares when the bailout is announced, "your doubts should be laid to rest."

It is bad enough that one of Bob Rubin's former protégés from the Clinton years, the New York Fed chief Geithner, is intimately involved in the negotiations, which unsurprisingly leave the Federal Reserve massively exposed to future Citi losses. But the real stunner comes only hours after the bailout deal is struck, when the Obama transition team makes a cheerful announcement: Timothy Geithner is going to be Barack Obama's Treasury secretary!

Geithner, in other words, is hired to head the U.S. Treasury by an executive from Citigroup — Michael Froman — before the ink is even dry on a massive government giveaway to Citigroup that Geithner himself was instrumental in delivering. In the annals of brazen political swindles, this one has to go in the all-time Fuck-the-Optics Hall of Fame.

Wall Street loved the Citi bailout and the Geithner nomination so much that the Dow immediately posted its biggest two-day jump since 1987, rising 11.8 percent. Citi shares jumped 58 percent in a single day, and JP Morgan Chase, Merrill Lynch and Morgan Stanley soared more than 20 percent, as Wall Street embraced the news that the government's bailout generosity would not die with George W. Bush and Hank Paulson. "Geithner assures a smooth transition between the Bush administration and that of Obama, because he's already co-managing what's happening now," observed Stephen Leeb, president of Leeb Capital Management.

Left unnoticed, however, was the fact that Geithner had been hired by a sitting Citigroup executive who still had a big bonus coming despite his proximity to Obama. In January 2009, just over a month after the bailout, Citigroup paid Froman a year-end bonus of $2.25 million. But as outrageous as it was, that payoff would prove to be chump change for the banker crowd, who were about to get everything they wanted — and more — from the new president.

The irony of Bob Rubin: He's an unapologetic arch-capitalist demagogue whose very career is proof that a free-market meritocracy is a myth. Much like Alan Greenspan, a staggeringly incompetent economic forecaster who was worshipped by four decades of politicians because he once dated Barbara Walters, Rubin has been held in awe by the American political elite for nearly 20 years despite having fucked up virtually every project he ever got his hands on. He went from running Goldman Sachs (1990-1992) to the Clinton White House (1993-1999) to Citigroup (1999-2009), leaving behind a trail of historic gaffes that somehow boosted his stature every step of the way.

As Treasury secretary under Clinton, Rubin was the driving force behind two monstrous deregulatory actions that would be primary causes of last year's financial crisis: the repeal of the Glass-Steagall Act (passed specifically to legalize the Citigroup megamerger) and the deregulation of the derivatives market. Having set that time bomb, Rubin left government to join Citi, which promptly expressed its gratitude by giving him $126 million in compensation over the next eight years (they don't call it bribery in this country when they give you the money post factum). After urging management to amp up its risky investments in toxic vehicles, a strategy that very nearly destroyed the company, Rubin blamed Citi's board for his screw-ups and complained that he had been underpaid to boot. "I bet there's not a single year where I couldn't have gone somewhere else and made more," he said.

Despite being perhaps more responsible for last year's crash than any other single living person — his colossally stupid decisions at both the highest levels of government and the management of a private financial superpower make him unique — Rubin was the man Barack Obama chose to build his White House around.

There are four main ways to be connected to Bob Rubin: through Goldman Sachs, the Clinton administration, Citigroup and, finally, the Hamilton Project, a think tank Rubin spearheaded under the auspices of the Brookings Institute to promote his philosophy of balanced budgets, free trade and financial deregulation. The team Obama put in place to run his economic policy after his inauguration was dominated by people who boasted connections to at least one of these four institutions — so much so that the White House now looks like a backstage party for an episode of Bob Rubin, This Is Your Life!

At Treasury, there is Geithner, who worked under Rubin in the Clinton years. Serving as Geithner's "counselor" — a made-up post not subject to Senate confirmation — is Lewis Alexander, the former chief economist of Citigroup, who advised Citi back in 2007 that the upcoming housing crash was nothing to worry about. Two other top Geithner "counselors" — Gene Sperling and Lael Brainard — worked under Rubin at the National Economic Council, the key group that coordinates all economic policymaking for the White House.

As director of the NEC, meanwhile, Obama installed economic czar Larry Summers, who had served as Rubin's protégé at Treasury. Just below Summers is Jason Furman, who worked for Rubin in the Clinton White House and was one of the first directors of Rubin's Hamilton Project. The appointment of Furman — a persistent advocate of free-trade agreements like NAFTA and the author of droolingly pro-globalization reports with titles like "Walmart: A Progressive Success Story" — provided one of the first clues that Obama had only been posturing when he promised crowds of struggling Midwesterners during the campaign that he would renegotiate NAFTA, which facilitated the flight of blue-collar jobs to other countries.

"NAFTA's shortcomings were evident when signed, and we must now amend the agreement to fix them," Obama declared. A few months after hiring Furman to help shape its economic policy, however, the White House quietly quashed any talk of renegotiating the trade deal. "The president has said we will look at all of our options, but I think they can be addressed without having to reopen the agreement," U.S. Trade Representative Ronald Kirk told reporters in a little-publicized conference call last April.

The announcement was not so surprising, given who Obama hired to serve alongside Furman at the NEC: management consultant Diana Farrell, who worked under Rubin at Goldman Sachs. In 2003, Farrell was the author of an infamous paper in which she argued that sending American jobs overseas might be "as beneficial to the U.S. as to the destination country, probably more so."

Joining Summers, Furman and Farrell at the NEC is Froman, who by then had been formally appointed to a unique position: He is not only Obama's international finance adviser at the National Economic Council, he simultaneously serves as deputy national security adviser at the National Security Council. The twin posts give Froman a direct line to the president, putting him in a position to coordinate Obama's international economic policy during a crisis. He'll have help from David Lipton, another joint appointee to the economics and security councils who worked with Rubin at Treasury and Citigroup, and from Jacob Lew, a former Citi colleague of Rubin's whom Obama named as deputy director at the State Department to focus on international finance.

Over at the Commodity Futures Trading Commission, which is supposed to regulate derivatives trading, Obama appointed Gary Gensler, a former Goldman banker who worked under Rubin in the Clinton White House. Gensler had been instrumental in helping to pass the infamous Commodity Futures Modernization Act of 2000, which prevented deregulation of derivative instruments like CDOs and credit-default swaps that played such a big role in cratering the economy last year. And as head of the powerful Office of Management and Budget, Obama named Peter Orszag, who served as the first director of Rubin's Hamilton Project. Orszag once succinctly summed up the project's ideology as a sort of liberal spin on trickle-down Reaganomics: "Market competition and globalization generate significant economic benefits."

Taken together, the rash of appointments with ties to Bob Rubin may well represent the most sweeping influence by a single Wall Street insider in the history of government. "Rather than having a team of rivals, they've got a team of Rubins," says Steven Clemons, director of the American Strategy Program at the New America Foundation. "You see that in policy choices that have resuscitated — but not reformed — Wall Street."

While Rubin's allies and acolytes got all the important jobs in the Obama administration, the academics and progressives got banished to semi-meaningless, even comical roles. Kornbluh was rewarded for being the chief policy architect of Obama's meteoric rise by being outfitted with a pith helmet and booted across the ocean to Paris, where she now serves as America's never-again-to-be-seen-on-TV ambassador to the Organization for Economic Cooperation and Development. Goolsbee, meanwhile, was appointed as staff director of the President's Economic Recovery Advisory Board, a kind of dumping ground for Wall Street critics who had assisted Obama during the campaign; one top Democrat calls the panel "Siberia."

Joining Goolsbee as chairman of the PERAB gulag is former Fed chief Paul Volcker, who back in March 2008 helped candidate Obama write a speech declaring that the deregulatory efforts of the Eighties and Nineties had "excused and even embraced an ethic of greed, corner-cutting, insider dealing, things that have always threatened the long-term stability of our economic system." That speech met with rapturous applause, but the commission Obama gave Volcker to manage is so toothless that it didn't even meet for the first time until last May. The lone progressive in the White House, economist Jared Bernstein, holds the impressive-sounding title of chief economist and national policy adviser — except that the man he is advising is Joe Biden, who seems more interested in foreign policy than financial reform.

The significance of all of these appointments isn't that the Wall Street types are now in a position to provide direct favors to their former employers. It's that, with one or two exceptions, they collectively offer a microcosm of what the Democratic Party has come to stand for in the 21st century. Virtually all of the Rubinites brought in to manage the economy under Obama share the same fundamental political philosophy carefully articulated for years by the Hamilton Project: Expand the safety net to protect the poor, but let Wall Street do whatever it wants. "Bob Rubin, these guys, they're classic limousine liberals," says David Sirota, a former Democratic strategist. "These are basically people who have made shitloads of money in the speculative economy, but they want to call themselves good Democrats because they're willing to give a little more to the poor. That's the model for this Democratic Party: Let the rich do their thing, but give a fraction more to everyone else."

Even the members of Obama's economic team who have spent most of their lives in public office have managed to make small fortunes on Wall Street. The president's economic czar, Larry Summers, was paid more than $5.2 million in 2008 alone as a managing director of the hedge fund D.E. Shaw, and pocketed an additional $2.7 million in speaking fees from a smorgasbord of future bailout recipients, including Goldman Sachs and Citigroup. At Treasury, Geithner's aide Gene Sperling earned a staggering $887,727 from Goldman Sachs last year for performing the punch-line-worthy service of "advice on charitable giving." Sperling's fellow Treasury appointee, Mark Patterson, received $637,492 as a full-time lobbyist for Goldman Sachs, and another top Geithner aide, Lee Sachs, made more than $3 million working for a New York hedge fund called Mariner Investment Group. The list goes on and on. Even Obama's chief of staff, Rahm Emanuel, who has been out of government for only 30 months of his adult life, managed to collect $18 million during his private-sector stint with a Wall Street firm called Wasserstein-Perella.

The point is that an economic team made up exclusively of callous millionaire-assholes has absolutely zero interest in reforming the gamed system that made them rich in the first place. "You can't expect these people to do anything other than protect Wall Street," says Rep. Cliff Stearns, a Republican from Florida. That thinking was clear from Obama's first address to Congress, when he stressed the importance of getting Americans to borrow like crazy again. "Credit is the lifeblood of the economy," he declared, pledging "the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money." A president elected on a platform of change was announcing, in so many words, that he planned to change nothing fundamental when it came to the economy. Rather than doing what FDR had done during the Great Depression and institute stringent new rules to curb financial abuses, Obama planned to institutionalize the policy, firmly established during the Bush years, of keeping a few megafirms rich at the expense of everyone else.

Obama hasn't always toed the Rubin line when it comes to economic policy. Despite being surrounded by a team that is powerfully opposed to deficit spending — balanced budgets and deficit reduction have always been central to the Rubin way of thinking — Obama came out of the gate with a huge stimulus plan designed to kick-start the economy and address the job losses brought on by the 2008 crisis. "You have to give him credit there," says Sen. Bernie Sanders, an advocate of using government resources to address unemployment. "It's a very significant piece of legislation, and $787 billion is a lot of money."

But whatever jobs the stimulus has created or preserved so far — 640,329, according to an absurdly precise and already debunked calculation by the White House — the aid that Obama has provided to real people has been dwarfed in size and scope by the taxpayer money that has been handed over to America's financial giants. "They spent $75 billion on mortgage relief, but come on — look at how much they gave Wall Street," says a leading Democratic strategist. Neil Barofsky, the inspector general charged with overseeing TARP, estimates that the total cost of the Wall Street bailouts could eventually reach $23.7 trillion. And while the government continues to dole out big money to big banks, Obama and his team of Rubinites have done almost nothing to reform the warped financial system responsible for imploding the global economy in the first place.

The push for reform seemed to get off to a promising start. In the House, the charge was led by Rep. Barney Frank, the outspoken chair of the House Financial Services Committee, who emerged during last year's Bush bailouts as a sharp-tongued critic of Wall Street. Back when Obama was still a senator, he and Frank even worked together to introduce a populist bill targeting executive compensation. Last spring, with the economy shattered, Frank began to hold hearings on a host of reforms, crafted with significant input from the White House, that initially contained some very good elements. There were measures to curb abusive credit-card lending, prevent banks from charging excessive fees, force publicly traded firms to conduct meaningful risk assessment and allow shareholders to vote on executive compensation. There were even measures to crack down on risky derivatives and to bar firms like AIG from picking their own regulators.

Then the committee went to work — and the loopholes started to appear.

The most notable of these came in the proposal to regulate derivatives like credit-default swaps. Even Gary Gensler, the former Goldmanite whom Obama put in charge of commodities regulation, was pushing to make these normally obscure investments more transparent, enabling regulators and investors to identify speculative bubbles sooner. But in August, a month after Gensler came out in favor of reform, Geithner slapped him down by issuing a 115-page paper called "Improvements to Regulation of Over-the-Counter Derivatives Markets" that called for a series of exemptions for "end users" — i.e., almost all of the clients who buy derivatives from banks like Goldman Sachs and Morgan Stanley. Even more stunning, Frank's bill included a blanket exception to the rules for currency swaps traded on foreign exchanges — the very instruments that had triggered the Long-Term Capital Management meltdown in the late 1990s.

Given that derivatives were at the heart of the financial meltdown last year, the decision to gut derivatives reform sent some legislators howling with disgust. Sen. Maria Cantwell of Washington, who estimates that as much as 90 percent of all derivatives could remain unregulated under the new rules, went so far as to say the new laws would make things worse. "Current law with its loopholes might actually be better than these loopholes," she said.

An even bigger loophole could do far worse damage to the economy. Under the original bill, the Securities and Exchange Commission and the Commodity Futures Trading Commission were granted the power to ban any credit swaps deemed to be "detrimental to the stability of a financial market or of participants in a financial market." By the time Frank's committee was done with the bill, however, the SEC and the CFTC were left with no authority to do anything about abusive derivatives other than to send a report to Congress. The move, in effect, would leave the kind of credit-default swaps that brought down AIG largely unregulated.

Why would leading congressional Democrats, working closely with the Obama administration, agree to leave one of the riskiest of all financial instruments unregulated, even before the issue could be debated by the House? "There was concern that a broad grant to ban abusive swaps would be unsettling," Frank explained.

Unsettling to whom? Certainly not to you and me — but then again, actual people are not really part of the calculus when it comes to finance reform. According to those close to the markup process, Frank's committee inserted loopholes under pressure from "constituents" — by which they mean anyone "who can afford a lobbyist," says Michael Greenberger, the former head of trading at the CFTC under Clinton.

This pattern would repeat itself over and over again throughout the fall. Take the centerpiece of Obama's reform proposal: the much-ballyhooed creation of a Consumer Finance Protection Agency to protect the little guy from abusive bank practices. Like the derivatives bill, the debate over the CFPA ended up being dominated by horse-trading for loopholes. In the end, Frank not only agreed to exempt some 8,000 of the nation's 8,200 banks from oversight by the castrated-in-advance agency, leaving most consumers unprotected, he allowed the committee to pass the exemption by voice vote, meaning that congressmen could side with the banks without actually attaching their name to their "Aye."

To win the support of conservative Democrats, Frank also backed down on another issue that seemed like a slam-dunk: a requirement that all banks offer so-called "plain vanilla" products, such as no-frills mortgages, to give consumers an alternative to deceptive, "fully loaded" deals like adjustable-rate loans. Frank's last-minute reversal — made in consultation with Geithner — was such a transparent giveaway to the banks that even an economics writer for Reuters, hardly a far-left source, called it "the beginning of the end of meaningful regulatory reform."

But the real kicker came when Frank's committee took up what is known as "resolution authority" — government-speak for "Who the hell is in charge the next time somebody at AIG or Lehman Brothers decides to vaporize the economy?" What the committee initially introduced bore a striking resemblance to a proposal written by Geithner earlier in the summer. A masterpiece of legislative chicanery, the measure would have given the White House permanent and unlimited authority to execute future bailouts of megaconglomerates like Citigroup and Bear Stearns.

Democrats pushed the move as politically uncontroversial, claiming that the bill will force Wall Street to pay for any future bailouts and "doesn't use taxpayer money." In reality, that was complete bullshit. The way the bill was written, the FDIC would basically borrow money from the Treasury — i.e., from ordinary taxpayers — to bail out any of the nation's two dozen or so largest financial companies that the president deems in need of government assistance. After the bailout is executed, the president would then levy a tax on financial firms with assets of more than $10 billion to repay the Treasury within 60 months — unless, that is, the president decides he doesn't want to! "They can wait indefinitely to repay," says Rep. Brad Sherman of California, who dubbed the early version of the bill "TARP on steroids."

The new bailout authority also mandated that future bailouts would not include an exchange of equity "in any form" — meaning that taxpayers would get nothing in return for underwriting Wall Street's mistakes. Even more outrageous, it specifically prohibited Congress from rejecting tax giveaways to Wall Street, as it did last year, by removing all congressional oversight of future bailouts. In fact, the resolution authority proposed by Frank was such a slurpingly obvious blow job of Wall Street that it provoked a revolt among his own committee members, with junior Democrats waging a spirited fight that restored congressional oversight to future bailouts, requires equity for taxpayer money and caps assistance to troubled firms at $150 billion. Another amendment to force companies with more than $50 billion in assets to pay into a rainy-day fund for bailouts passed by a resounding vote of 52 to 17 — with the "Nays" all coming from Frank and other senior Democrats loyal to the administration.

Even as amended, however, resolution authority still has the potential to be truly revolutionary legislation. The Senate version still grants the president unlimited power over equity-free bailouts, and the amended House bill still institutionalizes a system of taxpayer support for the 20 to 25 biggest banks in the country. It would essentially grant economic immortality to those top few megafirms, who will continually gobble up greater and greater slices of market share as money becomes cheaper and cheaper for them to borrow (after all, who wouldn't lend to a company permanently backstopped by the federal government?). It would also formalize the government's role in the global economy and turn the presidential-appointment process into an important part of every big firm's business strategy. "If this passes, the very first thing these companies are going to do in the future is ask themselves, 'How do we make sure that one of our executives becomes assistant Treasury secretary?'" says Sherman.

On the Senate side, finance reform has yet to make it through the markup process, but there's every reason to believe that its final bill will be as watered down as the House version by the time it comes to a vote. The original measure, drafted by chairman Christopher Dodd of the Senate Banking Committee, is surprisingly tough on Wall Street — a fact that almost everyone in town chalks up to Dodd's desperation to shake the bad publicity he incurred by accepting a sweetheart mortgage from the notorious lender Countrywide. "He's got to do the shake-his-fist-at-Wall Street thing because of his, you know, problems," says a Democratic Senate aide. "So that's why the bill is starting out kind of tough."

The aide pauses. "The question is, though, what will it end up looking like?"

He's right — that is the question. Because the way it works is that all of these great-sounding reforms get whittled down bit by bit as they move through the committee markup process, until finally there's nothing left but the exceptions. In one example, a measure that would have forced financial companies to be more accountable to shareholders by holding elections for their entire boards every year has already been watered down to preserve the current system of staggered votes. In other cases, this being the Senate, loopholes were inserted before the debate even began: The Dodd bill included the exemption for foreign-currency swaps — a gift to Wall Street that only appeared in the Frank bill during the course of hearings — from the very outset.

The White House's refusal to push for real reform stands in stark contrast to what it should be doing. It was left to Rep. Pete Kanjorski in the House and Bernie Sanders in the Senate to propose bills to break up the so-called "too big to fail" banks. Both measures would give Congress the power to dismantle those pseudomonopolies controlling almost the entire derivatives market (Goldman, Citi, Chase, Morgan Stanley and Bank of America control 95 percent of the $290 trillion over-the-counter market) and the consumer-lending market (Citi, Chase, Bank of America and Wells Fargo issue one of every two mortgages, and two of every three credit cards). On November 18th, in a move that demonstrates just how nervous Democrats are getting about the growing outrage over taxpayer giveaways, Barney Frank's committee actually passed Kanjorski's measure. "It's a beginning," Kanjorski says hopefully. "We're on our way." But even if the Senate follows suit, big banks could well survive — depending on whom the president appoints to sit on the new regulatory board mandated by the measure. An oversight body filled with executives of the type Obama has favored to date from Citi and Goldman Sachs hardly seems like a strong bet to start taking an ax to concentrated wealth. And given the new bailout provisions that provide these megafirms a market advantage over smaller banks (those Paul Volcker calls "too small to save"), the failure to break them up qualifies as a major policy decision with potentially disastrous consequences.

"They should be doing what Teddy Roosevelt did," says Sanders. "They should be busting the trusts."

That probably won't happen anytime soon. But at a minimum, Obama should start on the road back to sanity by making a long-overdue move: firing Geithner. Not only are the mop-headed weenie of a Treasury secretary's fingerprints on virtually all the gross giveaways in the new reform legislation, he's a living symbol of the Rubinite gangrene crawling up the leg of this administration. Putting Geithner against the wall and replacing him with an actual human being not recently employed by a Wall Street megabank would do a lot to prove that Obama was listening this past Election Day. And while there are some who think Geithner is about to go — "he almost has to," says one Democratic strategist — at the moment, the president is still letting Wall Street do his talking.

Morning, the National Mall, November 5th. A year to the day after Obama named Michael Froman to his transition team, his political "opposition" has descended upon the city. Republican teabaggers from all 50 states have showed up, a vast horde of frowning, pissed-off middle-aged white people with their idiot placards in hand, ready to do cultural battle. They are here to protest Obama's "socialist" health care bill — you know, the one that even a bloodsucking capitalist interest group like Big Pharma spent $150 million to get passed.

These teabaggers don't know that, however. All they know is that a big government program might end up using tax dollars to pay the medical bills of rapidly breeding Dominican immigrants. So they hate it. They're also in a groove, knowing that at the polls a few days earlier, people like themselves had a big hand in ousting several Obama-allied Democrats, including a governor of New Jersey who just happened to be the former CEO of Goldman Sachs. A sign held up by New Jersey protesters bears the warning, "If You Vote For Obamacare, We Will Corzine You."

I approach a woman named Pat Defillipis from Toms River, New Jersey, and ask her why she's here. "To protest health care," she answers. "And then amnesty. You know, immigration amnesty."

I ask her if she's aware that there's a big hearing going on in the House today, where Barney Frank's committee is marking up a bill to reform the financial regulatory system. She recognizes Frank's name, wincing, but the rest of my question leaves her staring at me like I'm an alien.

"Do you care at all about economic regulation?" I ask. "There was sort of a big economic collapse last year. Do you have any ideas about how that whole deal should be fixed?"

"We got to slow down on spending," she says. "We can't afford it."

"But what do we do about the rules governing Wall Street . . ."

She walks away. She doesn't give a fuck. People like Pat aren't aware of it, but they're the best friends Obama has. They hate him, sure, but they don't hate him for any reasons that make sense. When it comes down to it, most of them hate the president for all the usual reasons they hate "liberals" — because he uses big words, doesn't believe in hell and doesn't flip out at the sight of gay people holding hands. Additionally, of course, he's black, and wasn't born in America, and is married to a woman who secretly hates our country.

These are the kinds of voters whom Obama's gang of Wall Street advisers is counting on: idiots. People whose votes depend not on whether the party in power delivers them jobs or protects them from economic villains, but on what cultural markers the candidate flashes on TV. Finance reform has become to Obama what Iraq War coffins were to Bush: something to be tucked safely out of sight.

Around the same time that finance reform was being watered down in Congress at the behest of his Treasury secretary, Obama was making a pit stop to raise money from Wall Street. On October 20th, the president went to the Mandarin Oriental Hotel in New York and addressed some 200 financiers and business moguls, each of whom paid the maximum allowable contribution of $30,400 to the Democratic Party. But an organizer of the event, Daniel Fass, announced in advance that support for the president might be lighter than expected — bailed-out firms like JP Morgan Chase and Goldman Sachs were expected to contribute a meager $91,000 to the event — because bankers were tired of being lectured about their misdeeds.

"The investment community feels very put-upon," Fass explained. "They feel there is no reason why they shouldn't earn $1 million to $200 million a year, and they don't want to be held responsible for the global financial meltdown."

Which makes sense. Shit, who could blame the investment community for the meltdown? What kind of assholes are we to put any of this on them?

This is the kind of person who is working for the Obama administration, which makes it unsurprising that we're getting no real reform of the finance industry. There's no other way to say it: Barack Obama, a once-in-a-generation political talent whose graceful conquest of America's racial dragons en route to the White House inspired the entire world, has for some reason allowed his presidency to be hijacked by sniveling, low-rent shitheads. Instead of reining in Wall Street, Obama has allowed himself to be seduced by it, leaving even his erstwhile campaign adviser, ex-Fed chief Paul Volcker, concerned about a "moral hazard" creeping over his administration.

"The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted," Volcker told Congress in September, expressing concerns about all the regulatory loopholes in Frank's bill. "Ultimately, the possibility of further crises — even greater crises — will increase."

What's most troubling is that we don't know if Obama has changed, or if the influence of Wall Street is simply a fundamental and ineradicable element of our electoral system. What we do know is that Barack Obama pulled a bait-and-switch on us. If it were any other politician, we wouldn't be surprised. Maybe it's our fault, for thinking he was different.

Watch Matt Taibbi discuss "The Big Sellout" in a video on his blog, Taibblog.

Former Bailout Czar Signs On With Firm That Helped Run Bailout

2009-12-10T15:54:00.000-08:00

http://www.commondreams.org/print/50450

December 10, 2009 by TalkingPointsMemo
Former Bailout Czar Signs On With Firm That Helped Run Bailout
by Zachary Roth
What a difference a day makes.

On Sunday, we learned from a florid Washington Post profile that Neel Kashkari, the Treasury Department's one-time bailout czar, is now Thoreau-ing it up in the Northern California woods. (Sample line: "The moon hits his stubble, which is six days old.") But the very next day, the investment behemoth PIMCO announced that it had hired Kashkari as a managing director and the head of new investment initiatives.

But that's not the only thing cause for raised eyebrows over the news. As one good-government group frames it , Kashkari's ability to cash in on his short-lived but high-profile tenure in public service seems likely to speed up the already fast-moving revolving door between government and the financial sector. And in southern California-based PIMCO, he could hardly have picked a firm more enmeshed in the recovery effort he helped lead.

As Felix Salmon of Reuters notes , the original bailout plan Kashkari worked on was created and promoted by PIMCO. Bill Gross, the firm's energetic CEO, even offered to work on the program for free. In working on this plan, Salmon writes, Kashari "doubtless spent a great deal of time with very senior PIMCO officials who were probably flattering him daily in an attempt to bring him round to their way of thinking on the matter."

PIMCO's role in the bailout didn't end there. It was one of four firms hired by the New York Fed to manage its $1.25 trillion mortgage-backed securities purchase program. (PIMCO, like the other firms, wouldn't tell us how much it was paid for that). It was an asset manager for the New York Fed's $130 billion Commercial Paper Funding Facility. And questions have been raised about the strength of the internal firewalls PIMCO set up to separate employees managing the government's investments from those managing private investments.

To be sure, PIMCO withdrew from contention , late in the game, to manage the Treasury's Public Private Investment Program. Still, so close were PIMCO's ties to the Treasury Department and the Fed earlier this year that one financial blogger dubbed the firm "the fourth branch of government."

Both Kashkari and PIMCO are already familiar with the revolving door. Before he entered government in 2006, Kashkari was a vice president at Goldman Sachs. It was former Goldman CEO Henry Paulson who, as Treasury Secretary, in 2008 appointed Kashkari to run TARP. Goldman then got billions from the government's rescue plan -- most controversially as one of the counter-parties made whole by the AIG bailout.

As for PIMCO, in 2007, it hired Alan Greenspan as a consultant. For all of our sakes, let's hope the next few years are kinder on Kashkari's reputation than the last few have been on Greenspan's .

Madoff Victims to Work With Congress to Help Victims of Financial Crimes

2009-12-07T16:31:00.000-08:00

http://www.opednews.com/articles/Madoff-Victims-to-Work-Wit-by-Ronnie-Sue-Ambrosi-091207-7.html

December 7, 2009
Madoff Victims to Work With Congress to Help Victims of Financial Crimes
By Ronnie Sue Ambrosino

Washington, D.C. – On the eve of the one year anniversary of the Bernie Madoff scandal, a group of victims will testify before Congress this Wednesday to discuss proposals that will protect and aid the unwitting investors of financial scams. The victims will talk about their struggles in the aftermath of the historic Ponzi scheme's collapse and suggest ideas how Congress can help victims of financial frauds.

In the morning, the subcommittee will hear from Helen Davis Chaitman, a lawyer representing hundreds of Madoff victims, as well as several of the victims themselves and academic experts. In the afternoon, the Securities Exchange Commission and the Securities Investor Protection Corporation, the bodies charged with protecting and insuring investors, will also speak before Congress on the matter. Chaitman and the victims will be accessible at a short press conference and media availability immediately following the morning portion of the hearing.

While it has been almost a year since authorities discovered the Madoff scheme, thousands of investors have still not received a penny in government-mandated SIPC insurance which Wall Street is required to pay. Many victims, such as those at the hearing, are virtually penniless and live in day to day fear of lawsuits just for investing in Madoff.

####

The Madoff Coalition for Investor Protection represents hundreds of victims who had their lives destroyed by the investment scheme. The group is working with legislators to protect the rights of investors everywhere from the devastating consequences of Ponzi Schemes. The victims and counsel have been fighting for months to aid other victims in both the courts and on Capitol Hill.

The $700 billion man

2009-12-06T08:12:00.000-08:00

The humanization of someone who behaves souless...

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/04/AR2009120402016_pf.html

The $700 billion man
By Laura Blumenfeld
Washington Post Staff Writer
Sunday, December 6, 2009

NEVADA COUNTY, CALIF. -- He wears no coat though it's freezing, shines no light though it's near midnight, carries no shotgun though he's tramping on the pine-needled tracks of black bears.

He wants to be lost in these woods.

"Come on, you bums," Neel Kashkari calls to his dogs, two giant Newfoundlands. "Boys, let's go."

He is walking through the smoke of a controlled burn in the Sierra Nevadas. He is talking about the people and the life he left behind in Washington.

" . . . and it wasn't about politics, they were non-political. These people were killing themselves -- in Don's case, literally."

The moon hits his stubble, which is six days old. And the sweater he hasn't changed in three or four days. His BlackBerry -- he can't kick it -- rang once today. A year ago in D.C., it buzzed every few seconds. All night, he'd roll over to its bluish glow. His Treasury Department assistant slept with hers, powered up, on her pillow.

"It's like a dream," Kashkari says, his work boots crunching pine cones. "Sometimes I think: Was it real?"

It all began as it ended, abruptly. Kashkari was a 35-year-old business school graduate from a suburb of Akron, Ohio, who had gone to Washington in 2006 to learn how government worked. Then came the recession, and through a freakish set of circumstances, mixing pluck, cataclysm and luck, he was appointed by Treasury Secretary Hank Paulson as the federal bailout chief.

Suddenly, he was in charge of $700 billion.

Congress savaged him. Wall Street Journal editorials doubted him. His home-town buddies urged him to use the money to buy the Cleveland Browns and fire the coaches. His wife spoke to him so rarely, she described them as "dead to each other." He lost sleep, gained weight and saw a close adviser, Don Hammond, suffer a heart attack at his Treasury desk. On May 1, after serving seven months under Presidents Bush and Obama, he resigned.

Within a week, Kashkari and his wife put their belongings into "indefinite storage." They moved to a cabin near the Truckee River in Northern California. "Off the map," he told his friends. He threw away his business cards, and made a list of the things he wanted to do:

1. build shed

2. chop wood

3. lose 20 pounds

4. help with Hank's book

He called his four-step program "Washington detox."

Now, six months later, he is almost done. He is nearly better, nearly free of Washington, D.C. Tonight, Kashkari is out walking his dogs on a mountain, listening for the coyotes that sometimes shadow him. The wind washes through the treetops. It sounds like rushing water. Kashkari pivots between two thick, rough trunks. His shaved head, his broad-brush eyebrows, his blackest-brown eyes -- all turn sharply.

He opens his hands into the darkness:

"This makes $700 billion seem small."

Step one: Build shed

It was October 2008 when Hank Paulson announced that the government rescue operation, the Troubled Asset Relief Program (TARP), would be run by his aide, Neel Kashkari. The choice was met with considerable surprise. Who was Neel Kashkari? He was too young, too inexperienced and had ties to Wall Street, detractors said. To some, the appointment seemed all wrong. Critics described Paulson as a "Dr. Evil" figure who brainwashed Congress into giving him unprecedented financial authority so that Kashkari, his "Mini-Me," could distribute it to Wall Street friends.

Overnight, Kashkari became the face of the biggest, and one of the most controversial, market interventions in American history. Even he questioned their chances of success.

The Friday evening he was named, he slumped over a bowl of chips in Bethesda with a childhood friend. He held his head in hands and said: "Dude, tell me something funny."

"Man, what's going on, Neel?"

"I've been tapped to put TARP together. I gotta set up these seven teams and build this thing from scratch -- by Monday morning."

One year later, Kashkari is dressed in sap-stained jeans and a Cleveland Browns T-shirt, whistling in the lumber aisle at a Home Depot in Reno, Nev.

He is shopping for the boards to finish his shed. He stops at the pressure-treated two-by-sixes. "How many horizontal pieces do I need if the ramp is 96 inches long?"

He rubs the scruff on his chin, and takes out his BlackBerry.

In Washington, he used his BlackBerry to determine the bailout sum presented to Congress. His arithmetic: "We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five percent of that is $700 billion. A nice round number."

Looking back, he says, he is more confident about the two-by-sixes.

"Seven hundred billion was a number out of the air," Kashkari recalls, wheeling toward the hex nuts and the bolts. "It was a political calculus. I said, 'We don't know how much is enough. We need as much as we can get [from Congress]. What about a trillion?' 'No way,' Hank shook his head. I said, 'Okay, what about 700 billion?' We didn't know if it would work. We had to project confidence, hold up the world. We couldn't admit how scared we were, or how uncertain."

At the Home Depot checkout counter, Kashkari pays $157 for his lumber. He loads it onto his truck and drives into the Tahoe National Forest, climbing to 6,500 feet. The paved road turns to dirt at his cabin.

He rounds a corner and there stands the shed, in an old horse corral. He began designing it in his mind on Christmas Eve when incoming Treasury secretary Tim Geithner asked him to stay for the new administration. Kashkari didn't have anything to store in a shed but he knew, right then, that he needed to build it:

"I had to do something with my hands. It's a big amorphous unknown -- what's going to happen to our economy. And the shed is solid, measurable. I can see it, I can touch it. It's going to be around for the next 30 years. It's the opposite of amorphous."

Now his wife, Minal, is staggering down a slope pocked with snake holes, carrying 11-foot pieces of cedar trim. Kashkari grabs the nail gun.

"Hank was like: What is this thing you're building -- an outhouse, a deck?" Kashkari says, laughing.

"He probably thinks you're crazy," Minal says. "We're going on six months now. People are like: What are you doing?"

Kashkari climbs the ladder, 10 rungs up. He shoots a volley of nails, attaching the trim.

"Sweetie, get down, only one leg is hooked on the ladder."

"It's okay," Kashkari says, his voice steady, the ladder shaky.

The panting dogs, Winslow and Newsome, named for Cleveland Browns tight-ends, make the only sound.

"Oh [expletive]," he says. A large gap opens where he nails the trim to the wall. "[Expletive] it. We're going have to scrap this piece."

"Ugh, we don't have any more wood," Minal says.

Kashkari stares at the gap -- Minal calls it "the death stare." His cinder eyes can singe, and at Treasury meetings he was careful not to shoot disapproving looks. In Washington, colleagues described him as "unflappable." But now that there were no global monetary consequences to losing control, Kashkari smolders.

"Hold on," he snaps. He leans against the trim and rips off the gaping lumber, which somehow doesn't break.

"Woo-hoo!" Minal claps. "All right, let's get this last damn piece."

Twenty minutes later, in the fading light, they hug. "I didn't think we'd ever finish," Minal says.

Kashkari checks his BlackBerry, a Bloomberg alert: "U.S. says G20 Shouldn't Remove Stimulus Too Soon." Then he steps back, and considers the shed.

It looks like a small, country church. "The Anti-D.C. Sanctuary," he calls it.

Step two: Chop wood
Kashkari raises his ax.

"It felt like I got jumped."

Whack.

"Like three guys beat the crap out of me."

Whack, whack.

The massive block of sugar pine breaks, the crack bouncing off the mountain.

Kashkari is recalling his testimony before Congress, while splitting logs to feed the stove for the winter. He is down to his last two chain-sawed trees.

"Members of Congress will tell you they agree with you, and then in public they blast you. I understand their anger, but the playing at politics when so much was at stake -- "

Whack. The ax blade flies off its wooden handle.

As interim assistant secretary for financial stability, Kashkari had to defend multibillion-dollar cash injections in hearings on Capitol Hill. Constituents were losing their jobs and homes; Kashkari became the object of free-floating recession rage. He sat for five oversight hearings, whose headlines ran from "Lawmakers Slam Kashkari!" to "Congressman Calls Kashkari 'A Chump.' " In one House session, Rep. Gregory Meeks (D-N.Y.) opened with a round of criticism, and then a Republican finished him off, suggesting that Kashkari resign.

"I wasn't prepared for their hostility."

As a boy, Kashkari fell in love with Washington, watching the Iran-contra hearings.

"I was appalled when I found out," Minal teases, driving with him to buy a new ax. "You were 12 years old, what's wrong with you?"

"As a kid I thought: How glamorous," Kashkari says. "Well, it wasn't very glamorous when I was sitting there."

His flukish route from his parents' TV room to a Hill hearing room tracks back to June 2006. He was a tech banker at Goldman Sachs in San Francisco. Hank Paulson, the chief executive, was named Treasury secretary. Kashkari called Paulson, who didn't know the low-level employee, and asked -- his heart pounding -- to go along.

Five rush-altered Macy's suits, an 80 percent pay cut and 10 days later, Kashkari was sworn in as Paulson's aide. He was so nervous and so eager to prove himself that some nights he had to take a sleeping pill. He was an engineering nerd, suddenly working for a man who'd been a star offensive lineman at Dartmouth, whom he considered "the Joe Montana" of the business world. As Kashkari drove to Treasury, he coached himself, "Don't try to score a touchdown. Just -- if Paulson throws the ball, catch it."

In February 2008, that meant drafting an emergency plan in the unlikely event of an economic meltdown. Kashkari and a colleague wrote, "Break the Glass: Bank Recapitalization Plan." When the banks actually tanked later that year, the 10-page plan laid the basis for TARP. Amid the chaos, Kashkari was appointed czar.

Soon he was marking hearing dates on his calendar: "BEATING ON THE HILL."

"When I first got to Washington, I tried teamwork, consensus-building," he says. "But even before the crisis, I realized it doesn't work like that in D.C. "

At Truckee Mountain Hardware, Kashkari picks out a new ax, a heavier one with a fiberglass handle. "Pure therapy," he says, hoisting it. At this altitude, pressure builds to bursting. Minal's hand lotion oozes in her purse, the pretzel bags swell, and when Kashkari hacks a log, it explodes with pine-scented powder. The smell, he says, is "purifying."

They drive back to the cabin, where Minal reads out loud a November 2008 Gawker column about her husband:

"Financial Crisis Taking a Toll on Our Favorite [expletive] Banker: He came in looking peppy enough to bore holes in a taxpayer's forehead . . . now his eyes are dazed, plaintive even, and he's putting on classic stress-related weight under his chin. Congressmen yell at him --

"All right," Kashkari interrupts. He slips out the door. "I'm going to chop wood."

Step three: Lose 20 pounds
At the Truckee gym on Donner Pass Road, Kashkari steps onto a digital scale.

"Let's see," he says, as the black numbers pulse.

In Washington, Kashkari, about 5-foot-10, had ballooned -- "I'm a stress eater" -- to 203 pounds. His waistband cut into the folds of his stomach. His biceps felt like "bags of Jell-O."

Washingtonian magazine voted the "bailout czar . . . a person we'd most like to have over for drinks, good food and conversation." His actual lifestyle: dining at his Treasury desk on family-size Cool Ranch Doritos. Crashing at 2 a.m. on his lumpy office couch, his only companions the counter-snipers outside his window, on the White House roof. Showering in the Treasury locker room at 6 a.m., drenched in the smell of other men's sweat and toilet cleaner.

Now, after six months of dieting and 45-mile alpine bike rides, the gym scale under Kashkari's sneakers reads: 181.2.

"No dinner tonight," he grumbles.

"Are you detox'd yet?" A friend had messaged.

Not until he weighs 180.

Tonight, Kashkari is lifting weights. He starts with upper-back exercises and tells the story of Don Hammond. Overnight, Kashkari had to create 135 TARP positions. Hammond was on the 12th hole of the golf course when Kashkari called to recruit him as chief compliance officer: "Can you be here in an hour?"

Kashkari was managing a team of mostly older career bureaucrats. Hammond, 55, a jovial man with 23 years' experience at Treasury, was Kashkari's "confidence builder": "In meetings, I'd look over at his face for signs of concern. If his eyes crinkled, I'd say wait, Don -- what are you thinking?"

Thoughts tended toward the apocalyptic. During midnight negotiations with congressional leaders, Paulson doubled over with dry heaves. A government economist broke into Kashkari's office sobbing, "Oh my God! The system's collapsing!" Kashkari counseled her to focus on things they could control. (Minal: "So you offered her a bag of Doritos.")

"We were terrified the banking system would fail, but the thing that scared us even more was, what would we do the day after? How would we take over 8,000 banks?"

Kashkari suffered from an "enduring headache at the center of my brain." At night, he thrashed around -- no sleeping pill -- because he couldn't spare six hours. Minal's co-workers assumed she'd quit her engineering job because her husband had "somehow got a cut" of the $700 billion. She told them, "Hey, my husband took a pay cut for this job. I gotta keep working."

Hammond worked beside Kashkari, 18 hours a day, for 40 straight days. Then, after submitting a TARP report, he admitted to himself what he'd been denying: burning pressure in his chest.

"He was pale in the ICU. All these tubes in his nose and his arms," Kashkari says, recalling his hospital visit after Hammond's heart attack. As he speaks, Kashkari is gasping, doing lat pull-downs at the gym. "He was tilted up in bed. He asked about my upcoming House testimony. He said, 'I'll be checking my BlackBerry, if you need anything.' "

That evening, a Sunday, Kashkari convened his chiefs: "We need to divide Don's work, and keep going." The civil servants, working on stackable chairs in Treasury's basement, worked all night, he recalls: "I saw a 60-year-old man pull an all-nighter. In one of the worst times in American history, I saw the best in people coming together to put out the fire."

Later that week, when Kashkari testified before the Financial Services Committee, Hammond and his wife watched from the hospital bed. Rep. Meeks demanded to know why the secretary "has not moved to do anything" to prevent foreclosures. Other lawmakers grilled him for nearly six hours. "You can't ask him that question!" Hammond shouted at the little men on the screen. "You have to calm down," his wife said, glimpsing the heart monitor, "or we're turning off the TV."

"We were counting on each other," Kashkari recalls now at the Truckee gym. "The camaraderie." Veins knot at his temples. Sweat dots the skin between the hairs on his forearms. He does 20 reps of lower-back extensions.

"My friend almost died." Kashkari's face contorts, fighting against the weight of the machine. "But he survived, and he's okay. And I'm making sure I'm as strong or stronger, as a way of saying Washington tried to break us, but it didn't."

It's personal, this -- him vs. Washington. "It's detox of a tough period," he says later, wiping his forehead. "Through exercise like running, but exorcize is relevant, too."

The affliction, or D.C. addiction, doesn't corrode livers or taint blood. Its "toxins" lodge elsewhere, Kashkari says.

Where?

He raises an index finger and taps his skull.

Step four: Help with Hank's book
Kashkari steps off the plane at Reagan National Airport.

His bag bulges with manuscript pages from "On the Brink." It was Paulson who first brought Kashkari to D.C. in 2006, and it is Paulson who brings him back now for his first visit since he quit in May. Kashkari is helping with the final read-through of Paulson's book.

Near the taxis, Kashkari runs into Rep. Meeks of the Financial Services Committee. Last time they met, at a hearing, Meeks was the one asking questions.

"How are things going in Washington?" Kashkari now says politely. On the plane, Kashkari had sat in 12A behind Meeks's 11A, but he hunched down, unseen. Kashkari was annotating Paulson's chapter criticizing Congress.

"Barney Frank is drafting new regs for the financial system," Meeks says. "We gotta make sure this doesn't happen again."

The congressman edges away awkwardly: "Thank you for what you've done."

In the taxi, Kashkari rides past the Washington Monument and the White House. "I'm so happy not to live here," he says. "Zero longing." He doesn't see anything out the window that he misses, except maybe Chipotle.

He had disbursed more than $400 billion, invested in 540 banks, implemented a $50 billion foreclosure prevention plan. He made People magazine's "Sexiest Men Alive" issue. And he also made mistakes -- a punitive interest rate on the American International Group intervention, he says, and a clause allowing unilateral changes to the Capital Purchase Program contracts -- decisions executed quickly in the crisis and recognized belatedly by him on the road to Lake Tahoe, while biking up a 9 percent grade, his thoughts grinding round.

The next morning of his D.C. visit, he knocks on Paulson's front door.

"Neel," Paulson says warmly. "You're a different man."

"I lost 18 of the 20 pounds."

"Almost there," Paulson smiles. "I remember when you were here in April, and you were fat."

"And unhappy."

For the next five hours they edit "On the Brink." In the book, Paulson describes Kashkari as "talented and self-confident." Through Paulson's narrative, Kashkari, too, hopes to reclaim his story, to rebut the Facebook page titled "Neel Kashkari Is a Traitor" and the bloggers who called him "Cash-n-Carry." He tells Paulson about a job offer he's gotten in financial services and that he feels ready to start work before the end of the year. They reminisce about late nights together -- two dogged, bald, former Goldman bankers -- the older college football hero offering the younger fan a long-sought nod.

Later, he meets a friend from the Federal Reserve for lunch. He'd spent every weekend working with him when the economy was in free fall.

"That's the thing," Kashkari blurts across the table. "I started praying when I came to Treasury. At Goldman, I didn't pray. Not once. 'Cause I just didn't care. At Treasury, there were so many times."

His friend is silent.

"That's really personal," Kashkari says about his Treasury prayers, his eyes stinging from embarrassment. He says he'd like to take it back.

There rests the center of Kashkari's tension. He loathes this city. Yet his work was meaningful. It penetrated him so deeply that he learned to pray: "God, we need you." "Help Don make it through." "God, help me do my best, so I can catch the ball."

In Washington, it mattered -- and that, perhaps, is all that matters.

Two weeks later, Kashkari is back in the Tahoe forest with Minal. They are talking about the chipmunks nesting in their dryer vent, and the two-mile drive to their garbage cans. They can see shooting stars every night, but they can't get the Wall Street Journal home delivery.

Kashkari wonders out loud if they might move back to D.C., someday.

"You're crazy," Minal says.

"In a long time, in 10 years. Or 20." He looks at his wife sideways. "Because there's nowhere else you can have such a large impact -- for better and for worse."

Minal takes a deep breath. An addict, she understands, is never cured, but always recovering. "Not before 10 years." She waves a finger at him. "No reneging!"

That night, Kashkari sleeps for 9 1/2 hours. He dreams he's back at Treasury. The Federal Reserve chairman has come to hear Kashkari's important report. A meeting has been called, and everyone's waiting. But Kashkari can't find his report. He tears up his desk.

In the morning, Kashkari's sheets lie jumbled. He sits up, in his Cleveland Browns T-shirt, a TARP headache crawling across his brain. He thinks, "Rid the toxin." He makes a list: Go to gym twice today. Attach handles to doors of the shed.

The shed!

Kashkari pads over to the cabin window and looks down at the old horse corral. In the pine-filtered light, his anxiety dream dissipates. He checks, and his shed is still there.

‘Greed Is Still Good’ On Wall Street

2009-12-04T14:50:00.000-08:00

http://newsjunkiepost.com/2009/07/15/greed-is-still-good-on-wall-street/

‘Greed Is Still Good’ On Wall Street
By Gilbert Mercier
Jul 15, 2009

Yesterday, Goldman Sachs posted a record profit ($3.3 Billion) for the last quarter. Most of us are still struggling with the most severe global economic crisis since the Great Depression, and are wondering how it is even possible. Americans and Europeans are still losing their jobs at record speed, the real estate market is still declining, yet financial institutions such as Goldman Sachs are thriving.

Goldman Sachs is not alone. For the rest of the banking sector’s major players on Wall Street and in London it is even better than “business as usual,” they are hiring. their profits are soaring and of course they will pay their top executives outrageous bonuses.

Last week, The Wall Street Journal reported that even the investment division of Bank of America, which includes the once critically troubled Merrill Lynch, is expected to post a profit this year.

In the UK, at the government controlled Royal Bank of Scotland, profits are projected as well. The CEO running the bank since November 2008 is reported to get a $16 Million a year pay compensation.

Apparently, we did not learn anything at all from the financial crisis. Banks and other financial institutions are back to their pre-crisis mentality with a vengeance. In the US, with the TARP public money, billions of dollars were injected into private institutions such as Goldman Sachs. It seems that they made good use of the public funding for their own financial gains.

A unique opportunity to change the world economic system was squandered. The very same financial structures & institutions are still calling all the shots despite the fact that they created the mess in the first place.

The financial “Masters of the Universe” are back (they never left) with a vengeance and have exactly the same “philosophy” then before, that is: ‘Greed is good’.

Canopy Financial faces SEC fraud charges

2009-12-04T13:06:00.000-08:00

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/12/03/BUBH1AU07T.DTL&type=printable

Canopy Financial faces SEC fraud charges
Chronicle Staff Report
Thursday, December 3, 2009

(12-02) 15:18 PST -- The Securities and Exchange Commission said Wednesday that it has filed fraud charges against Canopy Financial Inc. and has frozen the assets of its co-founder, who allegedly provided investors with forged financial statements to lure them into a $75 million investment scheme.

Canopy, which provides a platform for administering and managing health savings and flexible spending accounts, is headquartered in Chicago and has offices in San Francisco and New Jersey. It filed for Chapter 11 bankruptcy in Illinois last week.

The SEC alleges that Canopy and Jeremy Blackburn, its former president and chief operating officer, solicited investors for a private placement of preferred shares. They allegedly provided investors, including private equity firm Spectrum Equity Investors, with a falsified audit report purportedly from accounting firm KPMG as well as financial statements with false and misleading information.

In July and August 2009, Spectrum and two others invested about $75 million in Canopy.

Blackburn misappropriated at least $1.7 million from the offering into his personal bank accounts, the SEC says.

The alleged fraud came to light when KPMG discovered that Canopy had been claiming that its financial statements for 2007 and 2008 were audited by KPMG. In fact, KPMG had never been retained by Canopy to audit its financial statements, the SEC says.

KPMG issued a cease-and-desist letter to Canopy demanding that it stop the unauthorized use of KPMG's na

Madoff Memorabilia Makes Millions; But What About Charitable Donations?

2009-12-04T07:41:00.000-08:00

http://newsjunkiepost.com/2009/11/18/madoff-memorabilia-makes-millions-will-go-to-victims-but-what-about-others-in-need/

Madoff Memorabilia Makes Millions; But What About Charitable Donations?
By Amy Beth Arkawy
NEWS JUNKIE POST
Nov 18, 2009

It’s tough enough being a New York Mets fan these days; so when I met a man who wanted to own a Mets jacket with Bernie Madoff’s name emblazoned on the back I couldn’t resist a friendly impromptu interrogation. Why would anyone want a piece of such notorious memorabilia? And pay a pretty penny, too.

The jacket–along with a slew of other Madoff “collectibles’ went on the auction block in New York last Saturday. Among the other goodies were two pairs of diamond earrings once owned by Bernie’s wife Ruth. each was projected to fetch somewhere in the neighborhood of $21,500. Both sold for $70,000 each. In fact, thanks to spirited bidders, all the items went for much more than expected, pulling in a million dollar bounty. And another million plus was pulled in Tuesday in Florida with the auction of three Madoff boats and a 1999 Mercedes once driven by Ruth.

Oh, the Mets jacket, slated to garner somewhere between $400-700, pulled in a staggering $14, 500. And that was a little too steep for Ted, an-ex Wall Street warrior turned Internet entrepreneur from Larchmont, New York. “I was hoping to grab it for under a thousand. But I was willing to go as high as, maybe, two grand,” he said glumly staring down at his 1/2 soy, 1/2 caff Venti latte at Starbucks in Rye Monday. “$14,000 seems a little over the top. I mean you gotta draw the line somewhere.”
Yeah. Only I’d draw my line at zero. Okay, maybe I’d go as high as $1.98; but that’s only as homage to the great Rip Taylor and his kitschy ’70’s game show, “The 1.98 Beauty Contest.”

But back to Ted and his deep pockets filled with disposable loose change. He went on to tell me he wanted the jacket because he’s a big Mets fan ( as am I) and we just endured one of the worst seasons in franchise history. “And Madoff perpetrated the worst Ponzi scheme in history. There seems to be, I don’t know, some sort of symmetry or poetry to owning that jacket,” he said. And besides, Ted knows a few folks who were, “stung big time,” by the scoundrel, who’s doing 150 years in a federal prison in North Carolina.

That’s right, there is a charitable lining behind selling off the spoils of Bernie’s greedy grab. Most of the proceeds will go to his victimized investors, many of whom were financially wiped out.

I asked Ted what he’d do with the $1,000-2,000 earmarked for Madoff merchandise. Without prodding, he offered the answer I was hoping for. “Probably give it to charity. There are still lots of people really hurting out there.”

Let’s hope there are others like Ted, willing, eager even to share their abundance this holiday season. Unfortunately, charities across the country ate bracing for a lean year. A recent Harris survey found only 38 percent planning charitable donations, down from 49 percent last year. The good news is 74 percent say they will dip into their coffers once again as their own economic straights improve.

Unfortunately, the sputtering economy has caused more people–the most since 1995–to face hunger in America. Forty nine million Americans–1 in 6–went hungry or had insufficient food in 2008. The report, issued yesterday by the U.S. Department of Agriculture, found 17 million people went hungry or did not eat regularly for at least a few days each month over seven or eight months last year. President Obama said his administration will boost benefits like food stamps and expand eligibility for school breakfast and lunch programs.

Feeding America ( www.feedingamerica.org) the country’s largest hunger-relief organization reports a serious strain on its 205 food banks across the nation. Those states hardest hit by the recession including California, Ohio, Nevada, Florida and Michigan have seen 50 percent increases in people turning to them for help. Donations are up 20 percent, but it’s not enough to keep pace with the growing demand.

So if you can share a little or a lot–please give to worthy charities of your choice. Every little bit counts. And who knows? Maybe the 2009 charitable bounty will follow the Madoff auctions and exceed expectations. That would be a fitting legacy to the unabashed greed that got us into the economic quagmire from which we have yet to emerge.

How Ponzi Poppa Scott Rothstein Spent His Money

2009-12-03T10:12:00.000-08:00

http://tpmmuckraker.talkingpointsmemo.com/2009/12/how_scott_rothstein_spent_his_money.php

An Unbelievable Spree: How Scott Rothstein Spent His Money
Justin Elliott | December 3, 2009, 11:20AM

In the years spent living off the profits of his alleged $1 billion Ponzi scheme, Florida attorney Scott Rothstein went on a Mike Tysonesque buying spree that's likely to make even the denizens of money-drenched Fort Lauderdale blush.

We already knew about the $52,000 birthday cake for Gov. Charlie Crist, and the special performance of Life in the Fast Lane for Rothstein's wife at an Eagles concert, but court papers filed earlier this week show the disgraced attorney also indulged his taste for gaudy jewelry, luxury automobiles, and real estate, even buying a 10% stake in the Versace Mansion in Miami Beach.

As stunning as the sheer amount of money involved -- the Feds are seeking forfeiture of $1.2 billion in money and property -- is the rate at which Rothstein spent. His net worth went from around $160,000 in 2003 to tens of millions just six years later, according to the Miami Herald. Some of the money was spread around to politicians and local charities.

He had several yachts and a particularly impressive collection of cars, including a 2009 white Bentley convertible, a '1967 red Corvette convertible, and a 2010 white Lamborghini.

The document laying out charges against Rothstein also lists real estate including: the stake in the Versace Mansion, many properties around Florida, a condo in a 58th Street skyscraper in Manhattan, and a vacation home in Rhode Island.

A Warren S87 yacht, the kind owned by Scott Rothstein. (warrenyachts.com)
He had equity interests in dozens of corporate entities that fit his high-flying lifestyle like VGeorgia (The World's Elite Vodka) and Renato Watches. And he stowed away many millions of dollars in TD Bank and Gibraltar Bank accounts, as well as at least $3 million in Morocco.

Topping it all off is 304 pieces of jewelry, a guitar collection, and 16 DuPont lighters, accessories for his cigar habit.

Here's a section from the court papers listing items to be forfeited:

4. Upon conviction of the offense of Conspiracy to Commit Mail Fraud and Wire Fraudand to Commit Wire Fraud as set forth in Counts 3, 4, and 5 of the Information, the defendant,SCOTT W. ROTHSTEIN, shall forfeit to the United States, all property, real or personal, whichconstitutesor is derived from proceeds traceable to the offense.5. The property subject to forfeiture, pursuant to Title 18,United States Code, Sections1963, 982(a)(1) and 981(a)(1)(C), includes but is not limited to:
...

1990 Red Ferrari F40 Coupe

2009 White Bentley Convertible

2008 Yellow McLaren Mercedes Benz SLR

2007 Black Limousine Ford Expedition

2009 Red Ferrari 430 Spider

2007 Silver Rolls Royce Convertible,

2006 Silver Hummer H1

2008 Cadillac Escalade

1967 Red Convertible Corvette

2009 Black Bugatti Veyron EB

2008 Blue Rolls Royce Drophead Convertible

2007 '87 Warren

'33 Aquariva

2009 11' Yamaha Jet Ski

2009 11' Yamaha VS

2009 11' Yamaha VS

1999 55' Sea Ray 540 Sundancer

2009 Yamaha Jet Ski

2010 White Lamborghini Ip-670sv

304 pieces of jewelry, watches, necklaces and earrings

3 pieces sports memorabilia

16 DuPont Lighters

$271,160 in United States currency from Rothstein's home

$1,500 in United States currency from Rothstein's office

$80,000 in American Express Gift Cards to the attention of Scott Rothstein,

5 additional watches

Guitar collection of Scott W. Rothstein, valued between $10,000 and $20,000

Must Watch! Story of Cap and Trade Science Scam & Derivative Scam

2009-12-01T14:27:00.001-08:00

http://storyofstuff.com/capandtrade/

‘Wall Street’s excesses caused more deaths among children than the tsunami four years ago'

2009-12-01T12:33:00.001-08:00

http://www.niemanwatchdog.org/index.cfm?fuseaction=background.view&backgroundid=00420

‘Wall Street’s excesses caused more deaths among children than the tsunami four years ago'
COMMENTARY | November 24, 2009
By Richard Parker

This is the text of the Kelman Seminar Lecture by Richard Parker at the Weatherhead Center for International Affairs at Harvard Nov. 10, co-sponsored with the Shorenstein Center, the Nieman Foundation and the Program on Negotiation at Harvard Law School.

“Attitude and action are linked in a continuing reciprocal process, each generating the other in an endless chain.”
—Herbert C. Kelman

The Kelman Seminars honor Herbert Kelman, Cabot Prof of Social Ethics Emeritus, and the singularly eminent Harvard psychologist. Kelman’s work on reconciliation has done much to advance our understanding of the underlying psychological processes determining both conflict and the opportunity for reconciliation.

Of perhaps even greater importance, he has pioneered applied invaluable practical means for achieving reconciliation among conflicting parties. In this Prof. Kelman represents a model for us all in the social sciences on how to use scientific research in the solution of some of humankind’s most daunting problems.

Much of his work has focused on inter-national conflict, the underlying personal and group psychological bases for national and ethnic collective identity, and the role of reconciliation in altering the very coordinates of both national and ethnic identity as part of the process for achieving reconciliation. Given that body of work, its enormous importance, and in particular Prof. Kelman’s invaluable contributions in recent years to the hard and often frustrating work of peace and reconciliation in the Middle East, one might reasonably ask a simple question:

Dr. Parker, who invited you here today? It is, I must say, a fair question.

I am not a specialist in reconciliation, not a social psychologist, not even a psychologist. Instead I am an economist, a card-carrying member of a profession that has spent the past century running away from psychology and toward physics, a profession that has long avowed an almost irrational belief in the rational nature of human choice and human motivation, a profession that disdains any idea of reconciliation save the role of price to reconcile supply and demand.

Yet there is precedent here that my presence is not entirely in error. In 2000, Daniel Kahneman, the distinguished Princeton psychologist, was awarded the Nobel Prize for Economics. His long-time research partner Amos Tversky would almost certainly have shared the prize, but Tversky by then was dead, and the Nobel’s rules allow its award only to living recipients.

Kahneman’s and Tversky’s work lies at the heart of a new field in my discipline called “behavioral economics”, which has rapidly become one of the hottest interests among a younger generation of economists—even as it has provoked widespread unease among many of the profession’s elders. The reason for excitement among the young and dis-ease among the elders of my tribe is simple: “behavioral economics” rejects one of the profession’s central tenets, that human beings are rational maximizers of their self-interest.

The goal of my Kelman Seminar lecture today is to explore with you some of the challenges that “behavioral economics” and its cousin “behavioral finance” are raising, specifically by looking at the current global financial crisis. I’ve chosen the global financial crisis, moreover, not simply as a heuristic opportunity to delve into this new paradigm in economics. I want to raise for you what amounts to a much larger, indeed for me, a daunting question: whether or not global civilization has reached a point at which the idea of “reconciliation” as Prof. Kelman and others have developed it requires new application to economics theory and real-world economic relations.
***************

As I understand reconciliation and its practitioners, to date most of their quite admirable work has focused on the consequences of the physical and psychological destruction caused by the hostility of large groups often within a single conflicted society (such as Rwanda or Northern Ireland), or to the aftermath of state-based oppression (as in post-communist Eastern Europe) or of more egregious state-based violence, especially when directed toward a large identifiable racial, ethnic, or political groups governed by the state (such as South Africa, Argentina, and East Timor).

My question is not whether such work is useful, indeed necessary—indeed that seems to me unchallengeable. Mine rather is a question about the extension of such work—whether the globalization of economic relations—the modern-day reconstitution and integration of societies as markets—has brought us to a new era in which we need to enlarge the scope of reconciliation’s work beyond the classic horrors of civil war, of political torture, and systemic political oppression to the consequences of economic relations, economic systems, and economic theories.
************

The global financial crisis is in that sense an immediate and familiar arena in which to ask that question—but not the only one. As both anthropogenic climate change and species destruction accelerates, I think it is fair to say that almost every aspect of modern globalization raises profound issues for those doing and theorizing about reconciliation. The twentieth century was, by all assessments, the most violent in human history in terms of the total dead caused by wars and other mass acts of state-organized violence, accounting for some 175-200 million deaths.

One scholar, Matthew White, has summarized the principal causes as follows:
Genocide and Tyranny: 83,000,000
Military Deaths in War: 42,000,000
Civilian Deaths in War: 19,000,000
Man-made Famine: 44,000,000
TOTAL: 188,000,000

Now if one estimates the total human deaths in the 20th century at four billion (a number subject to serious estimation error, given lack of systematic mortality records, but probably order-of-magnitude correct), that means that roughly five percent of all human deaths in the 20th century were induced by state-organized means, what one scholar has helpfully classified as “the democides” of the past century. If we are to avoid the cynicism alleged of Josef Stalin, who is said to have remarked that “one death is a tragedy, but a million a statistic” we need not only to reflect on the sheer scope of those 200 million dead but their nature, and their relevance to the work of reconciliation going forward.

Given that much of reconciliation’s work has been concentrated on post-conflict societies, four questions stand out for me:

Are we likely to see the sort of massive concentrated deaths caused by World War II repeated in this century, the kind that resulted in Nuremberg Trials as primogenitor form of systematic justice-seeking by means other than violent revenge?
Are the wars of the 21st century much likelier to be smaller in terms of casualties, but durable or even expanding in terms of number of wars, and hence total casualties? If so, have we in fact systematically been able to distinguish even analytically among causations that are ethnic, religious, political, and economic, and if possible analytically, are the distinctions of some significant use in shaping efforts at reconciliation?

Pertinent to my concerns about economics and reconciliation, what should we conclude from the list of 20th century democides which shows that a quarter of those deaths, nearly 50 million, were caused by famine—a figure equal to the number of military war deaths and twice the number of civilian war deaths?

Are we yet able to understand that an entire category of deaths not measured above—the category development economists now refer to as “preventable death, particularly from disease and malnutrition”—may indeed come to represent a greater challenge that the sum of likely wars and civil wars combined?

One recent estimate of such preventable mortality—measured as the gap between actual population size today and population size assuming globalized standards of modestly modern but not cutting edge nutrition, public health, and collective violence levels common among today’s OECD countries—estimates that more than 1.2 billion people, the great majority of them children under the age of five, have died needlessly by these standards since 1950 alone, a figure SIX TIMES the 200 million “democides” estimated above.

Why am I tracing out these differences? Because if in fact the concern of reconciliation is to reduce conflict, promote healing post-conflict, and generally create conditions for productive human life globally, these data suggest that the deep challenge of our age lies in grappling with systemic economic deprivation measured through means such as the UN’s Human Development Index.
***********
Why is this so, and why is economics relevant?

Let’s pause for a moment here and look back on those 50 million famine-induced deaths. What’s so singularly striking to me, first, is that the majority of them were caused by human beliefs about the proper economic organization of society rather than failures of nature. That is, by far the largest single cause of famine-induced deaths in the past century was in effect faith in scientific rationality: Stalin’s forced collectivization of agriculture in the 1930s and Mao’s in the 1950s. Put in none too bald terms, nearly 40 million people died in the 20th century as the result of an experiment in the economic organization of human societies meant to improve well-being.

When one looks at other large modern famines—which account for the bulk of the remaining famine-related deaths, what’s no less striking is the conclusion of Amartya Sen (in “Poverty and Famines: an Essay on Entitlement and Deprivation”) —that the vast majority of those dead fell victim not to an absolute shortage of food but to human-induced scarcity caused by hoarding and other forms of social misallocation in time of crisis. Not to put too fine a point on it, but in essence a second experiment in the economic organization carried out by those most likely to deplore Stalin’s and Mao’s handiwork.

These two factors—both of them ideologically-driven economic experimentation and allocational failure based on the exercise of unequal political and economic power—are, it seems to me, at the very heart of why I am so concerned about the need to advance the work of reconciliation beyond the classic boundaries it has to date assumed.
And this brings me to today’s global financial crisis in the first of several ways.

Perhaps the most overlooked feature of the crisis, at least here in the US, are the ways in which we have failed to recognize how it is actually increasing hunger across the planet as I speak.

According to the Food and Agriculture Organization, the number of human beings living in outright hunger has soared past 1 billion—one in six of the world’s inhabitants, more than the combined population of all the developed nations of the world. That explosion is because 75-100 million have been added to their ranks in each of the last two years, and with similar growth expected ahead for three to five more years at least. The FAO is excoriating in linking this massive increase in malnutrition to the global financial crisis, including the role of commodity price speculation in foods, fuels, and fertilizers, as well as the collapse in both private-market credit and public-sector aid to the most vulnerable. (See also the World Bank’s analysis here.)

UNICEF has meanwhile estimated that global infant mortality has soared by 300,000 a year and will not begin to fall back to pre-financial crisis levels before 2014. In other words, Wall Street’s financial excesses caused more deaths among children than all those killed by the tsunami that struck Southeast Asia four years ago. Over the estimated cycle, it moreover will produce twice the total estimated death count for Rwanda, Darfur, and the Balkans combined.

And the ILO calculates that by the end of 2009, given the global slowdown of output and trade, 45 percent of all the world’s workers will be earning less than $2 A DAY. (See also IOM’s assessment of the impact on global migration and worker remittances here.)

I cite these data to underscore the scope of the impact of our global financial crisis on those whom I think of as the world’s invisibles—invisible that is to those of us with eyes to see. Here in America the tragic and malign consequences of Wall Street’s meltdown are by no means as horrific, but they are no less shocking.

By narrow measure, US employment is now 10 percent, and by better measures including those working part-time who want fulltime work, those who’ve given up looking for work, etc.—the figure is growing perilously close to 18 percent. The average length of unemployment is now twice what it was a decade ago, and there are 6 jobseekers for every job currently on offer.

Measured from the start of the current collapse, ten million American families will have lost their homes by the end of this calendar year. One in five homeowners owe more on their mortgages than they have equity in their homes.
Fifteen percent of Americans live in poverty, but forty percent will spend at least a year or more in poverty in the next ten years—and two-thirds of Americans will spend a year or more in poverty before the end of their working lives.

(On poverty per decade, see Michael Zweig, “What's Class Got to do With It, American Society in the Twenty-first Century.” On poverty rate over lifetime, see Jacob Hacker, “The great risk shift: The new insecurity and the decline of the American dream.”)

Over the past thirty years—the three decades that have defined the slow but steady deregulation of Wall Street, and the increased globalization of the American economy, the share of US income received by the top 1 percent has doubled from 10 percent to 20 percent. This represents the highest level of income inequality since the US began recording income data in the early 20th century, and now demarcates the US as the single most economically inegalitarian country among the developed nations of the world.
***********

All this—the compelling evidence of millions of needless deaths particularly among the youngest and most vulnerable, the measured increase of malnutrition by over 100 million in just two years, the troubling problems across the industrialized work including the US—all point, in the context of conflict resolution and reconciliation to what I think is a profound question:

In seeking to address and remedy sources of conflict and suffering through principled acts of reconciliation particularly in post-conflict societies, have the theorists and practitioners of reconciliation somehow misidentified a principal—if not the principal—identifiable cause of such conflict, i.e., unresolved issues of economic wellbeing, power, and identity, both individual and collective, arising from the very nature of our current economic relations globally?

In short, has the global financial crisis of the past two years—its effects visible far beyond the esoterics of collateralized debt obligations, credit default swaps, and the oblique questions of what new regulatory conditions (and whether they ought to be market-generated in the manner of the Basel II accords or resemble something more akin to the era of Glass-Steagall)—exposed a level of consistent global harm sufficient for us to redefine the work and scope of reconciliation itself.

It strikes me that we cannot here begin to define precisely what the shape of a new and better global financial architecture can look like without those of you most committed to the work of reconciliation asking the following four fundamental questions:

Will the rapid advance of globalized finance and globalized markets, with the systemic integration of economies from the most advanced to the most primitive, give reason to reorient the perceived primary challenge of reconciliation away from the geographically local nature of wars and civil wars and their consequences?

Has this process of market globalization—of highly mobile capital and means of production set against the fixed immobility of states and mostly fixed mobility of citizens—in some way marginalized the state, and the power of the state, that requires reconciliation workers to think increasingly in post-national terms?

Is the corporation—in particular the multinational private corporation as well as the growing role of state-owned and state-controlled corporation the fulcrum for conflict resolution in ways that only states were a century ago? That is, have we reached a century in which the control of the behavior of large corporations is as seminal to human wellbeing as control of state actors was in the 20th century?
In what sense does reconciliation work increasingly require a morally-framed vision of universal citizenship with universal rights and duties incumbent on both human beings and corporate legal entities alike as the necessary teleological goal toward which we must aim?

***********
I wish I could give an easy set of answers to those questions, but I cannot. What I hope I have done today is encourage those of you who work with far greater skill, knowledge, and experience in the field of reconciliation to use these reflections to enlarge and orient the ambit of your work, scholarly and applied.

Prof. Kellman long ago insisted that we must learn to distinguish ontological needs from values from interests in order to seek negotiable goals in the work of reconciliation. It would seem to me that something like this work remains to be done across the entire range of economic questions that encompass not only our current economic crisis, but the roles and identities we draw from economic life itself. Perhaps the greatest challenge to liberal democracy in the 21st century lies in using the skills of reconciliation to re-appropriate from the economic not simply the means but the purpose of being human.

Richard Parker is Lecturer in Public Policy and Senior Fellow of the Shorenstein Center at Harvard Kennedy University.

The Attack of the Naked Shorts

2009-11-30T08:46:00.000-08:00

http://www.thedailycrock.com/?p=1112

the contrarian – The Attack of the Naked Shorts
NOV 29 2009
by Dave McGill

Well-run corporations know at least one thing very well. They don’t put people associated with the creation of a problem in charge of solving it. They know that if they do, the appointees will become immersed in covering their backsides or will perpetuate the problems, or both.

Several of President Obama’s appointments, including Timothy Geithner as secretary of the Treasury, are but the latest confirmation of the problems that can be encountered by violating this golden rule. Geithner, of course, was chairman of the Federal Reserve Bank of New York during the period which found the New York-based investment banking houses at the center of the financial orgy that tumbled the economy into a recession that is now about to enter its third year.

President Obama’s decision to put the foxes in the henhouse by appointing investment bankers to run the banking industry and to oversee the bailout of other investment bankers will not go down in history as his savviest move. Nor will it be seen as being consistent with his campaign promises.

At the same time, however, the mainstream media has seemed to bend over backwards to give the president a pass with respect to these appointments. In the process, the media has conveniently understated the degree of mayhem that was perpetrated on an unsuspecting global economy in the years leading up to the current Great Recession. Evidently it chose to believe that the intricacies of such schemes as the development of derivatives and credit default swaps was just too complicated for the public to digest. So what if people who were instrumental in deregulating these bastardized vehicles and freeing them from their usual reserve requirements were still running the store. You wouldn’t know it from the media.

Apparently, for the same reason, we have heard little of the fraudulent, “investment grade” credit ratings handed out by the rating agencies on bundles of real estate investments that should have been rated “diseased.” Nor is an unsuspecting public aware that as the roof was falling in, the financial orgy of greed was reaching peaks previously undreamt of.

Much of this final orgy involved short sales, investment vehicles by which one can bet that the price of a stock will fall. They are perfectly legal and involve actual shares. However, an exceptionally unusual trade of this type was made back on March 11 of 2008, three months into the recession.

On that day, according to investigative reporter Matt Taibbi, a mystery investor went short on the stock of Bear Stearns to the tune of $1.7 million. Specifically, this individual bet that the stock would lose at least half its value in nine days. Otherwise, his or her investment would be completely lost.

By Saint Patrick‘s Day, March 17, the stock had plummeted from its previous price of $62.97 to $2.00 per share. The investor had thus harvested a profit of approximately $270 million in just six days. The details of this suspicious transaction, although not generally known, have been communicated to members of Congress, but the investor involved has never been identified.

However, Taibbi has pointed out the curious circumstances surrounding a meeting that was held on the very same day the investment was made. The get-together involved Geithner and Fed Chairman Bernanke and representatives of every major investment banking house except Bear Stearns. Records reveal that the meeting took place and who the attendees were but, because of the secrecy involving the activities of the Fed, the subjects of discussion are unknown. All that is known is that, at some time after the meeting, someone made that crazy bet.

What is also known, is that the bet was peanuts compared to another feast that was taking place simultaneously at the trough of greed. The ultimate ending for Bear Stearns and, six months later, for Lehman Brothers, was helped, it turns out, by what might well have been called the attack of the naked shorts.

A naked short sale is similar to a regular short sale except that the shares involved don’t exist. That’s right… THEY DO NOT EXIST! It is nearly beyond belief that a situation such as this could have been allowed to develop, but it was, and it did.

Technically, naked shorts are illegal. However, as a result of the powerful influence of those profiting from them, penalties have not been defined nor has oversight been established.

Records for every company reveal not only the number of shares outstanding but also the number of shares that have not yet been delivered. These are the shares that “don’t exist.” Undoubtedly they were initially considered to be fairly inconsequential and simply represented the normal delay between acquisition and possession. However, it didn’t take long for the profiteers to realize that large volumes of undelivered shares in the arena of short sales could have a crippling effect on the price of a weak company’s stock, generating huge profits for the attackers.

Originally, the strategy was applied only to smaller companies but, greed being what it is, it wasn’t long before the targets got bigger and bigger and eventually involved the two giant investment banking companies.

Matt Taibbi’s research showed that, in the case of Lehman Brothers, for example, the total number of undelivered shares rose from 705,000 on June 27, 2008 to 32,877,794 on September 15. At that time, the price of the stock had dropped to 21 cents per share and the company declared bankruptcy. The numbers suggest that many people illegally reaped huge fortunes on the situation.

This is but a small window into the avalanche of illicit activities that were allowed and profited from in the financial sector and that have thrust us into the mess we are in today. Many individuals undoubtedly continue to abuse the situation in a user-friendly environment that seems to grant free passes to anyone on the inside.

Matt Taibbi’s very detailed and eye-popping articles, can be found on the internet. Click here for his broadside against Goldman Sachs. Additional writings can be found on his blog, “Tiabblog.”

Needless to say, there is a broad effort to discredit him, but his articles are scholarly and his information seems to be well supported.

Goldman Sachs's Black Magic

2009-11-29T17:25:00.000-08:00

10-16-09

Visit msnbc.com for Breaking News, World News, and News about the Economy

Still Doing God’s Work on Wall Street

2009-11-25T16:20:00.001-08:00

http://www.truthdig.com/report/item/still_doing_gods_work_on_wall_street_20091125/

November 25, 2009 by TruthDig.com
Still Doing God’s Work on Wall Street
by Robert Scheer

Jail, anyone? Perhaps that's too harsh, and at any rate premature, but is anyone ever going to be held accountable for the behind-the-scenes sweetheart deals that passed tens of billions of taxpayer dollars through the AIG shell game to the very banks that caused the financial meltdown? Or for the many other acts of double-dealing that left one out of three American homeowners owing much more than their houses were worth while the folks who swindled them were rewarded with hundreds of billions in public money?

Undoubtedly not, since the same folks who are most culpable wrote the laws that made this, and the other scams at the heart of the banking collapse, perfectly legal. And guess what? They're back at work in the government, writing the new laws that will, they claim, prevent us from being had once again. As a telling example of that process at work, check the official response of the Department of Treasury to the devastating report by the special inspector general for the Troubled Asset Relief Program (TARP), Neil M. Barofsky, titled "Factors Affecting Efforts to Limit Payments to AIG Counterparties." The main factor was that Timothy Geithner followed the lead of Goldman Sachs CEO Lloyd "I'm Doing God's Work" Blankfein in crowding the lifeboats with bankers.

Geithner, now treasury secretary, was previously the president of the Federal Reserve Bank of New York (FRBNY), where he negotiated the deal to pay Goldman Sachs and the other top banks in full to cover their bad bets on securitized mortgages. Barofsky's report concluded that Geithner's scheme represented a "backdoor bailout" for the financial hustlers at the center of the market fiasco. Noting that Geithner denies that was his intention, the report states, "Irrespective of their stated intent, however, there is no question that the effect of FRBNY's decisions-indeed, the very design of the federal assistance to AIG-was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG's counterparties."

Not surprisingly, the Treasury Department that Geithner now heads defended his actions in not forcing "haircuts" on the full dollar-for-dollar payoff by AIG to the banks while he was at the New York Fed: "The government could not unilaterally impose haircuts on creditors, and it would not have been appropriate for the government to pressure counterparties to accept haircuts by threatening to retaliate in some way through its regulatory power."

Nonsense, argues Eliot Spitzer, who as New York attorney general was way ahead of the curve in challenging Wall Street arrogance. Writing in Slate on Monday, Spitzer points out: "Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme."

The Ponzi scheme was based on the collateralized debt obligations (CDOs) in which the bankers traded and which AIG had insured with the credit default swaps (CDSs) that they sold but failed to back with adequate funding. Now Geithner's Treasury concedes that AIG "should never have been allowed to escape tough, consolidated supervision." But none of AIG's scams were regulated, nor were any of the others at the center of the larger financial debacle, because of laws pushed through Congress by Geithner's boss, Lawrence Summers, when they both were in the Clinton administration. Specifically, they prevented regulation of those opaque CDOs and CDSs that would come to derail the world's economy.

As the inspector general's report stated: "In 2000, the [Clinton administration-backed] Commodity Futures Modernization Act (CFMA) ... barred the regulation of credit default swaps and other derivatives." Why did the financial geniuses of the Clinton administration seek to prevent that obviously needed regulation? Because the Clintonistas believed the Wall Street guys knew what they were doing and that what was good for them was good for us lesser folk. As Summers, who is the top economic adviser in the Obama White House, put it in congressional testimony back then: "The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies."

Sounds nonsensical today: The inspector general's report notes that AIG, because of the deregulatory law that Summers and Geithner pushed through, was "able to sell swaps on $72 billion worth of CDOs to counterparties without holding reserves that a regulated insurance company would be required to maintain." But why, then, is Summers once again running the show with Geithner when both have made careers of exhibiting total contempt for the public interest? Because there is no accountability for the high rollers of finance, no matter who happens to be president.

© 2009 TruthDig.com

Wall Street tax must be international: Pelosi

2009-11-24T14:05:00.001-08:00

http://www.reuters.com/article/newsOne/idUSTRE5AI3ZV20091119

Wall Street tax must be international: Pelosi
Thu Nov 19, 2009 6:02pm EST
By Andy Sullivan

WASHINGTON (Reuters) - Any tax imposed on financial transactions would have to take effect internationally to keep Wall Street jobs and related business from moving overseas, U.S. House of Representatives Speaker Nancy Pelosi said on Thursday.

"It would have to be an international rule, not just a U.S. rule," Pelosi said at a news conference. "We couldn't do it alone, we'd have to do it as an international initiative."

Several House Democrats have proposed a Wall Street tax to pay for job-creating legislation they plan to pass in December. The tax, which could raise $150 billion per year, would tap into widespread public outrage at Wall Street in the wake of the financial crisis.

"There's something really out of kilter in this society," said Democratic Representative Marcy Kaptur, noting the gap between wages in her Ohio district and Wall Street bonuses.

But support is tepid among key legislators, especially those from the New York region who worry that finance jobs could disappear if the tax drives trading activity overseas.

The No. 4 Democrat in the House, Representative John Larson, said his proposal to impose a 0.25 percent tax on over-the-counter derivatives transactions would apply internationally.

"Part of our proposal would include that it would be international," Larson told Reuters after meeting with other lawmakers about the jobs package.

Democratic Representative Peter DeFazio said his separate proposal, which would tax a wider array of trading activity, would cover all U.S. corporations and individuals no matter where their trades took place.

Pelosi and other Democratic leaders have emphasized that the proposal is merely one of many ideas in play.

"It hasn't been developed to a high priority, but it has substantial currency in our caucus," Pelosi said.

Britain urged other governments earlier this month to consider a bank tax as a way to fund future bailouts, and France and Germany have also called for a bank tax. The International Monetary Fund is studying the idea.

LITTLE ADMINISTRATION SUPPORT

But it has little support in the Obama administration.

Treasury Secretary Timothy Geithner said on Thursday that he has "not seen a version of that tax that I think would be appropriate for our country."

Democrats are developing their jobs bill to ease double-digit unemployment levels that threaten an economic recovery. The Senate is expected to act early next year.

Increased road construction, money to help states avoid layoffs of police and other public employees, and a further extension of unemployment benefits are some of the elements under consideration, Pelosi said.

Other options include extending health-insurance subsidies for the jobless, a tax credit for businesses that create jobs, more funding for energy-efficiency programs, and low-interest loans for small businesses.

Funding for these initiatives could come from a transaction tax or by using leftover money from last year's $700 billion Troubled Asset Relief Program, a federal government program to buy assets and equity from financial institutions.

Lawmakers could also pay for the package over a five-year time period to avoid imposing tax increases or spending cuts that may hurt the nation's fragile economy.

Democrats passed a broader $787 billion stimulus bill earlier this year, but less than half has been spent.

A bipartisan group of at least 120 House lawmakers said on Thursday they had set up a "jobs caucus" to ensure that rank-and-file members, not just senior lawmakers, get a chance to shape the bill.

Their proposals included easing business regulations, revamping trade agreements, and extending existing tax breaks.

(Editing by Paul Simao and Vicki Allen)

Senator Says Loophole In Derivatives Regulation Undermines Reform

2009-11-23T15:44:00.000-08:00

http://www.huffingtonpost.com/2009/11/20/senator-says-loophole-in_n_366007.html

Senator Says Loophole In Derivatives Regulation Undermines Reform
First Posted: 11-20-09

The effort to impose new restrictions on the financial system falls short of true reform if there's a gigantic loophole for foreign exchange derivatives, Sen. Maria Cantwell (D-Wash.) said Thursday.

"Most people who write about the 'comprehensive reform' -- they're missing the point, which is, you've got to have derivatives regulation," she said in an interview with the Huffington Post.

And indeed, bills being considered in Congress would bring transparency and accountability to the complex and opaque derivatives contracts that nearly brought down the financial markets last year -- by forcing them to be traded through clearing houses or on exchanges.

But the bills, based on a proposal put forth by the Obama administration, would exempt foreign exchange derivatives from disclosure requirements.

That loophole is now facing opposition in both houses of Congress.

As Cantwell explains it: "The whole foreign issue is a scapegoat. The real issue is that if you have a loophole that people can drive their tractor through, drive their volume through, you create a dark market."

This one loophole could be widely exploited, Cantwell argued, and "You can't have exemptions that are 50-80 percent of the market or it won't be reform."

Foreign exchange derivatives -- private contracts to buy or sell currencies in the future -currently make up about eight percent of the largely opaque derivatives market. U.S. firms with extensive operations overseas like Nike and Apple use them as insurance against currency fluctuations.

Story continues below

Virtually the entire market is traded in the shadows by the biggest banks.

Wall Street wants to keep it that way. Banks made more than $18 billion off foreign exchange derivatives in 2007 and 2008, according to a report by national bank regulator the Office of the Comptroller of the Currency. By comparison, these same banks lost about $13.7 billion during the same period from all other types of derivatives trades.

Supporters of the exemption argue that the system is working fine, and that any attempts to regulate it will simply drive the market overseas into much more opaque places, beyond the reach of meaningful regulation.

Cantwell's response to that concern: "The international community is waiting for the United States to stand up and have transparent markets before they themselves have transparent markets. Se we ought to be the beacon for how it's done, not sit around and blame foreign countries that might have dark markets."

The two leaders responsible for shepherding derivatives reform legislation through the chamber -- Financial Services Committee Chairman Barney Frank (D-Mass.) and Agriculture Committee Chairman Collin Peterson (D-Minn.) -- have committed to closing the foreign exchange loophole, the Huffington Post reported earlier this week.

In the Senate, the bill introduced by Banking Committee Chairman Christopher Dodd (D-Conn.) includes the loophole. However, since the Senate Agriculture Committee also has jurisdiction over how derivatives will be regulated (American farmers have been using derivatives for more than 100 years) it's unclear what will ultimately emerge from the Senate.

"This is a long battle," Cantwell said. "It's like a porous border. We've got to make sure we really are closing those loopholes."

Rachel Maddow: Bernie Sanders' Two-Page Bill Against 'Too Big to Fail' Institutions

2009-11-23T11:10:00.000-08:00

Push to Curb Credit-Card Rates Fades

2009-11-19T06:57:00.000-08:00

http://www.boston.com/news/nation/washington/articles/2009/11/18/support_wanes_for_curbs_on_credit_card_interest_rates/

November 18, 2009 by The Boston Globe
Push to Curb Credit-Card Rates Fades
Democrats resist consumer outcry
by Michael Kranish

WASHINGTON - Efforts in Congress to cap credit-card interest rates are faltering because of opposition from Democrats and a lack of specific support from the White House, despite growing consumer outrage over a rush by banks to impose rates as high as 30 percent.

A man shows some of his credit cards at a market in Miami, Florida. Amid complaints about interest rate spikes and new fees, US lawmakers have voted overwhelmingly to speed up the implementation of sweeping new rules to guard against abusive practices by credit card companies. (AFP/Getty Images/File/Joe Raedle)During the 2008 presidential campaign, Barack Obama vowed to back a strict limit on credit-card interest rates. But the White House is not yet behind any particular plan this year. While Obama has chastised credit-card companies, his spokeswoman declined to say this week how he planned to follow through on his campaign pledge.

Obama finds the behavior of credit-card lenders "outrageous'' and "looks forward to reviewing additional legislation that caps interest rates,'' but he has not taken a specific position, spokeswoman Jen Psaki said.

Vice President Joe Biden, whose home state of Delaware is headquarters to many credit-card companies, did not respond to requests for comment.

The Senate soundly defeated legislation in May that was introduced by Senator Bernard Sanders, the Vermont Independent, to cap most credit-card interest rates at 15 percent. Nearly half of the Democratic senators joined Republicans in defeating the measure, 60 to 33.

Consumer groups say the problem of skyrocketing interest rates has only worsened since that vote, as banks scramble to boost rates in advance of a new rule scheduled to take effect in February, requiring banks to give consumers a 45-day advance notice of rate increases.

Sanders said many of the credit cards in the hands of American consumers are issued by four banks that received taxpayer bailout money after last year's economic meltdown: Citigroup, Bank of America, JP Morgan Chase, and Wells Fargo.

"People are disgusted. We bailed these [companies] out and they then had the gumption to raise interest rates on the American people,'' Sanders said in an interview.

Sanders said he plans to reintroduce his proposal to cap rates at 15 percent; he predicted it will have more support this time. (Representing Massachusetts, Senator John F. Kerry supported the cap in May; the late Senator Edward M. Kennedy, who was fighting brain cancer, did not vote. Senator Paul Kirk, who took Kennedy's seat, has not declared a position on the issue, his spokesman said.)

But Sanders faces strong opposition from many Democrats, particularly those who have major credit-card business in their states. One prominent opponent, Senator Thomas R. Carper of Delaware, said in an interview that he understands the anger among consumers who have received letters from credit-card issuers informing them of big rate hikes. But Carper said he opposes any effort to cap the rates because it would hurt the ability of banks to charge higher rates to customers who have a greater risk of default.

"The question is, should banks be able to price for risk?'' Carper said. "In a free market economy, I think they should.''

Carper said that if consumers don't like the credit-card rates, they can pay off their balances and shop for a better rate from another company.

Senator Tim Johnson, a Democrat from South Dakota, another home to credit card companies, explained his vote against credit-card legislation in a May press release. The measure, he said, "could hurt South Dakota jobs and consumers.''

The threat of another vote on Sanders's proposal is prompting companies to make a renewed push against caps. Bill Himpler, executive vice president of the American Financial Services Association, an industry trade group, said it is easy "from a populist standpoint'' to embrace a cap on interest rates. But he said many firms could continue to offer credit if the rate was capped at 15 to 18 percent, as some have suggested.

"You lose money at 18 percent because it is a very labor-intensive business line to offer consumer credit,'' he said. "Where you cap rates you end up having credit tightened and the cost of credit being greater for the consumer.''

The Consumer Federation of America, which worked to pass the 45-day advance notice requirement on rate hikes that takes effect in February, said it has not taken a position on the Sanders proposal.

"We want to give the law a little time to work,'' legislative director Travis Plunkett said yesterday. He warned that the federation would closely monitor to see if credit-card companies stop "the most abusive practices.''

Senate Finance Committee chairman Christopher Dodd of Connecticut, who supported the 15 percent cap, has proposed legislation that would temporarily freeze certain interest rates, but only until February when the notification law takes effect.

For decades, many states had usury laws capping credit-card interest rates as low as 6 percent. But those rules were upended in 1978 by a Supreme Court ruling that a national lending company based in a state without a rate cap could charge any rate to customers who lived in a state with a cap. As a result, many credit card companies moved to states with lenient rules such as Delaware and South Dakota.

Biden, who served as Delaware's US senator from 1973 until last January, has long been noted for his ties to the credit-card business. Biden's top contributor has been MBNA Corp., a company based in Delaware that was a major credit-card issuer and was bought by Bank of America in 2005.

Biden received $214,000 during his Senate career from MBNA-related donors, according to the nonpartisan Center for Responsive Politics.

© Copyright 2009 Globe Newspaper Company

New Derivatives Legislation "Was Probably Written by JPMorgan and Goldman Sachs"

2009-11-18T14:41:00.000-08:00

http://www.washingtonsblog.com/2009/11/new-derivatives-legislation-was.html

New Derivatives Legislation "Was Probably Written by JPMorgan and Goldman Sachs"
George Washington's Blog
Mon, 16 Nov 2009 15:33 EST

As I have repeatedly written (see this and this), the new derivatives legislation is so bad that it probably increases - rather than decreases - the risk to the financial system.

William Greider has a great piece in The Nation pointing out:

Who drafted this dubious piece of legislation? Bankers (or their lawyers) did. The leading sellers of derivatives are an exclusive club of five very large financial institutions--Citigroup, JPMorgan Chase, Bank of America, Morgan Stanley and Goldman Sachs--that hold 95 percent of the derivatives exposure among the largest banks (the total contract value exceeds $290 trillion). These are the same folks who toppled the global economy and compelled government to intervene with gigantic bailouts.
Michael Greenberger, a University of Maryland law professor and veteran federal regulator, studied the House committee's 187-page bill and detected the fine needlework of Wall Street lawyers. "It had to be written by someone inside the banks," Greenberger said, "because buried every few pages is a tricky and devilish 'exception.' It would greatly surprise me if these poison pills originated from anyone on Capitol Hill or the Treasury."

A well-informed Congressional source confirmed that the original language in the draft legislation was written by financial-industry experts. It "was probably written by JPMorgan and Goldman Sachs," he told me, "and possibly the Chicago Mercantile Exchange." The Chicago exchange trades commodity futures--hog bellies, beef, grains--and more exotic derivatives. It is a rival to Wall Street but very close to agribusiness interests like Cargill, the giant grain trader, that make heavy use of derivatives.

Washington insiders may not be shocked to learn that private-interest groups provided the draft bill. This is what lobbyists often do for the legislative process, especially on complex subjects like taxation and regulatory law. But the legislation was delivered to the House Financial Services Committee by Blue Dog Democrats, not lobbyists. There are fifteen Blue Dogs and like-minded members on the committee. Together they make up more than one-third of the committee's Democratic majority (forty-two Democrats, twenty-nine Republicans).
"The conduit for the draft text was Blue Dogs and conservative Democrats," my source explained...

The Blue Dogs claimed they were speaking for business, not bankers, but this too involved a little sleight of hand by industry lobbyists. Last summer, an official of the Securities Industry and Financial Markets Association told colleagues at a private industry meeting that since the bankers have damaged credibility in Washington, they should send their customers to push the bankers' position on Capitol Hill. Sure enough, representatives from various industrial and agricultural sectors showed up to testify as expert witnesses and demand exemption from regulation as the "end users" of derivatives. Bankers told their clients that regulation would raise their costs. Never mind the costs to the country if derivatives blow up again...

The House Financial Services Committee is a prized assignment and known informally among members as a "money committee," not because it deals with money issues but because its members have an easier time raising campaign funds from the banks and financial firms under their jurisdiction...

Money also explains why the committee is top-heavy with Blue Dogs. House Speaker Nancy Pelosi put them there, along with other freshmen and sophomores, knowing it can help them win re-election. She was encouraged by Representative Rahm Emanuel...

As recent election returns suggest, if the president continues to soft-sell reform, he is at risk of being identified with the old order in Wall Street. The longer Congress tries to placate the bankers with meek reforms, the sooner Democrats will discover this is really dumb politics.

Federal Regulator Gets Derivatives Advice From Industry Insiders

2009-11-18T14:26:00.000-08:00

http://huffpostfund.org/stories/2009/11/federal-regulator-gets-derivatives-advice-industry-insiders

Federal Regulator Gets Derivatives Advice From Industry Insiders
Advisory Group to Commodities Commission Dominated by Finance Lobbyists, Execs
By Keith Epstein and Ben Protess
Huffington Post Investigative Fund
18 Nov 2009

Like many federal agencies contemplating reform these days, the Commodities Futures Trading Commission is hearing a lot from the industry it regulates.

But executives and lobbyists don’t always have to knock on the commission’s door. Some are already inside.

They belong to the Global Markets Advisory Committee, which was set up by the CFTC to provide it with private-sector expertise. All of the committee’s 19 members are representatives of financial exchanges, investment banks or other industry groups – an imbalance that is coming under fire from a key senator, farm and consumer organizations, and businesses such as airlines that are sensitive to commodity prices.

The committee, which operates below the general public’s radar, is one of hundreds of similar advisory panels throughout government. It is emblematic of the way industry players or technical experts with a vested interest in agency decisions can gain unfettered access to regulators and a platform to advance arguments in Congress.

A 1972 federal law, the Federal Advisory Committee Act, requires advisory committees to be “fairly balanced.”

The global markets committee has the ear of decision-makers at the CFTC, a government agency long viewed as permissive and now at the crux of a crackdown on the obscure world of privately traded derivatives. Those often-speculative insurance contracts wreaked havoc on the ailing financial system.

When the advising group gathers in December it will focus on derivatives reform. The meeting comes as CFTC Chairman Gary Gensler tries to impose oversight on trillions of dollars in bets on future prices of commodities such as oil and wheat, as well as more exotic mortgage debts. Advancing bills in Congress would impose more capital requirements on derivative dealers and move some trades onto open exchanges.

Such efforts don’t appear to mesh with one of the advisory committee’s formal purposes, described in its 2009 annual report, as “avoiding unnecessary regulatory and operational impediments to conducting global business.”

Jill E. Sommers, one of the CFTC’s five commissioners, chairs the advisory committee and chooses its members. A former industry lobbyist herself, Sommers is a Republican recently reappointed by President Obama.

Big banks and investment houses are using the committee “to protect their profits and their dark market activity. They want to have carte blanche – and they look at Jill Sommers as an ally,” said Jim Collura, a lobbyist for the New England Fuel Institute, one of the groups that has complained to Sommers about being excluded from the process.

Sommers did not reply to requests for comment.

The global markets committee, established more than a decade ago, is only one of some 900 formal advisory groups scattered across the government. Altogether, 65,000 committee members counsel more than 55 agencies, the Government Accountability Office said last year. By advising agencies such as the EPA, FDA and Energy Department, they influence standards for food safety, environmental protection and energy use.

Advisory committees can afford their members – often industry players or technical experts with a vested interest in agency decisions – unfettered access to regulators and a platform to advance arguments in Congress. In some cases, agencies have faced legal challenges for ignoring advisory committee recommendations.

“These committees can be really important and have a lot of influence,” said Wake Forest University law professor Sidney Shapiro, a specialist in administrative procedure and regulatory policy. “It’s hard to generalize, but this is cause for worry, and the public interest is disadvantaged.”

The global market committee’s charter requires it to “serve as a channel of communication” that includes “end users most directly involved in and affected by market globalization.” The charter further specifies that “market users” must be members.

But none of the committee’s members represent ordinary consumers, who may face hardships from the effects of speculative commodities trading, whether at the gas pump or from fluctuating prices of electricity. Even so-called end users – major industries such as airlines or power companies that use derivatives to hedge their risk--have no seat at the table.

That soon may change. Last week, the Huffington Post Investigative Fund contacted the CTFC about the committee’s membership. In an e-mail Monday, a spokesman said the agency is “in the process of expanding the committee membership to include end users.” The spokesman declined to specify who may join.

Seeking More Balance
Sommers, the CFTC commissioner and chair of the advisory group, was a top lobbyist for the International Swaps and Derivatives Association, the main trade group representing those working in the $600 trillion-a-year privately negotiated derivatives markets. Sommers’ former boss and current chief executive officer of the swaps trade group, Robert Pickel, is on Sommers’ committee.

Sommers also was a lobbyist for the Chicago Mercantile Exchange, now CME Group, where some derivatives are traded. The exchange’s chief executive and one of its board members also are on Sommers’ committee.

Among the committee’s other members: Richard Berliand, JP Morgan’s worldwide head of futures and options; Bonnie Litt, a managing director of Goldman Sachs; and Robert Klein, managing director and associate general counsel of Citigroup Global Markets. The committee also includes a registered lobbyist, Joanne Medero, who heads government relations and public policy for Barclays Global Investors.

Transcripts from the most recent committee meeting on July 15, 2008 indicate some preference for the status quo. Among other things, the members were discussing how tighter U.S. rules could affect the global market.

“It’s not helpful to have legislation that encumbers the good decision making of the CFTC,” said Craig Donohue, chief executive of the CME Group. Arthur Hahn, a lawyer representing Euronext Liffe, an international derivatives exchange, said “rulemaking tends to be hard and fast.”

Sommers was named to the CFTC in 2007 by George W. Bush and reappointed this summer by President Obama. She has chaired the global advisory committee since February 2008.

Shortly after Sommers’ reappointment, a coalition of multiple interests not represented on her committee – from consumer organizations to ranchers, power companies, and airlines – wrote her a letter complaining that the group was unbalanced. “Our organizations have an interest in seeing its membership diversified to include commodity end-users and consumers,” wrote Collura on behalf of the coalition.

Sen. Maria Cantwell (D-Wash.), a senior member of the Senate Agriculture Committee, which oversees the CFTC, agreed that the committee should expand its membership. During Sommers’ most recent confirmation last month, Cantwell extracted a promise from Sommers to include end users before scheduling the advisory panel’s next meeting.

But on Nov. 6, when the CFTC announced the next scheduled meeting for December, there were no additional members.
Pickel, of the International Swaps and Derivatives Association, downplays the committee’s influence. The CFTC “can decide to listen to us or not,” he said. “It’s really just a forum that allows the commission to cast a net to take in views across the marketplace.”

Still, he said, “I wouldn’t be surprised” if the committee added new members.

Serving Out Their Terms
Despite White House rhetoric about minimizing the direct influence of registered lobbyists, efforts at a crackdown have been soft. On Sept. 23, Obama appeared to call for an end to the membership of lobbyists on advisory committees – in the form of an announcement on a White House blog by Norm Eisen, the president’s special ethics counsel. Lobbyists and executives from Boeing, International Paper Co., IBM and 13 other companies and trade organizations quickly complained - and threatened to circumvent the requirement by having their lobbyists simply stop registering.

Obama hasn’t required immediate changes on the advisory committees. He has not issued an executive order, or dispatched an official memorandum to the heads of his agencies – other options available to the nation’s chief executive.
The result is that lobbyists, executives, scientists and others who have a stake in decisions made by the agencies they advise can hold their positions until their terms expire.

“It is the president’s desire that registered lobbyists not be appointed to federal boards and commissions, and that those registered lobbyists currently serving…be allowed to serve out their terms but that they not be reappointed,” noted Robert Flaak, an overseer of the advisory committees at the General Services Administration, in an Oct. 1 “guidance” letter to federal agencies.

Attempts to remedy imbalances in committee membership have foundered in Congress. Among others, Rep. Henry Waxman, the California Democrat who until recently chaired the House government oversight committee, repeatedly has proposed amendments to the 37-year-old advisory committee law. One measure passed the House last year only to fail in the Senate.

This year, Waxman is trying again.

The composition and occasional secrecy of advisory committees has weakened the agencies they counsel, argued law professor Shapiro. “You either get bad advice or you’re just cooking the books – allowing special interests to game the process,” he said. Congress, presidents and the courts, he added, “have made it virtually impossible for these agencies to be hard-charging, effective protectors of the public.”

While the music plays funds gotta dance

2009-11-18T14:07:00.001-08:00

http://blogs.reuters.com/great-debate/2009/11/17/while-the-music-plays-funds-gotta-dance/

James Saft
Reuters
Tue, 17 Nov 2009 09:35 EST

With just a few short weeks until the end of the year, look for many fund managers to take on more risk in an effort to salvage their annual return figures.

This is not about fundamentals, this is about something far more important: career risk.

Hedge Fund Research's Global Hedge Fund index, which is broadly representative of the industry, is up just 11.9 percent year to date, while its Equity Hedge index is scarcely doing better, up 12.6 percent. The HFR Macro Fund index is actually down 8 percent, indicating the best paid minds in the business did not see the astounding emerging markets rally and dollar fall coming.

Given that global emerging markets are up something on the order of 60 percent this year, that all global shares are up 30 percent and even the S&P 500 is up 22 percent, we can conclude that a lot of managers are heading into the year-end reporting season with a lot of ground to make up.

There are also lifeboats full of institutional fund managers and mutual fund managers in the same position.

What all who have missed the rally have in common is not a common failure of analysis - there are lots of different ways to get it wrong - but a collective vulnerability to finding themselves waving their clients goodbye. Letters detailing 2009 performance will have to be posted, ranking lists of funds will be published and there will be consequences.

It must be hugely tempting for managers who are behind - and remember a lot of these people are not committed bears - to pile in and hope the momentum trade can bring their returns back to respectability.

It all adds up to a supportive background for risky assets through the new year. There can be no assurances that fundamentals, which are pretty poor, won't reassert themselves. There is no telling too that policy makers might put a foot wrong and scare the markets, though I doubt it. They have a very large interest in a merry year end. Even if they didn't, inflation is not an issue and unemployment is, so don't look for any telegraphs from Washington, London or Frankfurt bearing tidings of rising rates.

Come Bacl Chuck Price, All Is Forgiven

Individual investors who missed the rally are less likely to pile in right now. Their temptation will be to pass over the business headlines and go straight to sports. And besides, the holidays provide distractions of their own and you are highly unlikely to be fired by yourself as your own investment manager, now matter how richly you deserve the boot.

Professionals however are usually not so lucky as to be related to the client.

Of course, there must be many managers who are ahead of the market. Why won't they trim their sails and protect their gains? I don't know the answer to that but in my experience it just doesn't work that way. People tend to think of gifts as entitlements and it's a rare, and valuable, manager who having been aggressive when most were timid now gives up the habits of a lifetime.

It is all very reminiscent of good old Charles Prince, the former Citigroup chief who said about the leveraged buyout market, "As long as the music is playing, you've got to get up and dance," just as the world began to unravel. Prince wasn't a fool, he was expressing a core truth. If you are head of a bank or a mutual fund and you sit out a boom which you see as too risky you are taking on another, perhaps more persuasive risk; that the very clients you seek to protect will call you a stick-in-the-mud and take their business elsewhere.

This is not a specious argument about "cash on the sidelines" or money market funds. Numbers showing huge cash in money market funds are misleading; most of it will never end up in equity markets. This is simply about the self-fulfilling psychology and mechanics of rallies, especially rallies with official support.

The authorities, in their wisdom, have broken the circuit of a crash by flooding the market with enough money to drive up asset prices. This is intended to bring money out from under mattresses and force people to take risks again, to make them dance even if they feel like a fool.

That is unlikely to last forever or to work forever, but a reversal is less likely before January 1 than after.

ADL covering up for crimes of financial elites

2009-11-18T01:47:00.000-08:00

http://www.examiner.com/x-9462-LA-Nonpartisan-Examiner~y2009m11d16-ADL-covering-up-for-crimes-of-financial-elites#

ADL covering up for crimes of financial elites
November 16, 2009
Robert Stark

The ADL is accusing the New York Times Maureen Dowd of anti-semitism over a recent op-ed titled "Virtuous Bankers?

Really!?!" The article about corruption on Wall Street specifically involving Goldman Sachs. In a letter to the Editor in the NYT, ADL National Chair Robert G. Sugarman stated, "While one can agree or disagree with Maureen Dowd's portrayal of Goldman Sachs and other bankers (column, Nov. 11), her statement that "the bankers who took government money and then gave out obscene bonuses are the same self-interested sorts Jesus threw out of the temple" potentially raises one of the classic themes of anti-Semitism linking Jews and abhorrent money-lending practices. However unintentional, Ms. Dowd's invoking the New Testament story to illustrate our current financial mess conjures up old prejudices against Jews."

Writing in The New Jersey Jewish News Menachem Rosensaft and Jason H. Dolinsky also suggested that Dowd's article was anti-semitic, saying "we have heard these terms far too often to let them pass. Anti-Semitic tracts and Web sites are replete with references to “blood-sucking Jews.” And Ms. Dowd is too intelligent not to have realized that the depiction of Jews as greedy money-lenders has resulted in persecution and pogroms over the course of the past two millennia. Ms. Dowd has given new life to such ancient anti-Semitic incitements. We dread the prospect of swastikas smeared outside Goldman Sachs offices, or of learning that some street hood, inspired by Ms. Dowd’s column, broke an observant Jew's leg shouting "let Goldman Sachs buy you a new leg. At a time when a virulent Judaeophobia is on the rise, especially in Europe and throughout much of the Muslim world, politicians, journalists and columnists have a responsibility to refrain from using inflammatory anti-Semitic code words. Our constitutionally guaranteed freedom of speech does not bestow on any of us a license to incite to bigotry or violence."

Dowd was refering to an interview given by Goldman Sachs CEO Lloyd Blankfein where he said, "he understands that a lot of people are “mad and bent out of shape” at blood-sucking banks. He added “I know I could slit my wrists and people would cheer." Dowd is right when she states that "Blankfein’s trickle-down catechism isn’t working. Now we have two economies. We have recovering banks while we have 10-plus percent unemployment and 17.5 percent underemployment. The gross thing about the Wall Street of the last decade is how much its success was not shared with society."

Dowd discuses Matt Taibbi who was also called an anti-semite for his critique of Goldman Sachs in Rolling Stones Magazine. Taibbi was accused of anti-semitism in his critic of Goldman Sach's greed and financial exploitation for saying, "the first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." Taibbi never said anything anti-Jewish in his article but due to the fact that Goldman Sachs is associated by many as being a Jewish institution his criticism of the firms financial parasitism brought about that accusation from many.

Dowd wrote another article a while back in the NYT titled "Blue Eyed Greed", where she agreed with Brazil's president Lula that the financial crisis "was caused by the irrational behavior of white people with blue eyes, who before the crisis appeared to know everything and now demonstrate that they know nothing.” Dowd added "it is true, of course, that the upper-crust, underwhelming Anglo-Saxon leaders who allowed America’s financial markets to morph into louche casinos, George W. Bush and Dick Cheney, were very, very white men with blue eyes."

The ADL and the establishment media were silent over Dowd's assertions about Anglo's being responsible for the financial crisis, however now the ADL is accusing her of anti-semitism for an article that does not mention anything about Jews.

Journalist Philip Weiss's correspondent, Geof Gray commented about this on Weiss's blog stating, "and it is true, of course, that the upper crust, underwhelming Anglo-Saxon leaders who allowed America's financial markets to morph into louche casinos, George W Bush and Dick Cheney, were very very white men with blue eyes." Isn't this a tad disingenuous? Didn't Summers, and Rubin and Greenspan have something to do with the debacle? Isn't Maurice "Hank" Greenberg's AIG implicated as is Goldman Sachs, among others? Just upper crust Anglo Saxons? Isn't this an antique notion, true perhaps in the 1920's? Have we reached the point out of the fear of being accused to being antisemitic that we pretend that Jews aren't there?" Weiss concurred, "Gray has my total agreement here. Journalists are misleading their readers about the character of the power structure out of apprehensions of the rise of anti-Semitism. This kind of journalism is not helpful, and may actually be feeding the resentment that fosters anti-Semitism."

The Bernie Maddof scandal attracted a lot of attention from both the Jewish community and so called anti-semites. Madoff became a pariah within the Jewish community for ripping off many Jewish organizations and prominent Jewish individuals such as Steven Spielberg and Elie Wiesel. However groups like the ADL are covering up for the crimes of financial institutions such as Goldman Sachs, that were responsible for the financial crisis and ripped of the taxpayers through bailouts, which they spent on lavish bonuses for their executives. Goldman Sachs was President Obama's second top source of campaign contributions and donates heavily to many prominent politicians.

Goldman Sachs should be treated like a criminal entity much like ENRON was. However ENRON fit into the liberal establishment's stereotype of "Evil White Gentile Republicans, while Goldman Sachs has a stereotype as being Jewish." It is no more anti-semitic to criticize Goldman Sachs than it is anti-WASP to criticize ENRON. However there is a notion put out by the likes of the ADL that any organization that is associated as being Jewish should be immune from criticism. The ADL also uses this tactic to silence any harsh criticism of Israel or the Israeli Lobby.

The ADL receives a large portion of its funding from Wall Street and therefore has a vested interest in what is good for financial interest rather than what is good for America as well as American Jews who are not part of the moneyed elite. The ADL has received large donations from Michael Milken's junk bond fortune and Wall Street crook Marc Rich, who many believed used to ADL to lobby for his pardon from President Clinton. Mod associate of Meyer Lansky Moe Dalitz was simultaneously the CEO of "Sterling Bank" and National Commissioner of the ADL. Even the ADL's current National Chair Glen Lewy was an investment banker involved with Wolfensohn & Co, Deutsche Bank, and a member of the CFR.

In his article "Why Jewish Bankers Love Anti-Semites" Anti-Zionist Jewish author Henry Makow says, "Jewish bankers love anti-Semites because they transform a legitimate political and economic grievance into a racial one that easily can be dismissed as "hatred." Anti-Semites are like dogs who drive the Jewish sheep into the bankers' pen. In spite of this, some Jews are questioning the instrumental role Jews play in the creation of the New World Order. Jewish bankers love anti-Semites because they transform opposition to the NWO into discredited racism. They ensure that Jews serve the NWO agenda and non-Jews remain divided."

Neither Dowd's nor Taibbi's article's about Goldman Sachs mentions anything negative against Jews. The ADL is only enforcing that stereotype by screaming anti-semitism over strong criticism of Wall Street. It is true that individuals of Jewish decent are over represented in Finance. Everyone should be judged as an individual, however the ADL puts collective blame on all Jews when they claim to speak on their behalf, and cover up for criminals because they happen to be Jews, or support the ADL agenda.

MORE PROOF THAT CHICAGO SCHOOL FREEMARKET ECONOMICS IS NOTHING MORE THAN SCIENTOLOGY FOR EAST COAST RICH FUCKS

2009-11-17T09:33:00.000-08:00

http://exiledonline.com/more-proof-that-chicago-school-freemarket-economics-is-nothing-more-than-scientology-for-east-coast-rich-fucks/

GLOATS / NOVEMBER 4, 2009
MORE PROOF THAT CHICAGO SCHOOL FREEMARKET ECONOMICS IS NOTHING MORE THAN SCIENTOLOGY FOR EAST COAST RICH FUCKS
By Yasha Levine

Ames emailed me a New York Times blog post from last February by one Casey B. Mulligan–which may sound like a fictional baseball player’s name, but no, he’s real all right, just another in a long line of insane econ professors from the University of Chicago. In the blog post, Mulligan cheerfully announced that when it comes to commercial real estate, we’ve got nothing at all to worry about. There’s no danger of a CRE crash, like the one we’ve experienced in the residential market, so we can all go back to being happy free market beneficiaries.

No CRE crash? Ha-ha! I just love these Chicago School alchemy frauds! It is truly a joy to see them make such fools of themselves on the permanent public record. And not surprisingly, although Mulligan struck out, he’s still at the plate, batting out barely comprehensible economic fatwahs for the New York Times like nothing ever happened—that’s the kind of free market a real Chicago School economist likes.

So that you don’t have to wait, here’s what Casey wrote for the Times in February 2009. Note how he denigrates those damn pesky “experts”:

For months now, experts have been predicting that commercial real estate will be “the other shoe to drop.” But in fact, non-residential building fell far behind housing construction during the housing boom. This shortage of commercial buildings relative to housing suggests that a commercial real estate crisis will not occur, or that at worst it will occur with much less severity than did the housing crash.

. . .

We all know that there is a nationwide surplus of housing. But there is little if any nationwide surplus of non-residential buildings.

You heard him right. He said there is “little, if any, surplus in non-residential buildings.” That’s how fucking stupid Casey “1000 Strikes And I’m Never Out!” Mulligan is! Even back in February, any lay person could see dangerous levels of empty storefronts piling up in just about every city in America, but now commercial real estate types are starting to have a major freakout. Here’s a sample of how bad it is: There is a 20% vacancy rate in the Silicon Valley right now. Atlanta has a 18% office vacancy rate, with many estimating that it will take a decade or two to get back to normal occupancy levels. In Manhattan, office vacancies are hovering somewhere around 13% and are expected to go up to nearly 20%.

Nationally, about 1 out of every 5 offices stand empty. Properties that do manage to find tenants rent at a 30 to 50% discount, compared to two years ago.

It’s even worse in Buttfucksville, America. Here in my newly-adopted home of Victorville, California, some neighborhoods have brand new strip malls that have vacancy rates somewhere around 75%.

Nothing illustrates the size of the speculative bubble in commercial real estate better than this simple line graph: [Go to URL above to see all graphs]

You can see that commercial real estate is back down to pre-boom years, but the graph only goes up until July 2009. And the past three months have been none too good on the market, which is sinking further into a deep, dark depression the likes of which it hasn’t seen in many a decade. There’s been about a 3% drop in value every month since July, with no bottom in sight.

So just how wrong was Mulligan? Here’s how: the National Council of Real Estate Investment Fiduciaries (NCREIF) has an index tracking the rate of return on investments in commercial property. Since it was started in 1978, the index has never dropped more than about 7% in a single year. This year it has dropped by 15%, and there is still one quarter unaccounted for.

To put it another way: Most investment funds with commercial property in their portfolios are scarily underwater and are finding it hard to unload them in these vanishing market conditions.

To put it yet another way: Check out the NCREIF index in visual form above. See the inverted spike of the current crash? Keep going lower. The graph is slightly dated, so the tip of it should be placed well into the margins. Now compare it to the inverted spike of the early 90’s on the left. See how our crash is already almost three times as bad?

Well guess what? That’s exactly the opposite of what Mulligan predicted. According to him, today’s slump in the non-residential sector would not be as bad as the crash that happened in the 90’s because the ratio of residential to non-residential structures was 1% lower today than it was back then (meaning that there were 1% less commercial buildings when compared to residential ones). It is a weird comparison to make, as if the supply and demand of office space and housing are locked to each other. Seems like Mulligan got lazy, grasping at any data that would give his boosterism credibility. That’s part of Mulligan’s economic prowess, I guess: the ability to shill by shifting numbers around, but not the ability to get things right.

Moving on to Exhibit C of the Mulligan smackdown:

“We all know that there is a nationwide surplus of housing. But there is little if any nationwide surplus of non-residential buildings . . . it is a mistake to assume that commercial real estate shares the housing sector’s ailments,” he so presciently wrote.

Ah, yes. Just because we built too many houses does not mean we built too many office buildings, right? Well, wrong. About the only thing different between the two real estate markets is that the commercial side of it started crashing a little later. The timing and speed of their rise and fall were slightly different, but in the end, the two real estate markets followed very similar bubble trajectories.

See the place I marked with the red arrow on the chart above? That’s when Mulligan used Chicago School’s patented free-market statistical analysis to predict that commercial real estate prices weren’t going to drop much further, weeks before that little flatlining knob plunged downward at a nearly vertical pitch.

How did Mulligan manage to get it so wrong?

Hard to say, but what is clear is that anyone with a functioning brain stem could see that commercial real estate was the next bomb to drop a year ago. It couldn’t have been more obvious that Mulligan would be proven wrong, so totally, obvious-to-anyone-who-reads-Bloomberg-News-or-walks-through-business-districts wrong that it truly is funny, in a what-the-fuck kind of way. Kinda reminds me of the Chabad-Lubavichers, a weirdo Jewish Orthodox sect in Brooklyn whose supreme leader started proclaiming that he was the second coming of the messiah who would bring peace and everlasting tranquility to Earth.

All of his 200,000 followers believed him and worshipped him like a god in human form, and then the old man promptly died in 1994. Ever since, the movement has been pretending that the whole thing never really happened, but that hasn’t stopped them from being the laughing stock of the Jewish world. And that’s exactly the position Mulligan and the rest of the Chicago School minions should be finding themselves right now: ridiculed by their peers and divorced by their vapid wives, pelted with rotten tomatoes and fired without notice.

But that ain’t where he’s at. Mulligan still enjoys a blogger position at the New York Times, and still spews incoherent freemarket dribble and economic predictions, which proves that for the idiots running this country, it’s all about the “free markets” and the “free pass for whatever fuckup I make, no matter how disastrous the consequences for you!” People like him need to be outed and ridiculed as a matter of public service. Have they no memory or shame?

There was a great psychology study done at Cornell about a decade ago called the “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments.” The experiment proved that stupid people are consistently, pathologically unable to recognize their own mistakes. Their brains just weren’t wired for “learning from mistakes”; in fact, they were always convinced that they were always right, reality be damned.

From the study:

We argue that when people are incompetent in the strategies they adopt to achieve success and satisfaction, they suffer a dual burden: Not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realize it. Instead they are left with the mistaken impression that they are doing just fine.

. . .

It is one of the essential features of such incompetence that the person so afflicted is incapable of knowing that he is incompetent. To have such knowledge would already be to remedy a good portion of the offense.

That’s right, some people are just born too incompetent to learn, no matter what. They’re missing the necessary brain module. They didn’t come equipped with the deluxe instant playback analyzer package that most of us come standard with.

“Unskilled and Unaware of It” goes a long way to explaining the Mulligan phenomenon: the ability to keep on consistently and shamelessly spewing wrong predictions. Thoughtless shill-drones like him may be semi-hairless, five-fingered bi-peds with linguistic abilities, but they aren’t really human beings like the rest of us. Learning ability-wise, they’re more on level with Costa Rican howler monkeys—the dumbest, loudest, shrillest primates around. And last I heard, they had open huntin’ season on the howler monkeys down there because not only does shooting howlers make for good fun, those stupid monkeys make for some good eatin’s.

(Mark Ames contributed his vanity to this article.)

Yasha Levine is a McMansion inhabitin’ editor of The eXiled. He is currently stationed in Victorville, CA. You can reach him at levine [at] exiledonline.com.

CHINA EXECUTES MORE CORRUPT MILLIONAIRES… WHILE IN AMERICA, AIG SWIPES ANOTHER $249 MILLION IN BONUSES

2009-11-17T09:16:00.000-08:00

I don't believe in executing the financial criminals but I do believe they should have *Life Without Parole* if they are found guilty of ECONOMIC CRIMES AGAINST HUMANITY!!!

http://exiledonline.com/china-executes-more-corrupt-millionairesmeanwhile-in-the-peasant-states-of-america-aig-takes-another-242-million-in-bonuses/

CLASS WAR FOR IDIOTS / AUGUST 7, 2009
CHINA EXECUTES MORE CORRUPT MILLIONAIRES… WHILE IN AMERICA, AIG SWIPES ANOTHER $249 MILLION IN BONUSES
By Mark Ames

There’s a reason why the Chinese are ascendant while America is in decline. Because the Chinese walk upright and aren’t afraid to apply justice to the pigs who are ruining their country; while at the same time, Americans bow and scrape to the same people who loot them, dreaming like peasants of the day they can become Donald Trump’s “Apprentice.” It’s a grotesque role-reversal, and we ought to be ashamed.

I’ve written about the wonderful Chinese “Mobile Execution Bus Fleets” as the solution to America’s banker problem, but you folks are all too damn squeamish and worried about “class war.” So while you roll over and take it as AIG announces yet another new round of bonuses stolen from your bank account,the Chinese get down to the business of executing their millionaire traitors. Can’t reform ‘em, folks. Gotta put ‘em down for the good of the country. Three more big ones this week, including two put to death because they “seriously damaged the country’s financial regulatory order and social stability”:

BEIJING // China has executed two people for defrauding hundreds of investors out of millions of yuan in beauty parlour, cosmetics and property scams, crimes which the government described as a serious blow to social stability.

The two executed fraudsters, Du Yimin and Si Chaxian, “seriously damaged the country’s financial regulatory order and social stability”, the supreme people’s court ruled.

But wait folks, that’s not all. One of the most powerful public-private officials was turned into mu-shu millionaire after getting nailed for taking millions in bribes, and more executions of top officials could be a-comin:

Former Beijing airport boss executed in China
By CHRISTOPHER BODEEN (AP)

BEIJING — Leaders of China’s elite state industries are renowned for their power, influence, and — in several recent cases — corruption. Increasingly, they are paying the price.

On Friday, the former head of the company that runs airports in Beijing and more than 30 other Chinese cities was put to death after the People’s Supreme Court upheld his sentence in a $16 million bribery and embezzlement case.

Li Peiying’s execution came two days after word emerged that the head of China’s nuclear power program was under investigation for alleged corruption. Just last month, the former chairman of China’s second-biggest oil company, Sinopec, was also convicted of taking $29 million in bribes and given a suspended death sentence.

The heads of state-owned enterprises “possess power and money, making it easy to give rise to corruption,” Wang Yukai of the China National School of Administration was quoted Friday in the Communist Party newspaper Global Times as saying.

Meanwhile, in the peasant states of America, here’s how we mete out justice to our rich and powerful. We hand over to them whatever they haven’t stolen already, and apologize for the delay:

Banks Paid $32.6 Billion in Bonuses Amid U.S. Bailout
By Karen Freifeld

July 30 (Bloomberg) – Citigroup Inc., Merrill Lynch & Co. and seven other U.S. banks paid $32.6 billion in bonuses in 2008 while receiving $175 billion in taxpayer funds, according to a report by New York Attorney General Andrew Cuomo.

“When the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well,” Cuomo’s office said in the 22-page report. “When the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.”

The top 200 bonus recipients at JPMorgan Chase & Co. received $1.12 billion last year, while the top 200 at Goldman received $995 million. At Merrill the top 149 received $858 million and at Morgan Stanley, the top 101 received $577 million. Those 650 people received a combined $3.55 billion, or an average of $5.46 million.

Citigroup and Merrill Lynch suffered losses of more than $27 billion at each firm, the report said. Yet Citigroup paid out $5.33 billion and Merrill $3.6 billion in bonuses.

Recent photo of American taxpayers working to keep JPMorgan bankers happy.

The looting’s still going on right in front of everyone’s eyes. Because no one’s doing a damn thing. All the rage in this country is on the rightwing–and all that rightwing rage is being used to make sure that rightwing hicks can’t afford their own health care. They’re literally willing to kill a liberal to make sure that that liberal doesn’t give them a longer, healthier life. But you don’t see them storming any AIG meetings, where they’re laughing in the hicks’ gullible faces:

AIG Sets Aside $249 Million for Retention Bonus Costs
By Hugh Son

Aug. 7 (Bloomberg) – American International Group Inc., the insurer criticized by Congress for handing out retention bonuses after its U.S. bailout, said the awards will cost the company $249 million in the last two quarters of this year.

The earmark includes $93 million for the division with AIG’s Financial Products, the unit that sold derivatives blamed for the firm’s near-collapse last year, the company said today in a regulatory filing. AIG said the entire retention program will cost $1.09 billion, including $824 million already incurred through June 30 and $19 million for 2010 and 2011 combined.

“The public will perceive this very poorly,” said Frank Glassner, chief executive officer of pay consulting firm Veritas LLC.

Er, Mr. Glassner, sir, there’s where you’re wrong. The public won’t perceive this at all. If anything, they get a sick satisfaction from getting fleeced by the rich. “He noticed me enough to steal from my grandchildren! Wow!” In the ghetto mentality of today’s America, what matters to the bottom 90 percent is making sure that the bottom 90 percent stays as miserable as they are, and no one gets out.

And ghetto it is, as the masses of Americans are getting poorer and poorer at a rate never before recorded:

American Incomes Head Down, Threatening Recovery in Spending
By Shobhana Chandra

Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, according to Commerce Department figures released yesterday. The Obama administration’s tax cuts, extended jobless benefits and a one-time Social Security bonus have helped mask the damage done by the worst employment slump since the Great Depression.

Yeah, I can hear you yawning, “So what? They’re just Americans.” True, Master-san… but I still have a faint memory of a time when Americans actually minded being treated like cattle, and I can’t completely shake it.

Thinking about how low Americans have fallen, I think about something Chairman Mao said about the Hunanese people 70 years ago, which applies to Americans today:

“The Hunanese have not strengthened their backs. They have vomited more than breathed.”

The Moral Compass Missing From The Greatest Trade Ever

2009-11-16T15:12:00.000-08:00

http://www.opednews.com/articles/The-Moral-Compass-Missing-by-David-Fiderer-091116-965.html

November 16, 2009
The Moral Compass Missing From The Greatest Trade Ever
By David Fiderer

John Paulson was dissatisfied. The marketplace had not satiated his appetite for placing bets against subprime mortgage securities. So he cooked up a scheme to issue billions more in new securities designed by him to fail. The scheme worked, and his hedge fund earned billions.

The most interesting part ofThe Greatest Trade Ever,by Wall Street Journalreporter Gregory Zuckerman, describes Paulson's plan to give irrational exuberance an extra boost. It's one thing to trade against the value of securities that have already been issued. That's what the free market is all about. But it's quite another thing to direct your banks to originate new securitizations for no legitimate business purpose. No wonder Paulson slammed the book for “numerous inaccuracies”without citing specifics.

Here's how Zuckerman recounts the scheme, which was initiated by Paulson and one of his fund managers, Paolo Pellegrini:

Paulson and Pellegrini were eager to find ways to expand their wager against risky mortgages. Accumulating it in the market sometimes proved to be a slow process. So they made appointments with bankers at Bear Stearns, Deutsche Bank and Goldman Sachs, and other banks to ask if they would create CDOs that Paulson & Co. could essentially bet against.

More specifically, Paulson asked his investment banks to create new issues of repackaged subprime mortgage securities, know as collateralized debt obligations, or CDOs, so that they could be sold to some suckers at close to par. That way, Paulson's hedge fund could approach some other sucker who would sell an insurance policy, or credit default swap, on the newly minted CDOs. Bear, Deutsche and Goldman knew perfectly well what Paulson's motivation was. He made no secret of his belief that the CDOs' subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities, which had been ignored by therating agencies, Paulson could collect up to $5 billion.

Paulson not only initiated these transactions, he also specified the terms he wanted, identifying which mortgages would be stuffed into the CDOs, and how the CDOs should be structured. Within the overall framework set by Paulson's team, banks and investors were allowed to do some minor tweaking. Zuckerman writes:

Paulson's team would pick a hundred or so mortgage bonds for the CDOs, the bankers would keep some of the selections and replace others, and then the bankers would take the CDOs to the ratings companies to be rated"To try and protect themselves, the Paulson team made sure that at least one of the CDOs was a “triggerless” deal, or a CDO crafted to be more protective of [the] equity slices by making other pieces of the CDO [which Paulson had bet against] more likely to take early hits. Paulson's goal was to make the equity piece at bit safer, but this step made the other parts of the triggerless CDO even more dangerous for anyone who had the gumption to buy them.

Prior to 2006, there were not many opportunities for naked short selling on subprime securitizations. But in January of that year, investment banks launched a new product, which enabled Paulson to place those bets on a large scale. The ABX index, a sort of Dow Jones Average of subprime mortgage securities, facilitated benchmarking the price of credit default swaps. But it appears that Paulson made much more money by betting against the newly issued CDOs.

Here's howTrader Dailyreported it:

Paulson and Pellegrini then skinned the subprime cat two ways, via an ABX index position and by shorting individual CDO names.Their real score came through the second approach, which involved a huge purchase of credit default swaps tied to certain handpicked CDOs;Paulson homed in on the most troubled mortgage pools, regardless of rating-agency or Wall Street assurances. The value of the CDS instruments he amassed went through the roof when the CDOs' value plummeted as subprime borrowers, many with adjustable-rate hikes kicking in, began to default. [Emphasis added.]

Among the banks that Paulson had approached, Bear Stearns saw the deal for the sham that it was, and refused to play along. Trader Scott Eichel said that, “it didn't pass the ethics standards; it was a reputation issue, and it didn't pass our moral compass. We didn't think we could sell deals that someone was shorting on the other side.”

Paulson felt unburdened by any moral compass. Though he had made clear that the CDOs should be stuffed with only risky slices of debt, Paulson accepted no personal responsibility, claiming “it was a negotiation; we threw out some names, they threw out some names, but the bankers ultimately picked the collateral. We didn't create the securities, we never sold the securities to investors"”

Again, we are not talking about the supply and demand in a transparent market. The banks were not responding to the demand for financing these mortgages, which had already been placed into securitizations. Nor were the banks responding to investor demand for repackaged versions of the once-sold securitizations. Paulson asked his banks to artificially inflate the supply. “We want to ramp it up,” Pellegrini told Bear Stearns. Nobody could make the pretense that he was acting in good faith.

The Greatest Trade Everdoesn't dwell on the legal and moral implications of Paulson's collaboration with the investment banks. The book, which devotes no more than three pages to the scheme, remains sketchy about a lot of details. (Who issued the CDOs? What were their names? Who sold the credit default swaps?) This may make for a breezier narrative, but it points to the inherent limitations of books that recount private conversations. Sources like Paulson are clearly selective and self-serving in their recitation of facts. I wonder if any of Zuckerman's sources was candid about the real reason Paulson was able to get so rich so fast: The utter lack of transparency in the markets for private label mortgage securitizations and credit default swaps. The most important part of the story was what no one was talking about.

The other part of the story that no one was talking about was an open secret: Everyone knew that subprime lenders aided and abetted mortgage fraud. To my knowledge, the only investment banker who wrote candidly about the subject was Joseph Tibman, who was at Lehman when it collapsed, and wroteThe Murder of Lehman Brothers: An Insider's Look at the Global Meltdown.Tibman, who clearly has great affection for his old firm, recounted howin 2000, Lehman was tainted because of its financing arrangements with a sleazy subprime lender called First Alliance.The New York Timesand20/20did joint expose of First Alliance's shady practices, and internal documents showed that Lehman knew exactly what was going on. First Alliance was a “financial sweatshop,” where you checked your “ethics at the door,” to promote “high pressure sales for people"in a weak state.” At the time, the head of Lehman's commitment committee was an executive named Allan Kaplan, who had been with the firm for more than 30 years and was known as “the conscience of Lehman.” Kaplan had opposed the financing of First Alliance on the basis of his moral compass. After the scandal, his decisions on the committee, at least with regard to ethical concerns, were never challenged.

Kaplan's style was antithetical to that of Dick Fuld, Lehman's CEO. Tibman recounts a story where Fuld, then a young fixed income trader, rushed into Kaplan's office insisting that he needed an immediate approval of his trade. Kaplan, of the old school, said he would approve the deal when his desk was clear. Fuld pushed off the papers on Kaplan's desk and told Kaplan his desk was clear. Kaplan died in 2003, and afterwards, there were fewer restraints on Fuld's bullying style for pushing deals through. Coincidentally, subprime securitizations took off in a big way the next year. Tibman believes that as much as anything, what killed Lehman was Fuld's emasculation of the risk management function, which served as a moral compass.

The Money Man's Best Friend

2009-11-16T09:07:00.000-08:00

Monsters ALL!!!!

http://www.thenation.com/doc/20091130/greider/single

The Money Man's Best Friend
William Greider
The Nation
Wed, 11 Nov 2009 14:23 EST

The Obama administration promised to reform the financial system and make it safe for the rest of us, but recent Congressional action is more likely to reset the fuse for another explosive calamity. The time bomb in this case is that arcane financial instrument known as derivatives--the hedging devices that the big banks sell to investors, corporations and other banks to reduce risk or evade the requirements to hold adequate capital on their books.

As the financial meltdown demonstrated, derivatives do not reduce risk. They amplify it and spread it around interlocking networks of unwitting investors. That house of cards collapsed worldwide a year ago. It would be tragic to let the bankers build a new one. Some reformers think all but the simplest, most visible forms of derivatives should be prohibited by law. The president prefers instead to regulate them. Derivatives, his advisers explained, would be less dangerous if they were traded openly in financial markets, just like stocks and bonds. Regulators could then put the brakes on dangerous excess if they saw it developing. Anyway, that was the theory.

But the "reform" legislation approved by the House Financial Services Committee on October 15 is a fiesta of exemptions, exceptions and twisted legalese that effectively defeat the original purpose. Only experts can divine the actual meaning of the bill's densely worded provisions, and many of them have reacted with disgust. The "entanglements of derivatives exposures" among oversize banks "is the equivalent of the San Andreas Fault of our financial system," veteran financier Robert Johnson testified at an October 7 hearing on the draft bill. If Congress does not disarm derivatives, he warned, it could lead to another cascade of failure that would give regulators no choice but once again to rush to the rescue of the banks dubbed "too big to fail."

That risk is not theoretical. The largest banks that dominate this lucrative business seem to have gotten pretty much what they wanted--a free hand to keep peddling the indecipherable derivatives beyond the reach of regulators. According to the Financial Times, Goldman Sachs plans to market a new financial instrument that will allow banks to reduce the capital required to hold risky assets on their balance sheets. Goldman calls this product "insurance" and expects to sell it to the banks with toxic portfolios, enabling them to shift the risk off their balance sheets. It is not clear whether the new bill will interfere with this "innovation." Goldman evidently does not see a problem.

Who drafted this dubious piece of legislation? Bankers (or their lawyers) did. The leading sellers of derivatives are an exclusive club of five very large financial institutions--Citigroup, JPMorgan Chase, Bank of America, Morgan Stanley and Goldman Sachs--that hold 95 percent of the derivatives exposure among the largest banks (the total contract value exceeds $290 trillion). These are the same folks who toppled the global economy and compelled government to intervene with gigantic bailouts.

Michael Greenberger, a University of Maryland law professor and veteran federal regulator, studied the House committee's 187-page bill and detected the fine needlework of Wall Street lawyers. "It had to be written by someone inside the banks," Greenberger said, "because buried every few pages is a tricky and devilish 'exception.' It would greatly surprise me if these poison pills originated from anyone on Capitol Hill or the Treasury."

A well-informed Congressional source confirmed that the original language in the draft legislation was written by financial-industry experts. It "was probably written by JPMorgan and Goldman Sachs," he told me, "and possibly the Chicago Mercantile Exchange." The Chicago exchange trades commodity futures--hog bellies, beef, grains--and more exotic derivatives. It is a rival to Wall Street but very close to agribusiness interests like Cargill, the giant grain trader, that make heavy use of derivatives.

Washington insiders may not be shocked to learn that private-interest groups provided the draft bill. This is what lobbyists often do for the legislative process, especially on complex subjects like taxation and regulatory law. But the legislation was delivered to the House Financial Services Committee by Blue Dog Democrats, not lobbyists. There are fifteen Blue Dogs and like-minded members on the committee. Together they make up more than one-third of the committee's Democratic majority (forty-two Democrats, twenty-nine Republicans).

"The conduit for the draft text was Blue Dogs and conservative Democrats," my source explained. "The committee could not do anything without them," since the Republicans were committed to voting against whatever the Democrats proposed. Chairman Barney Frank made a deal to accept the Blue Dogs' original draft as the starting point, hoping to improve on it with amendments. The chairman made progress, but the finished bill is still vulnerable to whatever evasive games Wall Street decides to play.

The Blue Dogs claimed they were speaking for business, not bankers, but this too involved a little sleight of hand by industry lobbyists. Last summer, an official of the Securities Industry and Financial Markets Association told colleagues at a private industry meeting that since the bankers have damaged credibility in Washington, they should send their customers to push the bankers' position on Capitol Hill. Sure enough, representatives from various industrial and agricultural sectors showed up to testify as expert witnesses and demand exemption from regulation as the "end users" of derivatives. Bankers told their clients that regulation would raise their costs. Never mind the costs to the country if derivatives blow up again.

The ploy seems to have worked. The exemption for "end users" contained in the committee's final legislation is a major loophole--so vaguely defined it exempts insurance and mutual funds and might even be construed to protect hedge funds and private-equity capital from the disclosure of trading derivatives on public exchanges. Some committee members know very well they failed to eliminate crucial exceptions. Frank's commitment to reform is in question, since he voted for the original deregulation of derivatives in 2000. Now he says he wants to offer strengthening amendments when the bill comes to the House floor for passage. He has asked regulators at the SEC and the Commodity Futures Trading Commission to recommend ways to close loopholes "to prevent speculators from masquerading as end-users."

The odor of money hovers over the Blue Dogs--political money for their next campaigns. The House Financial Services Committee is a prized assignment and known informally among members as a "money committee," not because it deals with money issues but because its members have an easier time raising campaign funds from the banks and financial firms under their jurisdiction. This is not illegal. It is the way Congress works.

Money also explains why the committee is top-heavy with Blue Dogs. House Speaker Nancy Pelosi put them there, along with other freshmen and sophomores, knowing it can help them win re-election. She was encouraged by Representative Rahm Emanuel, now White House chief of staff, who was then chair of the Democratic Congressional Campaign Committee. In 2006 and again in 2008, Emanuel had a lot to do with electing Blue Dogs to House seats the Democratic Party was not supposed to win--suburban and rural districts normally represented by Republicans. Emanuel recruited candidates, coached them and financed them. They helped Democrats win control of the House and helped Pelosi become Speaker. Many of them face tough re-election fights in 2010 and need to raise a lot of money to survive. Naturally, party leaders worry about keeping them.

These more conservative junior members, one might say, are the tail wagging the committee's older, more liberal dogs. The Democratic Party is stuck with the consequences. It is a reform party that wants to have it both ways--serving the public interest without overly discomforting the bankers. The dilemma poses a test for Pelosi: will she stand with her favored Blue Dogs or go with the progressive/liberal majority of Democrats who want to solve the problem?

The House legislation essentially reflects the strategic choice President Obama made about financial reform. He wants to rearrange the regulatory system in Washington, but he does not want to alter the fundamental structure of the financial system or prohibit banking practices known to be dangerous. Instead of proposing hard rules and specific limits on bankers, the president would empower the regulatory agencies to keep watch and put the Federal Reserve in charge of guarding against systemic risk. Advocates of this approach argue that lawmakers do not know enough to write legislative commandments. There is some truth to that, but why imagine that regulators know what to do? Or that they will have the nerve to impose tougher rules that Congress declines to enact?

The Fed, in particular, failed utterly to see the developing crisis in advance or to listen to warnings from those who did. Again and again during the last twenty-five years, the Federal Reserve worried privately about banking excesses but never stepped up to restrain the reckless behavior until it was too late. Then, in crisis, the central bank rushed to the rescue and bailed out the largest of the bad actors.

But skepticism is rapidly gaining momentum in Congress. The most noteworthy critics of Obama's relatively limp reforms are two former Federal Reserve chairmen--Paul Volcker and Alan Greenspan--who in different ways recommend far stronger actions to correct things. Volcker wants to peel back a generation of permissive deregulation and restore the traditional format in banking: prevent commercial banks, whose deposits are insured by the government, from taking risky adventures in financial markets. Do not give more responsibility to the Fed, so it can focus on its core function--the conduct of monetary policy.

Greenspan now calls for anti-trust enforcement to break up the mega-banks--the very behemoths he helped create as Fed chairman. "If they're too big to fail, they're too big," he told the Council on Foreign Relations on October 15. "In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole. Maybe that's what we need to do." These declarations may read as belated expressions of regret, but they have serious influence in Washington.

In the Senate, both the chairman of the Banking Committee, Christopher Dodd, and the ranking Republican, Richard Shelby, think putting the Federal Reserve in charge of regulators would be a mistake. On November 10 Dodd unveiled a draft bill that strips the central bank of its regulatory function and creates a new overarching regulatory administration that pre-empts existing agencies. Shelby argues further that the Fed should be reorganized to eliminate the role of private bankers in making internal decisions at the twelve regional Federal Reserve banks (Dodd would require Senate confirmation for presidents of those banks). "I believe this is an inherent conflict," Shelby said, "because the banks decide who will be their regulator. I don't think that's a healthy thing." Senator Bernie Sanders, always the point man for big ideas, proposes that the Treasury be required to identify and dismantle banks that are too big to fail.

Amid the usual cast of characters, a strong new voice showed up this season to advise Congress--Richard Trumka, the new president of the AFL-CIO. "Our members were not invited to Wall Street's party," Trumka told the House Financial Services Committee, "but we have paid for it with devastated pension funds, lost jobs and public bailouts of private-sector losses. Our goal is a financial system that is...the servant of the real economy rather than its master."

Trumka too objects to Obama's plan to put the Federal Reserve in charge as super-regulator--at least until the central bank is reformed, stripped of banking insiders and made democratically accountable. "Giving the Federal Reserve, with its current governance, control over which financial institutions are bailed out in a crisis is effectively giving the banks the ability to raid the Treasury for their own benefit," he warned.

Strong words, but Trumka's critique is a better fit with reality and the public's angry mood than anything heard from the White House or Congress. As recent election returns suggest, if the president continues to soft-sell reform, he is at risk of being identified with the old order in Wall Street. The longer Congress tries to placate the bankers with meek reforms, the sooner Democrats will discover this is really dumb politics.

Government Sachs: Goldman's Close Ties To Washington Arouse Envy, Raise Questions

2009-11-15T09:22:00.000-08:00

http://www.huffingtonpost.com/2009/06/02/government-sachs-goldmans_n_210561.html

Government Sachs: Goldman's Close Ties To Washington Arouse Envy, Raise Questions
06- 9-09 04:12 PM

No wonder it's called "Government Sachs."

It seems that every few weeks, another Goldman Sachs executive goes to work for a government agency, with bankers landing in positions of power at the Treasury Department, the Federal Reserve, and pulling the levers of the massive trillion-dollar federal bailout.

At the same time, the bank, which announced on Tuesday that it was hiring former Securities and Exchange Commission Chairman Arthur Levitt, has received $10 billion in TARP funds.

This dual role - with former Goldman executives directing the financial rescue even as the bank took TARP funds - has aroused concern about potential conflicts of interest and excessive influence.

Goldman Sachs is "a political organization masquerading as an investment bank, and they're sitting at the table with the top people in government," says Goldman critic Christopher Whalen, the managing director of Institutional Risk Analytics, which rates banks and provides customer analytics. He calls Goldman "the most political firm on Wall Street."

Examples include former Goldman exec Henry Paulson, who led the Treasury Department when the bailout was first formulated last September, and who appointed former Goldman vice president Neel Kashkhari to oversee the massive $700 billion TARP fund. There is also the current Treasury Secretary Tim Geithner, who installed a circle of former Goldman bankers to help him navigate the country through the financial crisis.

The firm certainly knows how to work the corridors of power: Goldman's employees contributed more - $980,945 - to Barack Obama's presidential campaign than any other company.

And Goldman has more than 30 ex-government officials working as registered lobbyists on staff, including former House Majority Leader Richard Gephardt (D-Mo.) to represent its interests on issues related to TARP, according to Mother Jones.

Story continues below

Both admirers and detractors assert that Goldman's influence has only grown and that it has not always served the best interests of the government.

"People at Goldman are now at a much higher, much more visible level in government," says former Goldman vice president Lisa J. Endlich, who wrote "Goldman Sachs: The Culture Of Success".

Endlich thinks that the bigger issue, beyond Goldman, is the influence of Wall Street in the corridors of power. "They are all from the same world - whether it's Morgan Stanley or Goldman filling Treasury or the Fed with people with very similar world views."

Endlich says that the financial agencies used to be staffed by people from industry and academics, along with bankers. Given the widening gap between the salaries of Wall Street and Main Street in recent decades, the concentration of bankers at federal agencies means that they may be a little out of touch with the concerns of working people and businesses.

"There's a bit of a love affair with Wall Street," says Endlich, explaining that much of that is due to the complexity of financial instruments, from credit-default swaps to derivatives, now prevalent in the financial industry. "It's gotten so complete that we seem to only trust those who have worked in that world."

Whalen says that the firm has been adept at using their influence in Washington, D.C. to serve their own interests. "Getting the info before anyone else does and acting on it," he says, claiming that legendary Goldman chairman Sidney Weinberg used to sit in the office of Time magazine editor Henry Luce to soak up the latest tidbits of information.

Whalen claims that the firm was suffering in November and December, until they started "embedding themselves in this administration... When you saw the stock turn, it showed that they had established themselves sufficiently.. Their political stars were in alignment."

"Liar's Poker" author Michael Lewis claimed that Goldman's influence has a deep impact on the country's fiscal policy, especially during this financial crisis, during an interview with CNN's Fareed Zakaria on June 7:

And it is amazing to me the degree to which, say, Goldman Sachs is intertwined with the Treasury, and how they're -- there don't seem to be any independent voices in the thick of the decision-making. The decision-making is all being done by people who one way or another might expect to make a lot of money from Goldman Sachs in the future.
But Endlich asserts that there's a much more benign motives behind Goldman's revolving door: public service. Going back to Weinberg, who took a leave of absence to run FDR's war production board during World War II, she says that the firm has always emphasized taking a greater involvement in the community and contributing to charities.

Recalling her interviews with current New Jersey Governor Jon Corzine, Endlich noted that the firm always admired those who worked in public service. "Once you've reached the pinnacle of the business world, what else are you going to do? It's part of the DNA."

The firm itself likes to tout its legacy of public service - the 2005 annual report noted: "Goldman Sachs has a long tradition of public service. Many of our people have gone on to significant positions in government and the not-for-profit sector and their achievements are a source of pride for all of us."

The firm dismisses Lewis' comments and concerns about undue influence as "conspiracy theory gone mad."

Goldman spokesman Lucas van Praag argues that the firm is actually disadvantaged by having so many alumni in powerful positions.

"What benefit do we get from all these supposed connections?" he asks, in an interview with Huffington Post. "I would say we were disadvantaged from having so many alumni in important positions. Not only are we criticized - sticks and stones may break my bones but words do hurt, they really do - but we also didn't get a look-in when Bear Stearns was being sold and with Washington Mutual. We were runner-ups in the auction for IndyMac, in the losing group for BankUnited. If all these connections are supposed to swing things our way, there's just one bit missing in the equation."

Van Praag adds that government agencies have bent over backwards to avoid any perception of impropriety, explaining that when the firm's executives would meet with then-Treasury Secretary Paulson, "it was impossible to have a conversation with him without it being chaperoned by the general counsel of Treasury."

Take a look at this relationship map charting the revolving door between Goldman Sachs and the government:
And check out this slideshow and chart of the Goldman Sachs revolving door: [Go to URL to see]

• • • • • • • • • • • • • • •

The close ties between Goldman Sachs and the government dates back to World War II. Sidney Weinberg served as vice-chair for FDR's War Production Board during the war. The head of Goldman from 1930 to 1969, nicknamed "Mr. Wall Street," he worked his way up at the firm after starting as a $3-a-week janitor's assistant.

TREASURY DEPARTMENT
Henry Paulson: Served as Treasury Secretary under President George W. Bush.
Was CEO of Goldman from 1999 to 2006.

Robert Rubin: Served as Treasury Secretary under President Clinton.
Previously, he was co-chairman of Goldman from 1990 to 1992.

Robert K. Steel: Served as Under Secretary of the Treasury for Domestic Finance, the principal adviser to the secretary on matters of domestic finance and led the department's activities with respect to the domestic financial system, fiscal policy and operations, governmental assets and liabilities, and related economic and financial matters.
Retired from Goldman as a vice chairman of the firm in 2004, where he worked as head of equities for Europe and head of the Equities Division in New York.

Mark Patterson: Chief of Staff to Secretary Tim Geithner
Was director of government affairs at Goldman.

Dan Jester: Key adviser to Geithner, who played a key role in shaping the takeover of Fannie Mae and Freddie Mac.
Was strategic officer at Goldman.

Steve Shafran: Adviser helping to shape Treasury's effort to guarantee money market funds.
Was expert in corporate restructuring at Goldman.

Kendrick Wilson: Brought in to advise former Treasury Secretary Henry Paulson, another Goldman alum -- after a personal call from his old Harvard Business School classmate, George W. Bush -- to advise him on how to fix the financial markets. Paulson brought Wilson to Goldman in 1998 from Lazard Freres. Before that, Wilson was president of Ranieri & Co., which was established by Lew Ranieri. While at Salomon Brothers in the 1970s, Ranieri pioneered mortgage-backed securities, the exotic financial instruments that helped stoke the mortgage bubble. In other words, the man brought in to fend off a financial crisis appears to be a protege of one of the men who helped cause it.
Was senior investment banker at Goldman.

TARP
Neel T. Kashkari: Appointed by Paulson to oversee the $700 billion TARP fund and was considered Paulson's right hand man during the crisis, all at the tender age of 35. Kashkari was criticized for the lack of oversight of the funds disbursement, which he said would have been impossible since the funs are fungible. This assertion has been largely refuted by Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program. Kashkari was also responsible for recruiting Reuben Jeffrey.
Was technology investment banker for Goldman in San Francisco from 2004 to 2006.

Reuben Jeffrey: Selected by fellow Goldman alum Kashkari as the interim chief investment officer for the bailout. He was formerly the chairman of the CFTC, a role currently held by fellow Goldmanite Gary Gensler, as well as Under Secretary of State for Economic, Energy, and Agricultural Affairs.
Was executive for 18 years at Goldman, beginning in 1983.

Edward C. Forst: Left his post as executive vice president at Harvard to serve as an advisor on setting up TARP, but has since returned to the school.
Was global head of the Investment Management Division at Goldman for 14 years.

FEDERAL RESERVE
William Dudley: President of the Federal Reserve Bank of New York.
Was former chief economist and advisory director at Goldman where he worked from 1986 to 2007.

Stephen Friedman: Was chairman of the Federal Reserve Bank of New York until May 2009, when he was pressured to resign after buying Goldman shares in December and January. Previously, he was director of President George W. Bush's National Economic Council.
Joined Goldman in 1966 and was co-chairman from 1990 to 1994.

COMMODITIIES FUTURES TRADING COMMISSION
Gary Gensler: Appointed by Obama to head the CFTC. This was the commission headed by Brooksley Born in the late 1990's, when Alan Greenspan and Robert Rubin overruled her attempts to regulate credit-default swaps; fellow Goldmanite Reuben Jeffrey also held this position. Gensler worked in the Treasury Department as Assistant Secretary of the Treasury from 1997-1999 and as Under Secretary from 1999-2001, a position he received from Lawrence Summers.
Was partner in Goldman from 1979-1996

OTHER
Sonal Shah: Appointed to Office of Social Innovation and Civic Participation and an Advisory Board Member for the Obama-Biden Transition Project in 2008. Shah had previously held a variety of positions in the Treasury Department from 1995 to early 2002.
Was a former Vice President at Goldman from 2004 to 2007.

Joshua Bolten: Former chief of staff with the Bush administration as well as former director of the Office of Management and Budget until 2006.
Was executive director of Government Affairs for Goldman Sachs from 1994 to 1999. Bolten was instrumental in recruiting his fellow Goldman alum Henry Paulson as Treasury Secretary.

Jon Corzine: A strong supporter and political ally of Obama, Corzine is currently the governor of New Jersey. Before being elected governor, he served as the New Jersey representative to the U.S. Congress from 2001-2006, where he served on the Banking and Budget Committees.
Began working for Goldman in 1975 and worked his way up to chairman and co-CEO before being pushed out in 1998.

Robert Zoellick: Currently serves as president of the World Bank and previously was deputy secretary of state.
Was previously a managing director at Goldman, which he joined in 2006.

James Johnson: Was involved in the vice-presidential selection process for the Obama campaign and served as president and CEO of Fannie Mae.
Board member of Goldman.

Kenneth D. Brody: Was former president and chairman of the Export-Import Bank of the US.
Worked for Goldman for 20 years, founded and heading up its high-technology investment banking group and leading the firm's real-estate investment banking group.

Sidney Weinberg: Served as vice-chair for FDR's War Production Board during World War II.
The head of Goldman from 1930 to 1969, nicknamed "Mr. Wall Street," he worked his way up at the firm after starting as a $3-a-week janitor's assistant.

LOBBYISTS
Richard Gephardt: Was House Majority Leader from 1989 to 1995 and House Minority Leader from 1995 to 2003.
His lobbying firm was hired by Goldman to represent its interests on issues related to TARP.

Michael Paese: Former top staffer to Rep. Barney Frank, the chairman of the House Financial Services Committee.
Is Goldman's new top lobbyist. He will join the firm as director of government affairs - last year, that position was occupied by Mark Patterson, now the chief of staff at the Treasury Department. Paese has swung through the revolving doors several times - he previously worked at JPMorgan and Mercantile Bankshares and was senior minority counsel at the Financial Services Committee.

Faryar Shirzad: Former top economic aide to President George W. Bush and Republican counsel to the Senate Finance Committee.
He now lobbies the government on behalf of Goldman Sachs as the firm's Global Head of the Office of Government Affairs.

Richard Y. Roberts: Former SEC commissioner.
Now working as a principal at RR&G LLC, which was hired by Goldman to lobby on TARP.

Steven Elmendorf: Former chief of staff to then-House minority Leader Rich Gephardt.
Now runs his own lobbying firm, where Goldman is one of his clients.

Robert Cogorno: Former Gephardt aide and one-time floor director for Steny Hoyer (D-Md.), the No. 2 House Democrat.
Works for Elmendorf Strategies, where he lobbies for Goldman and Citigroup.

Chris Javens: Ex-tax policy adviser to Iowa Senator Chuck Grassley.
Now lobbies for Goldman.

GOVERNMENT - GOLDMAN
E. Gerald Corrigan was president of the New York Fed from 1985 to 1993. He joined Goldman Sachs in 1994 and currently is a partner and managing director; he was also appointed chairman of GS Bank USA, the firm's holding company, in September 2008.

Lori E Laudien: Former counsel for the Senate Finance Committee in 1996-1997
Has been a lobbyist for Goldman since 2005.

Marti Thomas: Executive Floor Assistant to Dick Gephardt from 1989-1998, he went on to serve in the Treasury Department as Deputy Assistant Secretary for Tax and Budget from 1998-1999, and as Assistant Secretary in Legal Affairs and Public Policy in 2000.
Joined Goldman as the Federal Legislative Affairs Leader from 2007-2009.

Kenneth Connolly: Was staff director of the Senate Environment & Public Works Committee).
Became a Vice President at Goldman in 2008.

Arthur Levitt: The longest-serving SEC chairman (1993 to 2001).
Hired by Goldman in June 2009 as an adviser on public policy and other matters.

Adrian Douglas: The explosive dynamics of the gold and silver markets

2009-11-15T06:10:00.000-08:00

http://www.gata.org/node/7887

Adrian Douglas: The explosive dynamics of the gold and silver markets
By Adrian Douglas
Saturday, October 10, 2009

This week gold closed above $1,000 per ounce for the fourth consecutive week and made another all-time weekly high close. But the top-callers have come out in their droves declaring that gold is in a bubble that is about to burst and that because the recession has been declared as over there is no reason to hold such a safe-haven asset.

All that is nonsense and I will explain why. The dynamics unfolding in the gold and silver markets are nothing short of explosive.

The dynamics are different for gold and silver so I will start by discussing gold.

Gold is a unique substance. It is about the only thing on the planet that is bought and stored and never consumed. Almost all the gold ever mined still exists above ground. The purpose of gold is to act as a store of wealth. This singularity of gold makes it susceptible to a scam that was first perpetrated by goldsmiths in the 16th century. The goldsmiths realized that customers would buy gold and leave it for safekeeping in their vault. This meant that they could show the same gold bar to many customers and sell it many times over. This was the early form of fractional reserve banking, where banks retainly sone a fraction of the money on deposit, gambling that no more than 10 percent of the money will ever be called upon to be paid out.

This scam is at the center of modern gold market manipulation. Paper substitutes for gold are sold, instead of real gold, through derivatives, futures, pooled accounts, exchange-traded funds, gold certificates, etc. I estimate that each ounce of gold has been effectively sold 20 times over or more. To maintain this Ponzi scheme, some real gold is required, because some investors or jewelers demand to take possession of real gold. For the scam to be sustained there must always be plentiful physical gold for those who want it.

This physical supply has been met from mine supply and central bank leasing and selling.

The market is in effect a giant inverted pyramid with a huge paper gold market being supported above a small amount of physical gold at the tip of the inverted pyramid. The scam can continue until there are indications of a shortage of physical gold. If the 20 or so so claimants of each ounce of real gold demand their gold, there is the potential for a squeeze such as never been seen before.

To lend support to the idea that all the gold in the world has been sold several times over I cite the case of Morgan Stanley, which was sued in 2005 for selling imaginary precious metals to its customers. The firm had the audacity to charge storage fees for metal that didn't exist. Morgan Stanley settled the suit out of court but no criminal charges were ever filed against the firm. If Morgan Stanley was doing this, you can bet that it is the tip of the iceberg.

As further evidence just look at the monster over-the-counter derivatives market. Standing at approximately $1,000 trillion, it is multiples of the liquidated value of all the assets and currency in the world. Clearly derivatives must be selling some sort of claims to assets that cannot be fulfilled because there are not enough underlying assets.

The price discovery of gold has been achieved almost exclusively through the shuffling of paper gold promises between investors and bullion banks on the New York Commodities Exchange with very little real gold ever changing hands. But the situation is changing. Some big entities are now demanding physical gold. These entities are almost certainly countries, not individuals, such as China, Russia, India, Venezuela, Iran, and the Gulf states, to name but a few. This demand for real gold, instead of paper substitutes, is putting a strain on the gold market.

Paul Walker, CEO of the metal consultancy GFMS, recently said the price of gold was going up because of "large lumpy transactions in a market with a degree of illiquidity." Roughly translated, this means that there are large demands for physical metal that the market is struggling to meet. That is a cartel apologist's limp-wristed reference to the explosive dynamics I am defining.

The supply that feeds the bottom of the inverted pyramid to support the gold price suppression via a paper market is drying up. Mine supply has been declining for almost a decade and this year central banks became net buyers of gold for the first time in 20 years. The stress in the physical market is starting to show to those who are paying attention.

For example, the London PM fix of the gold price is coming in at historic highs day after day, the contango in the futures market has contracted dramatically, and the U.S. mint is routinely suspending production due to shortages of metal. But most importantly we are seeing astute investors display a growing preference for real bullion. A couple of months ago Greenlight Capital, the large hedge fund, switched $500 million of investment in the exchange-traded gold fund GLD to physical gold bullion. The supposed gold holding of GLD has not grown to a record high despite a record high gold price.

Apparently Germany has asked that its sovereign gold held by the New York Federal Reserve Bank be returned to Germany. Hong Kong has requested the same of the Bank of England, which stores Hong Kong's gold.

Robert Fisk, a respected journalist for Britain's Independent newspaper, reported this week that the Arab oil-producing states, Japan, Russia, and China have been holding secret talks to replace the dollar as the international reserve currency and as an accounting unit for the oil trade. The Independent reports that the basket of currencies they propose instead of the dollar would include gold.

If gold is going to regain its monetary role, you can understand why those in the know want real bullion. There are some significant signs that a run on the bank of the anti-gold cartel for physical gold is commencing.

Meanwhile most investors and analysts are focused only on the net short position of the commercial traders on the Comex, which has reached a record level and has in the past signaled the onset of a major correction. But such market observers are watching only a side show of the main event. The main event is all about a growing tightness in supplies of gold in the physical market.

I don't think the commercial net short position of 800 tonnes is that important. What is important is that the world's stockpile of 140,000 tonnes of gold may have been sold several times over. In all likelihood half of the supposed 30,000 tonnes of central bank stockpiles have been sold at least 20 times over. The gold short position could well be 300,000 tonnes (15,000 times 20) against a total world inventory of only 140,000 tonnes, much of which is not available to the market.

Could there be a more bullish scenario for gold?

If you think that such business practices could not be tolerated, I can hold up the example of the airlines, which regularly and knowingly oversell the seats on their flights, expecting that not all passengers will show up. Bullion bankers oversell their inventory of gold knowing that only 10 percent of customers will ever ask for it, just as the goldsmiths figured.

One cannot discuss the gold market in isolation, as it is linked to the U.S. dollar and Treasury debt. The major impetus behind the suppression of the gold market was to maintain a strong dollar despite massive overissuance of the currency. This has allowed the United States to live beyond its means because the rest of the world accepts the funny money as payment for goods and services. In a study he did when he was a professor of economics at Harvard titled "Gibson's Paradox and the Gold Standard," former U.S. Treasury Secretary Lawrence Summers showed that in a free market gold and real interest rates move inversely to each other. But since 1995 the United States has had low gold prices and low interest rates. In the absence of a gold standard this could have been achieved only by surreptitiously fixing the gold price through market manipulation. This was the essence of the "strong dollar policy" of Robert Rubin, the mechanism of which was never explained to the public.

The dynamics of the silver market are different. About 90 percent of silver production is used for industrial applications. Only 10 percent is purchased for investment. Clearly paper substitutes for silver cannot be used in industrial processes. The investment market is suppressed by paper silver substitutes as described above with respect to the gold market. It is this market, specifically the Comex futures exchange, that controls the price of silver.

The very low price of silver over the last 30 years has encouraged large holders of silver to dishoard it. After all, who wants to pay costly storage fees for something that is of low and declining value and bulky to store? This dishoarding has filled the gap between silver production and industrial demand, which runs at more than 200 million ounces annually.

Much of the investment demand has been met with paper substitutes and scams that are variations on the one that was perpetrated by Morgan Stanley. Because of the suppression of the price of silver it has been uneconomic to recycle most industrially used silver, with the exception of silver used in photography. This has meant that most industrially used silver finds its way into landfills. All the above-ground silver is now less than 1 billion ounces. Considering that the exchange-traded fund SLV alone claims to have more than 250 million ounces of silver, it is reasonable to estimate that investors have been sold something of the order of 5 billion ounces of silver. But how much is supported by real metal?

If the same ounce of silver has been sold 20 times over, as with my estimate in gold, then only 250 million ounces of investment silver bullion exist. This means that 4.75 billion oounces of silver could potentially be demanded in a market where only 1 billion ounces of stockpile exist and mining supply is already oversubscribed to the tune of 200 million ounces annually. One can probably add to this picture that investors who cannot easily find physical gold will come looking to buy physical silver. What is even more bullish is that the industrial users will not sit idly by watching a manic silver grab. They will join in the fray because they cannot remain in business unless they have silver inventory. They will try to stockpile silver at a time of acute shortage.

So the dynamics of the gold and silver markets are wildly bullish. This is no longer about whether the commercials will knock down the price by selling more contracts short. This is about a lot of market participants who have been content to hold precious metal paper substitutes but who now increasingly will want to own real bullion. This has been happening slowly but will gather pace. Because in the last 30 years most investors have trusted the brokers, dealers, and bullion banks to have the metals that have been sold, there has been no "run on the bank." This is changing. Many indications point to significant supply stress building.

Why are the entities that hold the largest short positions on the planet custodians of the bullion depositories for the largest ETFs? That's like putting a sex offender in charge of the day care center or Bernie Madoff in charge of your company pension fund.

The argument against holding physical bullion yourself has always been the risk it might get stolen while in your possession. But the risk of holding bullion substitutes is that it already has been stolen or never existed.

The precious metals market is now akin to a game of musical chairs with perhaps only one chair for every 20 players. It might be prudent to follow in the footsteps of Germany, Hong Kong, China, and Greenlight Capital and get your chair before the music stops.

If the physical markets for precious metals lock up due to shortages, then the short squeeze will be of epic proportions; it will be something to tell your grandchildren about. It will be a far better story for your grandchildren if you are on the right side of the trade.

-----

Adrian Douglas is a member of GATA's Board of Directors and editor of the Market Force Analysis letter (www.MarketForceAnalysis.com), which provides indications of market turning points -- times to enter, take some profits, or exit a market. Subscribers receive bi-weekly bulletins.

How much imaginary gold has been sold?

2009-11-15T06:08:00.000-08:00

http://www.freerepublic.com/focus/news/2364617/posts

How much imaginary gold has been sold?
Gold Anti-Trust Action Committee ^ | October 16, 2009 | Adrian Douglas
Posted on October 17, 2009 5:20:01 PM GMT+02:00 by JustTheTruth

On October 10 I published an article that postulated that the gold market is a Ponzi scheme because it sells gold that doesn't exist by implementation of the principles of fractional reserve banking. (See www.gata.org/node/7887)

Since writing that article further information has come to light that supports this claim and allows an estimate of how much gold has been sold that doesn't exist if the owners of the gold ask for it.

In other words, there are several owners for each ounce of physical gold.

By complete coincidence Paul Mylchreest of The Thunder Road Report has just written an in-depth study into the daily trading volumes of gold on the London over-the-counter market, which can be found here:

www.gata.org/files/ThunderRoadReport-10-15-2009.pdf

The London OTC market is where most physical gold is traded. This market is a wholesale market where trades are conducted only between the bullion trading houses on behalf of their clients. About 95 percent of the trading is by way of gold that is held in unallocated bullion accounts.

The unique characteristic of gold is that about 50 percent (80,000 tonnes) of the above-ground stocks are held as a store of wealth (investment). The other 50 percent exists as jewelry. When gold is bought as a store of wealth it can perform that function for you wherever it is in the world. Given this unique characteristic many large investors in bullion prefer to leave their gold with the bullion dealer from whom they bought it so that it can be stored in their vault and easily resold. This is identical to the situation with stocks, where most stock certificates are held by brokerage houses, not by individuals.

That people are buying and selling gold without ever taking delivery means that there is the opportunity for bullion houses to sell gold that doesn't exist.

Now the bullion houses probably don't view this as illegal or dishonest because they will operate a fractional reserve type of system, just as the banks do with fiat currency, and will make sure they have enough gold on hand for what would be the maximum estimated volume of gold that could be called for delivery. After all, trading is done with unallocated gold, so how much more unallocated can it get if it doesn't exist at all?

This is what caused bank runs in the days of the gold standard. People would deposit gold in a bank and receive bank notes (dollar bills) in exchange. At any time the depositor could return and hand over his bank notes and receive from the bank the same quantity of gold he deposited. The banks realized that under normal circumstances a maximum of about 10 percent of the gold deposited could be requested. So the banks saw an opportunity.

They could issue up to 10 times as many bank notes in loans as there was gold in the bank and they could earn interest on the bank notes. The system worked until there was difficulty meeting withdrawals. Then word spread quickly that the bank was insolvent, and as holders of the banknotes rushed to the bank to redeem them for gold, the bank would admit it had insufficient gold and would declare bankruptcy.

The origin of the word "bankruptcy" is from the Latin words "bancus" and "ruptus," which means literally that the bank is broken. Banks have gone bust frequently enough to have earned themselves the ownership of the word to describe the phenomenon. Isn't that ironic when banks are meant to be a safe store for money?

This basic scam is at the center of modern gold market manipulation. Instead of real gold, paper substitutes for gold are sold through derivatives, futures, pooled accounts, exchange-traded funds, gold certificates, etc. I estimate that each actual physical ounce of gold has multiple ownership claims to it.

For the scam to be sustained there must always be plentiful physical gold for those who want it. The market is, in effect, a giant inverted pyramid with a huge paper gold market being supported by a small amount of physical gold at the tip of the inverted pyramid. The scam can continue until there are indications of a shortage of physical gold. If all the claimants of each ounce of real gold demand their gold, then there is the potential for a squeeze such as has never been seen before.

To lend support to the idea that all the gold in the world has been sold several times over I cite the case of Morgan Stanley, which was sued in 2005 for selling non-existent precious metals. Morgan Stanley even had the audacity to charge storage fees. The firm settled the class-action lawsuit out of court but no criminal charges were ever filed. If Morgan Stanley was doing this, you can bet that it is the tip of the iceberg.

Paul Mylchreest has done fabulously detailed research into data on the daily trading of gold on the London OTC market. He concludes that 2,134 tonnes of gold are traded each and every day. That is a shocking number because this is 346 times larger than all the gold that is mined in the world each day.

But this on its own is not sufficient evidence to indicate that the market is fraudulent. For example, if I have a 1-ounce gold coin and I have a hundred friends I could sell the coin to a friend and then he could immediately sell it back to me or sell it to one of my other friends, who could sell it back to me.

If I were to transact with all my friends in the same day in this way, I could have turned over a volume of 100 ounces in trading transactions but no fraud would have occurred because the last friend I traded with owns the 1-ounce coin, even though it went through a hundred sets of hands before it got to him. There are no multiple ownership claims to the coin because the trades were sequential, not simultaneous.

But if I were to sell 1 ounce of gold to all my friends and promise I would keep the gold for them, the trading for the day would be 100 ounces but now fraud has been committed because I have a liability of 100 ounces while I have possession of only 1 ounce. If they never ask for the gold and I can pay them cash when they want to sell their gold, then there is a good chance my friends would be none the wiser ... until the day when at least two friends insist on receiving the 1-ounce coins they each supposedly own.

The daily gold trading in London is simply humongous. We talk of the gold market being a tiny market. It is anything but. It has a daily turnover of $70 billion. To put this in perspective, the world consumes 86 million barrels of oil each day. The total cost of the global daily oil consumption is a mere $6 billion!

But as discussed above, the daily volume traded does not in and of itself prove that a fraudulent fractional reserve operation is being conducted. Mylchreest did some more work using statistics from the GFMS metals consultancy to determine the maximum quantity of gold stock the OTC market could be holding with which it can back the huge daily trade volume.

The gold that is traded has to be in the form of London Good Delivery (LGD) bars, which are 400-ounce bars. Mylchreest estimates that there can be only about 15,000 tonnes of such bars in the world. Let us assume that the London OTC market holds them all. We will show that by comparison with the trading of other unallocated gold products that 15,000 tonnes is nowhere near enough gold stock for the gold not to have more than one ownership claim to each ounce.

The purpose of buying investment gold is for it to store wealth. This necessarily implies that it is held for a long time. If gold is bought and traded quickly it would destroy wealth, not store it, because there would be a large loss due to transactional fees.

The figures we have so far suggest that the entire stock of gold of the London gold market could be turned over every seven days (15,000 / 2,134 = 7). That would hardly be characteristic of a market that is supposed to be selling a "buy and hold" product. For the purposes of illustration, in a town of 15,000 houses would you expect 2,134 houses to be sold each day? Or that each house on average would have 52 owners during the year?

Let's compare how much of the inventory of the precious metal exchange-traded funds are traded each day to get a good idea about how frequently investors trade something they have bought as a store of wealth. The most liquid and highly traded ETF is GLD. It has 325 million shares outstanding and the fund trades on average 11.9 million shares each day. This means it trades one share each day for each 30 shares outstanding. Central Fund of Canada trades one share for each 140 shares outstanding, while the Gold Trust Unit trades one share for each 300 shares outstanding.

The GLD ETF is a way of buying, holding, or selling unallocated gold. One would expect the investors' behavior in this ETF would be similar to those trading the unallocated accounts on the OTC. If the investor trading mentality on the London OTC is similar, then 2,134 tonnes should be 1/30th of the gold stock held by the OTC. This equates to 64,000 tonnes of gold.

But Mylchreest estimates that the OTC can hold no more than 15,000 tonnes because that is the entire global stock of LGD bars. If we use the CEF example, the stock would have to be 298,000 tonnes, or by the GTU example it would have to be 640,000 tonnes.

Probably the GLD comparison is the most relevant, as that exchange-traded fund claims to hold 1,100 tonnes gold, which is comparable to the maximum 15,000 tonnes that could be held by the OTC participants. However, the OTC is restricted to wholesale traders and has a minimum trade limit of 1,000 ounces.

In GLD the minimum trade is a tenth of an ounce and trading is open to everyone. Considering these limitations it is likely that OTC participants would turn over a lot less than 1/30th of the inventory in a day. But even taking the GLD estimate, the OTC participants should be holding 64,000 tonnes when according to what can be deduced from GFMS statistics they can be holding only 15,000 tonnes.

This means that each ounce has at least four owners. I think this is probably very conservative because the GLD vehicle is set up to be easily traded and in units as small as a tenth of an ounce. I would guess that it is more likely to be as high as 10 or even 20 owners to every ounce, particularly when the banking world has used a 5-10 percent reserve ratio with fiat money for a long time and bankers are creatures of habit.

This would imply that the liability for unallocated gold that has been sold is probably closer to 150,000 tonnes (taking the more conservative 10 percent figure), but the liability is backed by a totally inadequate maximum of only 15,000 tonnes of physical gold. So it's likely that between 45,000 and 135,000 tonnes of unallocated gold has been sold that does not exist.

This is between 50 and 170 percent of the entire existing investment gold stock that has taken 6,000 years to mine and accumulate.

We are hearing of more and more cases of gold investors wanting to take physical delivery or have allocated gold.

In my recent article I said:

"A couple of months ago Greenlight Capital, the large hedge fund, switched $500 million of investment in GLD to physical gold bullion. ... Apparently Germany has requested that its sovereign gold held by the New York Federal Reserve Bank be returned to Germany. Hong Kong has requested the same of the Bank of England, which stores its sovereign gold. Robert Fisk, a respected journalist for the UK's Independent newspaper, reported this week that the Arab oil-producing states, Japan, Russia, and China have been holding secret talks to replace the dollar as the international reserve currency and as an accounting unit for trade. He reports that the basket of currencies they propose instead of the dollar would include gold. If gold is going to regain its monetary role, then you can understand why those in the know want actual physical bullion. There are some very real and significant signs that a run on the Bank of the Gold Cartel for physical gold is commencing."

Talking of runs on the bank, Rob Kirby of Kirby Analytics in Toronto, a GATA consultant, did some brilliant sleuthing work. His sources have told him that there was panic in the London gold market around September 30 as participants in the market wanted to take delivery of their purchased gold and refused generous cash settlements that were offered instead. Central banks had to come to the rescue to provide the gold via leasing. Apparently even the central banks could not provide bars that met LGD standards, which indicates that an acute shortage of physical gold is developing and that perhaps already many OTC clients have drained a large proportion of the 15,000 tonnes of gold stock from the London OTC market.

This supports what I have been discussing above.

Paul Walker, CEO of GFMS, recently said that gold was going up because of some "large lumpy transactions in a market with a degree of illiquidity."

If the OTC was selling only gold that the participants own, there could never be a lack of liquidity. The panic that occurred at the end of September confirms that there is a chronic lack of liquidity. This necessarily implies that there is multiple ownership of the same ounce of gold and it is, therefore, fraudulent. Leasing of gold from central banks provides only temporary liquidity, because the central banks want their gold returned at some later date, and it looks as if the bullion bankers may have dipped into that well one too many times already.

The gold market is in a precarious position. Just as in the days of the gold standard it requires only one customer not having his deposit returned to bring down the bank, because a domino effect results in all depositors asking for their deposits to be returned. If my estimates are correct, that somewhere between 64,000 and 150,000 tonnes of gold have been sold against a reserve of only 15,000 tonnes.

But how much of even this 15,000 tonnes remains?

The panic at the end of September suggests that liquidity is very tight, in which case only a small percentage of investors asking for their gold to be delivered or placed in an allocated account will blow up the gold market and expose the scam -- a scam that has been repeated time and time again throughout history. Why should this time be any different?

If you think you own gold, you should take a few precautions.

If you have unallocated gold in some sort of pool account that does not have a satisfactory audit or you own shares in an ETF that does not have a reliable audit, take action. Take delivery of gold or move your investment to reliable and audited allocated storage.

If you do nothing about it and when the music stops you are left with just a piece of paper that says you own gold but no one is able to give it to you, then perhaps you will be able to take comfort in your having dismissed the German government, the Hong Kong government, Greenlight Capital, and many others as a bunch of nuts who don't know as much as you do about counterparty risk in the gold market. But the "nuts" who are realizing that there are multiple claims to each ounce of gold will at least have their gold if they ask for it first.

-----

Adrian Douglas is a member of GATA's Board of Directors and publisher of the Market Force Analysis letter (www.MarketForceAnalysis.com), which identifies market turning points. Subscribers receive bi-weekly bulletins on the markets to which they subscribe.

Home Loan Scamming Is Still Going Strong -- and Now You're Paying for It

2009-11-12T10:27:00.000-08:00

Home Loan Scamming Is Still Going Strong -- and Now You're Paying for It
By Yasha Levine, AlterNet
June 16, 2009
http://www.alternet.org/story/140683/

Everything the real estate industry tells you is a hustle. No industry is more geared toward pumping up the positive and burying anything remotely negative, leaving you -- and truth -- out in the cold.

The crash has not made real estate agents any more honest, but at least the gap between the industry's crazed optimism and stark reality has grown so obvious that even the real estate industry can't hide it anymore.

Nowhere is this more obvious than in Victorville, Calif., an exurb of Los Angeles situated in the high desert where housing bubbled up higher than just about anywhere at the peak of the subprime-lending craze and is still in free fall today.

These days, there are a lot of lies and broken dreams buried in the gravelly sand on which Victorville was built. During the last real estate boom, this barren wasteland was the mecca of low-income homeownership, proof that the American Dream was within reach of all.

Tract-home developers stripped away the rocks and tumbleweeds and Joshua trees, replacing them with mazes of curvy streets and cul de sacs with soothing names like Cottontail Drive, Steeplechase Road and Ladybird Lane, lining them with the cheapest McMansions in California. Things exploded out of control this past decade, with the population doubling to 100,000 in just eight years.

But that whole way of life is over now. Unemployment in Victorville is way above the national average, and violent crime has shot up. Homes prices have plunged to 1989 levels and many stand empty. Banks don't even bother to putting them on the market.

Yet, last week, the press started hyping up the supposed real estate sales-driven economic turnaround that was about to sweep the country. "Honk if You Think It's Over," read a June 7 New York Times headline. "The panic in the Manhattan real estate market of the winter of 2009 lifted in the last few weeks, brokers say, as more and more buyers and sellers have found the courage and the comfort level to sign on the dotted line."

The Washington Post went even further: "Economists, senior government officials and ordinary consumers are all showing greater confidence in the outlook for the economy. ... There are unquestionable signs of economic progress." ABC News went with a rhetorical structure: "Has the Recession Finally Ended? Strong Home Sales Are Just One Indicator That the Economy May Be on the Mend."

From where I sit, this reads like pure fiction. It runs contrary to virtually every economic piece of data available: rising unemployment, growing credit card debt, a massive shadow inventory of foreclosed homes and a wave of defaulting ARM and commercial loans that's just around the corner.

But there is something else, too. And it is as deadly to our vampiric debtor economy as a stake through the heart: the FHA loan. By guaranteeing certain mortgages, the Federal Housing Administration has been helping middle- and low-income Americans purchase their first homes ever since the 1930s.

But this modest leg-up program has been been hijacked and transformed into the new subprime-loan market operated by lenders who are as corrupt, predatory and shortsighted as the original, and maybe even more so. Because this time taxpayers have been put on the hook for the risk well in advance. Real-estate insiders have been sounding the alarm about this new shadow subprime mortgage market -- which is now almost $600 billion strong -- for months now. But instead of listening, Congress has been trying to expand the FHA loan program.

Not surprisingly, it seems that risk-free loans are the only way they banks can be persuaded to start lending again. But I wanted to find out firsthand how much of an impact these loans were having on the housing market. So last weekend, I shaved, put on a clean shirt and headed out for a day of shopping in Victorville.

Around here, it is much easier to shop for a brand new home than to find someone who will show you one of the many foreclosed ones. You don't need to make an appointment with a real estate agent, hunt down open houses on a Sunday afternoon or attend auctions. All you have to do is take a drive any day of the week during normal business hours and look out for the huge signs plastered around town. They are not easy to miss.

It took me five minutes to spot a new development on the very edge of Victorville's sprawl. The sign was dark green and advertised a development called "Braeburn at West Creek," with luxurious and spacious homes offered for around $200,000. The development had a quiet, upper-class suburb feel to it: new cars, landscaped lawns, no traffic and wide streets. Passing a group of kids playing basketball in the middle of one of the streets, I pulled up in front of the Braeburn sales office, built into the garage of a model two-story McMansion painted a trendy brown.

It was 3 p.m. on Saturday, prime house-hunting time. With all this buying activity the industry was reporting, I half-expected to run into other bargain shoppers like myself. But I was the only customer in the real estate office.

"Hello! Have you come to see the houses?" a chipper female voice yelped from a distant corner of the office. "Give me a second, I'll be right out." I couldn't get a visual on her. It was huge, this garage -- er, office -- big enough to hold three cars, easily the size of a decent apartment. Schematic drawings hung on the walls showing all the wonderful house configurations you could order.

That was when the voice appeared in human form: a blond middle-aged woman emerged from a corner office with a bundle of keys. Braeburn had three floor plans to choose from, she quickly started explaining. But I could only look at two of them. The third was still under construction. But if I wanted to, I could drive around and look at it: "It is quite far along in the building process."

The homes were all quite similar: all three had two floors, four to five bedrooms and range of 2,454 to 2,765 square feet. All of them had what's called a "great room," something you see in new home developments that combines the kitchen, living and dining rooms into one great open space.

"We have sold 105 homes so far, and I have about 30 homes left," the agent said, whipping out a photocopy list of Braeburn's homes, complete with lot numbers. "Right now we are headed into this cul de sac. This is our last cul de sac." The rest of the homes would be built on mere streets. She circled homes numbered 85 through 98 surrounding a dead end street called Window Rock Court.

"This is a nice neighborhood. I have a few foreclosures in here, but if you drive the neighborhood and ask the people, they'll tell you how they like it here. And how they are real comfortable. I got some correctional officers here, LAPD, teachers from the school."

Jesus, I thought. What a neighborhood. Prison guards, cops and their school-teacher wives. All die-hard small-government Republicans, no doubt. And all in government employ. The last gainfully employed people in this country, and they're always talking shit about their employer, Big Government.

"But go look at the houses for yourself first. We can talk about it when you go back."

The model homes were fully furnished, and looked like they came out of a Martha Stewart magazine with a theme of "the antique and modern in harmony." I had to hand it to them, it worked. It felt like home, as long as you didn't look out of the master bedroom window. The mini-highway and a barren desert wasteland dotted with high-voltage power lines squashed that comfort feeling.

These houses were clearly a step up from the entry-level McMansion I lived in just a few blocks away. But were they worth the extra $100,000 that you could be saving if you tried to get one of few foreclosed properties that are on the market? The sales lady assured me they were, and besides I'd never get a house for that price in Victorville.

"I have a lot of people coming in here that have been bidding on foreclosures until they are sick of it. They bid and they bid and they bid, and 20 other people are bidding, too. You throw a number out, and you never get anywhere. So they say 'I want my tax credit. I want my new home. I'm gonna pick my own carpet. I know it's under 10-year structural warranty and two-year cosmetic warranty.' "

Are the news reports about the increase in home sales true, I asked. She nodded. "I've been here for three years. Last year was really slow going, but this year has been really good. I've had four sales last month, three sales the month before that. First-time home buyers, that's what I'm getting. People are like ‘prices are down, the rates are low ... time for me to get a house.' So why not? People are not afraid of getting into homeownership. So that's a good sign, right?"

Of course, I nodded. Great for the economy. Great for Victorville. But the longer we talked, the more obvious it was FHA loans were at the core of a real estate scam of frightening proportions that was reinflating the real estate bubble with taxpayers' money, all in the name of economic recovery.

"Oh yes, we work with a lender. All you have to do is come in and let me worry about the paperwork. Right now you'll probably be able to get a 5 percent interest loan, which is good. And credit history is not much of a problem. We are doing just FHA loans, so we don't even go by a FICO score. If you haven't been late in the last 12 months on anything, you are eligible. People get in here with credit scores of 580s and 600s, but they've been on their job for 15 years, and they got a good history. The FHAs, that's what's helping out the first-time home buyers."

The FHA was helping the developers out, too. Even with boosts like the new accounting rules that allow banks to keep existing homes off the market (which boosts banks' assets and inflates home values by limiting supply) and taxpayer-funded cash perks for purchases of newly constructed homes, it could only work with zero-risk loans. No bank would consider giving a loan on obviously overpriced homes these days, especially with people with borderline bad credit. But thanks to the FHA, lenders literally cannot lose on these high-risk customers. So they are happy to hand out loans to all comers. In fact, places like Braeburn only sell to people who qualify for an FHA-backed mortgage: first-time home buyers. Fact is, FHA loans were the only reason places like Braeburn were still open for business. And that may not be such good thing.

FHA loans have been around since the Great Depression, helping working-class Americans buy their first homes by providing government insurance that guarantees certain types of loans at no risk to the lender. Until recently, they have been largely a force for good. During the civil rights movement, for example, FHA loans were retooled to help African Americans purchase homes. But like most public programs designed to help the American people, the FHA has been hijacked by big business -- in this case, the banking and real estate industries.

It was really a coup de etat for everyone involved. When the subprime market collapsed, President George W. Bush pushed Congress to heavily expand the the FHA loan program, increasing its budget, lowering entry requirements for both lenders and debtors. Eventually, our elected officials even took care of the bothersome 3.5 percent down payment requirement for the loan with all sorts of free cash.

Right now, the FHA is in essence giving out no-money-down loans to anyone who doesn't already own a house, regardless of credit history. In California, first-time homebuyers purchasing a freshly built home receive instant cash in the form of a tax credit: $8,000 from the feds (soon to be increased to $16,000) and $10,000 from the state. Local governments are also throwing in some goodies.

"I have some some money from the school facility fees that I can get. Like you need 3.5 percent down, but I can get you about $4,000 of that from down-payment sources. That just came back. It was gone but it's back," said the sales lady at Braeburn, lowering her voice just a bit that made it seem this was some sort of racket. "And we pay the $10,000 closing costs for you, as well. It's a win-win situation."

Win-win, indeed. If you bought Braeburn's largest home at base price, you'd pay nothing up front and have more than $5,000 left over for some new furniture, a 40-inch LCD TV and a weekend trip to Disneyland.

Homeowners have never been offered a better deal, but many won't hold on to their purchases for very long. It is common real estate industry knowledge that the less a buyer puts on a down payment, the more likely that buyer is to default. But no one seems to care, not the banks and not our government. In fact, Connecticut Sen. Chris Dodd, hardworking bank-shilling Democrat, has been pushing to increase access to FHA by making them available anyone, and not just first-time homeowners. He also wants to push the new-home federal tax credit to $15,000.

Under the guise of helping economic recovery, the bill is really a multidimentional wealth transfer, funding bank profits with taxpayer money while cutting taxes (tax credit is just another way of reducing tax revenue). This plan has received wide support.

The whole racket is so crude and so obviously doomed to end in disaster that papers like the Wall Street Journal, normally a champion of Thatcherite houseowning, have tried to blow the whistle:

The Next Housing Bust
Everyone knows how loose mortgage underwriting led to the go-go days of multitrillion-dollar subprime lending. What isn't well known is that a parallel subprime market has emerged over the past year -- all made possible by the Federal Housing Administration. This also won't end happily for taxpayers or the housing market.

Last year, banks issued $180 billion of new mortgages insured by the FHA, which means they carry a 100 percent taxpayer guarantee. Many of these have the same characteristics as subprime loans: low down payment requirements, high-risk borrowers, and in many cases, shady mortgage originators. FHA now insures nearly 1 of every 3 new mortgages, up from 2 percent in 2006.

The financial results so far are not as dire as those created by the subprime frenzy of 2004-2007, but taxpayer losses are mounting on its $562 billion portfolio. According to Mortgage Bankers Association data, more than 1 in 8 FHA loans is now delinquent -- nearly triple the rate on conventional, non-subprime loan portfolios. Another 7.5 percent of recent FHA loans are in "serious delinquency," which means at least three months overdue.

The FHA is almost certainly going to need a taxpayer bailout in the months ahead. The only debate is how much it will cost. By law, FHA must carry a 2 percent reserve (or a 50-to-1 leverage rate), and it is now 3 percent and falling. Some experts see bailout costs from $50 billion to $100 billion or more, depending on how long the recession lasts.

Private profits, public risk. It is a lurid example of the New Capitalism at work, exposing the cannibalistic nature of our society. Even the institutions created to serve the interests of the public have been perverted into instruments of theft.

Business Week, another conservative financial outlet, was actually warning about the FHA scam back in 2008:

For generations, these loans, backed by the Federal Housing Administration, have offered working-class families a legitimate means to purchase their own homes. But now there's a severe danger that aggressive lenders and brokers schooled in the rash ways of the subprime industry will overwhelm the FHA with loans for people unlikely to make their payments. Exacerbating matters, FHA officials seem oblivious to what's happening -- or incapable of stopping it. They're giving mortgage firms licenses to dole out 100 percent-insured loans despite lender records blotted by state sanctions, bankruptcy filings, civil lawsuits and even criminal convictions.
More Bad Debt

As a result, the nation could soon suffer a fresh wave of defaults and foreclosures, with Washington obliged to respond with yet another gargantuan bailout. Inside Mortgage Finance, a research and newsletter firm in Bethesda, Md., estimates that over the next five years, fresh loans backed by the FHA that go sour will cost taxpayers $100 billion or more. That's on top of the $700 billion financial-system rescue Congress has already approved. Gary E. Lacefield, a former federal mortgage investigator who now runs Risk Mitigation Group, a consultancy in Arlington, Texas, predicts: "Within the next 12 to 18 months, there is going to be FHA-insurance Armageddon."

Yet the FHA scam goes on, despite these warnings, for the simple reason that it's the only thing driving an otherwise moribund real estate market. Without these FHA loans, the whole thing would collapse, sooner rather than later. The Business Week piece was published seven months ago. That leaves five months, more or less, before the Armageddon it predicts.

But for now, this racket -- and the couple of trillion dollars pumped into the financial sector -- are showing borderline modest results. On average, pending home sales rose by 6.7 percent in April. That's its highest level since September and the sharpest increase in seven years.

In Victorville, new housing developments are being kept inflated at slightly below 2004 price levels. There has been a slight increase in demand for new homes, too, causing some builders to start raising prices.

A KB Homes development not far from where I live has sold all its lots, raised prices by about 1 percent and even started a new development -- smaller, and with less flash, more in sync with the depressed market -- that will start selling homes sometime this fall. Even Home Depot said its earnings for the month of May were better than expected.

But if you walk just one block over from the booming Braeburn community, a whole row of homes stands empty. It is a grim reminder of the massive shadow inventory of foreclosed homes no one wants to think about. New-home values are being inflated, but existing homes are becoming increasingly worthless. In bubble cities all across California, real estate has fallen below 1989 levels.

Median Home Prices Drop Below 1989 Levels in Some Parts of Southland
Properties in several areas are selling for less than they did 20 years ago, and that's not including inflation. Some first-time buyers are nabbing houses for less than what their parents paid.

By Peter Y. Hong

June 10, 2009

In parts of Southern California, the housing crash has upended a basic tenet of the American dream: that home values always increase over the long term.

Properties in several areas are selling for less than they did 20 years ago, and that's not even counting the effects of inflation.

The government is knowingly flooding the market with homes at inflated prices, setting young families up for default and massively increasing taxpayers' exposure to more toxic debt ... and for what?

It's all about taking care of the banking and finance industry.

Bush was responsible for widening the scope of FHA loans with his "HOPE for Homeowners" program, pledging to make $300 billion available for FHA-backed refinancing that would've helped 400,000 families avoid foreclosure. But the program seemed to be more about coming up with a legitimate reason for getting as many lenders approved to take part in the racket as quickly as possible than actually helping people refinance their homes.

Six months after HOPE was signed into law, only one homeowner had successfully refinanced with the program. At the same time, the number of FHA-approved lenders doubled from around 16,000 to 36,000. It was perfect timing, as many of them were subprime lenders looking for a new gig.

Here's Business Week again:

FHA "faces a tsunami" in the form of ex-subprime lenders who favor aggressive sales tactics and sometimes engage in outright fraud, says Kenneth M. Donohue Sr., the inspector general for the Department of Housing and Urban Development. "I am very concerned that the same players who brought us problems in the subprime area are now reconstituting themselves and bringing loans into the FHA portfolio," he adds.

FHA staffing has remained roughly level over the past five years, at just under 1,000 employees, even as that tsunami has been building, Donohue points out. The FHA unit that approves new lenders, recertifies existing ones and oversees quality assurance has only five slots; two of those were vacant this fall, according to HUD's Web site. Former housing officials say lender evaluations sometimes amount to little more than a brief phone call, which helps explain why questionable ex-subprime operations can reinvent themselves and gain approval.
So here we are. Subprime 2.0. Just like the last subprime bubble, it might help the economy in the short term; real-estate industry profits will soar, developers will keep the construction business running, banks will look more solvent and inspire confidence in the economy, which will help keep the bubble inflated. But it won't last.

The second contraction will come, and when it does, it'll be bigger and badder than ever. And the government bailout will come straight out of our pensions and health care.

Global Poll: Widespread Dissatisfaction with Free-Market Capitalism

2009-11-10T10:20:00.001-08:00

http://www.commondreams.org/headline/2009/11/09-1

November 9, 2009 by BBC World Service
Global Poll: Widespread Dissatisfaction with Free-Market Capitalism
by James Robbins

Twenty years after the fall of the Berlin Wall, a new BBC poll has found widespread dissatisfaction with free-market capitalism.

In the global poll for the BBC World Service, only 11% of those questioned across 27 countries said that it was working well.

Most thought regulation and reform of the capitalist system were necessary.

There were also sharp divisions around the world on whether the end of the Soviet Union was a good thing.

Economic regulation

In 1989, as the Berlin Wall fell, it was a victory for ordinary people across Eastern and Central Europe.

It also looked at the time like a crushing victory for free-market capitalism.

Twenty years on, this new global poll suggests confidence in free markets has taken heavy blows from the past 12 months of financial and economic crisis.

More than 29,000 people in 27 countries were questioned. In only two countries, the United States and Pakistan, did more than one in five people feel that capitalism works well as it stands.

Almost a quarter - 23% of those who responded - feel it is fatally flawed. That is the view of 43% in France, 38% in Mexico and 35% in Brazil.

And there is very strong support around the world for governments to distribute wealth more evenly. That is backed by majorities in 22 of the 27 countries.

If there is one issue where a global consensus seems to emerge from the survey it is this: there are majorities almost everywhere wanting government to be more active in regulating business.

It is only in Turkey that a majority want less government regulation.

Opinion about the disintegration of the Soviet Union is sharply divided.

Europeans overwhelmingly say it was a good thing: 79% in Germany, 76% in Britain and 74% in France feel that way.

But outside the developed West it is a different picture. Almost seven in 10 Egyptians say the end of the Soviet Union was a bad thing and views are sharply divided in India, Kenya and Indonesia.

Profits for Buyout Firms as Company Debt Soared

2009-11-10T09:51:00.000-08:00

IN THE END, it is the taxpayers who are indirectly subsidizing this scam when the companies go belly up and file for bankruptcy. Other subsidization from the taxpayer is unemployment insurance for those who lose their jobs because of evil private equity plus mortgage defaults, private bankruptcies and other social fallout (when the employees lose their jobs so private equity can strip it out and make money on the companies they devours). All these indirect costs to feed the voracious appetite of the endowments and pension funds that few benefit from!

Also check out the excellent short videos that support this article at http://graphics8.nytimes.com/packages/html/business/2009-private-equity/index.html#skipIntro

http://www.nytimes.com/2009/10/05/business/economy/05simmons.html?_r=1&hp=&pagewanted=print

October 5, 2009
Profits for Buyout Firms as Company Debt Soared
By JULIE CRESWELL

For most of the 133 years since its founding in a small city in Wisconsin, the Simmons Bedding Company enjoyed an illustrious history.

Presidents have slumbered on its mattresses aboard Air Force One. Dignitaries have slept on them in the Lincoln Bedroom. Its advertisements have featured Henry Ford and H. G. Wells. Eleanor Roosevelt extolled the virtues of the Simmons Beautyrest mattress, and the brand was immortalized on Broadway in Cole Porter’s song “Anything Goes.”

Its recent history has been notable, too, but for a different reason.

Simmons says it will soon file for bankruptcy protection, as part of an agreement by its current owners to sell the company — the seventh time it has been sold in a little more than two decades — all after being owned for short periods by a parade of different investment groups, known as private equity firms, which try to buy undervalued companies, mostly with borrowed money.

For many of the company’s investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.

But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.

How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times and an example of a growing phenomenon in corporate America.

Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.

But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.”

In many ways, what private equity firms did at Simmons, and scores of other companies like it, mimicked the subprime mortgage boom. Fueled by easy money, not only from banks but also endowments and pension funds, buyout kings like THL upended the old order on Wall Street. It was, they said, the Golden Age of private equity — nothing less than a new era of capitalism.

These private investors were able to buy companies like Simmons with borrowed money and put down relatively little of their own cash. Then, not long after, they often borrowed even more money, using the company’s assets as collateral — just like home buyers who took out home equity loans on top of their first mortgages. For the financiers, the rewards were enormous.

Twice after buying Simmons, THL borrowed more. It used $375 million of that money to pay itself a dividend, thus recouping all of the cash it put down, and then some.

A result: THL was guaranteed a profit regardless of how Simmons performed. It did not matter that the company was left owing far more than it was worth, just as many people profited from the mortgage business while many homeowners found themselves underwater.

Investors who bought that debt are getting virtually nothing in the new deal.

“From my experience, none of the private equity firms were building a brand for the future,” said Robert Hellyer, Simmons’s former president, who worked for several of the private equity buyers before being asked to leave the company in 2005. “Plus, the mind-set was, since the money was practically free, why not leverage the company to the maximum?”

Just as with the housing market, the good times ended when the economy fell into recession and the credit markets froze. Simmons is now groaning under a huge amount of debt at a time when its sales are slowing. And this time there is no escaping by finding yet another buyer willing to shoulder its entire burden.

Simmons is one of hundreds of companies swept up by private equity firms in the early part of this decade, during the greatest burst of corporate takeovers the world has ever seen. Many of these deals, cut in good times, left little or no margin for error — let alone for the Great Recession.

A disproportionate number of the companies that were acquired during that frenzy are now struggling with the enormous debts. More than half the roughly 220 companies that have defaulted on their debt in some form this year were either owned at one time or are still controlled by private equity firms, according to analysts at Standard & Poor’s. Among them are household names like Harrah’s Entertainment and Six Flags, the theme park operator.

Executives at THL counter that Simmons was the victim of hard economic times, not mismanagement or too much debt. As proof, executives point to Simmons’s 40 percent growth in sales and its 26 percent climb in operating income from 2003 through 2007 as well as its 13 consecutive quarters of market share gains against competitors through March 2009.

Simmons’s woes, said Scott A. Schoen, a co-president of the firm who sat on Simmons’s board, are entirely caused by the “unprecedented and unforeseeable” downturn that has shaken the entire bedding industry.

“We think the work we had done had positioned the company for us to reap the financial rewards that this economic cycle has taken away,” said Mr. Schoen, gazing across a conference table at THL’s headquarters overlooking Boston Harbor.

Still, he acknowledged, “We are clearly disappointed in the outcome of this investment. Make no bones about it.”

Built Over Generations

Like other emerging industrialists of the 19th century, Zalmon G. Simmons, of Kenosha, Wis., had his hand in numerous businesses — the local bank, a telegraph company, a railroad and a cheese-box factory. He was even, for a time, the mayor of Kenosha.

Around 1876, Mr. Simmons came across a new machine that could mass-produce woven wire mattresses. The Simmons bedding company was born.

From its humble beginnings on the banks of Lake Michigan, Simmons grew to become one of the country’s largest manufacturers of mattresses. Along the way, it even sprinkled a little Hollywood pixie dust on the ho-hum mattress business, hiring Dorothy Lamour and Maureen O’Hara to plug its products.

Until the 1970s, Simmons largely prospered. Then the troubles started, and the company was soon buried deep inside two enormous conglomerates, Gulf & Western and the Wickes Corporation, for a number of years.

But in the mid-1980s, Simmons caught the attention of a new type of investor. The businesses that stormed corporate America in recent years under the banner of private equity were not always called private equity firms. In the 1980s, they were known as leveraged buyout shops. Their strategy is essentially unchanged, however: they try to buy undervalued companies, using mostly borrowed money, fix them up and sell them for a fast profit.

Because they pile debt onto the companies they buy, the firms free up their own cash, allowing them to make additional investments and increase their potential profits.

Simmons’s first trip through the revolving door of private equity came in 1986. Like the latest trip, it was not a pleasant one for employees, but the buyers did just fine.

William E. Simon, a private equity pioneer and a Treasury secretary under President Richard M. Nixon, was the man with the golden touch. In 1986, his investment firm, Wesray Capital, and a handful of Simmons’s top managers acquired the company for $120 million, the bulk of which was borrowed. After selling several businesses to pay back some of the money it had borrowed, Wesray cashed out in 1989. It sold Simmons to the company’s employee stock ownership plan for $241 million — twice what it paid just three years earlier.

The deal was a fiasco for the employees. As part of the buyout, Simmons stopped contributing to its pension plan, since the stock ownership plan shares were meant to pay for the employees’ retirements. But then the bottom fell out of the housing market and Simmons, with its large debt, stumbled. Its pensions crumbled as the value of the stock plan shares plunged.

A succession of private equity buyers came and went. Merrill Lynch Capital Partners bought Simmons in 1991 for $32 million for a 60 percent stake in the company and the assumption of its debt. Merrill sold it to Investcorp, an investment group based in Bahrain, for $265 million in 1996. Two years later, Investcorp sold the company to Fenway Partners for $513 million.

During Fenway’s tenure, Simmons released one of the industry’s biggest innovations: the no-flip mattress. Profits soared. But after five years, Fenway executives decided to cash out. By the fall of 2003, Simmons was back on the block.

Teddy Bear at the Gate

A longtime figure in investment circles, Thomas H. Lee vaulted into the big leagues of private equity with what is regarded as one of the legendary deals of all time. After founding Thomas H. Lee Partners in 1974, he grabbed headlines in 1994 when he sold Snapple, the iced tea maker, for $1.7 billion to Quaker Oats. He bought the company two years earlier for around $130 million.

But while other captains of the buyout craze — like Henry Kravis of Kohlberg Kravis & Roberts — chased giant companies in hostile deals, Mr. Lee focused largely on midsize companies and steered clear of deals where he was not welcome. The research firm Hoover’s describes Thomas H. Lee Partners as “the teddy bear at the gate.”

Mr. Lee, scion of the family that founded the Shoe Corporation of America, left his namesake firm in 2006 to start another investment company. During his 30-year tenure at THL, his firm invested in a series of big names: Ghirardelli Chocolate, Petco Animal Supplies and General Nutrition Companies, among others. And by 2003, as the buyout boom began to build, his firm had Simmons in its cross hairs.

The Deal

The fall of 2003 was little more than a blur of meetings and presentations for Robert Hellyer, the former Simmons president who is among the fourth generation of his family involved in the mattress industry. In eight weeks, the company was shown to 20 private equity suitors in the corporate version of speed dating.

The list of potential buyers was quickly whittled to three and finally to THL, whose $1.1 billion bid for the company consisted of $327 million in new equity from the firm and more than $745 million in bonds and bank loans that had to be raised from investors.

“They were good guys; very smart guys,” Mr. Hellyer said. “Their thesis was to buy a good business with good management and let them get better.”

What THL wanted from the deal was a return of two to three times its initial investment.

From the get-go, the lofty price the firm paid for Simmons and the amount of debt raised red flags on Wall Street.

The “higher debt burden will limit the company’s ability to respond to unexpected negative business developments, including economic or competitive threats or internal missteps,” analysts at Moody’s Investors Service warned at the time.

But nobody, it seems, was listening. Six months after acquiring Simmons, THL set in motion plans to take the company public. And by December 2004, THL found a way to get part of its initial investment back. Simmons issued debt that required the company to pay a hefty 10 percent annual interest rate. The proceeds were used to pay THL a dividend of $137 million. With the company’s debt climbing, Simmons executives had to aim high with new products — and pray they were right.

In late 2004, Simmons unveiled the HealthSmart mattress in a blitz of marketing.

It gave away 250 beds to the audience of “The Ellen DeGeneres Show.” It began a $15 million advertising campaign. It put coupons for free HealthSmart beds in celebrity souvenir bags during New York’s Fashion Week.

A mattress line aimed at combating dust mites, mold and germs, the HealthSmart featured a zip-off top that could be washed or dry cleaned. But in the rush to get the product to market, Simmons did not go through its normal research and testings, Mr. Hellyer says.

HealthSmart was a flop. Consumers did not like the mattress — they thought the zip-on cover was troublesome. Sales at the company slid nearly 8 percent in the first quarter from the previous year.

“Panic ensued. Thomas H. Lee came in and pulled the national advertising right away,” said a former Simmons employee involved with HealthSmart who declined to be named because he is still involved with the mattress industry.

THL shelved its plans to take Simmons public, and the company shook up its sales division. By the third quarter of 2005, Simmons had “one of the best quarters in the company’s entire history up to that point,” a spokesman for THL said in an e-mail message. The numbers tell a slightly different story: Net sales declined 4.8 percent in that quarter from a year earlier, and operating income fell to $25.1 million, from $25.5 million in the third quarter of 2004. Later, spokesmen for THL and Simmons clarified the statement by saying that after excluding a one-time reorganization expense, an adjusted earnings figure for the quarter was the 10th best in the company’s history.

Executives at THL say they moved quickly to put Simmons back on track.

“More than a dozen THL professionals have devoted literally thousands of man-hours to Simmons, including making over 115 visits to company headquarters and site facilities around the country,” the firm said in a statement.

The results, it argued, speak for themselves. In the following years, Simmons’s sales and profits climbed, and the company introduced several new products, including the successful premium-price Beautyrest Black line of mattresses.

By early 2007, at the very top of the credit market bubble, THL took a bit more out of Simmons. It created a holding company that it used to issue $300 million more in debt, which paid an additional $238 million dividend to the private equity firm. With that, THL had recouped its entire $327 million equity investment in Simmons and booked a profit of around $48 million. (It made an additional $28.5 million in various fees over the years.)

THL was hardly alone in undertaking this sort of financial engineering, known as a dividend recapitalization. From 2003 to 2007, 188 companies controlled by private equity firms issued more than $75 billion in debt that was used to pay dividends to the buyout firms.

Asked whether the 2007 dividend was too much for Simmons, Mr. Schoen of THL defended the deal.

“That debt financing, which clearly spelled out to the market the use of the proceeds, was extremely well received. The securities were heavily oversubscribed,” Mr. Schoen said. “Not only did we think it was appropriate, but the market did as well,” he added.

As the economy soured in late 2007, so did Simmons’s sales. The company slashed costs and cut jobs throughout 2008. But last fall, unable to meet the terms of its bank loans and debt dating back to the 2003 acquisition itself, Simmons stopped making interest payments to its bondholders. THL began talking to the banks and bondholders about how to lighten Simmons’s debt load, and put the company up for sale.

The Impact on Employees

From the start, Noble Rogers loved working at Simmons.

“There were picnics, March of Dimes walks, Christmas parties, and we always had Halloween parties. It was a really family-oriented company,” Mr. Rogers, 50, recalled. “I told my wife that this was a great place for me to work. A great place for me to retire, to make a living at.”

For a long time, it was. For 22 years, Mr. Rogers worked at Simmons, the bulk of those years at a factory in Mableton, outside Atlanta. After operating the coiler machine for the company’s Beautyrest mattress, he moved into maintenance and kept all of the plant’s machinery humming.

Over the years, as Simmons passed from one private equity firm to another, and as Mr. Rogers became president of the local union at the plant, he saw little difference on the plant floor. Then, in the spring of 2008, when the slowing economy had begun to hurt sales, Simmons laid off the night shift at the Mableton plant. And on Sept. 18 that year, it gathered employees in the cafeteria to say that the plant was closing.

“So many people were hurt because they thought this was a great company to work for and they planned on spending the rest of their lives here. Their families were here. They bought houses and cars here,” Mr. Rogers recalled. “After this happened, people were really struggling.”

Between the closings and other cuts, Simmons let go of more than a quarter of its work force last year, said its chief financial officer, William S. Creekmuir.

Mr. Rogers, who received his union-negotiated severance package of two months’ pay, said he and other union representatives had tried to get a little more for workers, particularly those who would have been eligible for retirement. Simmons had a long history of giving retiring employees a bonus of $20 for each year worked and a free mattress set, Mr. Rogers said.

“They wouldn’t give us anything,” he said.

In the months after he lost his job, Mr. Rogers nearly lost his home to foreclosure and struggled to pay his family’s bills. Mr. Rogers, who eventually landed a job at an air filter company and picked up part-time work doing maintenance at an apartment complex, said Simmons bore little resemblance to the company he once loved.

“They stopped the picnics. They stopped the Christmas parties. They stopped the retirement parties,” he recalled. “That showed you the type of people I was working for. I just didn’t realize it until the hard times came like they did.”

For now, the Golden Age of private equity is over, the financiers say. In a speech to an industry gathering last spring. Mr. Schoen said that bankers and bondholders were reluctant to lend more money to the buyout kings.

“We’re in a brave new world,” he said. “We can’t go back to where we were, at least not in this investment cycle, and probably not in my career.”

But some private equity investors are searching for profits in the detritus of the buyout bust. Simmons hopes to emerge from bankruptcy in the hands of two new private equity firms. One is Ares Management, which owns the mattress giant Serta. Under the plan, Simmons’s debt would be more than halved, to $450 million, in part reflecting the losses suffered by its existing bondholders.

Simmons and its remaining employees face an uncertain future. Some in the industry predict Ares will eventually merge at least part of Simmons with Serta, jeopardizing more jobs.

“Simmons has been a cash cow. It’s made a lot of people a lot of money,” said David Perry, executive editor of Furniture/Today. “But there’s a growing question in the industry of how many more times can this be repeated. How much more juice can be squeezed out of the orange?”

Credit Card Firms Hurry to Raise Rates

2009-11-08T10:35:00.000-08:00

http://www.boston.com/business/personalfinance/articles/2009/11/06/credit_card_firms_hurry_to_raise_rates/

November 6, 2009 by The Boston Globe
Credit Card Firms Hurry to Raise Rates
Some top 30% as new rules loom
by Megan Woolhouse

Credit card companies are rushing to increase interest rates to historic highs of more than 30 percent, cut credit limits, and add new fees, even for customers who pay their bills on time.

Lenders are making the moves in advance of tougher federal regulations for credit cards scheduled to take effect on Feb. 22. The new rules will limit how companies can modify credit card agreements, specifically prohibiting them from retroactively raising interest rates and fees on existing balances.

US Representative Barney Frank, the Massachusetts Democrat who chairs the Financial Services Committee and is a leader in the effort to revamp credit card policies, said banks have "abused'' the nine-month period granted them to re-tool their practices.

"I didn't think they would be as blatant as they were about doing this,'' he said. "There's no justification for raising rates retroactively. This is really just a way for them to make more money.''

As a result of ever-escalating rates and fees, cardholders like Carole Hoppe Mezian of Norwood dread the arrival of their monthly statements. Hoppe Mezian carries a $10,000 balance on her Discover card and says she sometimes can't make payments on time. Since May, her interest rate has ballooned from 14.99 percent to 29.99 percent, and the minimum due on her September bill was $771, mostly in interest and penalties.

"I might have been better off going to the Mafia and getting a loan that way,'' she said.

Matthew Towson, a Discover spokesman, said the company is willing to work with Hoppe Mezian to help manage her debt.

A study by The Pew Charitable Trusts, an independent nonprofit, found the median interest rate advertised by most credit card companies in July 2009 was 13 to 23 percent higher than rates in December 2008.

To counteract the barrage of hikes, a bill now under consideration in Congress would move up to Dec. 1 enactment of the new rules. The House approved the accelerated plan Wednesday. But the bill's prospects in the Senate appear dim; many senators say a shortened deadline would cause banks to issue fewer cards, making it more difficult for consumers who most need credit to obtain it.

After years of complaints from consumer advocacy groups about credit companies' pricing practices, some rules have already been changed. For instance, portions of the new law enacted in August require banks to give customers 45-day notice of any changes in an agreement. Consumers can opt out of an impending increase, keeping their card at the lower interest rate, but only until the card expires. After that, they must apply for a new card. They can also avoid the interest hike by closing the account and arranging to pay off the balance at the lower interest rate.

Ken Clayton, a senior vice president of the American Bankers Association, a trade group, said recent rate increases were not an effort to circumvent the new regulations, but the result of massive losses faced by the credit card industry because of the recession. More than 10 percent of all credit card customers have defaulted on payments this year, he said. "There's a shared risk here,'' he said. "Credit card companies are making loans to people every day and the rates people are charged are affected by whether people are paying them back.''

There are no limits on how much interest a credit card company can charge, and the new law, passed in May, will not change that. Some consumer groups called for a 36 percent cap on credit card rates, but Frank said legislators did not institute a limit because most credit card companies would immediately "go up to that rate.''

While credit cards are becoming more expensive, interest rates set by the Federal Reserve have been at record lows for a year, allowing banks and credit card issuers to borrow money more cheaply. The prime rate - the amount banks charge their best customers to borrow money - is 3.25 percent. Credit card companies charge far above that because borrowing on a card is considered riskier.

At Bank of America, one of the biggest credit card providers in the country, credit card revenue dropped slightly between 2007 and 2008, from $14 billion to $13.3 billion. The bank received more than $40 billion in federal bailout money.

Lauren Bowne, a staff attorney at Consumers Union, the nonprofit publisher of Consumer Reports, called interest rates of 30 percent and above "astronomical.'' In the past, lenders have charged up to 30 percent, but typically only to risky customers. But such rates are now being applied to many more consumers, including those with pristine credit.

In addition to upping interest rates, banks are using fees to generate revenue, Bowne said, noting that some consumers have even been assessed fees for not using their cards often enough.

Betty Reiss, a Bank of America Corp. spokeswoman, said it implemented a rate increase after the new legislation was passed, but agreed not to raise rates again unless a customer is late two or more times in a paying a bill.

The upward trend in rates and fees has led to calls for even more regulation from consumer groups like the Industrial Areas Foundation. Spokesman Arnie Graf said many major banks are recouping lost profits at consumers' expense. Many of the nation's biggest credit card issuers are banks that benefited from billions in taxpayer money to help them recover from their own bad investments, he said.

"These are essentially dead banks borrowing from the government at nearly zero percent and loaning it out at 29.99 percent,'' Graf said. "Hell, anyone can do that.''

© Copyright 2009 Globe Newspaper Company

Learning to Love Insider Trading

2009-11-03T14:39:00.000-08:00

http://www.independent.org/newsroom/article.asp?id=2641

Learning to Love Insider Trading
October 24, 2009
Donald J. Boudreaux
Wall Street Journal

Here's a hot tip: Want to keep companies honest, make the markets work more efficiently and encourage investors to diversify? Let insiders buy and sell, argues Donald J. Boudreaux.

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It’s Halloween season, and the scariest demons in the world of business are insider traders, lurking behind every stockbroker’s desk and four-star restaurant banquette. They whisper dark corporate secrets into the ears of venal speculators, and inflict pain and agony upon ordinary investors.

Time to stop telling horror stories. Federal agents are wasting their time slapping handcuffs on hedge fund traders like Raj Rajaratnam, the financier charged last week with trading on nonpublic information involving IBM, Google and other big companies. The reassuring truth: Insider trading is impossible to police and helpful to markets and investors. Parsing the difference between legal and illegal insider trading is futile—and a disservice to all investors. Far from being so injurious to the economy that its practice must be criminalized, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest—in keeping prices from lying to the public about corporate realities.

Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie.

And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

Remember the 1970s-era price ceiling on gasoline? By causing prices at the pump to lie about the scarcity of oil, that price ceiling led Americans to waste untold hours waiting in lines to fuel their cars. Similar wastes occur when corporate assets are mispriced.

Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme’s managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme’s share price will be too high. Investors will buy Acme shares at prices that conceal the company’s imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme’s employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc.

Eventually, of course, those misled investors, creditors and workers will suffer financial losses. But the economy as a whole loses, too. Capital that would otherwise have been invested in firms more productive than Acme Inc. never gets to those firms. So compared with what would have happened had people not been misled by Acme’s deceitfully high share price, those better-run firms don’t enhance their efficiencies as much. They don’t expand their operations as much. They don’t create as many good jobs. Consumers don’t enjoy the increased outputs, improved product qualities and lower prices that would otherwise have resulted.

In short, overall economic efficiency is reduced.

It’s in the public interest, therefore, that prices adjust as quickly and as completely as possible to underlying economic realities—that prices adjust to convey to market participants as clearly as possible the true state of those realities.

As argued forcefully by Henry Manne in his 1966 book “Insider Trading and the Stock Market,” prohibitions on insider trading prevent asset prices from adjusting in this way. Mr. Manne, dean emeritus at George Mason University School of Law, pointed out that when insiders trade on their nonpublic, nonproprietary information, they cause asset prices to reflect that information sooner than otherwise and therefore prompt other market participants to make better decisions.

This achievement can have ramifications beyond a few percentage-point increases in productivity growth.

According to Mr. Manne, corporate scandals such as Enron and Global Crossing would occur much less frequently and impose fewer costs if the government didn’t prohibit insider trading. As Mr. Manne said a few years ago in a radio interview, “I don’t think the scandals would ever have erupted if we had allowed insider trading because there would be plenty of people in those companies who would know exactly what was going on, and who couldn’t resist the temptation to get rich by trading on the information, and the stock market would have reflected those problems months and months earlier than they did under this cockamamie regulatory system we have.”

Another potential benefit of lifting the ban on insider trading is explained by Harvard University economist Jeffrey Miron: “In a world with no ban, small investors might fear to trade individual stocks and would face a greater incentive to diversify; that is also a good thing.”

Not only do insider-trading prohibitions slow economic growth, promote corporate mismanagement and discourage investment diversification, their application also is unavoidably biased.

These prohibitions are meant to prevent all insiders with non-public information from profiting from the use of such information before it becomes public. It follows that unbiased application of these prohibitions should target not only traders whose inside information prompts them to actively buy or sell assets, but also traders whose inside information prompts them not to make asset purchases or sales that they would have made were it not for their inside information.

The insider who learns that the Food and Drug Administration will approve a new blockbuster drug developed by a major drug company, for example, obviously profits from this information if it prompts him to buy 1,000 shares of the company that he otherwise wouldn’t have bought. So, too, though, does the insider profit who, upon learning the same information, abandons her plans to sell 1,000 shares of the company. But because insider “nontrading” is undetectable, only the former insider is practically subject to prosecution and punishment.

And because opportunities to profit through insider “non-trading” might well occur with the same frequency as opportunities to profit through insider trading, as many as half of those investment decisions influenced by inside information might be undetectable.

This bias is not only a source of prosecutorial unfairness; its existence casts doubt on the assumption that insider trading is so harmful that it must be treated as a criminal offense. After all, if capital markets continue to function as well as they do given that many investment decisions potentially influenced by inside information are unstoppable because they are undetectable, why believe that the detectable portion of investment decisions influenced by inside information would be harmful if they were legal?

There are, of course, situations in which it is in the interest of both a company and the public for that company to delay the release of information. Such information should be protected as company property.

If, say, a big software firm plans to acquire a small, publicly traded software firm because such a merger would create greater production efficiencies, then an early leak of this information could undermine its merger efforts—and, hence, jeopardize the prospect of achieving greater efficiencies. With the public knowing that the big firm is seeking a controlling interest in the smaller firm, the price of that smaller firm’s shares might well rise so high that it is no longer profitable for the big company to acquire a controlling share.

The big company, therefore, has a legitimate interest in preventing insiders from trading on the knowledge that it plans to acquire the smaller firm. And the general public has an interest in permitting the company (and other firms in similar circumstances) to prevent trading on such inside information.

As University of Michigan law professor Adam Pritchard emphasizes, the challenge is to distinguish information that should be treated as proprietary from information that does not warrant such treatment. While this challenge is theoretically easy—protect only that information whose revelation to the public through insider trading would likely reduce overall economic efficiency—practically it is devilishly difficult.

Fortunately, neither elected officials nor government bureaucrats need to bother themselves with solving this challenge.

Discovering what types of inside information are proprietary and which are not proprietary—and, hence, which types of information are appropriate to protect and which not to protect from insider trading—can be left to corporations themselves.

Each corporation should be free to specify in its by-laws the types of information that insiders may not trade on. Any insiders who trade on such information would violate that firm’s by-laws and, hence, subject themselves to suit by that firm. Corporations whose by-laws prohibit all or some insider trading will have standing to sue anyone who violates their by-laws. People who trade on inside information not protected by corporate by-laws would be acting perfectly legally.

Won’t corporations simply make all of their inside information off-limits to inside trading?

No. The reason is that corporations must compete for that most demanding and vigilant of all clients: capital. Shares in a corporation whose by-laws prevent insiders from trading on, say, knowledge of executive malfeasance will be a riskier—and a less attractive—investment than shares in a corporation that doesn’t proscribe such insider trading. Corporations that allow trading on inside knowledge will enjoy a lower cost of capital than will corporations that prevent such trading.

Competition is a beautiful thing: It will punish firms that are either overly inclusive or under-inclusive in the sorts of information that they shield from inside trading.

This decentralized competitive method for selecting information that is proprietary, and thus off-limits to inside traders, isn’t perfect. But the relevant comparison isn’t with an ideal, perfectly working world. The relevant comparison is with the existing approach: Government officials have decided that all insider trading is unlawful and that anyone accused of insider trading is subject to criminal prosecution.

A less heavy-handed, less bureaucratic, less politicized, and more decentralized method for determining when inside information should, and when it shouldn’t, be traded on is preferable to Uncle Sam’s blanket proscription.

In addition to taking the responsibility of defining insider trading from political agencies that are inevitably political, allowing proscriptions on insider trading to be defined exclusively by companies permits corporations to customize their insider-trading proscriptions.

Different corporations have different mixes of investments in physical, human, financial and intellectual capital. Corporations also differ in their business plans. Companies whose successes depend heavily upon their financial-investment strategies will be more likely to have stronger and broader prohibitions on insider trading than will companies whose successes depend upon the development of new consumer products.

Or not. The above is simply my best guess. Perhaps there’s something I’m missing about companies whose successes depend upon the development of new consumer products that makes them especially vulnerable to insider trading. And that’s the point. My “best guess” isn’t very reliable, and nor are those of politicians and bureaucrats.

By allowing companies as they compete for capital to experiment with different ways of dealing with insider trading, we would discover which proscriptions work best for some kinds of firms and which proscriptions work best for other kinds of firms.

Relying upon competition and the self-interest of shareholders and creditors (both actual and potential) to discover which types of information are proprietary—and, hence, protected from insider trading—and which types of information are not proprietary removes politics from this vital task. Importantly, it also replaces the unreliable judgments and “best guesses” of political officials with the much more reliable determinations of competition.

Donald J. Boudreaux is Research Fellow at The Independent Institute, Associate Editor of The Independent Review, and Chairman and Professor in the Department of Economics at George Mason University.