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by NeonLX » Tue Mar 20, 2012 10:42 am
by 2012 Countdown » Tue Mar 20, 2012 10:49 am
by JackRiddler » Tue Mar 20, 2012 12:04 pm
Matt Taibbi: Bank of America is a “raging hurricane of theft and fraud”
Matt Taibbi ... wrote this article for OWS, and passed it out to the crowd. It’s an informative and urgent call to action for Americans from all walks of life. We are happy to be the first to publish it.
There are two things every American needs to know about Bank of America.
The first is that it’s corrupt. This bank has systematically defrauded almost everyone with whom it has a significant business relationship, cheating investors, insurers, homeowners, shareholders, depositors, and the state. It is a giant, raging hurricane of theft and fraud, spinning its way through America and leaving a massive trail of wiped-out retirees and foreclosed-upon families in its wake.
The second is that all of us, as taxpayers, are keeping that hurricane raging. Bank of America is not just a private company that systematically steals from American citizens: it’s a de facto ward of the state that depends heavily upon public support to stay in business. In fact, without the continued generosity of us taxpayers, and the extraordinary indulgence of our regulators and elected officials, this company long ago would have been swallowed up by scandal, mismanagement, prosecution and litigation, and gone out of business. It would have been liquidated and its component parts sold off, perhaps into a series of smaller regional businesses that would have more respect for the law, and be more responsive to their customers.
But Bank of America hasn’t gone out of business, for the simple reason that our government has decided to make it the poster child for the “Too Big To Fail” concept. Because it is considered a “systemically important institution” whose collapse would have a major, Lehman-Brothers-style impact on the economy, two consecutive presidential administrations have taken extraordinary measures to keep Bank of America in business, despite a staggering recent legacy of corruption schemes, many of which were simply overlooked by regulators.
This is why the question of whether or not Bank of America should remain on public life support is so critical to all Americans, and not just those millions who have the misfortune to be customers of the bank, or own shares in the firm, or hold mortgages serviced by the company. This gigantic financial institution is the ultimate symbol of a new kind of corruption at the highest levels of American society: a tendency to marry the near-limitless power of the federal government with increasingly concentrated, increasingly unaccountable private financial interests.
The inevitable result of that new form of corruption is this bank, whose continued, state-supported existence should naturally outrage all Americans, be they conservative or progressive.
Conservatives should be outraged by Bank of America because it is perhaps the biggest welfare dependent in American history, with the $45 billion in bailout money and the $118 billion in state guarantees it’s received since 2008 representing just the crest of a veritable mountain of federal bailout support, most of it doled out by the Obama administration.
For instance, with its own credit rating hovering just above junk status, Bank of America has been allowed to borrow tens of billions of dollars against the government’s credit rating using little-known bailout programs with names like the Temporary Liquidity Guarantee Program. Since the crash of 2008, it’s also borrowed billions if not trillions in emergency, near-zero interest rate loans from the Federal Reserve – it took out $91 million in rolling low-interest financing from the Fed on just one day in January, 2009.
Conservatives believe that a commitment to free market principles and limited government will lead us out of our economic troubles, but Bank of America represents the opposite dynamic: a company that is kept protected from the judgments of the free market, and forces the state to expand to take on its debts.
Last summer, for instance, the Bank – in order to satisfy creditors who were nervous about the enormous quantity of risky assets on its balance sheet – decided to move some $73 trillion (that’s trillion, with a T) in exotic derivative bets from one end of the company into the federally-insured, depository side of the bank.
This move, encouraged by the Obama administration, put the American taxpayer on the hook for an entire generation of irresponsible gambles made by another failed investment firm that should have gone out of business, but was instead acquired by Bank of America with $25 billion in taxpayer help – Merrill Lynch.
When did we make it the job of the taxpayer to buy failed companies, and rescue companies from their own bad decisions? How is that conservative?
Meanwhile, if you’re a progressive, Bank of America is the ultimate symbol of modern predatory capitalism. This company has knowingly sold hundreds of billions of worthless securities to unions and pension funds (New York state filed two different lawsuits against Bank of America and its subsidiaries on behalf of its pension fund, one of which was settled for $624 million) brazenly overcharged its depositors (it was forced to pay customers $410 million in restitution for bogus overdraft charges), and repeatedly lied to its shareholders (most notoriously, it lied about billions in losses on Merrill Lynch’s books before asking shareholders to approve its merger with the firm).
Moreover, Bank of America has ruthlessly preyed upon millions of homeowners, throwing them out on the street on the strength of doctored, “robosigned” paperwork created through brazenly illegal practices they helped pioneer — the firm sped struggling families to foreclosure court using perjured affidavits produced in factory-like fashion by the hundreds or thousands every day, with full knowledge of management. Through the firm’s improper use of an unaccountable private electronic mortgage registry system called MERS, it also systematically evaded millions of dollars in local fees, forcing some communities to cut services and raise property taxes.
Even when caught and punished for its crimes by the authorities, Bank of America has repeatedly ignored court orders. It was one of five companies identified in two separate investigations earlier this year that were caught continuing the practice of robosigning, even after promising to stop in a legally binding consent decree. Last summer, the state of Nevada sought to terminate a settlement over mortgage abuses it had entered into with Bank of America after it found the company was brazenly violating the agreement, among other things raising payments and interest rates on mortgage customers, despite the fact that the settlement only allowed them to modify loans downward.
Over and over again, we see that leveling fines and punishments at this bank is not enough: it simply ignores them. It is the very definition of an unaccountable corporate villain.
Companies like Bank of America are a direct threat to national security, for many reasons. For one thing, they drive smaller, more honest banks out of business: since the market knows the federal government will never let Bank of America fail, it charges less to lend the bank money. That gives Bank of America, despite its near-junk credit rating, a competitive advantage over a smaller, regional bank that might have a better credit rating, but doesn’t have the implicit support of the federal government.
Worse still, stock market investor dollars that normally would go to more customer-friendly, more creative, and more commercially dependable firms will instead continue to flow to Too-Big-To-Fail behemoths like Bank of America, as buying stock in a company with implicit state support will be considered almost a safe-haven investment, like buying gold or Treasury bills.
This robs more deserving and ingenious entrepreneurs of scarce capital, and also encourages existing companies to pour resources not into better performance and increased productivity, but into lobbying and government influence. The result will be fewer Googles and Apples, more bad banks, and more campaign contributions for politicians.
Moreover, we’ve seen throughout our history that when criminal organizations are not punished, they tend to be encouraged to commit more crimes. Five years from now, our government’s decision to avoid jailing Bank of America executives for their roles in the vast robosigning program may result in a situation where no court document of any kind can be trusted, as companies will realize that it is cheaper and easier to simply invent legal affidavits than to draw them up properly and accurately.
What will your defense be against a future lawsuit for a credit card debt or a foreclosure, when your bank walks into court with a pile of invented documents? Will you wish then that you’d fought harder for Bank of America to be punished now?
And the state’s decision to allow Bank of America to pay a middling, $137 million fine for the rigging of bids for five years of municipal bond issues – a very serious crime that robbed taxpayers of millions in revenue, and incidentally is exactly the sort of thing we used to put mobsters in jail for, when the rigged contracts were for cement instead of bonds – may mean that down the road, all municipal bond issues will be rigged.
In recent years, Too-Big-To-Fail banks like Bank of America and Chase and Wells Fargo have been caught rigging the bids for financial services in dozens of municipalities nationwide. Worse, these same banks have repeatedly been let off the hook by regulators, who rarely seek jail sentences for the offenders, and more often simply apply fractional fines to the companies caught. This behavior, if left unchecked, will ultimately mean that we will all have to pay more for our roads, our traffic lights, our sewers, in fact all public services, as the banker’s secret bonus will soon become an institutionalized part of the invoice. And it’ll be our fault, because we didn’t do anything about it now.
The only way to prevent this kind of slide to total lawlessness is to break this unhealthy relationship between bank and government. It would be a great sign of America’s return to healthier capitalism if we could allow one of the worst of public-private monsters, Bank of America, to sink or swim on its own, in the free market.
We don’t want Bank of America to fail. Our position is, it already is insolvent, and already has failed – and only our tax dollars, and our government’s continued protection, is keeping that failure from becoming more common knowledge. There are many opinions about the nature of modern American capitalism. Some think the system is no longer able to meet the needs of ordinary people and needs to be radically overhauled, while others like it just the way it is.
But one thing that everyone on this spectrum of beliefs can agree upon is that our system doesn’t work when corrupt companies, companies that should fail in the free market, are kept alive by the government. When we allow that, what we get is a system that is neither capitalism nor socialist, but somewhere more miserably in between – a bureaucratic state in which profit is not tied to performance, but political power.
We have to break that cycle, and we can. Even with the enormous levels of state support, Bank of America has been teetering on the edge of collapse for years now. In December of 2011, its share price briefly dipped below $5, a near-fatal event in the firm’s history. The market has reacted violently to bad news about the bank on multiple occasions in the last year – after news of layoffs, after hints that the government might not bail the bank out completely in the event of a collapse, and after significant new lawsuits were filed. Each of these corrections nearly sent the company into a tailspin, but it was always rescued in the end by the widespread belief that Uncle Sam would bail it out in the event of a collapse.
We need to put a dent in that belief. We need to convince politicians and investors alike to allow failure to fail.
– Matt Taibbi, February 29th, 2012, Occupy Wall Street
by 2012 Countdown » Tue Apr 03, 2012 4:10 pm
by NeonLX » Tue Apr 03, 2012 4:14 pm
by StarmanSkye » Tue Apr 03, 2012 6:32 pm
by 2012 Countdown » Fri Apr 06, 2012 5:55 pm
by Ben D » Sun Apr 08, 2012 9:29 pm
Banks test ‘CDOs’ for trade finance
FT April 8, 2012 8:00 pm
By Patrick Jenkins and Brooke Masters in London
Some of the world’s biggest banks are trying to extend the principles of securitisation to the plain-vanilla world of trade finance – a market worth an estimated $10tn a year – as concern mounts that regulatory changes could constrain a key lubricant of the global economy.
JPMorgan is among several banks that have begun testing investor appetite for the trade finance equivalent of collateralised debt obligations – the derivative products blamed for compounding the financial crisis – in an attempt to boost lending capacity.
Trade finance supports more than 80 per cent of global trade. But it has been disrupted by the financial crisis, as some lenders got into trouble, and by the regulatory response to the crisis, as banks have been ordered to hold more capital against lending.
Banks have lobbied hard against the constraints imposed on trade finance by the Basel III global rule book, due to be phased in from 2013.
The new rules for overall bank borrowing – the leverage ratio – treat a typical three-month trade finance loan as a year-long exposure, effectively forcing banks to hold far more top-quality capital against the loan.
That is deterring some banks from staying in the business and could push up trade finance prices by 300 per cent or more, critics predict.
Regulators have made some adjustments but have been reluctant to rewrite the rules, which they see as a critical backstop to keep banks from becoming over-leveraged.
“The industry needs to develop new instruments,” said Jeremy Shaw, JPMorgan’s head of trade services for Europe, Middle East and Africa. “We have tested the water with potential buyers. Institutional investors have the appetite.”
French banks, previously big players in trade finance, have retreated from the market in dramatic fashion in recent months, as they raced to shrink balance sheets in line with new European capital targets and their access to dollar funding – the currency of much global trade – dried up.
JPMorgan, one of the leading trade financiers, believes there is particular scope to “slice-and-dice” exposures to export credit agencies – the quasi-government entities that support export business – and repackage them as simple CDO-like instruments. A similar process is common for credit card debt.
Finding a legal structure that can pass regulatory scrutiny is proving difficult, however. Partners at several London law firms say they have been asked by clients to work on possible deals, but none have come off to date.
By transferring the bulk of such exposures off a bank’s own balance sheet, and on to third-party investors, the capital requirements would be reduced. There is also scope to syndicate, or restructure, trade finance exposures to corporate customers, JPMorgan believes.
by Marie Laveau » Sun Apr 08, 2012 9:37 pm
by JackRiddler » Mon Apr 09, 2012 2:52 pm
Please follow this link:
http://neweconomicperspectives.org/2012 ... gists.html
The JOBS Act is so Criminogenic that it Guarantees Full-Time Jobs for Criminologists
Posted on March 19, 2012 by Mitch Green | 9 Comments
By William K. Black, Henry N. Pontell and Gilbert Geis
As white-collar criminologists (and a former financial regulator and enforcement head) and experts in ferreting out sophisticated financial frauds, our careers and research focus on financial fraud by the world’s most elite private sector criminals and their political cronies. Therefore, we write to thank Congress and the President for preparing to adopt a JOBS Act that will provide us with job security for life. We will be the personal beneficiaries of Congress’ decision to adopt the law without the pesky hearings that would allow critics to launch devastating attacks on the proposed bill based on a brutally unfair tactic – the presentation of facts. Unfortunately, in our professional capacities, we must oppose the bill. This bill is an atrocity.
The “Jumpstart Our Business Startups” Act, the comically forced effort to create a catchy acronym, is the most cynical bill to emerge from a cynical Congress and Administration. It is an exemplar of why Congressional approval ratings are well below those of used car dealers. The JOBS Act is something only a financial scavenger could love. It will create a fraud-friendly and fraud-enhancing environment. It will add to the unprecedented level of financial fraud by our most elite CEOS that has devastated the U.S. and European economies and cost over 20 million people their jobs. Financial fraud is a prime jobs killer.
Powerful regulatory regimes – strong accounting rules, strict corporate governance, tough securities laws, and vigorous civil and criminal enforcement of the regulations and laws is the greatest infrastructure for strong economic growth that a nation can provide. For decades, the U.S. had an enormous competitive advantage over other nations in raising funds through securities because investors placed great trust in issuers that were subject to effective regulation. U.S. equities traded at a substantial premium compared to securities issued in other nations (which means that companies could raise capital much more effectively and inexpensively). Regulators serve as the “cops on the beat” that prevent a Gresham’s Dynamic in which “bad ethics drives good ethics out of the markets.”
Our system worked brilliantly. America prospered. American businesses and investors prospered. Unfortunately, economists decided to destroy what worked and to replace it with a fraud-friendly, deregulated world. Alan Greenspan was only the most prominent high priest of the following dogma: “a rule against fraud is not an essential or … an important ingredient of securities markets” (Easterbrook & Fischel 1991). This faith-based economics had no basis in reality, but it led to aggressive anti-regulatory leaders whose policies were so criminogenic that they led to recurrent and ever-larger serious financial crises.
George Akerlof, Nobel Laureate in Economics (2001), and Paul Romer wrote the definitive economics article on financial fraud in 1993 (“Looting: the Economic Underworld of Bankruptcy for Profit”). They ended it with the following to emphasize a profound policy message.
“Neither the public nor economists foresaw that S&L deregulation was bound to produce looting. Therefore, they could not imagine how serious it would be. Thus the regulators in the field who understood what was happening from the beginning found lukewarm support, at best, for their cause. Now we know better. If we learn from experience, history need not repeat itself” (p. 60).
But economists, as a group, proved that they did not “know better” and that their problem was not that they were “unaware of the concept” of looting “control frauds” (frauds led by the leaders of seemingly legitimate entities). Economists, overwhelmingly, have ignored a Nobel Laureate in economics, white-collar criminologists, and experts on public administration and regulation. They have compounded their mistakes and they have dominated financial policy in the U.S. and Europe – the epicenters of the crises.
Among the many fraud-friendly policies that led to the deregulation that prompts our recurrent, intensifying financial crises, the undisputed most destructive aspect is the recurrent, intensifying embrace of the “regulatory race to the bottom.” The “logic” of the argument in the securities law context is that (1) dishonest issuers like bad regulation because it allows them to defraud with impunity, (2) our “competitor” nations (typically described as the City of London) offer weaker regulation to induce the fraudulent issuers to locate abroad, and (3) we must not allow this to happen; we must make sure that fraudulent issuers are based in America. Of course, they never phrase honestly their “logic” about dishonesty. Four national commissions investigated the causes of financial crises – the S&L debacle, the ongoing U.S. crisis, the Irish crisis, and the Icelandic crisis. Each of the commissions has decried the idiocy of the “race to the bottom” dynamic and warned that it must end. The arguments advanced by industry in support of the JOBS Act reflect and worship at the altar of “the race to the bottom.”
It is self-defeating for us to say this because as criminologists and anti-fraud specialists we would have job security for life if this bill was adopted. It is literally composed of the wish list in regard to fraud-friendly provisions that those intent on cheating have been dreaming about and salivating to achieve for decades. This bill will kill millions of jobs because financial frauds are weapons of mass financial destruction. It will start an international fraud-friendly deregulation race to the bottom and will become the basis for further criminogenic U.S. Congressional actions.
By:
William K. Black
Associate Professor of Economics and Law
University of Missouri-Kansas City
Co-signers:
Henry N. Pontell
Professor of Criminology, Law and Society
University of California, Irvine
Gilbert Geis
Professor Emeritus of Criminology, Law and Society
University of California, Irvine
Janet Tavakoli
President
Tavakoli Structured Finance, Inc.
Barry Ritholtz,
CEO; Director of Equity Research,
Fusion IQ
Lynn A. Stout
Distinguished Visiting Professor of Corporate and Business Law
Cornell Law School
10 Reasons the JOBS Act is Insane
By William K. Black, New Economic Perspectives
Posted on April 1, 2012, Printed on April 9, 2012
http://www.alternet.org/story/154793/10 ... _is_insane
The plot of the movie "WarGames" involves a slacker hacker (played by Matthew Broderick) who starts playing the game “Global Thermonuclear War” with Joshua, a Department of Defense (DoD) supercomputer that has been given partial control by DoD of our nuclear forces. The game prompts Joshua, who has been programmed to win games, to trick DoD into authorizing Joshua to launch an attack on the Soviet Union so that Joshua can win the game. The hacker and the professor that programmed Joshua realize that the only way to prevent Joshua from attacking is to teach “him” that no one can “win” global thermonuclear war. The insanity is that the people who created the game “Global Thermonuclear War” thought it could be won. Joshua races through thousands of scenarios and ends his plan to win the “Global Thermonuclear War” game by attacking the Soviet Union when he realizes that “the only winning move is not to play.”
The JOBS Act is insane on many levels. It creates an extraordinarily criminogenic environment in which securities fraud will become even more out of control. One of the forms of insanity is the belief that one can “win” a regulatory “race to the bottom.” The only winning move is not to play in a regulatory race to the bottom. The primary rationale for the JOBS Act is the claim that we must win a regulatory race to the bottom with the City of London by adopting even weaker protections for investors from securities fraud than does the United Kingdom (UK).
The second form of insanity is that the JOBS Act is being adopted without any consideration of the findings of the Financial Crisis Inquiry Commission (FCIC), the national commission to investigate the causes of the current crisis. I am not aware of any proponent or opponent of the JOBS Act (other than me) who has cited the findings of FCIC. Everyone involved has ignored the detailed finding of a huge investigative effort. The FCIC report explained repeatedly how the three “de’s” (deregulation, desupervision, and de facto decriminalization) had produced the criminogenic environment that drove the financial crisis. The FCIC report specifically condemned the “regulatory arbitrage” that the worst actors exploited by choosing to be (not very) regulated by the “winners” of the regulatory race to the bottom. The FCIC report shows repeatedly how damaging the anti-regulatory fervor in general and the race to the bottom in particular proved.
The third form of insanity is that the JOBS Act was framed without any input from anti-fraud experts. Anti-fraud experts uniformly condemned the bill. We have ignored the experts.
The fourth form of insanity is that we have ignored the people who got past crises correct. The people who were the first to identify prior crises, who designed and implemented successful means to limit the crises, who prevented problems through effective supervision from becoming crises, and who held the most elite fraudulent CEOs culpable for their frauds have all been excluded from the drafting of the JOBS Act.
The fifth form of insanity is that the people who got everything wrong by designing the anti-regulatory policies that drove our prior crises have designed the JOBS Act. We are reinforcing failure and turning our back on what we know succeeds.
The sixth form of insanity is a counterfactual. The unique aspect about this crisis is that it is the first one in modern U.S. history in which the CEOs directing the control frauds that caused the crisis have done so with complete impunity from the criminal laws and near impunity from civil suits and enforcement actions. The worst, most destructive fraudulent CEOs have been allowed to become and remain wealthy through their frauds even though several of them caused greater losses than the entire S&L debacle. The worst fraudulent CEOs who led the prior epidemics of accounting control fraud that drove the S&L debacle and the Enron-era crisis were prosecuted. Not a single elite CEO from Wall Street or the largest fraudulent lenders has even been charged with fraud arising from such loans even though they, collectively, made over two million fraudulent loans in 2006. Had the Bush and Obama administrations prosecuted and denounced these elite frauds it would have been politically impossible for an act as criminogenic and cynical as the JOBS Act to be promoted by the Obama administration and adopted by large Congressional minorities. We are seeing with the JOBS Act the sick face of crony capitalism.
The seventh form of insanity is that there is no greater killer of jobs than elite financial fraud. Such fraud epidemics can hyper-inflate bubbles (as they did in the U.S. and several European nations) and cause severe financial crises and recessions. The resulting Great Recession has cost over 10 million Americans their existing or future jobs in this crisis. It has cost over another 15 million people their existing or future jobs in Europe. The JOBS Act is so fraud friendly that it will harm capital formation and produce additional job losses. It may appear to be an oxymoron designed by regular morons, but that underestimates the abilities of the lobbyists that drafted this bill. They are not morons. They are doing faithful, clever service to their fraudulent clients. That makes them more dangerous.
The eighth form of insanity is that all of this is occurring weeks after the death of James Q. Wilson, a prominent political scientist who became most famous for co-developing a criminological theory – “broken windows.” The theory held that it was essential to elevate conduct in the public sphere by reorienting enforcement priorities to emphasize seemingly minor crimes and civil wrongs (e.g., cracking down on squeegee men). Wilson and “broken windows” are near universal favorites of conservatives. Wilson’s theories are controversial among criminologists in the blue collar sphere, but they are broadly accepted in the white-collar sphere. The JOBS Act, however, totally repudiates any “broken windows” approach to minimizing elite white-collar crimes. It encourages the kind of fraud-friendly conduct that has always proven severely criminogenic. Conservatives are the strongest supporters of the JOBS Act, which allegorically hands out buckets of rocks to the bottom feeders of the world of securities and encourages them to break every window in sight. Conservatives apply policies designed to prevent and repair immediately “broken windows” only to poor criminals, not the fraudulent CEOs who caused vastly greater financial losses that brought the global economy to its knees.
The ninth form of insanity is that the JOBS Act is being adopted at the same time that the Federal Reserve Bank of Dallas – the most anti-regulatory bank in the entire Federal Reserve system (which is a very large statement) warned in its recently released annual report that the largest U.S. banks drove the ongoing crisis and posed “a clear and present danger to the U.S. economy.”
The Dallas Fed used to object vociferously to all financial regulation because it claimed that markets were “self-correcting” absent regulation. It now warns that market “incentives often turn perverse, and self-interest can turn malevolent. That’s what happened in the years before the financial crisis.” Only effective regulatory “cops on the beat” can prevent frauds from creating a perverse “Gresham’s dynamic” (when frauds prosper, market forces become perverse and bad ethics drives good ethics out of the marketplace). Effective securities regulation has led to U.S. equities trading at a significant premium compared to other nations, which aids U.S. equity issuers. The JOBS Act threatens the continuation of that premium. Even the Dallas Fed’s most senior economist and President – and the Dallas Fed has been the leading opponent of financial regulation – now agrees that effective regulation is essential to strong financial markets. The Obama administration and Congress still worship at the temple of the faith-based economics that has caused our recurrent, intensifying financial crises. When the temple’s high priests (the Dallas Fed’s leadership) become apostate the politicians should shed their dogma.
The tenth form of insanity is that the JOBS Act’s primary theme is dramatically reducing transparency in securities law. If there is any nearly universal principle that writers about the ongoing global crisis emphasized that we needed to learn it was the exceptional virtue of transparency. Greater transparency makes private market discipline possible, it greatly enhances regulatory effectiveness, it discourages fraud, and it aids investors in making decisions. The JOBS Act repeatedly embraces opaqueness. We have known for millennia that this increases fraud.
For every one that doeth evil hateth the light, neither cometh to the light, lest his deeds should be reproved.
--John 3:20 (1769 Oxford King James Bible ‘Authorized Version)
© 2012 New Economic Perspectives All rights reserved.
View this story online at: http://www.alternet.org/story/154793/
by crikkett » Wed Apr 18, 2012 11:07 am
Citigroup's Chief Rebuffed On Pay by Shareholders
Published: Wednesday, 18 Apr 2012 | 9:34 AM ET Text Size
By: Jessica Silver-Greenberg and Nelson D. Schwartz
The New York Times
In a stinging rebuke, Citigroup shareholders rebuffed on Tuesday the bank's $15 million pay package for its chief executive, Vikram S. Pandit, marking the first time that stock owners have united in opposition to outsized compensation at a financial giant.
The shareholder vote, which comes amid a rising national debate over income inequality, suggests that anger over pay for chief executives has spread from Occupy Wall Street to wealthy institutional investors like pension fund and mutual fund managers.
About 55 percent of the shareholders voting were against the plan, which laid out compensation for the bank's five top executives, including Mr. Pandit.
"C.E.O.'s deserve good pay but there's good pay and there's obscene pay," said Brian Wenzinger, a principal at Aronson Johnson Ortiz, a Philadelphia money management company that voted against the pay package. Mr. Wenzinger's firm owns more than 5 million shares of Citigroup.
While the vote at Tuesday's annual meeting in Dallas is not binding, it serves as a warning shot to other banks that have increased the pay of their top executives this year despite middling performance.
After the vote, Richard D. Parsons, who is retiring as Citigroup chairman, said that he takes the vote seriously and Citi's board will carefully consider it.
Mike Mayo, an analyst with Credit Agricole Securities, said: "This is a milestone for corporate America. When shareholders speak up about issues on which they've been complacent, it's definitely a wake-up call. The only question is what took so long?"
Shareholders rarely vote against compensation plans. The votes are part of the Dodd-Frank financial overhaul that mandates that public companies include "say on pay" votes for shareholders to express opinions about compensation. Last year, only 2 percent of compensation plans were voted against, according to ISS Proxy Advisory Services. In some instances, boards responded by reducing executives' pay.
In Citigroup's case, ISS itself recommended that shareholders vote against the pay proposal, citing concerns that the compensation package lacked "rigorous goals to incentivize improvement in shareholder value." At Tuesday's meeting, 75 percent of the shareholders voted.
Excessive pay has been a long-running problem at Citigroup, dating to well before Mr. Pandit became chief executive in 2007, analysts said. Citigroup has had the worst stock price performance among large banks over the last decade but ranked among the highest in terms of compensation for top executives, Mr. Mayo said.
Citi shares closed at $35.08 Tuesday, up 3.18 percent amid a market rally. Citigroup shares remain down more than 80 percent since the financial crisis.
Last year, Mr. Pandit's compensation included a $1.67 million salary and a $5.3 million cash bonus. In addition, he received a retention package valued at $40 million, to be awarded through 2015. In 2009 and 2010, as Mr. Pandit struggled to pull the bank back from the brink, he accepted only a $1 annual salary.
Still, investors say that it is too soon for the bank to start giving out generous pay packages again. "The company has been flatlining," said Mike McCauley, a senior officer at the Florida State Board of Administration, which voted its 6.4 million shares against the plan. "The plan put forth reveals a disconnect between pay and performance."
Calpers, the California state pension fund, also voted against the plan. The issue was whether pay was linked to performance and whether those targets were spelled out and sustainable over the long term, said Anne Simpson, director of corporate governance for Calpers, which owns 9.7 million Citigroup shares.
"Citi was found wanting on both," she said. "If you reward them for focusing on high-risk, short-term profits, that's what you get, and that's how the financial crisis caught fire."
Not all institutional investors are unhappy. Bill Ackman, the head of Pershing Square Capital Management, which owns more than 26 million shares, said he thinks that "Vikram Pandit is doing an excellent job and the bank has made tremendous progress during his tenure."
Noting that Mr. Pandit received just $1 a year in 2009 and 2010, Mr. Ackman called the current package "an appropriate level of compensation."
In justifying the pay package, the company noted in its proxy filing that Citigroup net income was $11.1 billion in 2011, up 4 percent from 2010 and that it paid back the federal government billions in bailout loans and deferred cash awards to "limit incentives to take imprudent or excessive risks."
Even as Citigroup's earnings and capital cushion have improved, the bank has struggled to make up for lackluster revenue. Citi was dealt a further blow in March when the Federal Reserve rejected the bank's proposal to buy back shares and increase its dividend. While Citi intends to submit a revised plan to the central bank this year, shareholders say that with a quarterly dividend of one cent, Citi's top executives shouldn't be rewarded.
"Citigroup was terribly managed and whatever could be done wrong, they did wrong," said David Dreman, whose money management firm owns about $400,000 worth of Citigroup shares. While many of those mistakes predated Mr. Pandit, he said, it was way too early to start handing out generous pay packages. "Shareholders have finally done something constructive on the whole C.E.O. pay problem," he said.
Mr. Pandit's compensation is higher than some more successful rivals, according to proxy filings. Lloyd C. Blankfein, the chief executive of Goldman Sachs, received $3 million less than Mr. Pandit's $15 million, while James P. Gorman, the chief of Morgan Stanley, had a pay package of $10.5 million.
Still, disapprovals are rare. Last year, shareholders at 42 companies — out of more than 3,000 firms — voted against pay plans. In one of the most visible renunciations, shareholders at Hewlett-Packard, which has struggled with lackluster returns, voted against the pay for the technology company's top executives, including the chief executive, Meg Whitman.
Companies should brace for more shareholder denunciations, said James D. C. Barrall, an executive compensation lawyer at Latham & Watkins. The nation's other major banks have their annual meetings in the coming weeks.
Bank of America, whose shares have also struggled, could be the next bank to feel shareholders' wrath when it holds its annual meeting May 9, executive compensation consultants said. Its chief executive, Brian T. Moynihan, received $7 million for 2011, down from $10 million the previous year.
"There could be a real disconnect between pay and performance at Bank of America," said Frank Glassner, a partner with Meridian Compensation Partners, an executive consulting firm.
This story originally appeared in The New York Times
by JackRiddler » Wed Apr 18, 2012 11:50 am
jingofever wrote:Astrophysicist Tom Murphy recounts a conversation he had with an unnamed 'established economics professor from a prestigious institution'.the Earth has only one mechanism for releasing heat to space, and that’s via (infrared) radiation. We understand the phenomenon perfectly well, and can predict the surface temperature of the planet as a function of how much energy the human race produces. The upshot is that at a 2.3% growth rate (conveniently chosen to represent a 10× increase every century), we would reach boiling temperature in about 400 years.
Of course that is not a warning about global boiling but rather taking the concept of infinite growth of energy (and economy) to its absurd conclusion.
Economist: That’s a striking result. Could not technology pipe or beam the heat elsewhere, rather than relying on thermal radiation?
vanlose kid wrote:physicist wrote:Physicist: True enough. So we would likely agree that energy growth will not continue indefinitely. But two points before we continue: First, I’ll just mention that energy growth has far outstripped population growth, so that per-capita energy use has surged dramatically over time—our energy lives today are far richer than those of our great-great-grandparents a century ago [economist nods]. So even if population stabilizes, we are accustomed to per-capita energy growth: total energy would have to continue growing to maintain such a trend [another nod].vanlose kid wrote:there it is again:Economist: Okay, point taken. But there is more to efficiency than incremental improvement. There are also game-changers. Tele-conferencing instead of air travel. Laptop replaces desktop; iPhone replaces laptop, etc.—each far more energy frugal than the last. The internet is an example of an enabling innovation that changes the way we use energy.
Physicist: These are important examples, and I do expect some continuation along this line, but we still need to eat, and no activity can get away from energy use entirely. [semi-reluctant nod/bobble] Sure, there are lower-intensity activities, but nothing of economic value is completely free of energy.
Economist: Some things can get awfully close. Consider virtualization. Imagine that in the future, we could all own virtual mansions and have our every need satisfied: all by stimulative neurological trickery. We would stil need nutrition, but the energy required to experience a high-energy lifestyle would be relatively minor. This is an example of enabling technology that obviates the need to engage in energy-intensive activities. Want to spend the weekend in Paris? You can do it without getting out of your chair. [More like an IV-drip-equipped toilet than a chair, the physicist thinks.]
http://physics.ucsd.edu/do-the-math/201 ... physicist/
one more reason why green-talk (the official-statist kind) makes no sense: maintaining "our standard of living" while transitioning to green. can't happen. and won't. so why is it being sold?
the empire can't afford it's citizens. the central-command model can't continue to work (the FED in all it's forms will end). so the empire collapses. or continues, nominally. the ruling class wish to perpetuate their rule. they command the energy resources and arms and the pop is left to fend for themselves. city states might make a come back. Neuromancer territory.
something other than the apocalypse-silo, old-school walled corporate enclaves.
*
by seemslikeadream » Thu Apr 19, 2012 6:57 pm
For He’s a Jolly Good Scoundrel
Sanford Weill in 2007.
By Robert Scheer
How evil is this? At a time when two-thirds of U.S. homeowners are drowning in mortgage debt and the American dream has crashed for tens of millions more, Sanford Weill, the banker most responsible for the nation’s economic collapse, has been elected to the American Academy of Arts & Sciences.
So much for the academy’s proclaimed “230-plus year history of recognizing some of the world’s most accomplished scholars, scientists, writers, artists, and civic, corporate, and philanthropic leaders.” George Washington, Ralph Waldo Emerson and Albert Einstein must be rolling in their graves at the news that Weill, “philanthropist and retired Citigroup Chairman,” has joined their ranks.
Weill is the Wall Street hustler who led the successful lobbying to reverse the Glass-Steagall law, which long had been a barrier between investment and commercial banks. That 1999 reversal permitted the merger of Travelers and Citibank, thereby creating Citigroup as the largest of the “too big to fail” banks eventually bailed out by taxpayers. Weill was instrumental in getting then-President Bill Clinton to sign off on the Republican-sponsored legislation that upended the sensible restraints on finance capital that had worked splendidly since the Great Depression.
Those restrictions were initially flouted when Weill, then CEO of Travelers, which contained a major investment banking division, decided to merge the company with Citibank, a commercial bank headed by John S. Reed. The merger had actually been arranged before the enabling legislation became law, and it was granted a temporary waiver by Alan Greenspan’s Federal Reserve. The night before the announcement of the merger, as Wall Street Journal reporter Monica Langley writes in her book “Tearing Down the Walls: How Sandy Weill Fought His Way to the Top of the Financial World ... and Then Nearly Lost It All,” a buoyant Weill suggested to Reed, “We should call Clinton.” On a Sunday night Weill had no trouble getting through to the president and informed him of the merger, which violated existing law. After hanging up, Weill boasted to Reed, “We just made the president of the United States an insider.”
The fix was in to repeal Glass-Steagall, as The New York Times celebrated in a 1998 article: “... the announcement on Monday of a giant merger of Citicorp and Travelers Group not only altered the financial landscape of banking, it also changed the political landscape in Washington. ... Indeed, within 24 hours of the deal’s announcement, lobbyists for insurers, banks and Wall Street firms were huddling with Congressional banking committee staff members to fine-tune a measure that would update the 1933 Glass-Steagall Act separating commercial banking from Wall Street and insurance, to make it more politically acceptable to more members of Congress.”
At the signing ceremony Clinton presented Weill with one of the pens he used to “fine-tune” Glass-Steagall out of existence, proclaiming, “Today what we are doing is modernizing the financial services industry, tearing down those antiquated laws and granting banks significant new authority.” What a jerk.
Although Weill has shown not the slightest remorse, Reed has had the honesty to acknowledge that the elimination of Glass-Steagall was a disaster: “I would compartmentalize the industry for the same reason you compartmentalize ships,” he told Bloomberg News. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking, you’d have consumer banking separate from trading bonds and equity.”
Instead, all such compartmentalization was ended when Clinton signed the Gramm-Leach-Bliley Act in late 1999. In his memoir Weill brags that he and Republican Sen. Phil Gramm joked that it should have been called the Weill-Gramm-Leach-Bliley Act. Informally, some dubbed it “the Citigroup Authorization Act.”
Gramm left the Senate to become a top executive at the Swiss-based UBS bank, which like Citigroup ran into deep trouble. Leach—former Republican Rep. James Leach—was appointed by President Barack Obama in 2009 to head the National Endowment for the Humanities, where his banking skills could serve the needs of intellectuals. Robert Rubin, the Clinton administration treasury secretary who helped push through the Citigroup Authorization Act, was the most blatant double dealer of all: He accepted a $15-million-a-year offer from Weill to join Citigroup, where he eventually helped run the corporation into the ground.
Citigroup went on to be a major purveyor of toxic mortgage-based securities that required $45 billion in direct government investment and a $300 billion guarantee of its bad assets in order to avoid bankruptcy.
Weill himself bailed out shortly before the crash. His retirement from what was then the world’s largest financial conglomerate was chronicled in The New York Times under the headline “Laughing All the Way From the Bank.” The article told of “an enormous wooden plaque” in the bank’s headquarters that featured a likeness of Weill with the inscription “The Man Who Shattered Glass-Steagall.”
That’s the man the American Academy of Arts & Sciences now honors, among others, for “extraordinary accomplishment and a call to serve.” Disgusting.
by JackRiddler » Mon Apr 23, 2012 12:00 am
http://counterpunch.org/hudson08192011.html
August 19 - 21, 2011
Guard-Dogs for the Banks
The Case Against Rating Agencies
By MICHAEL HUDSON
In today’s looming confrontation the ratings agencies are playing the political role of “enforcer” as the gatekeepers to credit, to put pressure on Iceland, Greece and even the United States to pursue creditor-oriented policies that lead inevitably to financial crises. These crises in turn force debtor governments to sell off their assets under distress conditions. In pursuing this guard-dog service to the world’s bankers, the ratings agencies are escalating a political strategy they have long been refined over a generation in the corrupt arena of local U.S. politics.
Why ratings agencies favor public selloffs rather than sound tax policy: The Kucinich Case Study
In 1936, as part of the New Deal’s reform of America’s financial markets, regulators forbid banks and institutional money managers to buy securities deemed “speculative” by “recognized rating manuals.” Insurance companies, pension funds and mutual funds subject to public regulation are required to “take into account” the views of the credit ratings agencies, provided them with a government-sanctioned monopoly. These agencies make their money by offering their “opinions” (for which they have never been legally liable) as to the payment prospects of various grades of security, from AAA (as secure government debt, the top rating because governments always can print the money to pay) down to various depths of junk.
Moody’s, Standard and Poor’s and Fitch focus mainly on stocks and on corporate, state and local bond issues. They make money twice off the same transaction when cities and states balance their budgets by spinning off public enterprises into new corporate entities issuing new bonds and stocks. This business incentive gives the ratings agencies an antipathy to governments that finance themselves on a pay-as-you-go basis (as Adam Smith endorsed) by raising taxes on real estate and other property, income or sales taxes instead of borrowing to cover their spending. The effect of this inherent bias is not to give an opinion about what is economically best for a locality, but rather what makes the most profit for themselves.
Localities are pressured when their rising debt levels lead to a financial stringency. Banks pull back their credit lines, and urge cities and states to pay down their debts by selling off their most viable public enterprises. Offering opinions on this practice has become a big business for the ratings agencies. So it is understandable why their business model opposes policies – and political candidates – that support the idea of basing public financing on taxation rather than by borrowing. This self-interest colors their “opinions.”
If this seems too cynical an explanation for today’s ratings agencies self-serving views, there are sufficient examples going back over thirty years to illustrate their unethical behavior. The first and most notorious case occurred in Cleveland, Ohio, after Dennis Kucinich was elected mayor in 1977. The ratings agencies had been giving the city good marks despite the fact that it had been using bond funds improperly for general operating purposes to covered its budget shortfalls by borrowing, leaving Cleveland with $14.5 million owed to the banks on open short-term credit lines.
Cleveland had a potential cash cow in Municipal Light, which its Progressive Era mayor Tom Johnson had created in 1907 as one of America’s first publicly owned power utilities. It provided the electricity to light Cleveland’s streets and other public uses, as well as providing power to private users. Meanwhile, banks and their leading local clients were heavily invested in Muni Light’s privately owned competitor, the Cleveland Electric Illuminating Company. Members of the Cleveland Trust sat on CEI’s board and wielded a strong influence on the city council to try and take it over. In a series of moves that city officials, the U.S. Senate and regulatory agencies found to be improper (popular usage would say criminal), CEI caused a series of disruptions in service and worked with the banks and ratings agencies to try and force the city to sell it the utility. Banks for their part had their eye on financing a public buyout – and hoped to pressure the city into selling, threatening to pull the plug on its credit lines if it did not surrender Muni Light.
It was to block this privatization that Mr. Kucinich ran for mayor. To free the city from being liable to financial pressure from its vested interests – above all from the banks and private utilities – he sought to put the city’s finances on a sound footing by raising taxes. This threatened to slow borrowing from the banks (thereby shrinking the business of ratings agencies as well), while freeing Cleveland from the pressures that have risen across the United States for cities to start selling off their public enterprises, especially since the 1980s as tax-cutting politicians have left them deeper in debt.
The banks and ratings agencies told Mayor Kucinich that they would back his political career and even hinted financing a run for the governorship if he played ball with them and agreed to sell the electric utility. When he balked, the banks said that they could not renew credit lines to a city that was so reluctant to balance its books by privatizing its most profitable enterprises. This threat was like a credit-card company suddenly demanding payment of the full balance from a customer, saying that if it were not paid, the sheriff would come in and seize property to sell off (usually on credit extended to customers of the bankers).
The ratings agencies chimed in and threatened to downgrade Cleveland’s credit rating if the city did not privatize its utility. The financial tactic was to offer the carrot of corrupting the mayor politically, while using the threat of forcing the city into financial crisis and raising its interest rates. If the economy did not pay higher utility charges as a result of privatization, it would have to pay higher interest.
But standing on principle, the mayor refused to sell the utility, and voters elected to keep Muni light public by a 2-to-1 margin in a referendum. They proceeded to pay down the city’s debt by raising its income-tax rate in order to avoid paying higher rates for privatized electricity. Their choice was thoroughly in line with Book V of Adam Smith’s Wealth of Nations which provides a perspective on how borrowing ends up with a proliferation of taxes to pay the interest. This makes the private sector pay higher prices for its basic needs that Cleveland Mayor Tom Johnson and other Progressive Era leaders a century ago sought to socialize in order to lower the cost of living and doing business in the United States.
The bankers’ alliance with the Cleveland’s wealthy would-be power monopoly led it to be the first U.S. city to default since the Great Depression as the state of Ohio forced it into fiscal receivership in 1979. The banks used the crisis to make an easy gain in buying up bond anticipation notes that were sold under distress conditions exacerbated by the ratings agencies. The banks helped fund Mayor Kucinich’s opponent in the 1979 mayoral race.
But in saving Muni Light he had saved voters hundreds of millions of dollars that the privatizers would have built into their electric rates to cover higher interest charges and financial fees, dividends to stockholders, and exorbitant salaries and stock options. In due course voters came to recognize Kucinich’s achievement and have sent him to Congress since 1997. As for Mini Light’s privately owned rival, the Cleveland Electric Illuminating Company, it achieved notoriety for being primarily responsible for the northeastern United States power blackout in 2003 that left 50 million people without electricity.
The moral is that the ratings agencies’ criterion was simply what was best for the banks, not for the debtor economy issuing the bonds. They were eager to upgrade Cleveland’s credit ratings for doing something injurious – first, borrowing from the banks rather than covering their budget by raising property and income taxes; and second, raising the cost of doing business by selling Muni Light. They threatened to downgrade the city for acting to protect its economic interest and trying to keep its cost of living and doing business low.
The tactics by banks and credit rating agencies have been successful most easily in cities and states that have fallen deeply into debt dependency. The aim is to carve up national assets, by doing to Washington what they sought to do in Cleveland and other cities over the past generation. Similar pressure is being exerted on the international level on Greece and other countries. Ratings agencies act as political “enforcers” to knee-cap economies that refrain from privatization sell-offs to solve debt problems recognized by the markets before the ratings agencies acknowledge the bad financial mode that they endorse for self-serving business reasons.
Why ratings agencies oppose public checks against financial fraud
The danger posed by ratings agencies in pressing the global economy to a race into debt and privatization recently became even more blatant in their drive to give more leeway to abusive financial behavior by banks and underwriters. Former Congressional staffer Matt Stoller cites an example provided by Josh Rosner and Gretchen Morgenson in Reckless Endangerment regarding their support of creditor rights to engage in predatory lending and outright fraud. On January 12, 2003, the state of Georgia passed strong anti-fraud laws drafted by consumer advocates. Four days later, Standard & Poor announced that if Georgia passed anti-fraud penalties for corrupt mortgage brokers and lenders, packaging including such debts could not be given AAA ratings.“Because of the state’s new Fair Lending Act, S&P said that it would no longer allow mortgage loans originated in Georgia to be placed in mortgage securities that it rated. Moody’s and Fitch soon followed with similar warnings.
“It was a critical blow. S&P’s move meant Georgia lenders would have no access to the securitization money machine; they would either have to keep the loans they made on their own books, or sell them one by one to other institutions. In turn, they made it clear to the public that there would be fewer mortgages funded, dashing “the dream” of homeownership.”
The message was that only bank loans free of legal threat against dishonest behavior were deemed legally risk-free for buyers of securities backed by predatory or fraudulent mortgages. The risk in question was that state agencies would reduce or even nullify payments being extracted by crooked real estate brokers, appraisers and bankers. As Rosner and Morgenson summarize:“Standard & Poor’s said it was taking action because the new law created liability for any institution that participated in a securitization containing a loan that might be considered predatory. If a Wall Street firm purchased loans that ran afoul of the law and placed them in a mortgage pool, the firm could be liable under the law. Ditto for investors who bought into the pools.
“Transaction parties in securitizations, including depositors, issuers and servicers, might all be subject to penalties for violations under the Georgia Fair Lending Act,” S&P’s press release explained.”
The ratings agencies’ logic is that bondholders will not be able to collect if public entities prosecute financial fraud involved in packaging deceptive mortgage packages and bonds. It is a basic principle of law that receivers or other buyers of stolen property must forfeit it, and the asset returned to the victim. So prosecuting fraud is a threat to the buyer – much as an art collector who bought a stolen painting must give it back, regardless of how much money has been paid to the fence or intermediate art dealer. The ratings agencies do not want this principle to be followed in the financial markets.
We have fallen into quite a muddle when ratings agencies take the position that packaged mortgages can receive AAA ratings only from states that do not protect consumers and debtors against mortgage fraud and predatory finance. The logic is that giving courts the right to prosecute fraud threatens the viability of creditor claims and endorses a race to the bottom. If honesty and viable credit were the objective of ratings agencies, they would give AAA ratings only to states whose courts deterred lenders from engaging in the kind of fraud that has ended up destroying the securitized mortgage binge since September 2008. But protecting the interests of savers or bank customers – and hence even the viability of securitized mortgage packages – is not the task with which ratings agencies are charged.
Masquerading as objective think tanks and research organizations, the ratings agencies act as lobbyists for banks and underwriters by endorsing a race to the bottom – into debt, privatization sell-offs and an erosion of consumer rights and control over fraud. “S&P was aggressively killing mortgage servicing regulation and rules to prevent fraudulent or predatory mortgage lending,” Stoller concludes. “Naomi Klein wrote about S&P and Moody’s being used by Canadian bankers in the early 1990s to threaten a downgrade of that country unless unemployment insurance and health care were slashed.”
The basic conundrum is that anything that interferes with the arbitrary creditor power to make money by trickery, exploitation and outright fraud threatens the collectability of claims. The banks and ratings agencies have wielded this power with such intransigence that they have corrupted the financial system into junk mortgage lending, junk bonds to finance corporate raiders, and computerized gambles in “casino capitalism.” What then is the logic in giving these agencies a public monopoly to impose their “opinions” on behalf of their paying clients, blackballing policies that the financial sector opposes – rulings that institutional investors are legally obliged to obey?
Threats to downgrade the U.S. and other national economies to force pro-financial policies
At the point where claims for payment prove self-destructive, creditors move to their fallback position. Plan B is to foreclose, taking possession of the property of debtors. In the case of public debt, governments are told to privatize the public domain – with banks creating the credit for their customers to buy these assets, typically under fire-sale distress conditions that leave room for capital gains and other financial rake-offs. In cases where foreclosure and forced sell-offs are not able to make creditors whole (as when the economy breaks down), Plan C is for governments simply to bail out the banks, taking bad bank debts and other obligations onto the public balance sheet for taxpayers to make good on.
Standard and Poor’s threat to downgrade of U.S. Treasury bonds from AAA to AA+ would exacerbate the problem if it actually discouraged purchasers from buying these bonds. But on the Monday on August 8, following their Friday evening downgrade, Treasury borrowing rates fell, with short-term T-bills actually in negative territory. That meant that investors had to lose a small margin simply to keep their money safe. So S&P’s opinions are as ineffectual as being a useful guide to markets as they are as a guide to promote good economic policy.
But S&P’s intent was not really to affect the marketability of Treasury bonds. It was a political stunt to promote the idea that the solution to today’s budget deficit is to pursue economic austerity. The message is that President Obama should roll back Social Security and Medicare entitlements so as to free more money for more subsidies, bailouts and tax cuts for the top of the steepening wealth pyramid. Neoliberal Harvard economics professor Robert Barro made this point explicitly in a Wall Street Journal op-ed. Calling the S&P downgrade a “wake-up call” to deal with the budget deficit, he outlined the financial sector’s preferred solution: a vicious class war against labor to reduce living standards and further polarize the U.S. economy between creditors and debtors by shifting taxes off financial speculation and property onto employees and consumers.“First, make structural reforms to the main entitlement programs, starting with increases in ages of eligibility and a shift to an economically appropriate indexing formula. Second, lower the structure of marginal tax rates in the individual income tax. Third, in the spirit of Reagan's 1986 tax reform, pay for the rate cuts by gradually phasing out the main tax-expenditure items, including preferences for home-mortgage interest, state and local income taxes, and employee fringe benefits—not to mention eliminating ethanol subsidies. Fourth, permanently eliminate corporate and estate taxes, levies that are inefficient and raise little money. Fifth, introduce a broad-based expenditure tax, such as a value-added tax (VAT), with a rate around 10%.”
Bank lobbyist Anders Aslund of the Peterson Institute of International Finance jumped onto the bandwagon by applauding Latvia’s economic disaster (a 20 per cent plunge in GDP, 30 per cent reduction of public-sector salaries and accelerating emigration as a success story for other European countries to follow. As they say, one can’t make this up.”
As the main advocate and ultimate beneficiary of privatization, the financial sector directs debtor economies to sell off their public property and cut social services – while increasing taxes on employees. Populations living in such economies call them hell and seek to emigrate to find work or simply to flee their debts. What else should someone call surging poverty, death rates and alcoholism while a few grow rich? The ratings agencies today are like the IMF in the 1970s and ‘80s. Countries that do not agree sell off their public domain (and give tax deductibility to the interest payments of buyers-on-credit, providing multinationals with income-tax exemption on their takings from the monopolies being privatized) are treated as outlaws and isolated Cuba- or Iran-style.
Such austerity plans are a failed economic model, but the financial sector has managed to gain even as economies are carved up. Their “Plan B” is foreclosure, extending to the national scale. By the 1980s, creditor-planned economies in Third World debtor countries had reached the limit of their credit-worthiness. Under World Bank coordination, a vast market in national infrastructure spending was set up for creditor-nation bank debt, bonds and exports. The projects being financed on credit were mainly to facilitate exports and provide electric power for foreign investments. After Mexico announced its insolvency in 1982 when it no longer could afford to service foreign-currency debt, where were creditors to turn?
Their solution was to use the debt crisis as a lever to start financing these same infrastructure projects all over again, now that most were largely paid for. This time, what was being financed was not new construction, but private-sector buyouts of property that had been financed by the World Bank and its allied consortia of international bankers. There is talk of the U.S. Government selling off its national parks and other real estate, national highways and infrastructure, perhaps the oil reserve, postal service and so forth.
S&P’s “opinion” was treated seriously enough by John Kerry, the 2004 Democratic Presidential nominee, as a warning that America should “get its house in order.” Despite the fact that on page 4 of its 8-page explanation of why it downgraded Treasury bonds, S&P’s stated: “We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the act,” Democrat Kerry was one of the three senators appointed to the commission under the debt-ceiling agreement. He chimed in to endorse the S&P action as a helpful nudge for the country to deal with its “entitlements” program – as if Social Security and FICA withholding were a kind of welfare, not actual savings put in by labor, to be wiped out as the government empties its coffers to bail out Wall Street’s high rollers.
No less a financial publication than the Wall Street Journal has come to the conclusion that “in a perfect world, S&P wouldn't exist. And neither would its rivals Moody's Investors Service and Fitch Ratings Ltd. At least not in their current roles as global judges and juries of corporate and government bonds.” As its financial editor Francesco Guerrera wrote quite eloquently in the aftermath of S&P’s bold threat to downgrade the U.S. Treasury’s credit rating: “The historic decision taken by S&P on Aug. 5 is the culmination of 75 years of policy mistakes that ended up delegating a key regulatory function to three for-profit entities.”
The behavior of leading banks and ratings agencies with Cleveland and other similar cases – of promising to give good ratings to states, counties and cities that agree to pay off short-term bank debt by selling off their crown jewels – is not ostensibly criminal under the law (except when their hit men actually succeed in assassination). But the ratings agencies have made an compact with crooks to endorse only public borrowers that agree to pursue such policies and not to prosecute financial fraud.
To acquiescence in such economically destructive financial behavior is the opposite of fiscal responsibility. Cutting federal taxes and Social Security payments to obtain a more positive S&P “opinion” would give banks an ability to “pull the plug” and force privatization and anti-labor austerity plans by refraining from rolling over the U.S. debt – and cutting taxes Tea-Party style rather than funding spending by taxation on a pay-as-you-go-basis.
The present meltdown of the euro provides an object lesson for why policy-making never should be left to central bankers, because their mentality is pro-creditor. Otherwise they would not have the political reliability demanded by the financial sector that has captured the central bank, Treasury and regulatory agencies to gain veto power over who is appointed. Given their preference for debt deflation of the “real” economy – while trying to inflate asset prices by promoting the banks’ product (debt creation) – central bank and Treasury solutions tend to aggravate economic downturns. This is self-destructive because today’s major problem blocking recovery is over-indebtedness.
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt: A History of Theories of Polarization v. Convergence in the World Economy. He can be reached via his website, mh@michael-hudson.com
by Wombaticus Rex » Wed Apr 25, 2012 12:39 am
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