"End of Wall Street Boom" - Must-read history

[chiggerbit]

Speaking of Fiat:




http://tinyurl.com/czytjf

Fiat says it won't assume Chrysler debt in deal


MILAN (AP) -- The Italian automaker Fiat says it won't assume Chrysler's debt - current or future - in its deal to take a 35 percent stake in the company.

Fiat issued a statement of clarification on Friday after Chrysler's chief executive said the Italian automaker would be responsible for 35 percent of Chrysler's debt to the U.S. government should a proposed alliance go through.

Fiat shares slipped 5.5 percent to euro4.45 ($6.08) on the Milan stock exchange early Friday on the Chrysler statement.

In a statement, Fiat said it "intends to make absolutely clear that the proposed alliance will not entail the assumption of any current or future indebtedness to Chrysler."

Fiat is discussing trading its small-car technology for a 35 percent stake in Chrysler.

I take the bold part to mean that Fiat also will not be beholden to the taxpayers for any bailout money that Fiat would receive, but of course I might be misjudging their.....motives.



Then scroll way down and read the comments left at this article re the JI Case plant in Burlington, Iowa, majority-owned by Fiat, and look at what Fiat is paying UAW workers there:

http://www.thehawkeye.com/Story/101208-Case

[seemslikeadream]

http://nymag.com/news/business/55687/

My Manhattan Project
How I helped build the bomb that blew up Wall Street.

By Michael Osinski Published Mar 29, 2009

I have been called the devil by strangers and “the Facilitator” by friends. It’s not uncommon for people, when I tell them what I used to do, to ask if I feel guilty. I do, somewhat, and it nags at me. When I put it out of mind, it inevitably resurfaces, like a shipwreck at low tide. It’s been eight years since I compiled a program, but the last one lived on, becoming the industry standard that seeded itself into every investment bank in the world.

I wrote the software that turned mortgages into bonds.


Because of the news, you probably know more about this than you ever wanted to. The packaging of heterogeneous home mortgages into uniform securities that can be accurately priced and exchanged has been singled out by many critics as one of the root causes of the mess we’re in. I don’t completely disagree. But in my view, and of course I’m inescapably biased, there’s nothing inherently flawed about securitization. Done correctly and conservatively, it increases the efficiency with which banks can loan money and tailor risks to the needs of investors. Once upon a time, this seemed like a very good idea, and it might well again, provided banks don’t resume writing mortgages to people who can’t afford them. Here’s one thing that’s definitely true: The software proved to be more sophisticated than the people who used it, and that has caused the whole world a lot of problems.

The first collateralized mortgage obligation, or CMO, was created in 1983 by First Boston and Salomon Brothers, but it would be years before computer technology advanced sufficiently to allow the practice to become widespread. Massive databases were required to track every mortgage in the country. You needed models to create the intricate network of bonds based on the homeowners’ payments, models to predict prepayment rates, and models to predict defaults. You needed the Internet to sail these bonds back and forth across the world, massaging their content to fit an investor’s needs at a moment’s notice. Add to all this the complacency, greed, entitlement, and callous stupidity that characterized banks in post-2001 America, and you have a recipe for disaster.

I started on Wall Street on October 5, 1985. I was 30 years old and had been writing software for six years. I originally got into it when my wife became ill and I took a job entering data, the bottom of the computer industry, at Emory University, so her rare kidney ailment could be treated. Before that, I had risked my life for $200 a week hauling shrimp 100 miles offshore from Cape Canaveral, and I had been the only white boy in my crew digging ditches in Alabama. Compared to all that, Wall Street was a country club. I recall my first day at Salomon Brothers, lingering at the windows by the elevator banks on the 25th floor of 55 Water Street. While groups of the well dressed and the professionally coiffed headed to their cubicles and offices, I stared out at the harbor, watching freighters, tankers, ferries, and garbage scows cross the great harbor. The perfection of the place was profound, the feng shui was palpable. As John Gutfreund, then the CEO, expected, I was ready to grab the balls of the bear.

My first assignment was to write a “machine-to-machine interrupt handler.” That was not exactly sexy in the world of finance, or in any world, and I won’t bore you by trying to explain. It was plumbing. As was all the programming, which, on the firm’s hierarchy, ranked somewhere above the secretarial pool but well below, literally and figuratively, the trading floor. I didn’t mind. To me, it was good, well-paying work. My manager, a former mathematics professor named Leszek Gesiak, an immigrant from Poland, became a friend. Neither one of us was on track, but we both enjoyed the challenges and pace of the job. We lunched at either Yip’s, a Chinese culinary cul-de-sac, or on Front Street, in the seaport, where you could get fresh fish cafeteria style across the street from the market. It was a different New York, still picking itself up from the seventies. Drug dealers loitered at the door of the brokerages, and taxis often smelled of pot from their previous occupants. Just a few years before, Michael Bloomberg had been fired from Salomon. He had the crazy idea that the data was as valuable as the firm’s capital.

When I asked Leszek what the busy group did that sat next to us, he told me they created mortgage-backed securities. It was an instrument, he claimed, designed to keep programmers employed. Having started to overcome my aversion to the overpaid life—I had recently bought a suit at Barneys, the old one on Seventh Avenue—I asked him how the bonds worked

I wanted a piece of that. But first, I kept a promise to my wife—that if she recovered, we would backpack around the world.

Returning to New York a year later, I had an interview at Shearson Lehman’s mortgage-research department. Again, I sought advice from Professor Gesiak. I drove to his apartment in Greenpoint and confessed to him that I had never studied finance, and I had only taken one course in computers. Over the kitchen table, while his wife minded the toddlers, he gave me a quick tutorial on the “present value of future cash flows.” It was only freshman calculus, after all.

Out the back window, clotheslines on pulleys ran across the courtyard to adjoining apartments, like a scene from The Honeymooners. Once I demonstrated that I understood how to discount a cash flow, Leszek brought out the hard stuff. Over glasses of vodka chased by raw garlic and butter on rye, he recounted how he had black-marketed goods in communist Poland. Halfway through the bottle, he claimed that the Polish zloty had been on the vodka standard—that is, the conversion ratio of zlotys to dollars on the black market was always the same as the price, in zlotys, of a half-liter of vodka.

Heading back to Manhattan that night, I smashed my car on the ramp up to the BQE. But the good news was that I got the job. I was in the mortgage-packaging business.

At Lehman, I began a thirteen-year effort to streamline the process of securitizing home mortgages, as well as other forms of debt. That was 1988, around the time of the savings-and-loan crisis. Remember that one? Lenders had gone nuts with, what else, real estate, and as they went bust, the government was stepping into the breach. Mortgage securitization was the answer. Retail lenders could make the loan, take a fee, then sell the mortgage to an investment bank. The bank, after bundling thousands of the mortgages together, could, through a little software magic, issue bonds based on that bundle of loans. Now, an investor does not want a single person’s mortgage, much the same as you may not want to underwrite your sibling’s purchase of an overpriced McMansion. But when 1,000 similar loans are combined, and the U.S. government, through Freddie Mac and Fannie Mae, absorbs the default risk, you now have a nifty little AAA-rated piece of paper paying one or two points above Treasury bills. And if the value of the loans is in excess of the limit set by the government agencies, your savvy friends on Wall Street can create a class of subordinated bonds that will absorb all the defaults in the deal. With friends like these …

While I slaved away at the sausage grinder, CMOs took off—$6 billion were issued in 1983, and by 1988, the annual output had jumped to $94 billion. This was the era described in Liar’s Poker. Wall Street guys felt cool and funny; people who were getting ripped off were dumb and ugly and deserved it. I got a $50,000 bonus check, a 50 percent dollop on top of my salary. Peanuts to the traders, but a bloody fortune to me, for the easiest work I’d ever done. I could afford to rent a nicer place in Greenwich Village, go out to jazz clubs, bike in France. But even then, I was wondering why I was making more than anyone in my family, maybe as much as all my siblings combined. Hey, I had higher SAT scores. I could do all the arithmetic in my head. I was very good at programming a computer. And that computer, with my software, touched billions of dollars of the firm’s money. Every week. That justified it. When you’re close to the money, you get the first cut. Oyster farmers eat lots of oysters, don’t they?

I never would have thought, in my most extreme paranoid fantasies, that my software, and the others like it, would have enabled Wall Street to decimate the investments of everyone in my family. Not even the most jaded observer saw that coming. I can’t deny that it allowed a privileged few to exploit the unsuspecting many. But catastrophe, depression, busted banks, forced auctions of entire tracts of houses? The fact that my software, over which I would labor for a decade, facilitated these events is numbing. Is capitalism inherently corrupt? I don’t think the free flow of goods in and of itself is the culprit. No, it’s the complexity masked by thousands of unseen whirring widgets that beguiles people into a sense of power, a feeling of dominion over the future

sheikhs whom we paid to fill up our SUVs could finance our mortgages, the core of the American Dream, as could the Chinese government—all the while getting an extra point or two above the Treasury. Ample financing allowed more people to buy their own homes. The world came full circle. Bonuses got bigger because the Wall Street boys were doing good for themselves and the world.

As CMOs became more complicated, my job was to make everything seem simple—to, in effect, mask the complexity that would’ve made the bonds difficult to trade. We invented a language for mortgage-backed bonds. I called it BondTalk. Lehman was a runner-up in CMO underwriting. I was told to rewrite the entire system. Make it all push-button. Flexible and faster. Traders told us what they wanted, and we wrote the software code to make it possible. We were on the cutting edge. When I finished that project, I approached my former boss to ask if I could move to the trading desk, to where the big money was


“Mike,” he told me when denying my request, “can you really look for people dumber than you and then take advantage of them? That’s what trading is all about.”

Yes, I assured him, yes, yes. But no deal. The next month, after I pocketed my $100,000 bonus, I left Lehman for Kidder, Peabody, which was the No. 1 underwriter of CMOs but had outdated software.

Working with another programmer, I wrote a new mortgage-backed system that enabled investors to choose the specific combinations of yield and risk that they wanted by slicing and dicing bonds to create new bonds. It was endlessly versatile and flexible. It was the proverbial money tree.

Another recession began, which, in the perverse world of the bond market, was good for business. As the government lowered interest rates to stimulate the economy, bonds increased in price. With a drop in rates, more people refinanced. There was more product for the securitization process, more meat for the grinder. Our software was rolled out to ride the latest wave. Traders loved it. What had taken days before now took minutes. They could design bonds out of bonds, to provide the precise rate of return that an investor wanted. I used to go to the trading floor and watch my software in use amid the sea of screens. A programmer doesn’t admire his creation so much for what it does but for how it does it. This stuff was beautiful and elegant.

The aim of software is, in a sense, to create an alternative reality. After all, when you use your cell phone, you simply want to push the fewest buttons possible and call, text, purchase, listen, download, e-mail, or browse. The power we all hold in our hands is shocking, yet it’s controlled by a few swipes of a finger. The drive to simplify the user’s contact with the machine has an inherent side effect of disguising the complexity of a given task. Over time, the users of any software are inured to the intricate nature of what they are doing. Also, as the software does more of the “thinking,” the user does less.

I made $125,000 in my bonus that year and bought an apartment on Gramercy Park. I had first-tier seats to the ballet, but I still rode my bike to work. The traders pocketed multiple millions. I wasn’t poor, but I wasn’t a plutocrat. I could live with myself. If there was a deception going on, I was but a small cog, I thought.

The world around me, though, had become bizarre. At the time, I had an odd sensation that mortgage traders felt they had to outdo the loutish behavior in Liar’s Poker. The more money they made, the more juvenile they became. What do you expect from 30-year-old megamillionaires whose overwhelming aspiration was something vaguely called Hugeness? They had wrestling matches on the floor. Food-eating contests. Like little kids, they scrambled to hide the evidence when the head of fixed income paid his rare visits to the floor.

Now that I was spending more time on the floor, I wondered why the men’s room always stank. Then one afternoon at three, when I was in there taking a leak, I discovered the hideous truth. Traders had a contest. Coming in at eight, they never left their desks all day, eating and drinking while working. Then, at three o’clock, they marched into the men’s room and stood at the wall opposite the urinals. Dropping their pants, they bet $100 on who could train his stream the longest on the urinals across the lavatory. As their hydraulic pressure waned, the three traders waddled, pants at their ankles, across the floor, desperately trying to keep their pee on target. This is what $2 million of bonus can do to grown men.

an internal report, there were management deficiencies across the board. If I remember correctly, one top executive had a contract stipulating that he would only work one day a week for his seven-figure wage. So Kidder was in bad shape when it was hit by the scandal involving the infamous Joseph Jett, who allegedly fabricated hundreds of millions of dollars in trades, more or less taking down the whole firm. Back then, a major Wall Street failure didn’t panic the entire country. Kidder may have handled a fifth of the country’s mortgage-backed securities, but in the wake of its demise, the American economy did not wither. Though securitization slowed to a crawl, breadlines weren’t forming. Homeowners made their payments. Bonuses, if you got one, were halved. People stood pat. Paine Webber cherry-picked traders and programmers. G.E. sold the assets of the firm. One of those assets, to my great surprise, was my software, purchased by Intex Solutions in Boston.

During the transition, I used the time to extend our structuring model to subordinated bonds. Allow me to expand Professor Gesiak’s analogy a bit: For deals with non-agency loans—that is, not Freddie or Fannie—in addition to the sirloin that comes out of the grinder, there is a small percentage of offal. By running that offal through the grinder again, in effect bundling together all the pieces from various deals that absorbed the default risk, we then created some andouille and some real dog food. The rise in price of the sausage over the offal more than compensated for the unsalable leftovers. That junk typically couldn’t be sold and stayed in-house, eventually becoming known as a “toxic asset.”

Times were lean at Paine Webber. The mortgage market, notoriously illiquid in bad times, petered out. Mortgage refinancings dwindled. The supply of raw material, new mortgages, disappeared. We had to lay off half of research. After a day of bloodletting, one of the bosses cornered me in the hallway. Did I get a sexual thrill out of firing people, he wanted to know, because it had always worked for him, big time.

That was 1995. I had been on Wall Street for ten years. I was fed up with the life, all day staring at a screen, the jockeying for bonuses. I wanted something different. I biked up to Boston and proposed to the people who had bought the Kidder software that I run it for them. “Don’t pay me a cent,” I told them. “I’ll integrate with your existing software, market it, maintain it, and enhance it. We’ll split the money, if any comes in, 50-50.”

They sent me a five-year contract with a subsequent five-year noncompete. That noncompete would retire me if enforced. I stared at it. Another five years was all I could take. Without consulting my lawyer, I signed it. Those pen strokes effectively capped my Wall Street career. Now it was up to me to chop some wood.

We had a deal. Intex was the largest supplier of cash flows on existing CMOs, but the company could not create new structures. That’s why Intex had bought my software from G.E. But it could not get it to run, much less sell it. I spent six months in my apartment, over the phone with one of the Intex programmers, integrating the two softwares. Within a year, we had sold it to four large investment banks; by the end of 1997, we had fifteen. We were it! By the end of ’98, we had 25. If a firm wanted to be in the mortgage business, they needed us. Instead of hiring a large staff to write the software, you could buy it from us, at half what it would cost you to create it from scratch. Price per copy was $500,000, plus annual maintenance. Not only did the big banks buy, but major mortgage servicers decided they could end-run the banks by taking the loans and ramming them through the grinder themselves.

For a decade, every firm had written its own proprietary structuring tool for securitizing mortgages. Now we had commoditized it. Firms liked using the same piece of software. Intex became the King of Mortgages. Bonds were traded without showing up on the Bloomberg screens!

Up until that point, almost all my securitization work had involved prime mortgages—those mortgages given to people who had an extremely high probability of paying them back. When a client wanted me to enhance my software to include “subprime” debt, well, that was something new, and I have to admit, I was kind of excited. This would greatly enlarge my universe of clients, because the subprime market was then split among many smaller players, each of whom needed my software.

up to his desk to show me how to structure subprime debt. Eager to please, I promised I could enhance my software to model his deals in less than a month. But when I glanced at the takeout in the deal, I couldn’t believe my eyes. Normally, in a prime-mortgage deal, an investment bank makes only a tiny margin. But this deal had two whole percentage points of juice! Looking at the underlying loans, I was shocked.

“Who’s paying 16 percent for a car loan?” I asked. The current loan rate was then around 8 percent.

“Oh, people who have defaulted on loans in the past. That’s why they’re called subprime,” he informed me. I had known this guy off and on for years. He was an intelligent, articulate, pleasant fellow. He and his wife came to my house for dinner. He had the comfortable manner of someone who had been to good schools—he was not one of the “dudes” trying to jam bonds into a Palm Beach widow’s account. (Those guys were also my clients.)

“But if they defaulted on loans at 8, how can they ever pay back a loan at 16 percent?” I asked.

“It doesn’t matter,” he confided. “As long as they pay for a while. With all that excess spread, we can make a ton. If they pay for three years, they will cure their credit and re-fi at a lower rate.”


That never happened.


In 2001, when my five-year contract expired, Intex let me go. I guess I had become too expensive, and Intex thought they’d be fine without me. Why I had been able to retire at 45 for simply writing a computer program befuddled me and aggravated others who felt they had worked as hard. Life is not always fair, I told them. Right place at the right time. Besides, I explained, the mortgage market is as big, if not bigger, than the stock market. When they screwed up their faces in disbelief, I told them to look around. Every house, every building, every car, plane, boat, and piece of plastic in your wallet has a loan tied to it. It’s all about cash flow.

Within a few months, the World Trade Center was attacked. The country became single-minded in its concerns. As segments of the economy weakened, the American home carried the day. Prices soared, more homes were built, everyone bought granite countertops, new plumbing, new mortgages. Home equity was the piggy bank. It kept Main Street working and Wall Street gorging. By 2003, more than $1 trillion in CMOs were being issued annually.

Banned from Wall Street, I discovered that my summer house, on the North Fork of Long Island, included five acres of underwater land. I applied for permits to grow oysters. I had something to do. In many ways, farming oysters is more difficult, demanding, and frustrating than writing software. Errors take seasons and years to emerge, whereas software is instantaneous. Nature does not give you explicit warning messages; her ways are more subtle and take a lifetime to penetrate. I forgot the day of the week but knew instinctively the tide and the phase of the moon.

Finance, however, is a larger drama. The daily tango of interest rates, money supply, and government debt continued to have an irresistible allure. By 2003, a financial-data firm approached me about writing a structuring tool for collateralized debt obligations, or CDOs. I asked my colleagues, what was a CDO exactly? Like CMOs, they were structured products, but the underlying collateral was not limited to home mortgages. They could be anything—corporate bonds, subprime-mortgage bonds, swaps, or simply air, like the synthetic CDOs: They could be CDOs underwritten by the bonds of other CDOs, CDOs squared. Chicken, pork, offal, chitterlings, tofu salad, fish guts—anything could be run through the grinder. “Diversity of collateral” was the pitch. Some things could go bad, but not everything at once. It never has, except during the Depression, and we’re so much smarter now. That could never happen again.

With prime mortgages, the complexity of the structure is on the bond side: tweaking and fitting hundreds of different bonds from the same bundle of mortgages. But when the underlying collateral is subprime, or the subordinated bonds are supporting several subprime-mortgage deals, then the difficult task is deciding when and if these loans will go under. Default models were the rage. Throw some epsilons and thetas on a paper, hoist a few Ph.D.’s behind your name, and now you’re an expert in divining the future.

sound, I can’t say I was motivated by anything more than the opportunity to make more money. It was sitting there, for me to take, and even for a relatively private person like me, who never dreamed of building my own castle in Greenwich or anything like that, it was hard to resist.

Fortunately for me, Intex threatened to sue. They claimed that CDOs were so similar to CMOs that my noncompete applied. To take the job would mean a legal battle. In a sense, I was saved from my own base instincts. But my oystering permits had been approved. When I looked at myself in the mirror, after working all day hauling 400-pound cages of oysters off the bottom, I looked healthier and more satisfied than I ever remember being when I wore $3,000 Versace suits and thought of myself as a Wall Street success story.

So that’s where I was when the world I had helped create started falling apart. I hadn’t anticipated it, but at the same time, nothing about it surprised me.

Last month, my neighbor, a retired schoolteacher, offered to deliver my oysters into the city. He had lost half his savings, and his pension had been cut by 30 percent. The chain of events from my computer to this guy’s pension is lengthy and intricate. But it’s there, somewhere. Buried like a keel in the sand. If you dive deep enough, you’ll see it. To know that a dozen years of diligent work somehow soured, and instead of benefiting society unhinged it, is humbling. I was never a player, a big swinger. I was behind the scenes, inside the boxes. My hard work, in its time and place, merited a reward, but it also contributed to what has become a massive, ever-expanding failure. For that, I must make a mea culpa. Not a mea maxima culpa, mind you, but some measure of responsibility, a few basis points of shame. Give my ego a haircut.

It hurts when people say I caused this mess. I was and am quite proud of the work I did. My software was a delicate, intricate web of logic. They don’t understand, I tell myself. Perhaps it was too complicated. But we live in a world largely of our own device. How to adjust and control these complexities, without stifling innovation, is the problem.

The other day, Professor Gesiak brought me a pitcher of his basement-brewed beer, bartering for oysters. He mused that the U.S. government would, like Poland’s, make the currency worthless. What do we have, I wonder, that like the vodka in communist Poland, can be counted on to hold its value in this age?

[JackRiddler]

.

Been busy, but following this thread, and I have a set of new articles from around the web I'd like to scrapbook. But meanwhile...

here where I think you should be

THIS FRIDAY AND SATURDAY

http://bailoutthepeople.org

April 3 & 4
National March on Wall St.
Jobs Not War!
Anniversary of Dr. King’s assassination

BOPM STATEMENT: APRIL 3 Demonstration to March on WALL ST AND AIG!

http://bailoutthepeople.org/pdfs/mengli ... 4-3-9a.jpg

March on Wall St to
DEMAND A JOBS PROGRAM:
March to demand a moratorium on evictions and foreclosures
to demand an END to the wars--BRING THE TROOPS HOME NOW!
to support the EMPLOYEE FREE CHOICE ACT--the RIGHT to a UNION
to STOP Layoffs, Cutbacks, Tuition Hikes, and Transit Fare Hikes
March to Support Worker and Immigrant Rights (March on May 1 too!)
Single Payer HEALTH CARE for ALL

... and this priceless bit from the image-only thread:



Two Reasons I like the graphic:

a) The obvious joke, as poet Robert Burns would have had it, on how "oft go awry" the "best-laid plans of mice" and Masters of the Universe. The Gran Moff Tarkins of Banking can strut about, for decades persuaded of their utter invincibility, in the more recent days of crisis just as fanatic in selling us on their indispensability. And yet disaster was programmed into the system as a condition of its predictable operation.

b) The fact that it really is the Death Star. It burned the planet, and still there are those high and low who seriously would like We the People to pay taxes and interest for a few generations solely to keep it in orbit about us, so that it can burn the planet some more. The supposed nightmare scenario, that the Wall Street monstrosity be allowed to complete its deserved self-detonation, is actually an essential outcome in freeing us from tyranny and creating a rational and humane replacement (by using the trillions to start up new banking institutions that provide capital to businesses as a public-sector utility, the dreaded "socialism").

[barracuda]

AIG Exec Whines About Public Anger, and Now We're Supposed to Pity Him? Yeah, Right
By Matt Taibbi

"I take this action after 11 years of dedicated, honorable service to AIG. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down." via Op-Ed Contributor Jake DeSantis -- "Dear AIG, I Quit!" -- NYTimes.com

Like a lot of people, I read Wednesday's New York Times editorial by former AIG Financial Products employee Jake DeSantis, whose resignation letter basically asks us all to reconsider our anger toward the poor overworked employees of his unit.

DeSantis has a few major points. They include: 1) I had nothing to do with my boss Joe Cassano's toxic credit default swaps portfolio, and only a handful of people in our unit did; 2) I didn't even know anything about them; 3) I could have left AIG for a better job several times last year; 4) but I didn't, staying out of a sense of duty to my poor, beleaguered firm, only to find out in the end that; 5) I would be betrayed by AIG senior management, who promised we would be rewarded for staying, but then went back on their word when they folded in highly cowardly fashion in the face of an angry and stupid populist mob.

I have a few responses to those points. They are 1) Bullshit; 2) bullshit; 3) bullshit, plus of course; 4) bullshit. Lastly, there is 5) Boo-Fucking-Hoo. You dog.

AIGFP only had 377 employees. Those 400-odd folks received almost $3.5 billion in compensation in the last seven years, a very large part of that money coming from the sale of credit default protection. Doing the math, that averages out to over $9 million of compensation per person.

Ask yourself this question: If your company made that much money, and the boss of the unit made almost $280 million in just a few years, exactly how likely is it that you wouldn't know where that money was coming from?

Are we supposed to believe that Jake DeSantis knew nothing about Joe Cassano's CDS deals? If your boss and the top guys in your firm were all making a killing selling anything at all -- whether it was rubber kayaks, generic Levitra or credit default swaps -- you really wouldn't bother to find out what that thing they were selling was? You'd really just mind your own business, sit at your cubicle and put your faith in the guys up top to fill you in if there was something you needed to know?

This would be a believable claim for an employee of some other wing of AIG, a company with well over 100,000 employees. But DeSantis works for tiny, 377-person AIGFP, a unit that had only two offices -- one in London and one in Greenwich, Conn.

And we're talking about financial professionals, the most shameless group of tirelessly envious gossips ever to walk the face of the earth. The likelihood that Cassano would pull in $280 million for himself, and his equally greedy, hopelessly jealous employees wouldn't know not only exactly how he made that money but every last ugly detail about his life -- from what skank he's sleeping with to what side of his trousers he hangs on -- is almost zero.

I know plenty of people who work in this world, and I've met very few who didn't hate with every cell in their bodies anyone in their own companies who made more money than they did or got bigger bonuses at Christmastime. Gossiping about each others' bonuses, and bitching about each others' compensation, is the national pastime for these people.

So forgive me if I don't buy this story that poor Jake and his buddies didn't know about Cassano's CDS business.

Also, there's this: let's just say, Jake, that you're telling the truth, that you don't know anything about this toxic portfolio. If that's the case, then why the fuck does anyone need to retain you at an exorbitant salary to help unwind that very portfolio? If these transactions aren't and never were your expertise, then where the hell is your value here?

When I spoke to Christine Pretto, the AIG spokeswoman, and asked about those bonuses, she said that AIG needed to retain people like you in order to take advantage of your "knowledge of these transactions." So if you don't have knowledge of these transactions, what are you being paid for? Your winning attitude?

Then there's the matter of Jake's other job offers. About that: It was apparent as early as last February that Cassano had basically destroyed not only the unit but perhaps AIG itself. The company announced over $11 billion in losses around that time.

If I'm Jake DeSantis, and I'm really innocent, I'm looking for a job that very instant. And I'm taking the first good job anyone offers me. Because by then I'd have realized that I was working for the latest version of Enron. That the man I've been working for the last six or seven years has turned out to be one of the most irresponsible Wall Street villains of all time, a man who single-handedly destroyed the 18th-largest company in the world. If I'm Jake DeSantis, I'm quitting out of moral disgust, because I don't want to be associated with this kind of behavior.

The only reason I'd stay is if I didn't have a choice. Which I feel sure is what happened here. If Jake DeSantis didn't take advantage of an opportunity to get a better job elsewhere with a company that didn't hide billions in losses and make $500 billion bets with money they didn't have, that's his fucking problem.

The notion that I the taxpayer have to pay this asshole a million-dollar bonus because he turned down a better job at a less-guilty company is repugnant to begin with; the notion that he stayed at AIGFP because he expected me to pay him this bonus makes me hate him even more.

But it's all moot, because I feel quite sure it's a lie. As one trader for another firm told me not long ago when I asked what he thought about the need to pay these "retention bonuses" to these "valued employees" at AIGFP:

"Yeah, right. Who would hire these guys? They'd stay for a dollar if you offered it to them, much less a million."

I mean, half of Wall Street is unemployed right now. There are plenty of unemployed traders out there whose resumes don't include such entries as "Worked for years at small unit of AIG that helped destroy the universe; throughout that time was completely ignorant of burgeoning global disaster unfolding 5 feet from my desk."

The idea that other companies would be so eager to pass over the seas of truly innocent available people in order to scoop up some still-employed veteran of AIGFP -- and that they would be so enthusiastic in their pursuit of said AIGFP employees that AIG would need to pay those AIGFP folks million-plus retention bonuses to get them to stay -- is so ludicrous it almost defies comment.

Show me, anywhere, the Wall Street firm that's willing right now to spend more than a million dollars poaching still-employed midlevel executives like DeSantis, when they can just put an ad in the paper and have 500 recently unemployed CEOs begging for work at almost any salary in five minutes.

So the idea that the rest of Wall Street is breaking down AIGFP's doors to lavish its idiot personnel with million-dollar offers is just utterly preposterous. The fact that DeSantis expects us to believe this is insulting in itself.

Also, remember, DeSantis until this year was probably the recipient of performance bonuses. This year, obviously, there was no performance, so AIG doled out these "retention" bonuses instead. And the value of these retention bonuses is seriously in question if AIG never really needed to pay extra to retain this personnel, which I personally believe they didn't.

I personally believe these "retention" bonuses were a ruse cooked up by management to suck a few more dollars out of the company before it sank to the ocean bottom. So if DeSantis is "owed" these bonuses, it's only in the sense that someone up above agreed to cheat the shareholders by paying these bonuses when they weren't really necessary; they weren't "earned" in any real sense.

But all of this is really secondary to the tone of DeSantis' letter. He acts like he's a victim because he didn't get to keep his after-tax bonus of $742,006.40 in the middle of a global depression. And he really loses his fucking mind when he writes:

"None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house."

First of all, Jake, you asshole, no plumber in the world gets paid a $740,000 bonus, over and above his salary, just to keep plumbing. Second, try living on a plumber's salary before you even think about comparing yourself to one; you're inviting a pitchfork in the gut by even thinking along those lines. Third, Jake, if you were a plumber, and the electrician burned the house down -- well, guess what? If you and that electrician worked for the same company, you actually wouldn't get paid for that job.

Out in the real world, when your company burns a house down, you're not getting paid by that client. It's only on Wall Street, where the every-man-for-himself ethos is built into an insanely selfish and greed-addled compensation system, that people like you expect to get paid in a bubble -- only there do people expect their performance bonuses no matter how much money the shareholders lose overall, no matter how many people get laid off after the hostile takeover, no matter how ill-considered the mortgages lent out by your division were.

You expect that money because you think it's owed to you. But what money? The money is gone. Your boss, if not you, set it all afire. You want the money, but where exactly do you think it's coming from?

Do you just not understand that that money now would have to come out of someone else's pocket? That it would have to come from middle-class taxpayers, real plumbers, people who didn't make millions over the years in equity and commodity trading?

Here's the real problem with people like Jake DeSantis. Throughout this whole period, they never were able to connect the dots -- to grasp the fact that when they skimmed a million here or a million there off the great rivers of capital that flowed through their offices, that that money came from somewhere, from someone. To them, it wasn't someone else's money, it was just money, and why shouldn't they have it?

It's remarkable that when DeSantis, in his letter, touts the reason he deserves his high compensation, all he can talk about is how much money he made: "The profitability of the businesses with which I was associated clearly supported my compensation."

For a guy like this, his worth as a human being is wrapped up in buying a bag of beans for $10 and selling it for $11. He states this like it's a law of nature: he was a good equities-and-commodities trader, therefore he should make a lot of money.

Only a person with a habitually overinflated sense of self-worth could think he deserves a $700,000 retention bonus, even if it has to be paid by taxpayers, when in reality no one "deserves" that much money. It may be that some people do get paid that much, but most people who make that much money have enough sense to realize their cushy lifestyles are an accident of fate, of birth, of class, not something that is "supported" by some unwritten natural law of compensation.

Hey Jake, it's not like you were curing cancer. You were a fucking commodities trader. Thanks to a completely insane, horribly skewed set of societal values that puts a premium on greed and severely undervalues selflessness, communal spirit and intellectualism -- values that make millionaires out of people like you and leave teachers and nurses, the people who raise your kids and clean your parents' bedpans, comparatively penniless -- you made a lot of money.

Good for you. Consider yourself lucky. But your company went belly-up and broke, almost certainly thanks in part to you, and now you don't get your bonus.

So be a man and deal with it. The rest of us do, when we get bad breaks, and we've had a lot more of them than you. And stop whining. Jesus Christ.

[bks]

Taibbi wrote:

Thanks to a completely insane, horribly skewed set of societal values that puts a premium on greed and severely undervalues selflessness, communal spirit and intellectualism -- values that make millionaires out of people like you and leave teachers and nurses, the people who raise your kids and clean your parents' bedpans, comparatively penniless -- you (AIG CEO DeSantis) made a lot of money.

Gee, did Matt Taibbi discover this yesterday? The man can certainly turn a phrase, but was criticizing capitalist excess an obsession of his before it became de riguer? He's got a nose for whatever's cooking, that's for sure.

Seems to me that Taibbi's internalized the same exploitation/humiliation tendency he calls out in DeSantis. Taibbi certainly isn't above finding and easy mark and flaying them for fun and profit. He just doesn't get compensated like the big boys for it.

Which is not to say I don't appreciate his letter here, or his pithy summary of the financial crisis. It's good stuff.

[seemslikeadream]

Did the Oil Price Boom of 2008 Cause the Recession?


The 'Real Time Economics' blog by Justin Lahart in the Wall Street Journal, 4/3/09, had a provocative discussion of a Brookings Institute paper attributing nearly all of last year’s economic downturn to the oil price shock.

In part it says:




Reeling from the housing bust and the banking crisis, it’s hard to think that the energy shock — the one that carried the average price of gasoline to a peak of $4.11 a gallon last July — was much more than a minor player in the economic downturn. But there’s the uncomfortable fact previous oil shocks, like the ones that came with the 1973 oil embargo, the 1979 Iranian revolution and the 1990 invasion of Kuwait, were also associated with recessions. And the 2001 recession, too, came on the heels of a run-up in oil prices.

In a paper presented at the Brookings Panel on Economic Activity Thursday, University of Calif.-San Diego economist James Hamilton crunched some numbers on how consumer spending responds to rising energy prices and came to a surprising result: Nearly all of last year’s economic downturn could be attributed to the oil price shock.

As he writes on his blog, that’s a conclusion that he doesn’t quite believe in himself. We’d like to think that, say, the seizing up of the credit markets this fall had something to with the economy falling off the table in the fourth quarter.

But then again, maybe what happened to oil prices had something to do with credit markets seizing up. The housing bubble saw people of lesser means traveling further afield to buy homes. That gave them long commutes that they were able to afford when gas was $2 a gallon, but maybe they couldn’t at $3.

http://blogs.wsj.com/economics/2009/04/ ... use-crisis /

http://pzl1.ed.ornl.gov/IAEE_2002_oil_m ... r_rev2.pdf




The disconcerting implication is that if oil production peaks and starts to decline as many predict it will, there will be severe consequences by 2050:





In 2050 the size of the upper and middle classes remains almost constant, while the number of poor balloons to two and a half times its current level.. Even worse, the average per capita GDP of the poor group drops from $2,900 today to $1,500 in 2050, a drop of almost 50%. This is due to the burgeoning population of this group sharing the shrinking energy pie. Another significant factor is the movement of a number of large and growing countries from the from the middle class to the poor group.

In sharp contrast to the outcomes expected for the rich countries, poor nations face a decidedly bleak future in 2050. The number of poor nations or regions jumps from 5 to 18. The total population of the group more than doubles while the average per capita GDP for the group drops by half. Given the level of human misery that exists in the poor nations today, this is a decidedly ominous forecast.

By 2050 well over half the world's population will be desperately, abjectly poor, and even the rich will find themselves living in constrained circumstances as their average per capita income drops by 25%. Just at the time when foreign aid is most desperately needed, the nations that will be called on to supply it will be find themselves less able to deliver. The implications for life and death in the poverty-stricken regions are dire indeed.

http://canada.theoildrum.com/node/3230

[jingofever]

From Firedoglake, Bailed Out Bank, JP Morgan, Dooming Chrysler. A snippet:

The WSJ confirms what we've all probably suspected: the creditors that are forcing Chrysler into bankruptcy are the same banks that have been surviving only with the help of the federal government. And of course, they are refusing to offer the same generosity to Chrysler.

And some good news, US watchdog calls for bank executives to be sacked:

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

[beeline]

From the "pitchforks" thread, deserves to be included here:

http://www.pbs.org/moyers/journal/04032009/transcript1.html

April 3, 2009
BILL MOYERS: Welcome to the Journal.

For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.

WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.

BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black.

The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called "Keating Five" were named — he sent a memo that read, in part, "get Black — kill him dead." Metaphorically, of course. Of course.

Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."

Bill Black, welcome to the Journal.

WILLIAM K. BLACK: Thank you.

BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we're going through, this economic and financial meltdown is driven by fraud. What's your definition of fraud?

WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.

BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: How did they do it? What do you mean?

WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.

BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?

WILLIAM K. BLACK: Yes.

BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.

BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?

WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.

BILL MOYERS: Yeah. Liars' loans--

WILLIAM K. BLACK: Liars' loans.

BILL MOYERS: Why did they call them liars' loans?

WILLIAM K. BLACK: Because they were liars' loans.

BILL MOYERS: And they knew it?

WILLIAM K. BLACK: They knew it. They knew that they were frauds.

WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.

BILL MOYERS: You think they really said that to borrowers?

WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.

BILL MOYERS: Ninja?

WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.

BILL MOYERS: You're talking about significant American companies.

WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.

BILL MOYERS: Which company?

WILLIAM K. BLACK: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.

BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?

WILLIAM K. BLACK: No, and that's a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.

BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?

WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."

BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.

WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.

BILL MOYERS: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.

WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme...

BILL MOYERS: But you're saying our system became a Ponzi scheme.

WILLIAM K. BLACK: Our system...

BILL MOYERS: Our financial system...

WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."

BILL MOYERS: Is there a law against liars' loans?

WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent.

BILL MOYERS: Because...

WILLIAM K. BLACK: Because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.

BILL MOYERS: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this?

WILLIAM K. BLACK: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic...

BILL MOYERS: Who did?

WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.

BILL MOYERS: You talk about the Bush administration. Of course, there's that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they're going to slash, cut business loose from regulation, right?

WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are the...

BILL MOYERS: That's right.

WILLIAM K. BLACK: They're the trade representatives. They're the lobbyists for the bankers. And everybody's grinning. The government's working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.

BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton's Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?

WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.

BILL MOYERS: What did AIG contribute? What did they do wrong?

WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?

BILL MOYERS: And why...

WILLIAM K. BLACK: How mad is this?

BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?

WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.

BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?

WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.

BILL MOYERS: The cover up?

WILLIAM K. BLACK: Sure. The cover up.

BILL MOYERS: That's a serious charge.

WILLIAM K. BLACK: Of course.

BILL MOYERS: Who's covering up?

WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.

These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.

BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.

TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.

Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.

WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.

BILL MOYERS: As?

WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.

BILL MOYERS: How is this happening? I mean why is it happening?

WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.

BILL MOYERS: What facts?

WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?

BILL MOYERS: You--

WILLIAM K. BLACK: Taking away people's bonuses?

BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you're seeming disillusioned now.

WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.

BILL MOYERS: In other words, they could have closed these banks without nationalizing them?

WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.

BILL MOYERS: And that's a law?

WILLIAM K. BLACK: That's the law.

BILL MOYERS: So, Paulson could have done this? Geithner could do this?

WILLIAM K. BLACK: Not could. Was mandated--

BILL MOYERS: By the law.

WILLIAM K. BLACK: By the law.

BILL MOYERS: This law, you're talking about.

WILLIAM K. BLACK: Yes.

BILL MOYERS: What the reason they give for not doing it?

WILLIAM K. BLACK: They ignore it. And nobody calls them on it.

BILL MOYERS: Well, where's Congress? Where's the press? Where--

WILLIAM K. BLACK: Well, where's the Pecora investigation?

BILL MOYERS: The what?

WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?

What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.

BILL MOYERS: What do you mean?

WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.

BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

WILLIAM K. BLACK: Absolutely.

BILL MOYERS: You are.

WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.

BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?

WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone.

BILL MOYERS: A.I.G. did?

WILLIAM K. BLACK: What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

BILL MOYERS: Even though Goldman Sachs had a big vested stake.

WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.

BILL MOYERS: Yeah, like a conflict of interest, it seems.

WILLIAM K. BLACK: Massive conflict of interests.

BILL MOYERS: So, how did he get away with it?

WILLIAM K. BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.

BILL MOYERS: Who's going to get the facts?

WILLIAM K. BLACK: We need some chairmen or chairwomen--

BILL MOYERS: In Congress.

WILLIAM K. BLACK: --in Congress, to hold the necessary hearings. And we can blast this out. But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.

BILL MOYERS: And we have to know that, in order to know what?

WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It's the predicate, right? You need to know the facts to make intelligent decisions. And they're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.

BILL MOYERS: So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?

WILLIAM K. BLACK: That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse. If they understand how bad it is, they'll run for the exits."

BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.

WILLIAM K. BLACK: Yes.

BILL MOYERS: Why?

WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.

BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker's income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

WILLIAM K. BLACK: Right.

BILL MOYERS: It was relatively a handful of people.

WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all.

BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?

WILLIAM K. BLACK: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere."

Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system.

So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

BILL MOYERS: William Black, thank you very much for being with me on the Journal.

WILLIAM K. BLACK: Thank you so much.

[Gouda]

The Coming Structural Adjustments...Dean Baker writes that the Gov is proposing to default on government bonds held by the Social Security trust fund (while guaranteeing trillions in bonds issued by private banks).

Gouda posted (page 21):

Jonathan Schwarz in 2005: What's more likely is we'll go through the same kind of "structural adjustment" we've imposed on others via the IMF. This means slower economic growth, cutbacks in Social Security and Medicare, and all the other things that benefit normal people.

Jonathan Schwarz, yesterday: Let The Structural Adjustment Begin!

Doug Henwood @ Left Biz Observer: The other would be as a confirmation of the argument I made in yesterday’s post: that once this bout of spending is done, Obama et al will impose a serious structural adjustment program on the U.S., cutting social spending to the bone…There’s a more sinister possibility: the bailout will be funded by an austerity program. That is, all the trillions being borrowed to spend on bailouts and stimuli will save the financial elite, but at the costs of a fiscal crippling, and instead of raising taxes on the very rich to pay down the debt, there will be deep cuts in civilian spending.

Glen Greenwald Agrees: Comparing the U.S. to Russia and Argentina

Dean Baker, yesterday:

In effect, the cutters are proposing that the government default on the bonds held by the Social Security trust fund: U.S. government bonds that were purchased with money raised through the designated Social Security tax.

It is truly incredible, and unbelievably galling, that anyone in a position of responsibility would suggest defaulting on the government bonds held by the Social Security trust fund at the precise moment that the government is honoring trillions of dollars of bonds issued by private banks.

Jonathan Schwarz again:

In case you've missed it, the Federal Reserve has guaranteed gigantic amounts of bonds issued by banks (see "bank debt" here). Thus, as Baker says, the Social Security cutters don't just want us to default on U.S. government bonds essentially belonging to Social Security recipients. They want us to do that at the same time we're paying off Citigroup's bonds.

[JackRiddler]

.

I've collected lots of stuff to scrapbook here and want to get to it soon, including on key developments like
- the abandonment of "mark-to-market" i.e. market determination of asset pricing, i.e. any remaining semblance of traditional capitalist ideology (& a close-to-ultimate step to unmitigated banking tyranny, but perhaps an even more final declaration of systemic bankruptcy and imminent doom)
- the announcement of figures for derivatives held by the Top 5 US banks (double ditto on the doom)
- more noise and maybe heat on the abandonment of the dollar as reserve currency
- Undead Pirate Commander Larry Summers
- & more

But meanwhile, here's an outline comedy piece (what else?)

Pirates: A How To

The banksters who suddenly discovered the sanctity of agreements (amid the mountains of their own frauds) had no contracts with the government! They made contracts with each other, for whatever fictional values they felt like specifying.

For example:

Purchaser of credit-default swap from AIG: "I say this piece of toxic shit I'm betting against (which I don't even own) is worth a billion dollars. The ratings agency agrees, they rated it AAA. So if it fails you'll pay me a billion, right?"

AIG Guy in London (Who Today No Longer Recalls This Conversation): "I'll agree, even though I don't have enough billions to pay you and the many others making the same bet. But I like your premiums! Even more than that, I like the outrageous bonuses I get for landing more premiums! Apres moi, le deluge!"

Thus Is the Holy Contract Sealed!

And then, when the piece of toxic shit fails, the US government steps in to "honor" the contract that the banksters made up out of their own fantasy. The taxpayer dollars are paid literally in exchange for fiction. Not bad, eh? Who hasn't wished they could just write any number they fancy and have it turn into real cash?

MEANWHILE, IN SOMALIA:

PIRATE 1 (Hijacker): "If this mission fails, I'll be losing a billion dollars in potential booty and ransom! -- Actually, I just pulled that figure out of my ass and sprinkled some fancy-sounding formulas on it. But it sounds like a great number to have!"

Pirate 2 (Hijack Insurer): "In exchange for your monthly premium, I hereby agree by contract to cover the sum of your potential loss for you. That is, in case, by some impossible quirk of fate, your mission should fail. Which is impossible, because everyone knows the iron law of economics: Oil tankers get bigger and easier to hijack every year! They've never gotten smaller! -- And while I'm at it, my good friend -- thanks for the kickback, by the way -- do you have any friends of yours who want to bet against your mission too? They don't actually have to be IN the mission, they only have to pay the premium, and I'll promise to cover them as well! It's a CONTRACT!"

Gasp! The mission -- to hijack a big ship that happened to be a Pentagon decoy full of special forces -- FAILS! Life is so unfair! No one could have foreseen this! It's a BLACK SWAN (tm)!

But wait, think of the chain reaction, if the Hijack Insurer should fail. All the hijackers will end up out of business! This cannot be allowed.

Contracts are sacred: Taxpayers MUST bail out the Somali pirates!

We need the government to step in and HONOR THAT CONTRACT!

---

Unfortunately for the Somalis, the last part does not apply to them. The problem is, they DIDN'T STEAL ENOUGH. If only they had stolen, say, 10 percent of the world, and if they had given .00001 percent of that to politicians in bribes and "campaign contributions," then the government would have given them the trillions they needed to purchase the rest of the world at depressed prices.

Clearly, it was a failure of imagination on their part to steal just a few ships. They should have read more Milton Friedman. (Like the great genius Larry Summers, who is the most indispensable and important person in the world, life is simply unimaginable without his counsel).

This is why many Somalis who have nothing to do with piracy likely are soon to be bombed from the air.

Tha-at's all folks!

.

[Pazdispenser]

Unfortunately for the Somalis, the last part does not apply to them. The problem is, they DIDN'T STEAL ENOUGH. If only they had stolen, say, 10 percent of the world, and if they had given .00001 percent of that to politicians in bribes and "campaign contributions," then the government would have given them the trillions they needed to purchase the rest of the world at depressed prices.

Clearly, it was a failure of imagination on their part to steal just a few ships. They should have read more Milton Friedman. (Like the great genius Larry Summers, who is the most indispensable and important person in the world, life is simply unimaginable without his counsel).

Indeed, Jack, indeed. Isnt this the "theft" corollary to Hitler's (Goebbel's?) "make the lie so big that no one can conceive it to be a lie"?

[antiaristo]

.....

Indeed, Jack, indeed. Isnt this the "theft" corollary to Hitler's (Goebbel's?) "make the lie so big that no one can conceive it to be a lie"?

Hello, Paz. Good to see you're still posting.

That's what I thought Goebbels had said. Then a couple of weeks ago I had reason to look up the big lie. This is what Wiki says he wrote in January 1941:

That is of course rather painful for those involved. One should not as a rule reveal one's secrets, since one does not know if and when one may need them again. The essential English leadership secret does not depend on particular intelligence. Rather, it depends on a remarkably stupid thick-headedness. The English follow the principle that when one lies, one should lie big, and stick to it. They keep up their lies, even at the risk of looking ridiculous.

That was January 1941, when the Nazis were winning big and thought themselves invincible.

He's not advocating the big lie: rather he is accusing "The English" of being practitioners "even at the risk of looking ridiculous."

The specific case he cites is "The essential English leadership secret" which "depends on a remarkably stupid thick-headedness"



If Goebbels were alive today methinks he'd have a better idea of who is behind the ruination of America than just about any American!

[American Dream]

http://www.grist.org/article/eat-the-ri ... nic-greens

EAT THE RICH WITH ORGANIC GREENS
Let millionaires pay to solve our twin environmental and economic crises
POSTED ON 13 APR 2009
BY GAR LIPOW


At heart, our economic and environmental crisis are the same.

No, the economic crisis is not, as some advocates of a green rapture claim, a direct result of peak oil or resource depletion. But they are two consequences of one mistake, a mistake every farmer used to know the folly of: eating our seed corn. Capital was converted into consumption and financial game playing. Public and private infrastructure was no longer replaced as it was used up. This included factories and bridges. But it also included finite natural resources, like oil. And it was the rich, the Masters of the Universe, who converted capital into consumption—both for their own direct use, and to conceal a huge transfer of wealth and income from ordinary people to themselves. Detail and documentation follow.

Both worldwide (wri.org query) and in the U.S., share of Gross Domestic Product (GDP) and value added from industry compared to services has dropped over the past three to four decades. The ratio of world financial assets to GDP has tripled since 1980 (PDF requiring free registration). The financial sector in the U.S. more than doubled as a percent of GDP between the 1960s and the eve of the financial crisis. Financial transactions have grown even faster, from a world volume of about 15 times world GDP in 1990 to about 72 times world GPD in 2006 (PDF). Large financial infrastructure or financial transaction volume greater than the underlying economy is not itself necessarily problematic. Up to a point this can represent changes in allocation of capital, real circulation of goods and services between multiple parties, and hedging against risk. But past a certain point, an inflated financial structure that outgrows the real economy on which it is based is a risk.

Meanwhile, the American Society of Civil Engineers estimates the U.S. is about 2.2 trillion short on needed public infrastructure, with a D average grade for what currently exists. Worldwide, in spite of some bright spots, most infrastructure is similarly inadequate. Globally, 1 in 6 of us lack access to clean water, largely because of lack of infrastructure.

Of course, just as conventional infrastructure has been neglected so has renewable and other types of green infrastructure. In all fairness, wind electricity became competitive with natural gas comparatively recently, and solar electricity is still more expensive than fossil fuels in a majority of applications. (Though one could argue that funding R&D and subsidizing more deployment to help bring manufacturing costs down is one of the types of infrastructure investment that was neglected.)

But various types of efficiency improvements that pay for themselves in very short time periods have failed to be deployed for decades. Most buildings still lack adequate weather sealing, duct sealing, insulation. Recycled energy is deployed at a fraction of the level that has been known to be economical for decades. (Recycled energy is where waste energy from industrial processes is used to produce electricity or energy for other industrial processes, or waste energy from electricity production or industrial processes is used to provide climate control and hot water.) Solar water heating has had a life cycle cost lower than electricity and natural gas since the ‘80s, and a lower cost than oil for longer than that. Passive solar heating has been known to have a lifecycle cost lower than any fossil fuel in new buildings since 1972, maybe longer.

Not coincidentally, this infrastructure neglect has been accompanied by transfers (PDF) of income and transfers (PDF) of wealth (PDF) from the vast majority of us to the very rich.

In the U.S, Paul Krugman says:

According to the federal Bureau of Labor Statistics, the hourly wage of the average American non-supervisory worker is actually lower, adjusted for inflation, than it was in 1970. Meanwhile, CEO pay has soared — from less than thirty times the average wage to almost 300 times the typical worker’s pay.

It has also translated into lower unionization, workers paying higher percentages of health costs, or going uninsured. In poorer nations, it has translated into the ending of free education, and charging school fees high enough to keep huge numbers of children out of school, of adding health fees to health care systems that exclude large numbers of people from receiving health care.

To visualize the scale of inequality, picture net worth translated into stacks of twenties. The wealth of most of us, even most of us in rich nations would be negative or zero, or stacks of bills a few inches high. But the stacks for the top 2% would range from hundreds of feet to miles.

So how does the shift from manufacturing to services, and from manufacturing and services to finance, relate to inequality and infrastructure neglect?

Because of the ability of financial assets to outweigh real ones, and the ability of financial transactions to overwhelm real transactions, the profit rate from financial transaction can greatly exceed the rate from real production. This is especially true when deregulation allows all sort of super profits to be made, and risks to be concealed. Thomas Geoghegan thinks this started when interest rates were deregulated, first for in-store purchase financing, then credit cards, then finally pay-day loans. At any rate, from the first loosening of such regulations we have seen super-high returns to finance (really FIRE: Finance, Insurance, Real Estate) followed by demands for comparable rates of return in other areas. That, in turn, helped drive investment from manufacturing and industry to services. Because service industries are mostly (not entirely) much lower in capital requirements than industry, investors can earn a higher return on capital than in manufacturing, even if profits are a lower percentage of sales.

Consider an office cleaning services business, a large one that cleans hundreds of offices. Even if the markup after expenses is only 5% (probably unrealistically low) most of those expenses are operating expenses: wages, sales, marketing, supplies, accounting and management, communications. Only a small percent of total expenses are capital—office space, office equipment, cleaning equipment, some trucks to give rides to workers who don’t have their own cars. Further, these expenses can be cut various ways.

For example, the actual cleaning can be outsourced to subcontractors who hire undocumented workers and save money by paying them illegally low wages and subject them to illegal working conditions. (This is much easier if labor laws are enforced by underfunded bureaucrats, if the penalties for violating labor laws are trivial compared to what is saved by violating them. It is even easier if half the time the governments running those departments are hostile to labor and discourage even what little enforcement those departments are capable of. See: U.S. labor law, actual enforcement of.)

This is cruel and unfair. But it is also ultimately unrealistic, a demand for profits that grow faster than the economy.

One way to fill that demand is to constantly lower the share of income going to labor. But there is only so far this can go, because there are not many jobs out there pleasant enough that people will volunteer to do them for free. Also, if you are a business person it is all well and good to cut the wages of your workers. But if every business person is doing the same thing, then some SOB is cutting the wages of your customers!

One way to generate profits faster than the economy grows is to create out and out scams. Create and sell imaginary wealth, then scamper off. Leave customers, naïve small investors, and taxpayers with the losses. In the past years we have had the bursting of foreign investment bubbles, followed by savings and loan scandals, where government guaranteed mortgages were granted against inflated property values. (The borrowers lost the property they over paid for. The U.S. government ended paying the difference between the debts and what the actual property was worth. And many of those who created the S&L scam ending up buying the property post bubble at bargain rates and profiting from it.)

Then there was the famous internet bubble, where investors just put money into jazzy schemes with no hope of making money. The stockholders didn’t know it, but they were the customers. The companies were selling stock, not products. Anybody who warned against this was accused of “not getting it.”

After an unsuccessful attempt to start a biotech bubble (well, there was one, but it only had a lifespan of months), we ended up with the current real estate bubble, where cheap credit fueled an increase in real estate prices trillions of dollars past historical prices. And deregulated finance leveraged that to the point where there were 25 dollars in financial instruments outstanding against every dollar of inflated real estate value. So when the bubble burst, the combination of actual mortgages and derivatives meant the entire economy was dependent not on real estate, but on unreal estate. And presto, we have the current catastrophe.

An important point about all these bubbles was that they also were con games that bought tolerance from workers as their paychecks were raided. Your hourly wages have gone down? Your income has only gone up because the two of you are working longer hours than you used to, and it has not gone up that much? Well, we have a deal for you: you can borrow a lot of money and still buy a lot of toys. Your house is worth a lot! Don’t leave all that value sitting idle. Take it out, buy what you want. Or invest it. Buy apartments. Oops! Invest in internet stocks. Oops! Buy some nice safe bonds. This time we promise you will get rich. Um, oops?

Bubbles were also one basis for pension raids, where pensions were converted from defined benefit (you get a guaranteed income when you retire) to defined contribution (money is put in an investment fund and you get what you get). The trick was to wait until a bubble inflated the value of a pension fund to the point where it could apparently pay all the benefits promised and then some. Withdraw the “and then some” because an employer has no responsibility to overfund a defined benefit pension. When the bubble burst, well nobody could have foreseen ... Or maybe the employers did not have to wait that long. A bubble is great time to persuade workers to voluntarily convert from a defined benefit to a defined contribution pensions. After all, if you are turned loose with capital in this market (whatever bubble is being inflated) you are going to get rich, rich, rich!

Of course, as Geoghegan points out, employers had other ways of getting out of obligations like pensions. There is almost no contract a corporation can’t break with its workers by sifting assets and obligations between subsidiaries, and then declaring bankruptcy in the empty shell that the employees are contracted with. The recent high-minded declarations that taking back AIG bonuses violated sacred contracts was one of the most breathtaking displays of hypocrisy ever. The entire business model on which our financial is system is based is the routine breaking of contracts with workers. Unless you work for a very small business, there is no long-term property right you have been granted by your employer that can’t in practice be taken away.

At any rate, I suspect bubbles are one among many reasons profitable efficiency and renewable investments did not get made. Like any real investment they could not compete with speculative bubbles.

A third way for profits to (temporarily) grow faster than the economy is direct eating of the seed corn—consuming capital. At the beginning of this essay, I linked to studies showing how public infrastructure was neglected. But it is not uncommon for private infrastructure to be neglected, for business to stop maintaining equipment, or avoid upgrading needed to maintain market share. Heck, here is a dirty secret about the dying newspaper industry: A lot of newspapers that are being shut down were profitable when they were taken over. But they were earning 5% returns on investments in an era that demanded 35% returns or 12% returns. So when they were bought by the Masters of the Universe, cost cutting measures drove away customers and advertisers to the point where they were no longer profitable. And I’ll bet a lot of those same cost cutters would be happy to get that 5% now. I’m not saying in the age of the internet that the majority of the newspapers this crash will kill would have survived if local ownership had been maintained. But I’ll bet a substantial minority could have.

And the kind of infrastructure neglect I documented also springs from profit seeking. As capital shifts from industry and services to finance, part of the ideology appears to be a belief in infinite tax cuts, that public investment is parasitism, that the Masters of the Universe know best how to spend their own money—and ours too.

So how do politicians meet the business demand for tax cuts and the public demand for service? What is the basis of free lunch conservatism? Well, one obvious base is to stop maintaining infrastructure, to not worry about twenty years from now, or ten years from now or seven years from—only spend money where the benefits are clear today. (You can also do what the current governor of California did, and borrow billions while publicly cutting up a giant mock-up of a credit card. When the bill comes due, well nobody could have predicted ... )

The pattern of replacing the old popped bubbles with new bubbles has been repeating for some time now. Are there any reasons to think the latest is different? One is sheer size. The number of dollars lost is already larger than any past bubble. And housing prices are not down to historic levels yet. Nor has the full impact of overvalued commercial real estate or cars been felt yet. Nor have we come anywhere close to evaluating the net exposure of various derivatives.

Also, we managed to drag just about the entire world economy into this crash—which means there is not a lot of “outside” available to tie a recovery to.

This is why the current plan won’t work. Lending money to buy worthless assets in hope that the price of those worthless assets will be permanently driven up high enough to get the banks out of trouble only works if we can survive another bubble. It depends on getting the rate of return for finance up to absurd levels in hopes that will lead to a healthy economy. Look, I understand the modern medicine has discovered that leeches actually are the most effective cure for certain diseases. But this is not one of them.

Dean Baker makes the point that the maximum additional growth that could be expected from pouring money into the banks won’t begin to equal the losses they are offsetting. Household losses simply mean the demand won’t be there. No recovery will be effective unless it gets a lot more money into the hands of ordinary people—enough to get demand moving again. And the only way to do this, without adding inflation to our current economic woes, is to start directing money into infrastructure and other areas like health care and education that actually pay back their costs.

In short, substantial redistribution of income, wealth, and power away from the Masters of the Universe and toward the rest of us is no longer optional as a fundamental solution to the problem. The rich are going to have to make some sacrifices for the good of everybody.

And, as everyone but the most ignorant of conservatives realizes, this is not going to be done on a pay-as-you-go basis. Because debt is part of the recovery, lenders and investors are going to need some assurance money won’t be poured down a rat hole. And that means not leaving the rats in charge of the pipeline. The AIG bonuses may represent a tiny percentage of the money that has been stolen from us. But they are a huge illustration that no fix will work that leaves the current top executives in charge of AIG or of any major institution we bail out. If they can’t even get over their sense of entitlement enough to understand what was wrong with the bonuses, they sure as hell won’t be able to make the radical changes needed in their lending and investment practices. Reversing decades of class warfare by the rich against the working and middle classes is no longer a short term issue. It is an immediate need.

What this means in practice in financial terms is putting the banks and failed financial institutions into receivership, making bondholders, and possibly even some counterparties to transactions write off part of their debts. It means shrinking the size of the financial sector relative to the rest of the economy, and democratizing it. One immediate action would be to take Geoghegan’s proposal seriously—put a ceiling on interest rates, thus limiting the ability of finance to demand super profits.

Similarly, we could put some sand in the gears of the giant finance machine so that money does not move so frictionlessly compared to the real economy it represents. This goes back to an old idea of a Tobin tax, a quarter of a percent or so tax on all financial transactions, on the sale or transfer of any financial instrument. This would be trivial for normal hedging and asset and liability transfers, but would put a crimp in constant flipping of assets dozens or hundreds of times.

In terms of democratization, you will note that our credit union system is not currently in crisis. (I think there are three credit unions in the entire nation in trouble.) Nor does the bank of South Dakota have major problems, which indicates that if the states owned their own banks, and those state banks constituted a substantial percent of the banking system, this would be a nice stabilizing and democratizing factor.

There are other factors to improving finance, but this would be a good start. However all the improvements in finance in the world won’t do any good if we don’t get demand moving again, and don’t improve what is financed, if we don’t stop eating our seed corn.

That is a good argument for financing a smart grids locally, and long distance transmission nationally. For financing renewable energy and energy efficiency, and for financing agriculture that builds rather than destroys soil, agriculture that protects rather than harms the health of the people who eat its products, the people who work in the fields, and larger ecosystem is in which it is embedded. But it is also a good argument for helping people stay in their homes (whether owned or rented) through foreclosure and eviction protection. It is a good argument for providing aid to states and municipalities so they don’t have to drastically cut services in the middle of a depression. It is a good argument for financing health, and education, and mass transit, even increasing payouts to old people by giving a raise well above inflation to social security recipients.

On other occasions I have made arguments for specifics in these areas, and will again. But here my emphasis is three intertwined general points:

We can no longer afford to eat our seed corn.

We can no longer afford to continue letting the Masters of the Universe drain the rest of the economy for their own benefit.

And as these two points imply, we can no longer let the Masters of the Universe make the key decision for us. Somehow we have to change the balance of power between classes.

[stefano]

Goldman Sachs, one of the 19 banks given preliminary results of the US government’s stress tests on Friday, on Wednesday sold $2bn of bonds without a federal guarantee to investors. The debt offering, made in the week before the test results are made public, triggered concerns that Goldman was pushing the boundaries of the bank’s agreements with regulators to keep the outcome of the tests confidential. Corporate governance experts said it was a clear signal to investors that the preliminary test results were “not unexpected”.

Check out this very meaty blog from the FT, they post about thirty times a day.

[MinM]

Goldman Sachs, one of the 19 banks given preliminary results of the US government’s stress tests on Friday, on Wednesday sold $2bn of bonds without a federal guarantee to investors. The debt offering, made in the week before the test results are made public, triggered concerns that Goldman was pushing the boundaries of the bank’s agreements with regulators to keep the outcome of the tests confidential. Corporate governance experts said it was a clear signal to investors that the preliminary test results were “not unexpected”.

Check out this very meaty blog from the FT, they post about thirty times a day.

Top Senate Democrat: bankers "own" the U.S. Congress - Glenn Greenwald - Salon.com