Professional financial hackers have a lot of common with the organized crime. And not only
in respect to common addictions
to cocaine and prostitutes. But there is a subtle difference: financial hackers make it daily (and
very lucrative) business to figure out ways to abide by the letter of the law while violating its
spirit. Although the claim that they do not break the law has very little credibility. They do break
the law, but at the same time their political influence is big enough to keep them out of jail. In
2012 Lanny Breuer, then the head of the Justice Department's criminal division openly admitted
that. In a speech at the New York City Bar Association he said that he felt that it was his duty to
consider the health of the company, the industry, and the markets in deciding whether or not to file
charges. Which in case of Goldman represents insurmountable obstacle to criminal prosecution.
In any case GS converted itself into a special type of TBTF company, the company that specialized in hacking financial system. And in a large company internal
politic can turn really destructive both to the firm and society at large. In fact, in large
companies there are
people with very high IQ at the top with personal traits that makes them more dangerous in comparison with
bosses of Mexican gangs.
It also makes internal political battles more vicious. BTW, a lot of
psychopaths have above average IQ.
In a way the USA never had a subprime crisis. What we had was systemic, neoliberalism-induced crisis that involves FED,
government, congress, banking, ratings, insurance, investment and financial industries (the banks were
at the center of this crime syndicate and they were the largest beneficiaries of the crimes committed),
one manifestation of which was 2008 subprime crisis.
Large banks became huge, dominant political force and based on their political weight, they hacked the
financial system in the same way computer hackers hack computers systems to suit their short term needs
and first of all for enrichment of the brass (appetite for "make money fast" schemes was greatly raised
during dot-com crisis).
As Simon Johnson wrote in May 2009 the USA had a
The Quiet Coup with banks becoming the most favored and the most protected industry of the Congress.
Financial system is essentially a system of rules. If a rich and powerful organization is directed toward
hacking the rules: finding weaknesses and exploiting them it is undistinguishable from mafia in a very
precise meaning of the term (organize crime syndicate with strong ethnic component), only more sophisticated.
Again they are not gangsters in traditional meaning of this word, they are of a hackers, and as such
they are much more difficult to prosecute. As a comment to blog post at EconomistView by "Eric"
(Paul Krugman The Unwisdom of Elites) aptly stated:
Villains....who exactly? The principle reason that there have been few prosecutions of high level
bankers is that not so much that got done was illegal. Reckless, maybe. But even here is it really
reckless behavior if you have a belief -- which turns out to be true -- that public finances will
bear the downside risks on your behalf?
In hindsight it feels like these things should have been illegal, but the available serious punishments,
such as not bailing out AIG, not allowing various investment firms to become bank holding entites,
not backstopping the GSEs (read their debt issues and you'll see that nowhere is a claim made for
public backing), not taking first loss positions on Bear Stearn assets, etc., etc., were foregone
by voluntary actions by public officials.
Make peace with the truth that there will be no sweeping prosecutions, least of all by the federal
government of the USA.
Those are serious, well educated and well motivated guys which are paid good money for finding the
flaws and based on this knowledge subverting existing system of rules, rules which are the essence of
financial system. Essentially they are professional financial system hackers. Or a strange
brand of Harvard trained Mafiosi (and again, Mafia is nothing more that a diversified criminal business
with strong ethnic component ;-). But unlike Mafia they have really good connections in government
and essentially captured the government in a silent coup. In a way this organization behaves like cancer
cells in a human body and prognosis is not that good, despite the fact that the patient survived one
time:
Finanally, the Great Recession was brought on by a runaway financial sector, empowered by reckless
deregulation. And who was responsible for that deregulation? Powerful people in Washington with close
ties to the financial industry, that’s who....
Due to deregulation which was the important part of neoliberal doctrine, they become legislators
of their own business... Here is what a telling quote from the post
Overruled found on
macrobusiness.com.au
But in global finance there are some things happening that are genuinely different. Dangerously
so. It is becoming a hall of mirrors, money referring to itself in an
infinite regress. Little wonder that people are attracted to gold, because gold seems
to be a tangible, solid measure of value, something we can rest on in an environment where everything
seems relative. Yet this, too, is an illusion. The yellow metal only has value because it has a history
of being deemed to have value. It is no more an objective measure of value than the pieces of coloured
plastic, notes, that make up legal tender.
To explain what I mean, let’s start with a definition of what
money is. It is rules. Rules about value and obligation. Those rules are usually based on legally
enforced structures, although that need not be the case. In the case of cross border capital markets,
the enforcement is informal because there is no supranational government to impose penalties. Disputes
are resolved by a handful of law firms, the main penalty is to be prevented from participating for
a period.
Now if money is rules, then what does it mean to “de-regulate
financial markets” as was claimed in the 1990s? Can you de-regulate
rules? Obviously not. So what happened? The place where rules were set shifted.
Instead of government for the most part making the rules, the
traders started making the rules. The logic was, as Alan Greenspan
argued, that because everyone was acting in their self interest then nothing could possibly go wrong.
Pricing would be accurate, the less formal self organisation of the market would be superior to the
formal oversight of governments (what would governments, which are always bad, know?) and everyone
would win. Free lunches as far as the eye can see.
So the rules proliferated, especially after the advent of the
Black and Scholes pricing of risk, a clever piece of maths based on what is probably circular argument,
but one that is sufficiently concealed to give traders the impression that they are handing off risk
accurately. This led to the explosion of derivatives and securities markets, including such instruments
as collateralised debt obligations, credit default swaps and endless hedging games (my personl favourite
is a derivative on “volatility”).
Now the point about rules is that they are based on agreement,
and their creation can be without any limit provided traders are prepared to agree, to trust each
other enough to transact. They are not finite in the way that, say, gold is. And so the rule making
exploded. The global stock of derivatives is $US600 trillion, about twice the capital stock of the
world (all the shares, property, equities, bonds and bank deposits). Far from deregulation making
the rules of finance more more streamlined and more efficient — as if the efficiency of money could
be measured anyway, given that it would mean measuring money with itself — the rule making expanded
wildly. And we all know what happened when the trust that underlies those rules collapsed.
Lloyd Blankfein personality (The Independent called him
the prince of Casino Capitalism) also suggests that GS
might operate in the throes of an addiction to gambling. And they know they are controlled
by their addiction, and so they hate themselves, like addicts typically do, for their lack of self-control.
They also see what their addiction is doing to the nation and the world, and guilt collides with craving,
making the addiction even more disturbing.
From the Wall Street Journal
In December 2007, after the firm distributed multimillion-dollar bonus checks in part thanks to
bets on a mortgage meltdown, about 10 Goldman mortgage traders, surrounded by dozens of cheering
colleagues, wolfed down the burgers, according to attendees. Bystanders wagered cash on how many
burgers the traders could eat.
The annual event resembled a scene out of “Liar’s Poker,” a book depicting bawdy antics of bond
traders at Salomon Brothers in the 1980s. In fact, the 2007 contest was held just a few floors away
from where the Salomon traders worked when that firm leased space in the same Manhattan building.
It was a lower-stakes version of what went on every day in the group: aggressive, take-no-prisoners
trading. Mortgage-backed bonds, including complex derivatives that tracked pools of risky loans,
were traded for big money in Goldman’s 400-person mortgage unit.
Addicts used to hate their actions, hate the world that lets them act, and they dehumanize the victims
who suffer from it in a way that the strong hate the weak.
The real question about Goldman is what constructive role in economy those guys play. Are they just
government supported and government protected extortion gang operating mainly in developing market,
but due to inertia ripping off home constituents? Is Goldman really such an indispensable financial
intermediary? If one looks at the firm’s revenue breakdown it's clear that this is more of a casino
than anything else, and some of GS moves are savagely predatory and put the economy in danger (they
were instrumental in causing the collapse of AIG (see
Janet Tavakoli- Goldman Sachs Nearly Bankrupted AIG); saving AIG was largely about saving the derivatives
market, which is so big and unstable that the bankruptcy of a large and intertwined counterparty could
mean the bankruptcy of all gamblers including Goldman). AS
Karl Denninger
noted on April 12, 2009:
There is a rumor about Goldman Sachs flying around on the street - allegedly they are about to report
their second-best quarter in history, +$12 billion or so.
A 47 percent gain for the company’s stock price this year and a return to profitability in
the first quarter may help Chief Executive Officer Lloyd Blankfein raise new money, analysts said.
That might let Goldman Sachs, the sixth-biggest bank, return the cash received in October from
the Treasury’s Troubled Asset Relief Program and shake off compensation and hiring restrictions
imposed on banks that took the U.S. aid.
Gee, you don't think being paid by the taxpayer through AIG's "conduit" for losses that didn't
(yet) happen at 100 cents on the dollar might have anything to do with that, do you?
And further (and potentially much worse) there is the repeated statement by Goldman executives
that they were "fully hedged" against a potential counterparty default by AIG.
One wonders - was that "hedge" to be short the equity on AIG itself, perhaps?
Why is this important?
Because if that's how Goldman hedged they got paid twice and the taxpayer literally
got robbed.
Someone in Congress needs to look into this now; there are already rumblings
of investigation. Those rumblings need to get a lot louder and turn into subpoenas,
not "polite inquiries."
If in fact Goldman (or anyone else) was "hedged" against a possible credit loss from their CDS
with AIG and they were able to collect on that hedge (no matter what it was)
those payments through AIG need to be clawed back immediately as nobody is entitled
to be paid twice for the same risk and reap what amounts to a windfall profit by quite literally
engineering a multi-billion dollar transfer of funds from the Taxpayer to the firm!
This is not small potatoes either - we're talking $100 billion+ in aggregate with these various
banks on a worldwide basis.
We the people deserve answers on this right now and if persons in our government handed these
banks $100 billion dollars of our tax money for what was a covered bet, allowing them to collect
twice on a risk that had not yet been realized (when at most they were entitled to collect once via
their private hedging activity) every single person involved in that scandal must be immediately
removed from office, prosecuted if possible, and every nickel of those funds must be clawed back
by whatever means are necessary.
The fact that GS is run by a compulsive gambler completes the picture. It’s a hybrid hedge
fund and bookie, with an investment bank and asset management business attached to create some respectability.
As NYT wrote
(Clients
Worried About Goldman’s Many Hats )
Goldman’s trading operation has grown so pivotal and influential that many analysts say the firm
as a whole now operates more like a hedge fund than an investment bank — another benchmark of the
firm’s internal evolution that can create new friction with clients.
Is we assume that GS is a parasite on the body of the society, the question arise who is protecting
such a mass scale racket in comparison with which Russian mobsters are just children. “Great vampire
squid" Goldman Sachs is a strange firm and sometimes it is difficult to figure where GS ends and government
starts and vise versa.
Paulson continued to appoint Goldman Sachs alumni to positions of power after the AIG decision—he
named Edward C. Forst, a former head of Goldman’s investment-management division, to help draft the
$700 billion Toxic Asset Relief Program (of which $10 billion went to Goldman Sachs), and then Neel
Kashkari, a former Goldman V.P., as the TARP manager. And of course Edward Liddy, former Goldman
board member, was already serving as the new CEO of AIG. Suddenly, everywhere you looked, men who
had passed through the Goldman gauntlet of loyalty and rewards were now in key positions overseeing
the rescue of the financial system. The company was earning its nickname: “Government Sachs.”
"Goldman's activity is of negative social value. Its recent profits came from trading, which basically
amounts to profiting from insider information at the expense of others," says
Stiglitz.
GS is more like a hedge fund then an investment bank. While slimy business practices of Goldman Sacks
flourished in the atmosphere of deregulation, the idea of milking fiat money system with stock
market is the central in GS business model. That's why a recent
Rolling Stone article called the firm a "great vampire squid wrapped around the face of humanity,
relentlessly jamming its blood funnel into anything that smells like money." And a 2007 New York Times
column likened its culture to the KGB, the former Soviet Union's secret police.
It's not as if Goldman escaped the financial crisis unscathed. There was a period of chaos last year
when Blankfein admits he was willing to consider any option to survive, including merging with Citigroup,
which by contrast is today considered one of the weakest financial institutions, 34%-owned by the government.
Recently Goldman short selling of MBS during the time the other arm of the firm was packaging them caused
a lot of outrage, but nothing was done so far by Obama administration to curb abuses. We will see if
Blankfein will go to jail for perjury.
Professor Krugman, other wise people have also noticed the same mind boggling phenomenon that
you very well pointed out. What has this great country become now? Goldman Sachs and what it represents
have shear contempt for each and everyone of those they have the Audacity to repeatedly and legally
rob, the retirees, the pension funds of teachers and firefighters, 401ks of the workers and savings
of all decent people.
Your suggestion that Goldman worked its miracles by being clever is
disingenuous. As the Times own Gretchen Morgenson demonstrated,
Government Sachs worked it miracles by sitting down at the private table
with goverment decision-makers -- like its old boss Hank Paulson --& hammering out recovery program
that benefitted Goldman & whenever possible maimed or killed its competitors (bon
voyage, Lehman brothers). If Goldman is corrupt, its Toadies in Treasury T-shirts are worse. Geithner
& the top Goldman alum who run Treasury should all be fired, & Goldman should never again enjoy the
special status it has acquired through well-placed veterans. There can never be honest & effective
regulation when Goldman & its revolving bureaucrats decide what & who is to be regulated. The change
we can believe in come from leaders who serve the people; not those who serve big banking.
I am on a completely different ideological plane than you are. I think your Keynesian economics
are a complete and absolute fraud. BUT what you say about Goldman Sachs is fact. I do not think that
you go far enough. Too many government players are involved with or developed from Goldman. They
guided our policies in a way that helped Goldman. More than anything, a special prosecutor needs
to be appointed to investigate this travesty of justice.
One quick side note, Asset Backed Securities and other derivatives
are not inherently bad, they are bad in the hands of scummy New York investment banks.
But otherwise they can help small entities raise capital and allow their business models to flourish
and withstand the onslaught of larger entities.
===
This isn't the American Dream anymore, but the great American Fraud! The US has now the best of
both worlds: the privatisation of the profits, and the socialization of the losses!
I do hope that with their robust democracy the US will come out of this situation in a better
manner.
10 reasons why Wall Street has absolute power over America's democracy
Paul B. Farrell, MarketWatch Last update: 7:13 p.m. EDT April 20,
ARROYO GRANDE, Calif. (MarketWatch) -- Two mind-numbing fast-paced dramas. Two parallel worlds.
One real, one fiction, both deadly. Jack Bauer, mythic hero of "24." Dying from a deadly bio-pathogen
leaked from weapons developed by Starkwood, a rogue mercenary army attacking the presidency, hell-bent
on taking over America.
The other drama in play: "Hank the Hammer" Paulson, iconic Wall Street hero, a Trojan Horse placed
inside Washington by Goldman Sachs as Treasury Secretary in control of America's $15 trillion economy.
Goldman, a modern dynasty with vast financial powers much like those once used by the de' Medici,
Rothschilds and Morgans to control nations.
One of the confounding aspects of bear market rallies is that the longer they last, the more likely
investors are to expect a correction, says Barron's Bob O'Brien.
Both dramas play high-stakes games with financial WMDs that have lethal consequences. Jack compresses
thrills, kills and chills into 24 hours. Hank, Goldman and their army of Wall Street mercenaries
move with equally blinding speed, heart-pounding action.
Drama? You bet. Six short months ago Hank led an assault on Congress. The scene parallels one
in "24:" Sangala War Lord Juma's brazen attack inside the White House. But no AK-47s necessary. The
Hammer assaulted Congress with just a two-and-a-half page memo in hand. Like a crack special-ops
warrior, he took down the enemy, demanding $750 billion, absolute control, total secrecy, no accountability
and emergency powers to act immediately ... warning that inaction was not an option, that collapse
of America's banking system was imminent, would bring down the global monetary system, pushing world's
economies into a "Great Depression II." Congress surrendered.
Here's the whole plot:
Scene 1. American government is now run by the 'Goldman Conspiracy'
Oh, you really think just I'm plotting a television series? Or just paranoid, exaggerating this
power grab? You better read "The Usual Suspects," Matthew Malone's brilliant article in Portfolio
magazine: He "exposed" the "Goldman Sachs 'conspiracy' to take over the U.S. financial system." Read
it in this context: America's financial sector has exploded from 19% of corporate profits in 1986
to 41% today, becoming a magnet for every wannabe billionaire. They know why Wall Street must control
Washington.
Malone focuses on the incestuous "conspiracy" of Goldman alumni in Treasury, Bank of America,
Merrill Lynch, AIG, Citigroup, Washington lobbyists and politicians.
Scene 2. Huge conflicts motivating Wall Street's 'Trojan Horse'
And just in case you think any emphasis on The Hammer's conflict of interest was invented purely
to increase drama, please remember that he worked at Goldman for three decades after serving under
Nixon. He got $38 million his last year as CEO in 2006 before becoming Treasury Secretary.
Then during the market meltdown six months ago the $700 million personal fortune he built at Goldman
was threatened by Goldman's huge $20 billion derivatives exposure at AIG: Suddenly his responsibilities
at Treasury merged with a strong self-interest in protecting his personal fortune. AIG was "saved."
Scene 3. Wall Street's 'quiet coup' also runs world's banking system
There's another equally disturbing expose in "The Quiet Coup," Simon Johnson's great article in
Atlantic magazine. A former chief economist at the International Monetary Fund, Johnson also warns
that America's "financial industry has effectively captured our government" and is "blocking essential
reform."
Worse, he says that unless we break Wall Street's stranglehold (unlikely in the new Washington)
we will be unable "to prevent a true depression," warning that "we're running out of time," echoing
many of our predictions of the "Great Depression II" coming soon.
See previous Paul B. Farrell.
Scene 4. Wall Street used the meltdown to take over America's government
Matt Taibbi, author of "The Great Derangement," captured this drama in a Rolling Stone piece,
"The Big Takeover, how Wall Street insiders are using the bailout to stage a revolution." A must-read:
"As complex as all the finances are, the politics aren't hard to follow. By creating a crisis that
can only be solved by those fluent in a language too complex for ordinary people to understand, the
Wall Street crowd has turned the vast majority of Americans into non-participants in their own political
future. ... in the age of CDS and CBO, most of us are financial illiterates."
Wall Street "used the crisis to effect a historic, revolutionary change in our political system
-- transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above
and clueless customers below."
Scene 5. How Obama is keeping alive Bush's 'disaster capitalism'
Back in 2007 at the start of the meltdown, Hank was misleading us in Fortune: "This is far and
away the strongest global economy I've seen in my business lifetime." In the real world, Naomi Klein,
author of "The Shock Doctrine: Rise of Disaster Capitalism," was warning us that "during boom times
it's profitable to preach laissez faire, because an absentee government allows speculative bubbles."
But "when those bubbles burst, the ideology becomes a hindrance and goes dormant while big government
rides to the rescue." Then, free-market "ideology will come roaring back when the bailouts are done.
The massive debts the public is accumulating to bail out the speculators will then become part of
a global budget crisis." TARP paybacks: Obama has a new "disaster capitalism."
Scene 6. Wall Street's CEOs rule like dictators in a banana republic
Seriously, here's how bad Taibbi sees it: "Paulson and his cronies turned the federal government
into one gigantic half-opaque holding company, one whose balance sheet includes the world's most
appallingly large and risky hedge fund, a controlling interest in a dying insurance giant, huge investments
in a group of teetering megabanks, and shares here and there in various auto-finance companies, student
loans, and other failing business."
And let's include $5.5 trillion in Fannie Mae and Freddie Mac. Wall Street's greed and stupidity
resembles the self-destructive reigns of banana republic dictators.
Scene 7. Wall Street makes an un-American bet on 'disaster capitalism'
Today as you ponder buying some Goldman stock, remember, you're really betting that "disaster
capitalism" is back, strong, tightening its stranglehold on Washington and on the American taxpayers,
who will guarantee all Wall Street's future failures. Yes, this is un-American, but so what?
The "Goldman Conspiracy" is still probably a good short-term buy ... if you're interested in betting
on America's new "democracy of capitalists, by capitalists, and for capitalists," with "The Conspiracy"
leading the joint chiefs of this new mercenary army ... and it only took six short months for their
"Quiet Coup!"
Scene 8. Banks recycle TARP money, pump earnings, cheat America
Here's how it worked: The Hammer conned a clueless Congress, then shelled out $350 billion of
our taxpayer money (Helicopter Ben Bernanke helped by upping the ante with a couple trillion side-bet),
buying toxic debt to save his ol' Wall Street buddies. They stopped lending and used the dough to
doctor their balance sheets.
So no surprise that Goldman, Wells Fargo and J.P. Morgan Chase are now reporting "blockbuster"
first-quarter earnings, says the New York Times, while just months ago "many of the nation's biggest
banks were on life support."
Get it? They screwed taxpayers and borrowers so they can repay TARP with (you guessed it) our
recycled TARP money. Now it's back to business-as-usual, with no restrictions on CEO pay and bonuses
... no thank-yous ... no admissions of guilt ... while some even arrogantly deny that they ever needed
TARP money.
Scene 9. Wall Street's already set the stage for new disaster
Right after the election in November, at the peak of the banking crisis, when Hank, Goldman and
the Wall Street mercenary armies were divvying up the $350 billion TARP money, we detailed
30 reasons for the "Great Depression II" likely coming around 2011. We quoted John Whitehead,
former Goldman Sachs chairman, former chairman of the New York Fed, former Reagan deputy secretary
of state. He warned America's problems will take years, burn trillions, result in massive deficits:
"This is a road to disaster," he said. "I've always been a positive person and optimistic, but
I don't see a solution here." He did see a depression at the end of that road, one you can call the
"Great Depression II."
Scene 10. Obama turned 'The Goldman Conspiracy' into a superpower
Do you see the parallels: Jack and Starkwood, Hank and Goldman? Jack's a great mythic hero. We
need to believe a hero will defend the little guy, stand between us and total annihilation. But Jack
Bauer's "dead." Yes, dead. Jack's not real. Never was "alive." Jack's a fiction, a figment of Main
Street America's vivid imagination, the symbol of "hope" for a populist revolution. Hope that Jack,
Barack or some other new hero will emerge, take power back from Wall Street and return it to the
people.
Unfortunately that won't happen, folks. Yes, on TV Jack will come back from near-death, again.
But in real life, Hank, Goldman and Wall Street's mercenaries are winning the war. Read and weep
Portfolio's chilling finale: "Obama's victory and Geithner's appointment are the completion of Goldman's
meticulously crafted plan to become a superpower. The firm now has the clout to impose its will on
the financial markets, and the world."
GOP or Dems? Conservatives or liberals? It doesn't matter.
We'll all controlled by "The Conspiracy." So why not surrender, let them have the power? The truth
is, through their lobbyists and surrogates in Washington, they already rule America. Surrender is
a mere formality.
Accept reality. Hold them accountable later. After the next crisis. After the next meltdown of
disaster capitalism -- if there's anything left after the "Great Depression II" sweeps like a pandemic
across the planet, consuming all economies, for a long time. But for now, Goldman and other banks
may well be short-term buys. Just be ready to dump them in the near future ... a scenario that will
be here sooner than you think.
"Why does the US use the winter storm as the excuse every time?" Shu Bin, director of the
State Grid Beijing Economics Research Institute, told the Global Times on Thursday, noting
that the power grid system is very vulnerable and requires constant maintenance and
upgrade.
A report from the US Department of Energy (DOE) in 2015 said that 70 percent of power
transformers in the country were 25 years or older, 60 percent of circuit breakers were 30
years or older, and 70 percent of transmission lines are 25 years or older. And the age of
these components "degrades their ability to withstand physical stresses and can result in
higher failure rates," the report noted.
[...]
"The US has no nationwide power grid network allocation plan like China. When it
encounters extreme weather, a state won't help another state like some Chinese provinces
and regions do with flexible allocation plans," Lin Boqiang, director of the China Center
for Energy Economics Research at Xiamen University, told the Global Times on Thursday.
[...]
"China uses 50Hz across the country, like the country has the same heartbeat," he said,
adding that China has never experienced such a scale of blackouts as the US.
[...]
China has mastered the top technologies such as "UHV transmission" and "flexible DC
transmission" and started the strategic "west-east electricity transmission" and
"north-south electricity transmission" projects, which in turn offer an opportunity for the
development of the country's western region.
Not as apocalyptic as it may seem. I wrote a comment on the situation in the earlier
thread
here .
Temps are starting to move up and tomorrow (Thursday) should begin the thaw. Friday is
sunny and 47 deg F for a high, then sunny weekend and following. So we're over the worst of
it. The lowest it ever got was around 0 deg F.
The infrastructure failed - the people paid to manage this failed - everybody is angry, 10
people died so far last I heard.
Rolling blackouts, some people very much suffering, townships opening warming shelters -
probably not millions of pipes bursting. Not totally iced in, just nowhere to go. People
stayed home. Businesses stayed closed. Not totally without food, people stocked up staples in
2020.
Not that dire. Absolutely fucking disgusting, and a hardship that touched everyone - some
people got really screwed and I don't know why the treatment was uneven like that - not
demographics, something with the grid. Dire, yes, and life-threatening to some or perhaps
many (numbers not clear to me yet), but not so dire as your picture suggests. Nothing like
Katrina, except the same ineptness.
But heads will roll. The governor has mandated an investigation into the regulator, ERCOT.
What follows next is of great interest. Facts will appear. I'll post anything useful.
I heard a rumor it was getting better. Could be less blackouts. Will post now in case
power goes off ;)
This Texas debacle may light a heated debate in the USA for the next weeks, for two
reasons:
1) Texas is the big alt-right/Trumpist Festung for the foreseeable future. Their
nation-building process involve catapulting Texas as the anti-California ,
the conservative version of the Shining City on the Hill, around which the USA will be
rebuilt;
2) What is happening in Texas right now goes directly to the heart of neoliberalism, which
is the political doctrine that vertebrates the alt-right. That's why conservative ideologues
such as Tucker Carlson et al are desperately scrambling on TV and social media to blame the
outage on the so-called Green New Deal.
What is happening right now in Texas, therefore, may be another episode on the battle for
the soul of the American Empire.
LYNN FRIES : This newsdoc explores the folly of expecting private enterprise to
operate in the service of the public interest on a grand scale, globally, in key fields:
Financing the United Nations 2030 Agenda and Sustainable Development Goals, Climate change,
Health, Digital cooperation, Gender equality and the empowerment of women, Education and
skills. Specifically, it explores the United Nation's Strategic Partnership Agreement with the
World Economic Forum. The agreement was signed by the Office of the UN Secretary-General and
Executives of WEF, the World Economic Forum better known as DAVOS, a leading proponent of
public-private partnerships and a multistakeholder approach to global governance.
The United Nations as the world's intergovernmental multilateral system should always focus
on protecting common goods and providing global public benefits. That's the position of
signatories of an Open Letter sent to the UN Secretary-General by hundreds of civil society
organizations from all regions of the world. The letter states: "This public-private
partnership will permanently associate the UN with transnational corporations, some of whose
essential activities have caused or worsened the social and environmental crises that the
planet faces. This is a form of corporate capture". The letter calls on the Secretary-General
to terminate the Agreement.
I met up with Harris Gleckman to get his take on all this. Harris Gleckman is the author of
"Multistakeholder Governance and Democracy: A Global Challenge" and is currently working on a
handbook on the governance of multistakeholderism. Harris Gleckman is a Senior Fellow at the
Center for Governance and Sustainability, UMass Boston. We go now to our featured clips of that
meeting.
LYNN FRIES : Civil society is calling the World Economic Forum-UN Agreement as a
corporate takeover of the UN.
HARRIS GLECKMAN: The UN Charter starts with the words "We the Peoples". What the
Secretary-General is doing through the Global Compact and now through the partnership with the
World Economic Forum is tossing this out the window. He is saying: I'm going to align the
organization with a particular structural relationship with multinationals, with
multistakeholderism, and set aside attention to all the different peoples of the world in their
particular interests of environment, health, water needs and really talk about how to govern
the world with those who have a particular role in creating problems of wars from natural
resources, of creating problems relating to climate, creating problems relating to food supply
and technologies. That is undermining a core element of what the United Nations has been and
should be for its next 75 years.
LYNN FRIES : It's striking that the Agreement was signed as the UN is celebrating 100
years of multilateralism, the centenary year 1919 to 2019. And next year 2020 will mark the
1945 signing of the UN Charter 75th anniversary.
HARRIS GLECKMAN : Lynn, if I could give you an overview of what I'm concerned about
the aspect of this about multistakeholderism is that the Secretary-General is the leading
public figure for the multilateral system, the intergovernmental system. The World Economic
Forum is the major proponent or one of the major proponents that a multi-stakeholder governance
system should replace or marginalize the multilateral system. So the Secretary-General is
taking steps to just jump on the bandwagon of multistakeholderism without a public debate about
the democratic character of multistakeholderism, about a public debate about whether this is
effectively able to solve problems, without a public debate about how stakeholders are selected
to become global governors or even a public debate about what role the UN should have with any
of these multistakeholder groups.
LYNN FRIES : I noted that the letter that was sent to the UN Secretary-General was
also copied to the President of the General Assembly, the President of the Security Council and
the Chair of the G77 with a request that it be circulated to all Governments as an Official
Document.
HARRIS GLECKMAN : The Secretary-General should have gone to the intergovernmental
process to debate this issue and now civil society is saying to the intergovernmental process:
If the Secretary-General isn't going to tell you about it, we want you to have that debate
anyway.
LYNN FRIES : In addressing the UN Secretary-General the letter by Civil Society
Organizations recognized that the Secretary-General faced serious challenges.
HARRIS GLECKMAN: Yes it is absolutely the case that the Secretary-General is caught
in a very difficult bind. Governments are not able to collect and are not collecting their
taxes from the bulk of international business activities because of movements around tax
havens. Government's say: well we don't have the money, so we cannot underwrite an effort to
have a credible global governance system and this is affecting the operation of the UN. So the
Secretary-General is looking at a challenge. He has the financial challenge: under payment of
current dues and underfunding of the whole organization and an aggressive effort by the Trump
administration to deconstruct all the organizations of the international system in a period
Lynn where as you observed it's the hundredth year of multilateralism and the 75th year of the
United Nations. And here the Secretary-General has two major crises on his hands in terms of
the integrity of the system.
LYNN FRIES: Briefly give us some context on what you see as the motivation of the
World Economic Forum.
HARRIS GLECKMAN : The World Economic Forum's motivation for joining, for perhaps,
even driving forward this idea of a strategic partnership came from their work following the
financial crisis starting n 2008-09. Davos, the common name for the World Economic Forum,
convened 700 people working for a year and a half on a project that they called Global Redesign
Initiative. They created that project because they realized that the whole public view about
globalization as "a good for the world" was crumbling as a result of the financial crisis. And
so they wanted to propose a new method of governing the world. And two of the elements of their
proposal – that's actually a 700 page research paper – were to have a new
relationship with governments in the United Nations system and to advocate that the global
problems of the world should be solved by multistakeholder groups. This new partnership with
the Secretary-General is an implementation of what they laid out in their Global Redesign
Initiative to have a special place in the United Nations system for corporations to influence
the behavior of the international organizations. And also for those corporations to be able to
say to other people: Look we're in partnership with the United Nations so treat us as if we
were neutral friendly bodies.
Let me just share with you a couple of examples that may help convey how serious that is.
The Sustainable Development Goals were negotiated by governments in open sessions and they
determined what the goals should be in 17 areas. Multistakeholder groups have announced that
they are going to implement Goal 8 or Goal 6. And in the process, they declare: Here is how we
will work on health, here's how we will work on education, here's how we will work on the
environment. And rewrite what is the outcome of the Sustainable Development Goals in their own
organizational interest. In some ways, that's not surprising. You bring together a group of
companies, selected governments, selected civil societies, selected academics and they will
have their own internal dynamic of concern. But what they do is they assert that what they are
doing- their rewritten version- actually they are telling the world: Well, we are actually
doing the UN version. But that is not what their text is.
For example, in the energy field, in the energy goal there are five key adjectives that
describe the target about global energy needs. The leading multistakeholder group, Sustainable
Energy for All, their target has four of those adjectives and they drop the one which was
AFFORDABILITY. This is how the process of multistakeholders taking over an area, redefining it
but to the public announcing that they are implementing the intergovernmental goals is an
unhealthy development in global governance.
LYNN FRIES : The Civil Society letter referred to the Agreement as a public-private
partnership as did you in a recent OPED. Explain more about the public interest issue with
public-private partnerships.
HARRIS GLECKMAN : Well let's take a particular effort of a public-private partnership
in providing water in a city. Historically this is a public or a municipal function to make
sure that there is adequate amounts of water. The quality of water is healthy and its safety.
And that it's regularly and reliably available to the residents in the area. When a
public-private partnership comes in, the corporate side may have an interest in some of these
goals but add an additional one. That is they want a return on their investment, they want a
profit from it. So some of the items of those various public functions – access, quality
of material of water, reliability of water, access to all people then gets suddenly changed. So
if there's a manufacturing facility in one part of town more water may be diverted in that
direction. If water purification is a little hard about a particular element: We may get a
little lazy about doing that in the interests of profits. If it's going to take a lot of work
to dig up a street and replace pipes, they'll say: Well, we can wait another five years and use
those pipes which may have lead in them. All because now you add the fact that this
public-private partnership needs to make a return of profit on what should be, what
historically has a public municipal function. So you create this unequal development in terms
of meeting public needs against the now new requirement that if you want a water system, you
have to produce a profit for some of the actors involved.
LYNN FRIES : Food security is a major issue for vast populations. Comment on the
implications for food security.
HARRIS GLECKMAN : If we want to build, recover, create a food secure world, you need
to work with those who are growing, producing foods directly. Not those who are processing,
distributing, marketing, rebranding. We need to start at the very base and create a system of
engagement with small farmers, with small fishing families, with those around the world who are
the actual food producers. Who have been preserving knowledge and building knowledge for
centuries, they received that knowledge from centuries. That's the direction that would change
the way in which we could actually look at the issues of hunger and food security in the world
in a quite different fashion. Going to those who have a profit-centered motive in global
governance will sharply narrow what might be possible to do. That's what the partnership will
tend to do as the Secretary General and WEF have private discussions about how do we address
the issue of food security while not talking very loud about how we make a profit in that
process.
LYNN FRIES : If the UN Secretary-General invited you for a 1:1 what would you
say?
HARRIS GLECKMAN : I think that I would say to the Secretary-General that he needs to
give a major re-examination of the way the United Nations works with all of the peoples of the
world. In order to provide a stronger base for the United Nations, the doors have to be made
wider so that the views of various popular bodies, social movements, communities around the
world have far greater access to the United Nations. I'd also say to him. Mr. Secretary
General, the UN needs an open and clear conflict of interest policy and a conflict of interest
practice. For those multinationals who are causes of problems, who aggravate the global
problems of inequality we need and you as Head of the United Nations need to separate the
United Nations from that process. They should not be invited to attend meetings. They should
not be allowed to make statements. In the climate area, those who are continuing to extract
natural resources from the ground where they should stay we have taken too much of carbon out
of the ground. If we're going to meet the Paris Accord, they should have no role entering the
United Nations. I'd also say to the Secretary General that he needs to establish a much bigger
office to support civil society. At the moment, the UN support for civil society organization
institutional support is about two people. That is absolutely the wrong level of engagement
with the wider elements of civil society. And the last thing I would probably say to the
Secretary-General is that the UN is very proud of having developed a system of internal
governance that protects the weaker countries, the smaller countries, that their views can be
heard in the intergovernmental governance process. The Secretary-General should not engage with
multi stakeholder groups who do not have a rulebook that allows for the protection of smaller
members of the group, that does not have a way to appeal and challenge decisions that does not
require public disclosure of their finances, all of those characteristics of
multistakeholderism. The Secretary General should have and the UN should have no relationship
with those who are not interested in protecting core concepts of democracy
LYNN FRIES : We have to leave it there. Special thanks to our guest contributor,
Harris Gleckman, and thank you for watching and for your interest in this segment of
GPEnewsdocs coming to you from Geneva, Switzerland.
The WEF and its various constituencies try to overtake control of development with their
"public-private partnership" flag but how these, let's say, partnerships, actually work and
interact with local communities and governments is an issue that need to attract more
scrutiny and transparency. If one uses the migratory pressure as a measure, so far,
development in Africa, South America and South Asia is not doing a good job on the part of
local communities. There may be a few success cases, as it seems to be the case that
deforestation in Brazil that while proceeding it's way, has somehow slowed down compared to
the last decade of the XXth century. But when a success story is analysed what you find
behind is simply strong government action as the Brazilian did starting in 2004 when they
begun the monitoring of development in the Amazon basin and expanded in 2006 with a
moratorium in soya culture and beef production. The WEF has a series of initiatives on what
they call sustainable development that sound excellent in their web pages but in reality do
not seem to work so well and the UN should be kept independent and legally above of the WEF
initiatives to monitor development and accountability. This initiative will almost certainly
result in foxes governing henhouses.
As I see it the WEF makes the hell of a good PR job without counterbalancing parties.
Truly scary stuff and why does it remind me of the way public transport was destroyed in
the US: step 1 – starve it of revenue; step 2 – privatize it (while promising
better service); step 3 – let it rot; and step 4 – close it down (responding to
the public, gripping about how bad the service had become). The job accomplished!
One has to wonder what the Sec. General has been smoking lately and where are Russians and
Chinese to push back?
The UN will never accomplish its mission, man is incapable of bringing about world peace.
The UN is here for one reason and one reason only and that is to destroy the false religious
system when the political rulers hand it their power to accomplish just that.
If WEF is looking at doing infrastructure on a global scale that is based on good science,
is sustainable and maintainable, the ultimate power over the "multi-stakeholder groups"
submitting their bids to the UN should be the UN – this means a new UN mandate that
must be ratified yearly by voters, and bureaucrats that must win elections. If this big idea
is going to accomplish what needs to be done the "stakeholders" might want to take a close
look at what happened to the dearly departed ideas of neoliberalism. Neoliberalism was
destroyed from within by the need for ever more profit; by the" rat-race to the bottom" and
by externalizing costs in the form of pollution – by the most obviously unsustainable
practices, both social and environmental. If the goal is clear and comprehensive all these
problems inherent in yesterday's capitalism will have to be addressed at the get-go. It is a
difference of scale whether a city hires a contractor to do new waterlines, or the UN hires
"multi stakeholder groups" to do some continent-wide 50 year project. That means the UN will
need to become answerable to the people for the management of all these big ideas. Because
conflict of interest will be so massive as to be unmanageable otherwise. And one definition
will be imperative – Just what stake or stakes is/are held by "multi-stakeholder
groups"? Because what is at stake is the planet itself. Not money.
The UN problem has always been money. The 200 nation states are dilatory in paying their
dues. This gives the few rich countries power – 'cooperate with us and we'll fund your
activities.' Its not as bare-faced as I state it but you get the picture. To solve this
problem we need the majority of countries to vote to make national dues a precedent claim on
each government. Publish the result of the vote and monthly progress towards the aim. Name
the countries cooperating.
Once the UN administration is confident of its income it can plan its activities better,
make peoples' health and livelihoods a priority and achieve a much higher profile amongst
humanity.
"Mining transnationals find it cheaper to buy water rights than to desalinate seawater and
transport it for tens or hundreds of kilometers. Even more so if they have to use less
polluting but more expensive desalination technologies.
This is an unequal and unjust war where the main victims are the poor population, small
farmers and the sustainable development of our region of Atacama.
We continue to approve and facilitate the approval of mining projects and mega-projects
without making it a condition not to consume water from the basin.
– The population of Copiapó, Caldera, Tierra Amarilla and Chañaral,
particularly the lower income population, suffers the consequences of having to endure
repeated supply cuts, low pressure and a terrible quality of drinking water.
The drinking water crisis in the mentioned cities is a direct consequence of the over
exploitation of the Copiapó river basin by foreign mining companies, of the
purchase-sale and speculation with water rights, as well as of the irrationality and
indolence of the State in not establishing priorities in the use of the vital water" https://www.youtube.com/watch?v=8lGEONBfvTM
Although corporate meddling is not unheard of in the UN system, under the new terms of the
UN-WEF partnership, the UN will be permanently associated with transnational corporations. In
the long-term, this would allow corporate leaders to become 'whisper advisors' to the heads
of UN system departments.
The UN system is already under a significant threat from the US Government and those who
question a democratic multilateral world. Additionally, this ongoing corporatization will
reduce public support for the UN system in the South and the North, leaving the system, as a
whole, even more vulnerable.To prevent a complete downfall, the UN must adopt effective
mechanisms that prevent conflicts of interest consistently. Moreover, it should strengthen
peoples and communities which are the real human rights holders, while at the same time build
a stronger, independent, and democratic international governance system.
There is a strong call to action going on by hundreds of organizations against this
partnership agreement http://bit.ly/33bRQZP
"... As Hudson points out, WW1 was a coup for the USA's financial sector and allowed them to gain control of academia to erase Marx and his Classical Economist allies and replace them with their own toadies along with their newly formed product--Propaganda and the nascent Police State, which the institution of Prohibition greatly facilitated. ..."
The latest by Crooke I found a curious read since he bases his article on his interpretation
of Adam Tooze's books about the world wars, neither of which I've read. Curious because we
know from Hudson that the counterrevolution by the Feudal Lords of banking and land holding
against Classical Economists and their political allies began in earnest well before then in
@1870 and that their Race for Africa was a big part of their efforts to regain their hold on
their home governments.
Within the USA, a similar revolution was being waged although it began several decades
later in response to the Populists.
As Hudson points out, WW1 was a coup for the USA's financial sector and allowed them
to gain control of academia to erase Marx and his Classical Economist allies and replace them
with their own toadies along with their newly formed product--Propaganda and the nascent
Police State, which the institution of Prohibition greatly facilitated.
I wrote the above to provide barflies with a contrasting historical context much of which
was recently reviewed via all the Marxian discussion and where the actual roots of
Neoliberalism are seated.
Deep at the core is the battle by Banksters and their allies to keep their institutions
private versus the Classical and Populist goal of making them public utilities and how the
World Wars helped the former to gain their goals.
Tooze's narrative seems okay on the surface, and it clearly fooled Crooke, but it's
incomplete. What did the European Powers run out first that generated WW1's stalemate? Money
for arms as posited or human bodies to man those arms? In George Seldes's censored interview
with Hindenburg a week after the Armistice, published in You Can't Print That! ,
the defeated Field Marshal admitted it was the entry of American Men--human numbers--that
turned the tide and made it clear to him that the war couldn't be won. Sure, money helped get
the doughboys over there, but before they arrived masses of money were sent in both
directions that didn't change the balance other than to create the unpayable postwar debts
the Americans demanded be paid.
karlofi@103
Hindenburg realised that the manpower resources of the US were crucial, though they hardly
came into play on the battle field. But it was US raw materials, combined with the British
blockade, that were the crucxial factor.
With the US the Alliance was simply, even minus Russia, too big, too powerful. And then
there was the military reality that the Allies were beginning to organise themselves on the
battlefield: including tanks etc.
As for the "Feudal Lords of Banking..." Hudson is a great resource, but his theory sounds
wrong to me.
When I first happened across Seldes's interview and knowing the "stabbed in the back"
claim that Hitler used in his rise to power, I was very curious as to why it was
censored--what possible reason could be claimed to withhold such an important set of
revelations? Clearly as Seldes himself says, if it had been published at the time, the entire
course of subsequent history would likely have taken a different direction. Are you familiar
with Seldes? He was I.F. Stone's idol and model with a penchant for truth-telling regardless
of the subject or people involved. The book I linked to is filled with similar stories that
contradicted the current narrative being sold to the masses, and his subsequent works are
similar. But as you might guess, few people have ever heard of him or his writings.
Given what Hudson reveals about the manipulation of the learning/teaching of
political-economy, it would be very wise to suspect much of what was/is produced via the
"social sciences," (history written by the victors) which is why my collegiate mentor
stressed the learning methodology he devised to try and arrive at the best non-subjective
conclusion as possible whatever the inquiry--to try and duplicate as closely as possible the
scientific method for confirmation of theories. I've discovered quite a lot of metaphysics
within the entire spectrum of social science disciplines that's made me question a vast
catalog of assumptions. As Fischer and other historians have discovered, historical truth
often lies literally in the margins--the annotations--made by decision makers or obscure
signals reports filed away within deep archives or forensic chemical reports detailing what
is or isn't present within the samples. The learning of the revealed truths can be painful,
making the adage Ignorance is Bliss rather powerful and enticing. But that's not for me as I
subscribe to the alternative adage, The Truth will set you Free.
I'm just reading Keen's 2nd Edition of his Debunking Economics: The Naked Emperor
Dethroned? where he writes on page 29: "[...], conventional Marxsim is as replete with
logical errors as is neoclassical economics, even though Marx himself provides a far better
foundation for economic analysis than did Walras or Marshall."
To my knowledge, Keen refers to himself as a Post-keynesian economist (not to be confused
with bastardized Keynesian or central banks' Neo-Keynesian economics), highly influenced by
the work of Hyman Minsky who learned under Schumpeter.
Unemployment benefits currently are usually is just six month or so; this is the time when you can plan you "downsizing". You do
not need to rush but at the same time do not expect that you will get job offers quickly, if at all. Usually it does not happen.
many advertised positions are fakes, another substantial percentage is already reserved for H1B candidates and posting them is the
necessary legal formality.
Often losing job logically requires selling your home and moving to a modest apartment, especially if no children are living with
you. At 50 it is abut time... You need to do it later anyway, so why not now. But that's a very tough decision to make... Still, if the current housing market is close to the top
(as it is in 2019), this is one of the best moves
you can make. Getting from your house several hundred thousand dollars allows you to create kind of private pension to compensate for
losses in income till you hit your Social Security check, which currently means 66.
$300K investment in A quality bonds that returns 3% per year is enough to provides you with $24K per year "private pension" from 50 to
age of 66 when social security kicks in. That allows you to pay for the apartment and amenities. The food is extra but with this
level of income you qualify for food assistance.
This way you can take lower paid job, of much lower paid job (which mean $15 per hour), of temp job and survive.
And if this are many form you house sell your 401k remains intact and can supplement your SS income later on. Simple Excel spreadsheet can provide you with
a complete picture of what you can afford and what not. Actually the ability to walk of fresh air for 3 or more hours each day worth a lot
of money ;-)
Notable quotes:
"... Losing a job in your 50s is a devastating moment, especially if the job is connected to a long career ripe with upward mobility. As a frequent observer of this phenomenon, it's as scary and troublesome as unchecked credit card debt or an expensive chronic health condition. This is one of the many reasons why I believe our 50s can be the most challenging decade of our lives. ..."
"... The first thing you should do is identify the exact day your job income stops arriving ..."
"... Next, and by next I mean five minutes later, explore your eligibility for unemployment benefits, and then file for them if you're able. ..."
"... Grab your bank statement, a marker, and a calculator. As much as you want to pretend its business as usual, you shouldn't. Identify expenses that don't make sense if you don't have a job. Circle them. Add them up. Resolve to eliminate them for the time being, and possibly permanently. While this won't necessarily lengthen your fuse, it could lessen the severity of a potential boom. ..."
Losing a job in your 50s is a devastating moment, especially if the job is connected to a long career ripe with upward mobility.
As a frequent observer of this phenomenon, it's as scary and troublesome as unchecked credit card debt or an expensive chronic health
condition. This is one of the many reasons why I believe our 50s can be the most challenging decade of our lives.
Assuming you can clear the mental challenges, the financial and administrative obstacles can leave you feeling like a Rube Goldberg
machine.
Income, health insurance, life insurance, disability insurance, bills, expenses, short-term savings and retirement savings are
all immediately important in the face of a job loss. Never mind your Parent PLUS loans, financially-dependent aging parents, and
boomerang children (adult kids who live at home), which might all be lurking as well.
When does your income stop?
From the shocking moment a person learns their job is no longer their job, the word "triage" must flash in bright lights like
an obnoxiously large sign in Times Square. This is more challenging than you might think. Like a pickpocket bumping into you right
before he grabs your wallet, the distraction is the problem that takes your focus away from the real problem.
This is hard to do because of the emotion that arrives with the dirty deed. The mind immediately begins to race to sources of
money and relief. And unfortunately that relief is often found in the wrong place.
The first thing you should do is identify the exact day your job income stops arriving . That's how much time you have
to defuse the bomb. Your fuse may come in the form of a severance package, or work you've performed but haven't been paid for yet.
When do benefits kick in?
Next, and by next I mean five minutes later, explore your eligibility for unemployment benefits, and then file for them if
you're able. However, in some states severance pay affects your immediate eligibility for unemployment benefits. In other words,
you can't file for unemployment until your severance payments go away.
Assuming you can't just retire at this moment, which you likely can't, you must secure fresh employment income quickly. But quickly
is relative to the length of your fuse. I've witnessed way too many people miscalculate the length and importance of their fuse.
If you're able to get back to work quickly, the initial job loss plus severance ends up enhancing your financial life. If you take
too much time, by your choice or that of the cosmos, boom.
The next move is much more hands-on, and must also be performed the day you find yourself without a job.
What nonessentials do I cut?
Grab your bank statement, a marker, and a calculator. As much as you want to pretend its business as usual, you shouldn't.
Identify expenses that don't make sense if you don't have a job. Circle them. Add them up. Resolve to eliminate them for the time
being, and possibly permanently. While this won't necessarily lengthen your fuse, it could lessen the severity of a potential boom.
The idea of diving into your spending habits on the day you lose your job is no fun. But when else will you have such a powerful
reason to do so? You won't. It's better than dipping into your assets to fund your current lifestyle. And that's where we'll pick
it up the next time.
We've covered day one. In my next column we will tackle day two and beyond.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: "Million Dollar Plan." Have a question for Pete
the Planner? Email him at [email protected]. The views and opinions expressed in this column are the author's and do not
necessarily reflect those of USA TODAY.
Only the greedy, selfish, well off, egotistical and share holders believe that Public
Services should, could and would benefit from privatisation and deregulation.
Education and Health for example are (in theory) a universal right in the UK. As numbers
in the population rise and demographics change so do costs ie delivery of the service becomes
more expensive.As market force logic is introduced it also becomes less responsive - hence
people not able to get the right drugs and treatment and challenging and challenged young
people being denied an education that is vital for them in increasing numbers.
Meanwhile - as Public Services are devalued and denuded in this system the private sector
becomes increasingly wealthy at the top while its workers become poorer and less powerful at
the bottom.
With the introduction of Tory austerity which punishes the latter to the benefit of the
former there is no surprise that this system does not work and has provided a platform for
the unscrupulous greedy and corrupt to exploit Brexit and produce conditions which will take
'Neoliberalism' to where logic suggests it would always go - with the powerful rich protected
minority exerting their power over an increasingly poor and powerless majority.
The competitive tender approach ensures the cheapest bids get the contracts and the cheapest
bids are those most likely to employ exploited labour and cheap materials as well as cutting
corners. Result? a job of sorts gets done, but the quality is rubbish, with no investment or
pride in the product. Look at Hong Kong where this is longstanding practice: new tunnel, half
the extractor fans do not work correctly because they were poorly installed. I once spoke to
the Chief Engineer of the Tsing Ma bridge, he was stressed out of his socks for the whole
construction period trying to monitor all the subcontractors who had bid so low they had to
cheat to make a profit with the result that they would try to cut corners and avoid doing
things if they thought they could get away with it. Good job that engineer was diligent.
Others may be less able or willing.
BTW: I seldom find comparisons in UK-media to other countries when those countries are
better.
I think that's because most of the UK media is propaganda for the established system,
which they rely on for advertising revenue and access to information. If an outlet's
journalists start seriously questioning the existing system, a few things happen: 1.
the journo doesn't get promoted within the system; 2. their access to information is
curtailed (they are not invited to briefings etc., and; 3. advertising revenue drops. As the
business model of most mainstream media is to present consumer audiences to advertisers, this
is not going to sit well with the owners, see 1 and 2 above leading to poor evaluations. Any
journo with half a brain quickly learns this and fits in. Only so far and no further.
As a Tory for most of my longish life, I have to agree that whilst some things have
flourished once privatised, certain services must remain in public ownership and control to
enable governments to improve or reduce, depending on national taxation and expenditure - if
people want better services then they must be prepared to pay for them, and of course the
long-term pensions of the workforce. Managers should be subject matter experts before running
departments, not just accountants or management consultants, so they can improve delivery not
just constantly re-structure or carp on about 'efficiency savings'.
Having worked in shipping, that industry has oscillated several times but rail is an
interesting example - a disaster in the dying days of national ownership, the private world
started well improving safety, reliability and capacity but has gone downhill in recent
years, not helped by the track management system. Again, the airlines started well but now
several have gone into administration and BA has 'down-qualitied' itself to become one of the
worst.
Some parts of the NHS can be provided by private industry but limited to service provision
and collective buying only - certainly NOT cancer screening.
Then, when you look at private providers who go bust and completely fail to provide any
acceptable capability - jails, probation, social care etc. one wonders when, if ever,
politicians will realise that it costs them, the civil service and commercial management an
incredible amount of time, effort and cost just to fail!
Outsourcing government work is the most inefficient way of getting it done for the benefit of
taxpayers. When the profits private companies make from it are added to what economies must
invest to pay the taxes for it it's astonishing how popular it has become throughout the
world, something only explicable if those authorising it are amongst the most stupid of
financial administrators or the most corrupt.
Outsourcing for example £1m worth of work requires that amount to be paid in taxes,
which needs about £5m to be earned in wages and profits to pay £1m in taxes,
which in turn needs an investment of perhaps ten times that amount, when the £1m is
borrowed by debt laden governments to be repaid by over-borrowed and overtaxed economies.
If the outsourced company is not profit-making it will borrow the capital to be able to
deliver what's required and that in turn will raise the amount it will want for future work,
which is what I think accounts for Carillion and the other outsource giants going to the
wall.
The process is generally the fault of governments failing to adhere strictly to the necessity
of only paying its workforce on average the same as the private sector pays its workers,
which in democracies is not an unfair requirement demanded by equality legislation. Many
would claim that such was why Margaret Thatcher decided on privatising so many public
utilities especially after the miners' strike in Ted Heath's government and why it gained so
much support and popularity when wages and benefits for similar skill levels seemed so much
better and jobs more secure for many public sector workers involved than they were in the
private sector. Now of course, the high costs of private necessary public services are making
life unbearable for the majority of workers and welfare recipients while profits are going
abroad to those who own them and the EU in getting the flak – courtesy of the media -
for the resultant poverty and austerity, allowed the false £350m a week to win the
referendum. The £4 billion a week worth of exports to the EU paid most of that and the
way companies are relocating to hedge against Brexit means a lot of lost jobs will go with
them – some earlier estimates but it at more than 100,000 - which doesn't seem to deter
those determinedly wanting out of the EU one little bit.
This is a blessing for the low labour cost Member States, who being in the populous markets
the multinationals need, can attract the UK industries looking to further cut costs and
freight charges so those that go will never come back because higher costs in the Brexit UK
will not be compensated for easily with uncompetitive price hikes for EU customers, unlike
CAP payments that have been promised to farmers by the government proBrexit Minister.
The doom and gloom felt by many I think is well justified when sovereign debt and bank credit
is considered relative to taxes. While sovereign debt is regarded as an asset and future
taxes are acceptable for bank credit and both can be securitized by banking systems to borrow
even more capital that will be acceptable to central banks as QE, it's not surprising that
sovereigns don't need to worry about economies being unable to provide the taxes their
governments unlawfully spend even when leaving it for future generations is also unlawful
i.e. is a crime, since if they don't, their central banks and bond holders covered by them
will. When the cost in trillions since 2016 already spent by government in preparing for
Brexit is included one can't help but think that the financial economy has made a proverbial
killing from UK incorporated and now owns most if not all of it. If most of the finance for
Brexit came from its financiers and investors is it possible that after Brexit they'll pour
trillions back into the economy to make it capable of not only surviving but also competing
favourably with the EU, Japan, China, and the US?
I have to disagree. Hardly anything has flourished after privatisation. The big failures,
which get all the publicity, were generally basket case private businesses which had to be
nationalised to save them from collapse.
Sometimes they are stuffed with public money and
sold at a loss to the public, like the Tory nationalisation of Rolls Royce, or deprived of
funds like British Rail to provide an excuse to liberate thousands of square miles of real
estate
This latter is the scheme for the NHS with hospitals and other property provided at
great public expense sold off to any shark who says he has the money, and once it's private
load the enterprise with debt and walk away.
Unlike the privatisations of the 80s and 90s there's barely any pretence these days
that new sell-offs are anything more than simply part of a quest to find new avenues for
profit-making in an economy with tons of liquid capital but not enough places to profitability
put it.
Back in the Thatcher/Reagan years there were at people around who genuinely believed in the
superiority of the market, or at least, made the effort to set out an intellectual case for
it.
Now we're in a different era. After 2008, hardly anyone really believes in neoliberal
ideas anymore, not to the point that they'd openly make the case for them anyway. But while
different visions have appeared to some extent on both left and right, most of those in
positions of power and influence have so internalised Thatcher's 'there is no alternative'
that it's beyond their political horizons to treat any alternatives which do emerge as
serious propositions, let alone come up with their own.
So neoliberalism stumbles on almost as a reflex action. Ben Fine calls it a 'zombie' but I
think the better analogy is cannibalism. Unlike the privatisations of the 80s and 90s there's
barely any pretence these days that new sell-offs are anything more than simply part of a
quest to find new avenues for profit-making in an economy with tons of liquid capital but not
enough places to profitability put it. Because structurally speaking most of the economy is
tapped out.
Privatising public services at this point is just a way to asset strip and/or funnel
public revenue streams to a private sector which has been stuck in neoliberal short-term, low
skill, low productivity, low wage, high debt mode for so long that it has lost the ability to
grow. So now it is eating itself, or at least eating the structures which hold it up and
allow it to survive.
The central premise used by Governments for privatising public servcies seems to have been
that publicly run services are inefficient compared to private companies; that the need to
turn a profit means wasteful systems and behaviours are minimised. Therefore, money can be
saved by outsourcing as private companies can provide the same or better service more
cheaply.
I think this is very disrespectful to all those who work in public service, many of whom
are dedicated to their jobs to provide care or a good service to members of the public. The
idea that making money is the only motivating force that can make someone do their job well
seems flawed. Further, if efficiency gains alone are not enough to make a profit, then the
only recourse for companies is to provide a poorer service or be more exploitative of their
employees, which is regularly played out.
This central premise is not widely challenged by politicians. It seems accepted as fact. I
wonder if there have been any studies to either support or challenge this idea.
Looks like pendulum start swinging against privatization...
Notable quotes:
"... As corporate profits are the private sector's yardstick of success, privatized monopolies are likely to abuse their market power to maximize rents for themselves. Thus, privatization tends to burden the public, e.g., if charges are raised. ..."
"... In most cases, privatization has not closed the governments' fiscal deficits, and may even worsen budgetary problems. Privatization may worsen the fiscal situation due to loss of revenue from privatized SOEs, or tax evasion by the new privatized entity. ..."
"... In most cases, profitable SOEs were privatized as prospective private owners are driven to maximize profits. Fiscal deficits have often been exacerbated as new private owners use creative accounting to avoid tax, secure tax credits and subsidies, and maximize retained earnings. ..."
"... As a rule of thumb, I'd say that any privatisations that require the introduction of convoluted pseudo-market structures or vast new regulatory bureaucracies or which derive most of their ongoing income from the public sector are likely to be contrary to the long-term public interest. In the UK, unfortunately, all these ships sailed a long time ago ..."
"... Chicago is the proving grounds for thirty or so years of the Democrats' surrender to neoliberalism and austerity politics. Let us not forget, brethren and sistren, that Rahm is the Spawn of Bill + Hill as well as dear friend and advisor of Obama. So there is the work of Daley to undo and the work of the Clintonians to undo. It will take more than one term for Lightfoot. ..."
"... Privatization, at any cost, is no longer a choice. We have abused the pension system and now the public must pay for private companies to provide the most basic services. ..."
"... I keep thinking that perhaps an Act could or should be introduced here in UK (same for the States, i suppose), which should ensure that all politicians that enable any type of privatisation of public resources or PFI arrangement (yes that old chesnut), should be made personally responsible for the results therof. ..."
"... And any losses to the public accidentally or "accidentally" occasioned by such commandeering over public resources, to be treated like deliberate misappropriation by the said public officials. With the financial and custodial penalties as may be appropriate. ..."
"... lots of private services that are suspiciously similar to public utilities in terms of natural monopoly, such as cable TV, internet and even railroads. Maybe these should be nationalized and treated more like public services. It can work when they're adequately funded and oversight accountability has teeth; major airports are a good example. ..."
"... Plus the state giveaways includes tens of millions of dollars each year in corporate tax credits in the name of job creation. A report by the nonprofit " Good Jobs First " revealed that over 300 Illinois companies are keeping the state taxes paid by their employees. EDGE- the Economic Development in a Growing Economy is a corporate freebie tax credit, which is partly from the state personal income taxes paid by workers. That's right, the biggest welfare queens are the corporations collecting and keep their employees state income tax payments. ..."
"... Can it get worse? According to the Chicago Trib , "The Chicago Mercantile Exchange (CME), for example, with billions of untaxed contracts worth well over a quadrillion dollars, and whose profit margin in recent years is higher than any of the top 100 companies in the nation, had the hubris to demand an $85 million per year tax break. They got it." The money is there to secure the pensions and budget but has been diverted to the corporate welfare queens for honoring us mere serfs with their presence in the humble fiefdom of Illinois. ..."
"... Michael Hudson, to his immense credit, explains the pernicious effects of privatization of common goods repeatedly throughout his work, and demonstrates that it has been with us at least as long as the ancient practice of land alienation and rural usury. ..."
Posted on April 7,
2019 by Jerri-Lynn Scofield Jerri-Lynn
here. Another succinct post by Jomo Kwame Sundaram that makes clear the "benefits" of
privatization are not evenly distributed, and in fact, typically, "many are even worse off"
when the government chooses to transfer ownership of the family silver.
Note that SOE is the acronym for state owned enterprise.
For those interested in the topic, see also another short post by the same author from last
September, debunking other arguments to promote the privatization fairy, Revisiting
Privatization's Claims .
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development.
Originally published at Inter Press
Service
In most cases of privatization, some outcomes benefit some, which serves to legitimize the
change. Nevertheless, overall net welfare improvements are the exception, not the rule.
Never is everyone better off. Rather, some are better off, while others are not, and
typically, many are even worse off. The partial gains are typically high, or even negated by
overall costs, which may be diffuse, and less directly felt by losers.
Privatized Monopoly Powers
Since many SOEs are public monopolies, privatization has typically transformed them into
private monopolies. In turn, abuse of such market monopoly power enables more rents and
corporate profits.
As corporate profits are the private sector's yardstick of success, privatized monopolies
are likely to abuse their market power to maximize rents for themselves. Thus, privatization
tends to burden the public, e.g., if charges are raised.
In most cases, privatization has not closed the governments' fiscal deficits, and may even
worsen budgetary problems. Privatization may worsen the fiscal situation due to loss of revenue
from privatized SOEs, or tax evasion by the new privatized entity.
Options for cross-subsidization, e.g., to broaden coverage are reduced as the government is
usually left with unprofitable activities while the potentially profitable is acquired by the
private sector. Thus, governments are often forced to cut essential public services.
In most cases, profitable SOEs were privatized as prospective private owners are driven to
maximize profits. Fiscal deficits have often been exacerbated as new private owners use
creative accounting to avoid tax, secure tax credits and subsidies, and maximize retained
earnings.
Meanwhile, governments lose vital revenue sources due to privatization if SOEs are
profitable, and are often obliged to subsidize privatized monopolies to ensure the poor and
underserved still have access to the privatized utilities or services.
Privatization Burdens Many
Privatization burdens the public when charges or fees are not reduced, or when the services
provided are significantly reduced. Thus, privatization often burdens the public in different
ways, depending on how market power is exercised or abused.
Often, instead of trying to provide a public good to all, many are excluded because it is
not considered commercially viable or economic to serve them. Consequently, privatization may
worsen overall enterprise performance. 'Value for money' may go down despite ostensible
improvements used to justify higher user charges.
SOEs are widely presumed to be more likely to be inefficient. The most profitable and
potentially profitable are typically the first and most likely to be privatized. This leaves
the rest of the public sector even less profitable, and thus considered more inefficient, in
turn justifying further privatizations.
Efficiency Elusive
It is often argued that privatization is needed as the government is inherently inefficient
and does not know how to run enterprises well. Incredibly, the government is expected to
subsidize privatized SOEs, which are presumed to be more efficient, in order to fulfil its
obligations to the citizenry.
Such obligations may not involve direct payments or transfers, but rather, lucrative
concessions to the privatized SOE. Thus, they may well make far more from these additional
concessions than the actual cost of fulfilling government obligations.
Thus, privatization of profitable enterprises or segments not only perpetuates exclusion of
the deserving, but also worsens overall public sector performance now encumbered with remaining
unprofitable obligations.
One consequence is poorer public sector performance, contributing to what appears to be a
self-fulfilling prophecy. To make matters worse, the public sector is then stuck with financing
the unprofitable, thus seemingly supporting to the privatization prophecy.
Benefits Accrue to Relatively Few
Privatization typically enriches the politically connected few who secure lucrative rents by
sacrificing the national or public interest for private profit, even when privatization may not
seem to benefit them.
Privatization in many developing and transition economies has primarily enriched these few
as the public interest is sacrificed to such powerful private business interests. This has, in
turn, exacerbated corruption, patronage and other related problems.
For example, following Russian voucher privatization and other Western recommended reforms,
for which there was a limited domestic constituency then, within three years (1992-1994), the
Russian economy had collapsed by half, and adult male life expectancy fell by six years. It was
the greatest such recorded catastrophe in the last six millennia of recorded human history.
Soon, a couple of dozen young Russian oligarchs had taken over the commanding heights of the
Russian economy; many then monetized their gains and invested abroad, migrating to follow their
new wealth. Much of this was celebrated by the Western media as economic progress.
As a rule of thumb, I'd say that any privatisations that require the introduction of
convoluted pseudo-market structures or vast new regulatory bureaucracies or which derive most
of their ongoing income from the public sector are likely to be contrary to the long-term
public interest. In the UK, unfortunately, all these ships sailed a long time ago
After the recent Chicago municipal elections, I wrote up some notes on the reasons for the
discontent. This article by Sundaram explains exactly how these schemes work. Further, you
can apply his criteria of subsidies for the rich, skimming, and disinheriting the middle
class and poor to all of the following instances in Chicago.
If I may–some for instances of how Sundaram's observations turn up in U.S.
cities:
Chicago is the proving grounds for thirty or so years of the Democrats' surrender to
neoliberalism and austerity politics. Let us not forget, brethren and sistren, that Rahm is
the Spawn of Bill + Hill as well as dear friend and advisor of Obama. So there is the work of
Daley to undo and the work of the Clintonians to undo. It will take more than one term for
Lightfoot.
Consider:
–Parking meters and enforcement have been privatized, starving the city of funds and,
more importantly, of its police power.
–Taxes have been privatized in TIFs, where money goes and is never heard from
again.
–There have been attempts to privatize the park system in the form of the Lucas museum
and the current Obama Theme Park imbroglio, involving some fifty acres of park land.
–The school system has been looted and privatized. The Democrats are big fans of
charter schools (right, "Beto"), seeing them as ways to skim money off the middle class and
the poor.
–Fare collection on public transit has been privatized using a system so deliberately
rudimentary and so deliberately corrupt that it cannot tell you at point of service how much
you have paid as fare.
–Boeing was enticed to Chicago with tax breaks. Yes, that Boeing, the one that now
deliberately puts bad software in your airplane.
–Property tax assessment has been an opaque system and source of skimming for
lawyers.
–Zoning: Eddie Burke, pond scum, is just the top layer of pollution.
–And as we have made our descent, all of these economic dogmata have been enforced by
petty harassment of the citizenry (endless tickets) and an ever-brutal police force.
And yet: The current Republican Party also supports all of these policies, so let's not
pretend that a bunch of Mitch McConnell lookalikes are headed to Chicago to reform it.
Providing professional services i.e. architecture, engineering, etc. for a public entity,
local or federal, does not yield unreasonable profits. Typically, the public agencies have
their own staff to monitor and cost control a project. The professional services provided to
private developers yields far more profit- oftentimes twice the profits associated with
public agency work. Most professional services companies will transition their work to the
public agencies during a recession.
At any rate, especially in Illinois, privatizing the work to avoid pension liabilities is
no longer a choice. Michael Madigan pension promises will require the public to maintain a
public service budget with no staff to fill potholes. Essentially, these are the no work jobs
made popular by the Soprano crew twenty years ago.
Discussion of the downside of the privatization of public services is merely an
oscillation from discussing the weather, the Bears or any other kitchen table discussion
– nothing more than pleasant small talk to pass the time.
Privatization, at any cost, is no longer a choice. We have abused the pension system and
now the public must pay for private companies to provide the most basic services.
The question is, what can one do to help arrest this wholesale theft of public resources
and their expropriation into the hands of well connected. " Public", as in, it is the working
public over the last 100 or 200 years that created (or paid for), the electricity grid, or
public schools, or entire armed or police forces
I keep thinking that perhaps an Act could or should be introduced here in UK (same for the
States, i suppose), which should ensure that all politicians that enable any type of
privatisation of public resources or PFI arrangement (yes that old chesnut), should be made
personally responsible for the results therof.
And any losses to the public accidentally or "accidentally" occasioned by such
commandeering over public resources, to be treated like deliberate misappropriation by the
said public officials. With the financial and custodial penalties as may be appropriate.
Anybody out there with similar thoughts or should i really try harder and give up on
drugs?
I vociferously disagree with the assertion that the wrecking of pension funding in the
past is the reason we are forced to leave privatization schemes in place today.
In a similar vein, the are lots of private services that are suspiciously similar to
public utilities in terms of natural monopoly, such as cable TV, internet and even railroads.
Maybe these should be nationalized and treated more like public services. It can work when
they're adequately funded and oversight accountability has teeth; major airports are a good
example.
Let's not forget the privatization of the
Chicago Skyway , not once but twice.
Plus the state giveaways includes tens of millions of dollars each year in corporate tax
credits in the name of job creation. A report by the nonprofit " Good Jobs
First " revealed that over 300 Illinois companies are keeping the state taxes paid by
their employees. EDGE- the Economic Development in a Growing Economy is a corporate freebie
tax credit, which is partly from the state personal income taxes paid by workers. That's
right, the biggest welfare queens are the corporations collecting and keep their employees
state income tax payments.
Can it get worse? According to the
Chicago Trib , "The Chicago Mercantile Exchange (CME), for example, with billions of
untaxed contracts worth well over a quadrillion dollars, and whose profit margin in recent
years is higher than any of the top 100 companies in the nation, had the hubris to demand an
$85 million per year tax break. They got it." The money is there to secure the pensions and
budget but has been diverted to the corporate welfare queens for honoring us mere serfs with
their presence in the humble fiefdom of Illinois.
Paging Mike Madigan- The Institute on Taxation and Economic Policy lists Illinois as one
of the "Terrible Ten" most tax-regressive states, imposing a much higher rate on poor
residents for sales and excise taxes, property taxes and income taxes. Al Capone would be
proud of him.
Michael Hudson, to his immense credit, explains the pernicious effects of privatization of
common goods repeatedly throughout his work, and demonstrates that it has been with us at
least as long as the ancient practice of land alienation and rural usury.
Natural monopolies ought to be nationalised, full stop.
I support public ownership of natural monopolies, however it would be helpful if these
pieces contained data, case studies or footnoted entries providing some empirical evidence of
the author's thesis.
This article comes at a time when the clarion call for privatizing Eskom, SA's electricity
utility, is hitting deafening levels. To the private sector, efficiency = maximizing profits
by making the "bloated" enterprise lean (aka cutting the workforce) and quite literally mean
(aka cutting services to "unprofitable" segments of the market, iow, the poor and
vulnerable). When profits soar because the holy grail of efficiency is achieved, the
mainstream business press brings out the champagne and toasts this "success" as proof that
the previously "moribund" (they always exaggerate the state of things) monopolistic monolith
has been given a new lease on life by privatizing it and the template is set for rescuing
other "ailing" SOEs.
The drawbacks are never laid out as cleary as they are in this article and the plight of
those worst affected, whether laid-off workers or those whose services have been cut, never
makes it into the headlines.
And then there is prison privatization where the burden of operation and maintaining the
institution should clearly be on the public so as to be constant reminder of the burden,
among others reasons. The motivations by private prison operators to reduce services and
costs out of site of the pesky prying eyes of the public are manifold.
Privatization is a great way to avoid having user fees wasted by providing services, and
instead put to better use funding the re-election campaigns of politicians supporting
privatization. Plus, it provides much-needed consulting fees for former politicians as well
as job-creating 7-figure salaries for the CEOs,
(/snark, if you couldn't tell)
On a side note, the Dilbert comic strip is written about private industry ,
There was a rudimentary plan
put forward last June that recommended some pretty substantial privatizations of U.S.
government assets and services which include:
-Privatizing the US Post Office ( through an Initial Public Offering or outright sale to a
private entity ).
-Sell off U.S. government owned electricity transmission lines ( U.S. government owns 14% of
this nations power transmission lines through TVA, Southwestern Power Administration, Western
Area Power Administration, and Bonneville Power Administration ).
-Spin-off the Federal Aviation Administrations air traffic control operations into a private
nonprofit entity.
-Spin-off the Department of Transportations operations of the Saint Lawrence Seaways Locks
and Channels into a private non-profit entity.
-End the federal conservatorship of Fannie Mae and Freddie Mac, then regulate a new system of
private guarantors for their MBS securities.
At heart, the problem with privatization is that marketing to a government-employed
purchaser or "purchase influencer" is ridiculously cheap, due to their poor accountability
strictures.
This is abetted by the Katamari Damacy process (self-accretionary tendency) of money and
power.
In Oz the electricity grids were privatized as they would be cheaper that way – or
so people were told. Instead, the cost of electricity has risen sharply over the years to the
point that it is effecting elections on both the State and Federal level as the price hikes
are so controversial. A problem is that those companies have to pay back the loans used to
buy the public electricity grids and as well, the senior management award themselves sky-high
wages because they are totally worth it. These are factors that were never present when it
was publicly owned. And just to put the boot in, those very same companies have been
'gold-plating' the electricity grid for their gain-
Meanwhile, whatever money the governments made selling their electricity companies has
been long spent on white elephants or buying themselves re-elections by giving out goodies to
voters.
buying themselves re-elections by giving out goodies to voters.
I don't reside in the states, so I don't see much of the detail of daily life. What are
these "goodies" of which you speak? In what I am able to read on the internet, people aren't
being given goodies any more. At least the old-time politicians handed out jobs, and turkeys
at Christmas. The current crop do hand out jobs to their kids and immediate family, but not
so much to anyone else.
The county "poorhouse" in Lebanon County, PA over the years evolved into a bare-bones but
very well run nursing home with caring, long-term staff. The Republican county commissioners,
however, year after year, avoided raising taxes by underfunding the retirement plan for the
employees. Then, "suddenly" there was a crisis because the underfunding had become legally
untenable.
The solution was to sell the operation to a for-profit operator to fund the pansion plan
shortfall at the minimal level required legally. In the next contract, the new owner cut
health care and other benefits. The wages had always been minimal and he was free of the old
pension plan requirements.
The employees went on strike for many months, the owner brought in replacements from
companies that specialize in that service, until the employees had to cave in.
I had been counting on that facility when my sister was diagnosed with Alzheimers. I have
family that is able to step in so she is provided for. Many others in the county are not so
fortunate. Here are some staff comments: https://www.indeed.com/cmp/Cedar-Haven-Healthcare-Center/reviews?fcountry=ALL
" instead of trying to provide a public good to all, many [ordinary working people] are
excluded because it is not considered commercially viable or economic to serve them."
There are also social and class dimensions to the exclusion. Private Internet Service
Providers (ISPs) in the USA have made the "not commercially viable or economic to serve them"
argument for decades when pressed about their refusal to wire the entire country. Their
"business model" leaves millions without reliable broadband service in a variety of settings,
from rural areas and small towns to inner cities and low income suburbs. In many cases,
citizens in those areas have no access to broadband at all.
When small towns and counties in the US have taken the initiative to wire their
localities, the ISPs have bribed state legislatures to pass laws prohibiting public broadband
throughout the rest of the state. Talk about subversion of democracy! Insult to injury: the
ISPs who wailed about "unfair competition" to state legislators then refuse to wire areas
throughout the rest of the state.
Lack of universal and affordable broadband has two major effects:
➤ Local governments are shut out of economic opportunities because they lack
connectivity. They are unable to shepherd business startups and existing businesses that need
broadband to thrive. People move away. Businesses relocate or downsize. Local economies are
left with erroding tax bases and boarded up downtowns.
➤ Children and young people in "broadband deserts" cannot tap into the many sources
of learning that exist on the web. In particular, they don't have the opportunity to learn
anything about frontend or backend web development applications such as, html, php, Ruby on
Rails, Photoshop or Indesign.
That is one reason the US tech industry lacks workers from different backgrounds. Most
tech workers grew up in areas the ISPs considered "commercially viable". In addition, many
tech workers are self taught to some degree, even those with computer science degrees. It is
difficult to be self taught if you lack access to the most basic resources and tools.
The "Independent" Federal Reserve Isn't Quite What It Is Cracked Up to Be
By Dean Baker
Neil Irwin had a New York Times article * warning readers of the potential harm if the
Federal Reserve loses its independence. The basis for the warning is that Donald Trump seems
prepared to nominate Steven Moore and Herman Cain to the Fed, two individuals with no obvious
qualifications for the job, other than their loyalty to Donald Trump. While Irwin is right to
warn about filling the Fed with people with no understanding of economics, it is wrong to
imagine that we have in general been well-served by the Fed in recent decades or that it is
necessarily independent in the way we would want.
The examples Irwin gives are telling. Irwin comments:
"The United States' role as the global reserve currency -- which results in persistently
low interest rates and little fear of capital flight -- is built in significant part on the
credibility the Fed has accumulated over decades.
"During the global financial crisis and its aftermath, for example, the Fed could feel
comfortable pursuing efforts to stimulate the United States economy without a loss of faith
in the dollar and Treasury bonds by global investors. The dollar actually rose against other
currencies even as the economy was in free fall in late 2008, and the Fed deployed trillions
of dollars in unconventional programs to try to stop the crisis."
First, the dollar is a global reserve currency, it is not the only global reserve
currency. Central banks also use euros, British pounds, Japanese yen, and even Swiss francs
as reserve currencies. This point is important because we do not seriously risk the dollar
not be accepted as a reserve currency. It is possible to imagine scenarios where its
predominance fades, as other currencies become more widely used. This would not be in any way
catastrophic for the United States.
On the issue of the dollar rising in the wake of the financial collapse in 2008, this was
actually bad news for the U.S. economy. After the plunge in demand from residential
construction and consumption following the collapse of the housing bubble, net exports was
one of the few sources of demand that could potentially boost the U.S. economy. The rise in
the dollar severely limited growth in this component.
The other example given is when Nixon pressured then Fed Chair Arthur Burns to keep
interest rates low to help his re-election in 1972. This was supposed to have worsened the
subsequent inflation and then severe recessions in the 1970s and early 1980s. The economic
damage of that era was mostly due to a huge jump in world oil prices at a time when the U.S.
economy was heavily dependent on oil.
While Nixon's interference with the Fed may have had some negative effect, it is worth
noting that the economies of other wealthy countries did not perform notably better than the
U.S. through this decade. It would be wrong to imply that the problems of the 1970s were to
any important extent due to Burns keeping interest rates lower than he might have otherwise
at the start of the decade.
It is also worth noting that the Fed has been very close to the financial sector. The
twelve regional bank presidents who sit on the open market committee that sets monetary
policy are largely appointed by the banks in the region. (When she was Fed chair, Janet
Yellen attempted to make the appointment process more open.) This has led to a Fed that is
far more concerned about keeping down inflation (a concern of bankers) than the full
employment portion of its mandate.
Arguably, Fed policy has led unemployment to be higher than necessary over much of the
last four decades. This has prevented millions of workers from having jobs and lowered wages
for tens of millions more. The people who were hurt most are those who are disadvantaged in
the labor market, such as African Americans, Hispanics, and people with less education.
Insofar as the Fed's "independence" has meant close ties to the financial industry, it has
not been good news for most people in this country.
"... Privatization typically enriches the politically connected few who secure lucrative rents by sacrificing the national or public interest for private profit, even when privatization may not seem to benefit them. ..."
"... For example, following Russian voucher privatization and other Western recommended reforms, for which there was a limited domestic constituency then, within three years (1992-1994), the Russian economy had collapsed by half, and adult male life expectancy fell by six years. It was the greatest such recorded catastrophe in the last six millennia of recorded human history. ..."
"... Soon, a couple of dozen young Russian oligarchs had taken over the commanding heights of the Russian economy; many then monetized their gains and invested abroad, migrating to follow their new wealth. Much of this was celebrated by the Western media as economic progress. ..."
<img
src="http://b.scorecardresearch.com/p?c1=2&c2=16807273&cv=2.0&cj=1" />
Has
Privatization Benefitted the Public? Posted on April 7,
2019 by Jerri-Lynn Scofield Jerri-Lynn
here. Another succinct post by Jomo Kwame Sundaram that makes clear the "benefits" of
privatization are not evenly distributed, and in fact, typically, "many are even worse off"
when the government chooses to transfer ownership of the family silver.
Note that SOE is the acronym for state owned enterprise.
For those interested in the topic, see also another short post by the same author from last
September, debunking other arguments to promote the privatization fairy, Revisiting
Privatization's Claims .
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development.
Originally published at Inter Press
Service
In most cases of privatization, some outcomes benefit some, which serves to legitimize the
change. Nevertheless, overall net welfare improvements are the exception, not the rule.
Never is everyone better off. Rather, some are better off, while others are not, and
typically, many are even worse off. The partial gains are typically high, or even negated by
overall costs, which may be diffuse, and less directly felt by losers.
Privatized Monopoly Powers
Since many SOEs are public monopolies, privatization has typically transformed them into
private monopolies. In turn, abuse of such market monopoly power enables more rents and
corporate profits.
As corporate profits are the private sector's yardstick of success, privatized monopolies
are likely to abuse their market power to maximize rents for themselves. Thus, privatization
tends to burden the public, e.g., if charges are raised.
In most cases, privatization has not closed the governments' fiscal deficits, and may even
worsen budgetary problems. Privatization may worsen the fiscal situation due to loss of revenue
from privatized SOEs, or tax evasion by the new privatized entity.
Options for cross-subsidization, e.g., to broaden coverage are reduced as the government is
usually left with unprofitable activities while the potentially profitable is acquired by the
private sector. Thus, governments are often forced to cut essential public services.
In most cases, profitable SOEs were privatized as prospective private owners are driven to
maximize profits. Fiscal deficits have often been exacerbated as new private owners use
creative accounting to avoid tax, secure tax credits and subsidies, and maximize retained
earnings.
Meanwhile, governments lose vital revenue sources due to privatization if SOEs are
profitable, and are often obliged to subsidize privatized monopolies to ensure the poor and
underserved still have access to the privatized utilities or services.
Privatization Burdens Many
Privatization burdens the public when charges or fees are not reduced, or when the services
provided are significantly reduced. Thus, privatization often burdens the public in different
ways, depending on how market power is exercised or abused.
Often, instead of trying to provide a public good to all, many are excluded because it is
not considered commercially viable or economic to serve them. Consequently, privatization may
worsen overall enterprise performance. 'Value for money' may go down despite ostensible
improvements used to justify higher user charges.
SOEs are widely presumed to be more likely to be inefficient. The most profitable and
potentially profitable are typically the first and most likely to be privatized. This leaves
the rest of the public sector even less profitable, and thus considered more inefficient, in
turn justifying further privatizations.
Efficiency Elusive
It is often argued that privatization is needed as the government is inherently inefficient
and does not know how to run enterprises well. Incredibly, the government is expected to
subsidize privatized SOEs, which are presumed to be more efficient, in order to fulfil its
obligations to the citizenry.
Such obligations may not involve direct payments or transfers, but rather, lucrative
concessions to the privatized SOE. Thus, they may well make far more from these additional
concessions than the actual cost of fulfilling government obligations.
Thus, privatization of profitable enterprises or segments not only perpetuates exclusion of
the deserving, but also worsens overall public sector performance now encumbered with remaining
unprofitable obligations.
One consequence is poorer public sector performance, contributing to what appears to be a
self-fulfilling prophecy. To make matters worse, the public sector is then stuck with financing
the unprofitable, thus seemingly supporting to the privatization prophecy.
Benefits Accrue to Relatively Few
Privatization typically enriches the politically connected few who secure lucrative rents by
sacrificing the national or public interest for private profit, even when privatization may not
seem to benefit them.
Privatization in many developing and transition economies has primarily enriched these few
as the public interest is sacrificed to such powerful private business interests. This has, in
turn, exacerbated corruption, patronage and other related problems.
For example, following Russian voucher privatization and other Western recommended reforms,
for which there was a limited domestic constituency then, within three years (1992-1994), the
Russian economy had collapsed by half, and adult male life expectancy fell by six years. It was
the greatest such recorded catastrophe in the last six millennia of recorded human history.
Soon, a couple of dozen young Russian oligarchs had taken over the commanding heights of the
Russian economy; many then monetized their gains and invested abroad, migrating to follow their
new wealth. Much of this was celebrated by the Western media as economic
progress.
Yes it does. I've now added a sentence to my introduction to make that clear. I noticed
the omission when I was uploading the post, but wasn't sure whether readers would be
confused.
As a rule of thumb, I'd say that any privatisations that require the introduction of
convoluted pseudo-market structures or vast new regulatory bureaucracies or which derive most
of their ongoing income from the public sector are likely to be contrary to the long-term
public interest. In the UK, unfortunately, all these ships sailed a long time ago
After the recent Chicago municipal elections, I wrote up some notes on the reasons for the
discontent. This article by Sundaram explains exactly how these schemes work. Further, you
can apply his criteria of subsidies for the rich, skimming, and disinheriting the middle
class and poor to all of the following instances in Chicago.
If I may–some for instances of how Sundaram's observations turn up in U.S.
cities:
Chicago is the proving grounds for thirty or so years of the Democrats' surrender to
neoliberalism and austerity politics. Let us not forget, brethren and sistren, that Rahm is
the Spawn of Bill + Hill as well as dear friend and advisor of Obama. So there is the work of
Daley to undo and the work of the Clintonians to undo. It will take more than one term for
Lightfoot.
Consider:
–Parking meters and enforcement have been privatized, starving the city of funds and,
more importantly, of its police power.
–Taxes have been privatized in TIFs, where money goes and is never heard from
again.
–There have been attempts to privatize the park system in the form of the Lucas museum
and the current Obama Theme Park imbroglio, involving some fifty acres of park land.
–The school system has been looted and privatized. The Democrats are big fans of
charter schools (right, "Beto"), seeing them as ways to skim money off the middle class and
the poor.
–Fare collection on public transit has been privatized using a system so deliberately
rudimentary and so deliberately corrupt that it cannot tell you at point of service how much
you have paid as fare.
–Boeing was enticed to Chicago with tax breaks. Yes, that Boeing, the one that now
deliberately puts bad software in your airplane.
–Property tax assessment has been an opaque system and source of skimming for
lawyers.
–Zoning: Eddie Burke, pond scum, is just the top layer of pollution.
–And as we have made our descent, all of these economic dogmata have been enforced by
petty harassment of the citizenry (endless tickets) and an ever-brutal police force.
And yet: The current Republican Party also supports all of these policies, so let's not
pretend that a bunch of Mitch McConnell lookalikes are headed to Chicago to reform it.
Providing professional services i.e. architecture, engineering, etc. for a public entity,
local or federal, does not yield unreasonable profits. Typically, the public agencies have
their own staff to monitor and cost control a project. The professional services provided to
private developers yields far more profit- oftentimes twice the profits associated with
public agency work. Most professional services companies will transition their work to the
public agencies during a recession.
At any rate, especially in Illinois, privatizing the work to avoid pension liabilities is
no longer a choice. Michael Madigan pension promises will require the public to maintain a
public service budget with no staff to fill potholes. Essentially, these are the no work jobs
made popular by the Soprano crew twenty years ago.
Discussion of the downside of the privatization of public services is merely an
oscillation from discussing the weather, the Bears or any other kitchen table discussion
– nothing more than pleasant small talk to pass the time.
Privatization, at any cost, is no longer a choice. We have abused the pension system and
now the public must pay for private companies to provide the most basic services.
The question is, what can one do to help arrest this wholesale theft of public resources
and their expropriation into the hands of well connected. " Public", as in, it is the working
public over the last 100 or 200 years that created (or paid for), the electricity grid, or
public schools, or entire armed or police forces
I keep thinking that perhaps an Act could or should be introduced here in UK (same for the
States, i suppose), which should ensure that all politicians that enable any type of
privatisation of public resources or PFI arrangement (yes that old chesnut), should be made
personally responsible for the results therof.
And any losses to the public accidentally or "accidentally" occasioned by such
commandeering over public resources, to be treated like deliberate misappropriation by the
said public officials.
With the financial and custodial penalties as may be appropriate.
Anybody out there with similar thoughts or should i really try harder and give up on
drugs?
Michael Hudson, to his immense credit, explains the pernicious effects of privatization of
common goods repeatedly throughout his work, and demonstrates that it has been with us at
least as long as the ancient practice of land alienation and rural usury.
Natural monopolies ought to be nationalised, full stop.
I support public ownership of natural monopolies, however it would be helpful if these
pieces contained data, case studies or footnoted entries providing some empirical evidence of
the author's thesis.
This article comes at a time when the clarion call for privatizing Eskom, SA's electricity
utility, is hitting deafening levels. To the private sector, efficiency = maximizing profits
by making the "bloated" enterprise lean (aka cutting the workforce) and quite literally mean
(aka cutting services to "unprofitable" segments of the market, iow, the poor and
vulnerable). When profits soar because the holy grail of efficiency is achieved, the
mainstream business press brings out the champagne and toasts this "success" as proof that
the previously "moribund" (they always exaggerate the state of things) monopolistic monolith
has been given a new lease on life by privatizing it and the template is set for rescuing
other "ailing" SOEs.
The drawbacks are never laid out as cleary as they are in this article and the plight of
those worst affected, whether laid-off workers or those whose services have been cut, never
makes it into the headlines.
And then there is prison privatization where the burden of operation and maintaining the
institution should clearly be on the public so as to be constant reminder of the burden,
among others reasons. The motivations by private prison operators to reduce services and
costs out of site of the pesky prying eyes of the public are manifold.
Privatization is a great way to avoid having user fees wasted by providing services, and
instead put to better use funding the re-election campaigns of politicians supporting
privatization. Plus, it provides much-needed consulting fees for former politicians as well
as job-creating 7-figure salaries for the CEOs,
(/snark, if you couldn't tell)
On a side note, the Dilbert comic strip is written about private industry ,
There was a rudimentary plan
put forward last June that recommended some pretty substantial privatizations of U.S.
government assets and services which include:
-Privatizing the US Post Office ( through an Initial Public Offering or outright sale to a
private entity ).
-Sell off U.S. government owned electricity transmission lines ( U.S. government owns 14% of
this nations power transmission lines through TVA, Southwestern Power Administration, Western
Area Power Administration, and Bonneville Power Administration ).
-Spin-off the Federal Aviation Administrations air traffic control operations into a private
nonprofit entity.
-Spin-off the Department of Transportations operations of the Saint Lawrence Seaways Locks
and Channels into a private non-profit entity.
-End the federal conservatorship of Fannie Mae and Freddie Mac, then regulate a new system of
private guarantors for their MBS securities.
At heart, the problem with privatization is that marketing to a government-employed
purchaser or "purchase influencer" is ridiculously cheap, due to their poor accountability
strictures.
This is abetted by the Katamari Damacy process (self-accretionary tendency) of money and
power.
In Oz the electricity grids were privatized as they would be cheaper that way – or
so people were told. Instead, the cost of electricity has risen sharply over the years to the
point that it is effecting elections on both the State and Federal level as the price hikes
are so controversial. A problem is that those companies have to pay back the loans used to
buy the public electricity grids and as well, the senior management award themselves sky-high
wages because they are totally worth it. These are factors that were never present when it
was publicly owned. And just to put the boot in, those very same companies have been
'gold-plating' the electricity grid for their gain-
Meanwhile, whatever money the governments made selling their electricity companies has
been long spent on white elephants or buying themselves re-elections by giving out goodies to
voters.
buying themselves re-elections by giving out goodies to voters.
I don't reside in the states, so I don't see much of the detail of daily life. What are
these "goodies" of which you speak? In what I am able to read on the internet, people aren't
being given goodies any more. At least the old-time politicians handed out jobs, and turkeys
at Christmas. The current crop do hand out jobs to their kids and immediate family, but not
so much to anyone else.
described
as "probably the most dishonest argument in the entire Medicare for All debate."
"People who love their employer-based insurance do not get to hold on to it in our current
system. Instead, they lose that insurance constantly, all the time. It is a complete
nightmare."
-- Matt Bruenig, People's Policy Project
In an
interview with the Washington Post , the Democratic leader said she is "agnostic" on
Medicare for All and claimed, "A lot of people love having their employer-based insurance and
the Affordable Care Act gave them better benefits."
Matt Bruenig, founder of the left-wing think tank People's Policy Project, argued in a
blog post that Pelosi's statement "implies that, under our current health insurance system,
people who like their employer-based insurance can hold on to it."
"This then is contrasted with a Medicare for All transition where people will lose their
employer-based insurance as part of being shifted over to an excellent government plan,"
Bruenig wrote. "But the truth is that people who love their employer-based insurance do not get
to hold on to it in our current system. Instead, they lose that insurance constantly, all the
time, over and over again. It is a complete nightmare."
To illustrate his point, Bruenig highlighted a University of Michigan study showing that
among Michiganders "who had employer-sponsored insurance in 2014, only 72 percent were
continuously enrolled in that insurance for the next 12 months.
"This means that 28 percent of people on an employer plan were not on that same plan one
year later," Bruenig noted.
"Critics of Medicare for All are right to point out that losing your insurance sucks,"
Bruenig concluded. "But the only way to stop that from happening to people is to create a
seamless system where people do not constantly churn on and off of insurance. Medicare for All
offers that. Our current system offers the exact opposite. If you like losing your insurance
all the time, then our current healthcare system is the right one for you."
All On Medicare -- a pro-Medicare for All Twitter account -- slammed Pelosi's remarks,
accusing the Democratic leader of parroting insurance industry talking points:
The Speaker's alternative to the Medicare for All legislation co-sponsored by
over 100 members of her caucus is a bill to strengthen the Affordable Care Act (ACA), which
she
introduced last week .
"We all share the value of healthcare for all Americans -- quality, affordable healthcare
for all Americans," Pelosi told the Post . "What is the path to that? I think it's the
Affordable Care Act, and if that leads to Medicare for All, that may be the path."
The nation's largest nurses union was among those who expressed disagreement with the
Speaker's incrementalist approach.
In a
statement last week, National Nurses United president Zenei Cortez, RN, said Pelosi's plan
would "only put a Band-Aid on a broken healthcare system."
"National Nurses United, along with our allies, will continue to build the grassroots
movement for genuine healthcare justice and push to pass Medicare for All," Cortez concluded.
This work is licensed under a Creative Commons Attribution-Share Alike 3.0 License
@Andrei Martyanov All true. And one more point: compared with China, how much of the
present-day US economy is even real – i.e., results in the production of actual
goods that people might want, as opposed to dodgy financial/insurance transactions which may
add a lot of dollar value to GDP, but don't create anything real that enhances the quality of
life for the masses?
Economist used to have a joke: every time you break your leg, you increase GDP. First, you
gotta pay the hospital (transaction), then you gotta pay your doctor (another transaction),
then you gotta pay for your case (yet another transaction). All those transactions make it
look like 'wealth' is being created, because they are–numerically, at
least–increasing per capita GDP. But still: wouldn't you and the country actually be
better off if you hadn't broken your leg in the first place?
China, emerged as an "honest broker" among countries in the Middle East, and used the
free market system to improve relations with its trading partners and grow its economy. The
IC appears to find fault with Russia because it is using the system the US created to
better advantage than the US.
Industrial Capitalism is the system China and Russia are running on. America briefly had
this system from 1868 to 1912; it was called the American System of Economy (Henry
Clay/Peshine Smith).
This type of economy uses state credit (from Treasury not banks) and injects it into
industry. Industry then grows, and people's welfare is increased through improved
productivity.
Finance Capitalism came out of London and hopped to America, especially post WW2. At the
same time Atlantacism and Rim theory hopped. America still runs under this BIZWOG (Britain
Israel World Government) matrix. This matrix depends on finance capitalism.
Finance Capitalism is the placing of EXISTING ASSETS onto a private bank ledger, to then
hypothecate said assets into new bank credit. For example, a ships bill of lading may be used
to create new bank credit, or existing homes are put on double entry ledger to make housing
bubbles.
The closer analogs to China and Russian economy are American System of Economy, not the
current American BIZWOG finance capital. The historical analogs would also be Canada
1938-1974, when Canada had a sovereign economy. Canada post 1974 was converted to finance
capitalism and now are debt laden and suffering like the rest of the west.
Kaiser's Germany used industrial capitalism then Japan's Manchurian Railroad Engineers
copied it for Japan. Mussolini in Italy copied parts of it, and NSDAP in Germany resurrected
Frederick List and the Kaiser's methods.
Finance Capital out of wall street funded the Bolsheviks in what amounted to a looting
operation of Russia. It is any wonder that finance capitalism found succor with communism
since they are both pyramid schemes?
Rim Theory, Atlantacism, Finance Capitalism, and Brzezinsky's chessboard are part of the
same thing, an excuse matrix for gobbling up the world into one double entry private bank
ledger, to then benefit a special (((usury))) finance class of plutocrats.
The "markets" that China and Russia operate on are those of industrial capitalism, using
state credit. China has four large state banks, and they often cancel debt instruments
(housed in the state bank) to then effectively put debt free money into their economy. Russia
injects gold into their Central Bank Reserves, to then emit Rubles. Both China and Russia
inject into industry, their farm sectors, and other sectors to get a desired output to help
their people, not put them into debt servitude.
The BIZWOG matrix will collapse, it is anti-logos and hence against the natural order. It
is on the wrong side of history.
W e are still trying to fathom the apparent but transient palace-coup attempts of Rod
Rosenstein and Andrew McCabe. No one has gotten to the bottom of the serial lying by McCabe and
James Comey, much less their systematic and illegal leaking to pet reporters.
We do not know all the ways in which James Clapper and John Brennan seeded the dossier and
its related gossip among the press and liberal politicians -- only that both were prior
admitted fabricators who respectively while under oath misled congressional representatives on
a host of issues.
The central role of Hillary Clinton in funding the anti-Trump, Russian-"collusion,"
Fusion/GPS/Christopher Steele dossier is still not fully disclosed. Did the deluded FISA court
know it was being used by Obama-administration DOJ and FBI officials, who withheld from it
evidence to ensure permission to spy on American citizens? Could any justice knowingly be so
naïve?
Do we remember at all that Devin Nunes came to national prominence when he uncovered
information that members of the Obama administration's national-security team, along with
others, had systematically unmasked surveilled Americans, whose names then were leaked
illegally to the press?
One day historians will have the full story of how Robert Mueller stocked his legal team
inordinately with partisans. He certainly did not promptly disclose the chronology of, or the
interconnected reasons for, the firings of Lisa Page and Peter Strozk. And his team has largely
used process-crime allegations to leverage mostly minor figures to divulge some sort of
incriminating evidence about the president -- none of it pertaining to the original mandated
rationale of collusion.
These are the central issues and key players of this entire sordid attempt to remove a
sitting president.
But we should remember there were dozens of other minor players who did their own parts in
acting unethically, and in some cases illegally, to destroy a presidency. We have mostly
forgotten them. But they reflect what can happen when Washington becomes unhinged, the media go
berserk, and a reign of terror ensues in which any means necessary is redefined as what James
Comey recently monetized as a "Higher Loyalty" to destroy an elected president.
Here are just a few of the foot soldiers we have forgotten.
Anonymous
On September 5, 2018 (a date seemingly picked roughly to coincide with the publication of Bob
Woodward's sensational tell-all book about the inside of the Trump White House), the New
York Times printed a credo from a supposed anonymous Republican official deep within the
Trump administration. In a supposed fit of ethical conviction, he (or she) warned the nation of
the dangers it faced under his boss, President Trump, and admitted to a systematic effort to
subvert his presidency:
The dilemma -- which he does not fully grasp -- is that many of the senior officials in
his own administration are working diligently from within to frustrate parts of his agenda
and his worst inclinations. I would know. I am one of them.
Anonymous elaborated:
Given the instability many witnessed, there were early whispers within the cabinet of
invoking the 25th Amendment, which would start a complex process for removing the president.
But no one wanted to precipitate a constitutional crisis. So we will do what we can to steer
the administration in the right direction until -- one way or another -- it's over.
We do not know whether Anonymous was describing the coup attempt as described by Andrew
McCabe that apparently entailed Rod Rosenstein at the Justice Department informally polling
cabinet officials, or marked a wider effort among Never Trump Republicans and deep-state
functionaries to ensure that Trump failed -- whether marked by earlier efforts to leak
confidential calls with foreign officials or to serve up unsubstantiated rumors to muckrakers
or simply slow-walk or ignore presidential directives.
In any case, Anonymous's efforts largely explain why almost daily we hear yet another mostly
unsubstantiated account that a paranoid, deranged, and dangerous Trump is holed up in his
bedroom with his Big Macs as he plans unconstitutional measures to wreck the United States --
and then, by accident, achieves near-record-low peacetime unemployment, near-record-low
minority unemployment, annualized 3 percent GDP growth, record natural-gas and oil production,
record deregulation, comprehensive tax reform and reduction, and foreign-policy breakthroughs
from the destruction of ISIS to cancellation of the flawed Iran deal.
James Baker
In the course of congressional testimony, it was learned that the FBI general counsel, James
Baker, for a time had been under investigation for leaking classified information to the press.
Among the leaks were rumored scraps from the Steele dossier passed to Mother Jones
reporter David Corn (who has denied any such connection) that may have fueled his sensational
pre-election accusation of Trump–Russian collusion.
Nonetheless, about a week before the 2016 election, Corn of Mother Jones was writing
lurid exposés, such as the following, to spread gossip likely inspired from the
Christopher Steele dossier (italics inserted):
Does this mean the FBI is investigating whether Russian intelligence has attempted to
develop a secret relationship with Trump or cultivate him as an asset? Was the former
intelligence officer and his material deemed credible or not?
An FBI spokeswoman says, "Normally, we don't talk about whether we are investigating
anything." But a senior US government official not involved in this case but familiar with
the former spy tells Mother Jones that he has been a credible source with a proven record of
providing reliable, sensitive, and important information to the US government. In June,
the former Western intelligence officer -- who spent almost two decades on Russian
intelligence matters and who now works with a US firm that gathers information on Russia for
corporate clients -- was assigned the task of researching Trump's dealings in Russia and
elsewhere, according to the former spy and his associates in this American firm.
What does "assigned" mean, and by whom? That Fusion/GPS (which, in fact, is a generic
opposition-research firm with no particular expertise in Russia) hired with disguised Clinton
campaign funds a has-been foreign-national spy to buy dirt from Russian sources to subvert a
presidential campaign?
Those leaks of Christopher Steele's dirt also did their small part in planting doubt in
voters' minds right that electing Trump was tantamount to implanting a Russian asset in the
White House. Baker has been the alleged center of a number of reported leaks, even though the
FBI's general counsel should have been the last person to disclose any government communication
to the press during a heated presidential campaign. And there is still no accurate information
concerning what role, if any, Baker played in Andrew McCabe's efforts to discuss removing the
president following the Comey firing.
Evelyn Farkas
On March 1, 2017, just weeks after Trump took office, the New York Times revealed that.
in a last-minute order, outgoing president Obama had vastly expanded the number of government
officials with access to top-secret intelligence data. The Obama administration apparently
sought to ensure a narrative spread that Trump may have colluded with the Russians. The day
following the disclosure, a former Pentagon official, Evelyn Farkas (who might have been a
source for the strange disclosure of a day earlier), explained Obama's desperate eleventh-hour
effort in an MSNBC interview:
I was urging my former colleagues, and, and frankly speaking the people on the Hill . . .
it was more actually aimed at telling the Hill people, get as much information as you can,
get as much intelligence as you can before President Obama leaves the administration.
Because I had a fear that somehow that information would disappear with the senior people
who left so it would be hidden away in the bureaucracy, um, that the [stutters] Trump folks
-- if they found out how we knew what we knew about their [the] Trump staff, dealing
with Russians -- that they would try to compromise those sources and methods, meaning we no
longer have access to that intelligence.
So I became very worried because not enough was coming out into the open and I knew that
there was more. We have very good intelligence on Russia, so then I had talked to some of my
former colleagues and I knew that they were also trying to help get information to the
Hill.
Despite media efforts to spin Farkas's disclosure, she was essentially contextualizing how
outgoing Obama officials were worried that the incoming administration would discover their own
past efforts ("sources and methods") to monitor and surveil Trump-campaign officials, and would
seek an accounting. Her worry was not just that the dossier-inspired dirt would not spread
after Trump took office, but that the Obama administration's methods used to thwart Trump might
be disclosed (e.g., " if they found out how we knew what we knew about their [the] Trump
staff, dealing with Russians -- that they would try to compromise those sources and methods,
meaning we no longer have access to that intelligence" ).
So Farkas et al. desperately sought to change the law so that their rumors and narratives
would be so deeply seeded within the administrative state that the collusion narrative would
inevitably lead to Congress and the press, and thereby overshadow any shock at the improper or
illegal methods the Obama-administration officials had authorized to monitor the Trump
campaign.
And Farkas was correct. Even today, urination in a Russian hotel room has overshadowed
perjury traps, warping the FISA courts, illegal leaking, inserting a spy into the Trump
campaign, and Russian collusion with Clinton hireling and foreign agent Christopher Steele.
Samantha Power
We now forget that for some reason, in her last year in office, but especially during and after
the 2016 election, Power, the outgoing U.S. ambassador to the United Nations, reportedly asked
to unmask the names of over 260 Americans picked up in government surveillance. She offered no
real explanations of such requests.
Even stranger than a U.N. ambassador suddenly playing the role of a counterintelligence
officer, Power continued her requests literally until the moments before Trump took office in
January 2017. And, strangest of all, after Power testified before the House Oversight and
Government Reform Committee, Representative Trey Gowdy reported that "her testimony is 'they
[the unmasking requests] may be under my name, but I did not make those requests.'"
Who, in the world, then, did make those requests and why and, if true, did she know she was
so being used?
And were some of those unmasking requests leaked, thus helping to fuel media rumors in late
2016 and early 2017 that Trump officials were veritable traitors in league with Russia? And why
were John Brennan, James Clapper, Susan Rice, and Sally Yates reportedly in the last days (or,
in some cases, the last hours) requesting that the names of Americans swept up in surveillance
of others be unmasked? What was the point of it all?
In sum, did a U.N. ambassador let her name be used by aides or associates to spread rumors
throughout the administrative state, and thereby brand them with classified government
authenticity, and then all but ensure they were leaked to the press?
We the public most certainly wondered why the moment Trump was elected, the very name Carter
Page became synonymous with collusion, and soon Michael Flynn went from a respected
high-ranking military official to a near traitor, as both were announced as emblematic of their
erstwhile complicit boss.
Ali Watkins and James Wolf
Watkins was the young reporter for Buzzfeed (which initially leaked the largely fake
Steele dossier and erroneously reported that Michael Cohen would implicate Trump in suborning
perjury) who conducted an affair with James Wolf, a staffer, 30 years her senior, on the Senate
Intelligence Committee.
Wolf, remember, systematically and illegally began leaking information to her that found its
way into sensationalized stories about collusion. But as Margot Cleveland of the
Federalist pointed out, Watkins was also identified by Buzzfeed "in court filings
as one of the individuals who 'conducted newsgathering in connection with the Dossier before
Buzzfeed published the Article' on the dossier. This fact raises the question of whether
Watkins received information from Wolfe concerning the dossier and, if so, what he leaked."
In other words, the dossier was probably planted among U.S. senators and deliberately leaked
through a senior Senate aide, who made sure that the unverified dirt was published by the press
to damage Donald Trump.
And it did all that and more.
The list of these bit players could be easily expanded. These satellites were not
coordinated in some tight-knit vast conspiracy, but rather took their cue from their superiors
and the media to freelance with assumed impunity, as their part in either preventing or ending
a Trump presidency. And no doubt the Left would argue that the sheer number of federal
bureaucrats and political appointees, in a variety of cabinets and agencies, throughout the
legislative and the executive branches, all proves that Trump is culpable of something.
Perhaps. But the most likely explanation is that a progressive administrative state, a
liberal media, and an increasingly radicalized liberal order were terrified by the thought of
an outsider Trump presidency. Therefore, they did what they could, often both unethically and
illegally, to stop his election, and then to subvert his presidency.
In their arrogance, they assumed that their noble professions of higher loyalties and duties
gave them exemption to do what they deemed necessary and patriotic. And others like them will
continue to do so, thereby setting the precedent that unelected federal officials can break the
law or violate any ethical protocols they please -- if they disagree with the ideology of the
commander in chief. We ridicule Trump for going ballistic at each one of these periodically
leaked and planted new stories that raised some new charge about his stupidity, insanity,
incompetence, etc. But no one has before witnessed any president subjected to such a
comprehensive effort of the media, the deep state, political opponents, and his own party
establishment to destroy him.
Subversion is the new political opposition. The nation -- and the Left especially -- will
come to regret the legacy of the foot soldiers of the Resistance in the decades to come.
The Pentagon's inspector general has formally opened an investigation into a watchdog
group's allegations that acting Defense Secretary Patrick Shanahan has used his office to
promote his former employer, Boeing Co.
Citizens for Responsibility and Ethics in Washington filed an ethics complaint with the
Pentagon's inspector general a week ago, alleging that Shanahan has appeared to make statements
promoting Boeing and disparaging competitors, such as Lockheed Martin.
Shanahan, who was traveling with President Donald Trump to Ohio on Wednesday, spent more
than 30 years at Boeing, leading programs for commercial planes and missile defense systems. He
has been serving as acting Pentagon chief since the beginning of the year, after James Mattis
stepped down.
The probe comes as Boeing struggles to deal with a public firestorm over two deadly crashes
of the Boeing 737 Max 8 jetliner within the last five months. And it focuses attention on
whether Trump will nominate Shanahan as his formal pick for defense chief, rather than letting
him languish as an acting leader of a major federal agency.
Dwrena Allen, spokeswoman for the inspector general, said Shanahan has been informed of the
investigation. And, in a statement, Pentagon spokesman Tom Crosson said Shanahan welcomes the
review.
"Acting Secretary Shanahan has at all times remained committed to upholding his ethics
agreement filed with the DoD," said Crosson. "This agreement ensures any matters pertaining to
Boeing are handled by appropriate officials within the Pentagon to eliminate any perceived or
actual conflict of interest issue(s) with Boeing."
During a Senate hearing last week, Shanahan was asked by U.S. Sen. Richard Blumenthal,
D-Conn., about the 737 Max issue. Shanahan said he had not spoken to anyone in the
administration about it and had not been briefed on it. Asked whether he favored an
investigation into the matter, Shanahan said it was for regulators to investigate.
On Wednesday, Blumenthal said that scrutiny of Shanahan's Boeing ties is necessary. "In
fact, it's overdue. Boeing is a behemoth 800-pound gorilla -- raising possible questions of
undue influence at DOD, FAA and elsewhere," said Blumenthal.
Shanahan signed an ethics agreement in June 2017, when he was being nominated for the job of
deputy defense secretary, a job he held during Mattis' tenure. It outlined the steps he would
take to avoid "any actual or apparent conflict of interest," and said he would not participate
in any matter involving Boeing.
The CREW ethics complaint, based to a large part on published reports, including one by
Politico in January, said Shanahan has made comments praising Boeing in meetings about
government contracts, raising concerns about "whether Shanahan, intentionally or not, is
putting his finger on the scale when it comes to Pentagon priorities."
One example raised by the complaint is the Pentagon's decision to request funding for
Boeing 15EX fighter jets in the 2020 proposed budget. The Pentagon is requesting about $1
billion to buy eight of the aircraft.
Shanahan, 56, joined Boeing in 1986, rose through its ranks and is credited with rescuing
a troubled Dreamliner 787 program. He also led the company's missile defense and military
helicopter programs.
Trump has seemed attracted to Shanahan partially for his work on one of the president's
pet projects -- creating a Space Force. He also has publicly lauded Shanahan's former employer,
Boeing, builder of many of the military's most prominent aircraft, including the Apache and
Chinook helicopters, the C-17 cargo plane and the B-52 bomber, as well as the iconic
presidential aircraft, Air Force One.
This is only the third time in history that the Pentagon has been led by an acting chief,
and Shanahan has served in that capacity for longer than any of the others.
Presidents typically take pains to ensure the Pentagon is being run by a Senate-confirmed
official, given the grave responsibilities that include sending young Americans into battle,
ensuring the military is ready for extreme emergencies like nuclear war and managing overseas
alliances that are central to U.S. security.
3 hours ago Why did Trump
appoint a former Boeing executive and industry lobbyist to the the Secretary of Defense to
replace General Mattis? What in Shananhan's background makes him qualified to lead our nation's
military forces? 3 hours ago WITHOUT A DOUBT HE DID., ALSO INVESTIGATE NIKKI HALEY'S APPOINTED
ON BOEING'S BOARD TO REPLACE SHANAHAN. FOLLOW THE HOEING KICKBACKS(MONEY), TO DONALD TRUMP'S
FAMILY. 3 hours ago
Shanahan probably helped Boeing on the promise of a later payback just like Ms. Nikki Haley did
while Gov of SC where Boeing built a new plant on her watch. She helped big time to keep the
Unions out of the new Boeing plant and now Boeing is going to put her on their board of
directors. Nothing like a bit of an obvious payoff. 2 hours ago Reminds me of the Bush Jr days in
the White House. During the Gulf War (#2) Vice President #$%$ Cheney awarded oil company
Halliburton (Cheney was CEO before accepting the VP job) to deliver meals for the troops. The
contract was ?No Bid.? Why was an oil company delivering food to troops with a no bid contract?
After Cheney?s Job was over being VP he went back to being CEO at Halliburton and moved
Halliburton?s headquarters to Dubai. What an American! 2 hours ago Now we understand why Boeing
& the FAA hesitated to ground those planes for few days despite many countries who did
grounded those plane which is a precedent for a country to ground & NOT wait for the
manufacturer. ONLY after Canada grounded those planes Boeing & the FAA & that's because
Canada IS a the #1 flight partner of the US ! 4 hours ago Years ago there was a Boeing
procurement scandal and Trump does love the swamp he claims to hate.
"President typically take pains to ensure the Pentagon is being
run by Senate confirmed official" .Presidents typically don't put incompetent people in cabinet positions or give his kids top security
level clearances when they have no need and no experience that requires one...well, no one has accused trump of being presidential
or typical - ever
Dianna 4 hours ago
The swamp is now the " Trump Cesspool."
Nonconservative 3 hours ago
Hey deplorables....hows that swamp draining going?...ANYWORD on that great big beautiful health plan with lower premiums and keeping my own doctor?....what about infrastructure?...any
idea when the roads in every city will be driveable again...or did we spend all the money from the US govt. paying Trump to stay
at his own hotels?........hello?......hello deplorables?......anybody home????
Pierre Escargot 1 hour ago
Pentagon to probe if Shanahan used office
to help Boeing. Why not? Robert Mueller's and James Comey turned government service into self-service.
"... "If that was to happen and no energy source can cover the decline rate, wouldn't the world be pretty fucked economically thereafter? Hence one can assume or take a wild ass guess that the decline after peak would resemble something like Venezuela. So not a smooth short % decline rate." ..."
"... Realistically the global economy is already in a tight spot. It started back in 2000 when Oil prices started climbing from about $10/bbl in 1998 to about $30/bbl in 2000. Then the World Major Central banks dropped interest which ended triggering the Housing Boom\Bust and carried Oil prices to $147/bbl. Since then Interest rates have remained extremely low while World Debt has soared (expected to top $250T in 2019). ..."
"... Probably the biggest concern for me is the risking risks for another World war: The US has been targeting all of the major Oil exporters. The two remaining independent targets are Venezuela & Iran. I suspect Venzuela will be the next US take over since it will be a push over compared to Iran. ..."
"If that was to happen and no energy source can cover the decline rate, wouldn't the world be pretty fucked economically
thereafter? Hence one can assume or take a wild ass guess that the decline after peak would resemble something like Venezuela.
So not a smooth short % decline rate."
Energy is the economy, The economy cannot function without energy. Thus its logical that a decline in energy supply will reduce
the economy. The only way for this not to apply is if there are efficiency gains that offset the decline. But at this point the
majority of cost effective efficiency gains are already in place. At this point gains become increasing expensive with much smaller
gains (law of diminishing returns). Major infrastructure changes like modernizing rail lines take many decades to implement and
also require lots of capital. Real capital needed will be difficult to obtain do to population demographics (ie boomers dependent
on massive unfunded entitlement & pensions).
Realistically the global economy is already in a tight spot. It started back in 2000 when Oil prices started climbing from
about $10/bbl in 1998 to about $30/bbl in 2000. Then the World Major Central banks dropped interest which ended triggering the
Housing Boom\Bust and carried Oil prices to $147/bbl. Since then Interest rates have remained extremely low while World Debt has
soared (expected to top $250T in 2019).
My guess is that global economy will wipe saw in the future as demographics, resource depletion (including Oil) and Debt all
merge into another crisis. Gov't will act with more cheap and easy credit (since there is no alterative TINA) as well as QE\Asset
buying to avoid a global depression. This creating a wipesaw effect that has already been happening since 2000 with Boom Bust
cycles. This current cycle has lasted longer because the Major central banks kept interest rates low, When The Fed started QT
and raising rate it ended up triggering a major stock market correction In Dec 2018. I believe at this point the Fed will no longer
seek any further credit tightening that will trip the economy back into recession. However its likely they the global economy
will fall into another recession as consumers & business even without further credit tighting by CB (Central Banks) Because they've
been loading up on cheap debt, which will eventually run into issues servicing their debt. For instance there are about 7M auto
loans in delinquency in March of 2019. Stock valuations are largely driven by stock buybacks, which is funded by debt. I presume
companies are close to debt limit which is likely going to prevent them from purchase more stock back.
Probably the biggest concern for me is the risking risks for another World war: The US has been targeting all of the major
Oil exporters. The two remaining independent targets are Venezuela & Iran. I suspect Venzuela will be the next US take over since
it will be a push over compared to Iran. I think once all of remaining independent Oil Exports are seized that is when the
major powers start fighting each other. However is possible that some of the proxy nations (Pakastan\India),(Israel\Iran), etc
trigger direct war between the US, China, and Russia at any time.
Notice that the US is now withdrawing from all its major arms treaties, and the US\China\Russia are now locked into a Arms
race. Nuclear powers are now rebuilding their nuclear capacity (more Nukes) and modernizing their deployment systems (Hypersonic,
Very large MIRV ICBMS, Undersea drones, Subs, Bombers, etc.
My guess is that nations like the US & China will duke it out before collapsing into the next Venezuela. If my assessment is
correct, The current state of Venezuela will look like the garden of Eden compared to the aftermath of a full scale nuclear war.
Currently the Doomsday clock (2019) is tied with 1953 at 2 minutes:
1953 was the height of the cold war. I presume soon the Doomsday clock will be reduced to less than 2 Minutes later this
year, due to recent events in the past few weeks.
"the world's nuclear nations proceeded with programs of "nuclear modernization" that are all but indistinguishable from
a worldwide arms race, and the military doctrines of Russia and the United States have increasingly eroded the long-held taboo
against the use of nuclear weapons."
" The current international security situation -- what we call the "new abnormal" -- has extended over two years now.
It's a state as worrisome as the most dangerous times of the Cold War, a state that features an unpredictable and shifting
landscape of simmering disputes that multiply the chances for major military conflict to erupt."
Elizabeth Warren had a good speech at UC-Berkeley. She focused on the middle class family balance sheet and risk shifting.
Regulatory policies and a credit based monetary system have resulted in massive real price increases in inelastic areas of demand
such as healthcare, education and housing eroding purchasing power.
Further, trade policies have put U.S. manufacturing at a massive disadvantage to the likes of China, which has subsidized
state-owned enterprises, has essentially slave labor costs and low to no environmental regulations. Unrestrained immigration policies
have resulted in a massive supply wave of semi- and unskilled labor suppressing wages.
Recommended initial steps to reform:
1. Change the monetary system-deleverage economy with the Chicago Plan (100% reserve banking) and fund massive infrastructure
lowering total factor costs and increasing productivity. This would eliminate
2. Adopt a healthcare system that drives HC to 10% to 12% of GDP. France's maybe? Medicare model needs serious reform but is
great at low admin costs.
3. Raise tariffs across the board or enact labor and environmental tariffs on the likes of China and other Asian export model
countries.
4. Take savings from healthcare costs and interest and invest in human capital–educational attainment and apprenticeships programs.
5. Enforce border security restricting future immigration dramatically and let economy absorb labor supply over time.
As I have said in other comments, I like Liz Warren a lot within the limits of what she is good at doing (i.e. not President)
such as Secretary of the Treasury etc. And I think she likes the media spotlight and to hear herself talk a little to much, but
all quibbling aside, can we clone her??? The above comment and video just reinforce "Stick to what you are really good at Liz!".
I am not a Liz Warren fan boi to the extent Lambert is of AOC, but it seems that most of the time when I hear Warren, Sanders,
or AOC say something my first reaction is "Yes, what she/he said!".
The Boeing Company BA recently won a $250 million contract to offer weapon system
integration for the Long Range Stand-Off (LRSO) Cruise Missile. Work related to the deal is
scheduled to be completed by Dec 31, 2024.
The contract was awarded by the Air Force Nuclear Weapons Center, Eglin Air Force Base,
Florida. Per the terms of the deal, this aerospace giant will provide aircraft and missile
carriage equipment development and modification, engineering, testing, software development,
training, facilities and support necessary to fully integrate the LRSO Cruise Missile on the
B-52H bomber platform.
Attributes of LRSO
The LRSO is a nuclear-armed air-launched cruise missile, under development. It is set to
replace the current AGM-86 air launched cruise missile (ALCM). LRSO, might be up to about 50%
longer than Joint Air-to-Surface Standoff Missile-Extended Range (JASSM-ER) and still be
suitable for internal carriage by the B-2 and B-52.
Our View
AGM-86 ALCM has been serving the U.S. Air Force quite efficiently. However, with
increasingly sophisticated air defense systems developed by America's nemeses, especially
Russia, demand for a new stealth nuclear-armed cruise missile capable of either destroying
these defenses or penetrating them has been increasing consistently. In this scenario, the LRSO
comes as the most credible stealthy and low-yield option available to the United States
(according to Strategic Studies Quarterly Report).
Boeing's B-52, which has been the U.S. Air Force's one of the most preferred bombers, is
completely dependent on long-range cruise missiles and cannot continue in the nuclear mission
beyond 2030 without LRSO. As B-52 is expected to play a primary role in the U.S. nuclear
mission for at least next decade and ALCM is already well beyond its originally planned end of
life, we may expect more contracts similar to the latest one to usher in from the Pentagon in
the coming days. This, in turn, should prove conducive to Boeing.
Price Performance
In a year's time, shares of Boeing have gained about 16.5% against the industry's 2.2%
decline.
I first suggested the U.S. economy was headed toward a recession more than a year ago, and now others are forecasting the same.
I give a business downturn starting this year a two-thirds probability.
The recessionary indicators are numerous. Tighter monetary policy by the Federal Reserve that the central bank now worries it
may have overdone. The near-inversion in the Treasury yield curve. The swoon in stocks at the end of last year. Weaker housing activity.
Soft consumer spending. The tiny 20,000 increase in February payrolls, compared to the 223,000 monthly average gain last year. Then
there are the effects of the deteriorating European economies and decelerating growth in China as well as President Donald Trump's
ongoing trade war with that country.
There is, of course, a small chance of a soft landing such as in the mid-1990s. At that time, the Fed ended its interest-rate
hiking cycle and cut the federal funds rate with no ensuing recession. By my count, the other 12 times the central bank restricted
credit in the post-World War II era, a recession resulted.
It's also possible that the current economic softening is temporary, but a revival would bring more Fed restraint. Policy makers
want higher rates in order to have significant room to cut in the next recession, and the current 2.25 percent to 2.50 percent range
doesn't give them much leeway. The Fed also dislikes investors' zeal for riskier assets, from hedge funds to private equity and leveraged
loans, to say nothing of that rankest of rank speculations, Bitcoin. With a resumption in economic growth, a tight credit-induced
recession would be postponed until 2020.
"Recession" conjures up specters of 2007-2009, the most severe business downturn since the 1930s in which the S&P 500 Index plunged
57 percent from its peak to its trough. The Fed raised its target rate from 1 percent in June 2004 to 5.25 percent in June 2006,
but the main event was the financial crisis spawned by the collapse in the vastly-inflated subprime mortgage market.
Similarly, the central bank increased its policy rate from 4.75 percent in June 1999 to 6.5 percent in May 2000. Still, the mild
2001 recession that followed was principally driven by the collapse in the late 1990s dot-com bubble that pushed the tech-laden Nasdaq
Composite Index down by a whopping 78 percent.
The 1973-1975 recession, the second deepest since the 1930s, resulted from the collapse in the early 1970s inflation hedge buying
of excess inventories. That deflated the S&P 500 by 48.2 percent. The federal funds rate hike from 9 percent in February 1974 to
13 percent in July of that year was a minor contributor.
The remaining eight post-World War II recessions were not the result of major financial or economic excesses, but just the normal
late economic cycle business and investor overconfidence. The average drop in the S&P 500 was 21.2 percent.
At present, I don't see any major economic or financial bubbles that are just begging to be pricked. The only possibilities are
excess debt among U.S. nonfinancial corporations and the heavy borrowing in dollars by emerging-market economies in the face of a
rising greenback. Housing never fully recovered from the subprime mortgage debacle. The financial sector is still deleveraging in
the wake of the financial crisis. Consumer debt remains substantial but well off its 2008 peak in relation to household income.
Consequently, the recession I foresee will probably be accompanied by about an average drop in stock prices. The S&P 500 fell
19.6 percent from Oct. 3 to Dec. 24, but the recovery since has almost eliminated that loss. A normal recession-related decline of
21.2 percent – meeting the definition of a bear market – from that Oct. 3 top would take it to 2,305, down about 18 percent from
Friday's close, but not much below the Christmas Eve low of 2,351.
A. Gary Shilling is president of A. Gary Shilling & Co., a New Jersey consultancy, a Registered Investment Advisor and author
of "The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation." Some portfolios he manages invest
in currencies and commodities.
The_Mick, 9 hours ago
"I first suggested the U.S. economy was headed
toward a recession more than a year ago, and now others are forecasting the same." And yet you were WRONG a year ago! You don't get excused for last year just because you're still predicting it!
Of course a recession is coming - maybe this year but maybe not for 10 years. Recessions happen from time to time but they are not
predictable because economics has too many variables we can't quantify.
And do you think you're impressing anyone by adding "maybe a bear market too"???
What do you mean "maybe"? If there's a recession then, of course, our slightly overpriced market will experience a bear market! DUH!
Terry7 hours ago I expected a deeper understanding from My Shilling.
This article seems very week. If he had submitted it as an an economic paper I don't think he would get high marks. Many historical
economic facts glossed over or omitted. Terrible job of describing the causes of the early 1970s world recession . As for a recession
without a bear market.....? Don't make me laugh.... And buy the way we are already in a bear market !
This decade is a lot like the 1990s in that it has been a nice long run. But no business cycle goes on for every. It's just does
not work like that because it is cycle in nature. After a ten year run in stocks it is less risky for serious money to be out of
them that in them. That is why the bond market is so solid right not. Because it's not work risking all your cash for maybe a couple
more percent when you have already make 300% or more..
The western economies are just running off free or very cheap money being constantly pumped into investment assets by the central
banks. There are no real guts to them. USA, EU and Japan have been running the printing presses with abandonment. At the same time
China and India are becoming the industrial power houses because they had over one billion people who will work for next to nothing.
Because every investment asset is pumped up of "free" money in the form of very low interest rate loans from the FED etc. Things
are very fragile. And someone has give Powel this "reality check". So the FED does a 180 on policy and now looks like a Wall St poodle.
And they speculators have gone back to pumping FANG stocks
But they all know this market is very pumped up and fragile. And they all keep their stop loss triggers very tight. That is why
it falls so dramatically when it takes a hit. Like OMG the FED funds rate going from 2.75% to 3.00% !! So tread very carefully .
The cracks are all around
Salo, 7 hours ago
I am only surprised when I read
that another recession is not coming.
Almost 10 years since the "end" of the Great Recession, and all it took was $22 Trillion of borrowed money, a $4 Trillion in the
red Fed balance sheet and interest rates just barely north of 2%. Oh, and one big beautiful corporate tax cut. Who knew expansionary
economies were so uncomplicated?
Ricardo, 6 hours ago
I remember reading
Gary Shilling's articles a few years after the Crash of 2009 when he attempted to prove without a doubt that market returns would
be sub-par for decades to come. He was wrong and you would have missed out on the longest and biggest bull market in history. Be
wary of what Gary has to tell you.
Boeing Co. tumbled early Monday on heightened scrutiny by regulators and prosecutors over
whether the approval process for the company's 737 Max jetliner was flawed.
A person familiar with the matter on Sunday said that the U.S. Transportation Department's
Inspector General was examining the plane's design certification before the second of two
deadly crashes of the almost brand-new aircraft.
Separately, the Wall Street Journal reported that a grand jury in Washington, D.C., on
March 11 issued a subpoena to at least one person involved in the development process of the
Max. And a Seattle Times investigation found that U.S. regulators delegated much of the plane's
safety assessment to Boeing and that the company in turn delivered an analysis with crucial
flaws.
Boeing dropped 2.8 percent to $368.53 before the start of regular trading Monday in New
York, well below any closing price since the deadly crash of Ethiopian Airlines Flight 302 on
March 10. Ethiopia's transport minister said Sunday that flight-data recorders showed "clear
similarities" between the crashes of that plane and Lion Air Flight 610 last October.
U.S. Federal Aviation Administration employees warned as early as seven years ago that
Boeing had too much sway over safety approvals of new aircraft, prompting an investigation by
Transportation Department auditors who confirmed the agency hadn't done enough to "hold Boeing
accountable."
The 2012 investigation also found that discord over Boeing's treatment had created a
"negative work environment" among FAA employees who approve new and modified aircraft designs,
with many of them saying they'd faced retaliation for speaking up. Their concerns pre-dated the
737 Max development.
In recent years, the FAA has shifted more authority over the approval of new aircraft to the
manufacturer itself, even allowing Boeing to choose many of the personnel who oversee tests and
vouch for safety. Just in the past few months, Congress expanded the outsourcing arrangement
even further.
"It raises for me the question of whether the agency is properly funded, properly staffed
and whether there has been enough independent oversight," said Jim Hall, who was chairman of
the National Transportation Safety Board from 1994 to 2001 and is now an aviation-safety
consultant.
Outsourcing Safety
At least a portion of the flight-control software suspected in the 737 Max crashes was
certified by one or more Boeing employees who worked in the outsourcing arrangement, according
to one person familiar with the work who wasn't authorized to speak about the matter.
The Wall Street Journal first reported the inspector general's latest inquiry. The watchdog
is trying to assess whether the FAA used appropriate design standards and engineering analysis
in approving the 737 Max's anti-stall system, the newspaper said.
Both Boeing and the Transportation Department declined to comment about that inquiry.
In a statement on Sunday, the agency said its "aircraft certification processes are well
established and have consistently produced safe aircraft designs," adding that the "737 Max
certification program followed the FAA's standard certification process."
The Ethiopian Airlines plane crashed minutes after it took off from Addis Ababa, killing all
157 people on board. The accident prompted most of the world to ground Boeing's 737 Max 8
aircraft on safety concerns, coming on the heels of the October crash of a Max 8 operated by
Indonesia's Lion Air that killed 189 people. Much of the attention focused on a flight-control
system that can automatically push a plane into a catastrophic nose dive if it malfunctions and
pilots don't react properly.
In one of the most detailed descriptions yet of the relationship between Boeing and the
FAA during the 737 Max's certification, the Seattle Times quoted unnamed engineers who said the
planemaker had understated the power of the flight-control software in a System Safety Analysis
submitted to the FAA. The newspaper said the analysis also failed to account for how the system
could reset itself each time a pilot responded -- in essence, gradually ratcheting the
horizontal stabilizer into a dive position.
Software Fix
Boeing told the newspaper in a statement that the FAA had reviewed the company's data and
concluded the aircraft "met all certification and regulatory requirements." The company, which
is based in Chicago but designs and builds commercial jets in the Seattle area, said there are
"some significant mischaracterizations" in the engineers' comments.
The Organization of Petroleum Exporting Countries will once again become a nemesis for U.S.
shale if the U.S. Congress passes a bill dubbed NOPEC, or No Oil Producing and Exporting
Cartels Act, Bloomberg
reported this week , citing sources present at a meeting between a senior OPEC official and
U.S. bankers.
The oil minister of the UAE, Suhail al-Mazrouei, reportedly told lenders at the meeting that
if the bill was made into law that made OPEC members liable to U.S. anti-cartel legislation,
the group, which is to all intents and purposes indeed a cartel, would break up and every
member would boost production to its maximum.
This would be a repeat of what happened in 2013 and 2014, and ultimately led to another oil
price crash like the one that saw Brent crude and WTI sink below US$30 a barrel. As a result, a
lot of U.S. shale-focused, debt-dependent producers would go under.
Bankers who provide the debt financing that shale producers need are the natural target for
opponents of the NOPEC bill. Banks got burned during the 2014 crisis and are still recovering
and regaining their trust in the industry. Purse strings are being loosened as WTI climbs
closer to US$60 a barrel, but lenders are certainly aware that this is to a large extent the
result of OPEC action: the cartel is cutting production again and the effect on prices is
becoming increasingly visible.
Indeed, if OPEC starts pumping again at maximum capacity, even without Iran and Venezuela,
and with continued outages in Libya, it would pressure prices significantly, especially if
Russia joins in. After all, its state oil companies have been itching to start pumping
more.
The NOPEC legislation has little chance of becoming a law. It is not the first attempt by
U.S. legislators to make OPEC liable for its cartel behavior, and none of the others made it to
a law. However, Al-Mazrouei's not too subtle threat highlights the weakest point of U.S. shale:
the industry's dependence on borrowed money.
The issue was analyzed in depth by energy expert Philip Verleger in an Oilprice
story earlier this month and what the problem boils down to is too much debt. Shale, as
Total's chief executive put it in a 2018 interview with Bloomberg, is very capital-intensive.
The returns can be appealing if you're drilling and fracking in a sweet spot in the shale
patch. They can also be improved by making everything more efficient but ultimately you'd need
quite a lot of cash to continue drilling and fracking, despite all the praise about the decline
in production costs across shale plays.
The fact that a lot of this cash could come only from banks has been highlighted before: the
shale oil and gas industry faced a crisis of investor confidence after the 2014 crash because
the only way it knew how to do business was to pump ever-increasing amounts of oil and gas.
Shareholder returns were not top of the agenda. This had to change after the crash and most of
the smaller players -- those that survived -- have yet to fully recover. Free cash remains a
luxury.
The industry is aware of this vulnerability. The American Petroleum Institute has vocally
opposed NOPEC, almost as vocally as OPEC itself, and BP's Bob Dudley said this week at CERAWeek
in Houston that NOPEC "could have severe unintended consequences if it unleashed litigation
around the world."
"Severe unintended consequences" is not a phrase bankers like to hear. Chances are they will
join in the opposition to the legislation to keep shale's wheels turning. The industry,
meanwhile, might want to consider ways to reduce its reliance on borrowed money, perhaps by
capping production at some point before it becomes forced to do it.
"At this point in the cycle, a pickup in inflation will generally lead to corporate margin
compression, which is potentially more supportive of maintaining a long duration stance,"
Bartolini, lead portfolio manager for U.S. core bond strategies, said after the jobs figures.
He sees annual CPI remaining around this report's consensus of 1.6 percent -- the slowest since
2016 -- for a while.
Benchmark 10-year yields enter the week at 2.63 percent, close to the lowest level in two
months. In the interest-rate options market, traders have been ramping up positions that target
lower yields in five- and 10-year notes.
DougDoug,
The Fed is pretty much DONE with rate hikes, as paying the INTEREST on, 22 Trillion in
Debt will get,.. UGLIER and UGLIER ! Especially with, all the new,.. Tax and SPEND Demo'Rat
Liberals, coming into, Congress ! "We the People", will be,.. TOAST !!
I'm HOLDING, my "Floating Rate" senior secured, Bond CEF's and my Utility and Tech, CEF's,
too ! Drawing NICE Dividends,.. Monthly !
The World is NOT ending for, the USA,.. THANKS,.. to Trump !
NEW YORK (Reuters) - The U.S. Securities and Exchange Commission is launching a review of the main set of rules governing stock
trading, opening the door to the biggest potential changes in a decade-and-a-half, the head of the agency said on Friday.
The possible changes are aimed at making it easier to trade illiquid stocks, making more trading information available to investors,
and improving the speed and quality of public data feeds needed for trading.
The SEC in 2005 adopted a broad framework called Regulation National Market System that was largely aimed at ensuring retail investors
get the best price possible and preventing trades from being executed at prices that are inferior to bids and offers displayed on
other trading venues.
Since then, faster, more sophisticated technology has put a bigger focus on rapid-fire, high-speed trading. There has also been
an influx of new electronic stock exchanges, fragmenting liquidity and increasing costs for brokers around exchange connectivity
and market data needed to fuel algorithmic trading.
"It is clear that the market challenges we faced in the early 2000s are not the same as the issues that we confront over a decade
later," Jay Clayton, chairman of the SEC, said at an event in New York.
To get a better grasp of current market issues, the SEC held a series of roundtable discussions with industry experts last year
that led to potential rule-making recommendations around thinly-traded securities, combating retail fraud, and market data and market
access, Clayton said.
Some areas the SEC is looking at include:
- Increasing the speed of, and adding more stock price information to, public data feeds to help make them more competitive against
the more expensive, private data feeds sold by most stock exchanges.
- Allowing thinly-traded securities to trade only on their listing market, rather than on all 13 U.S. stock exchanges.
- Improving disclosure around reverse mergers.
- Adjusting the quote size of some high-priced stocks.
The 2019 review follows an active 2018 for the SEC.
The regulator adopted rules to increase transparency around broker-dealer stock order routing and private off-exchange trading
venues. It also ordered a pilot program to test banning lucrative rebate payments that exchanges make to brokers for liquidity-adding
stock orders.
judi 1 hour ago What about Naked Shorting? It is out of control and no one including the SEC is doing anything to stop it??
Tara 41 minutes ago The rules implemented in 2005 did nothing to help retail traders with accounts under 25K.
When are you going to address the real issue of stock price manipulation? Also, bring back the uptick rule. And while you are at
it, we need rules to punish dishonest analysts who publish opinions of price that are so far off the charts, they never reflect actual
earnings often announced days later.
Rob 38 minutes ago They are going to make it more in favor of big boys aka the banks
• The OPEC+ cuts have likely already tipped the oil market into a supply deficit,
according to Barclays.
• OECD inventories fell dramatically over the past two years, and came back to
the five-year average in 2018, where they have mostly remained.
• The OPEC+ cuts quickly headed off a renewed surplus, and will likely drain
inventories over the course of this year. Inventories are set to fall below the
five-year average.
• Still, Barclays says the market return to balance or even a small surplus in
the second half of 2019.
• Some of the more catastrophic oil forecasts for 2019 centered on a sharp
slowdown in Chinese demand.
• China's car sales actually contracted year-on-year over the last few months,
and car sales could continue to fall this year.
• But China's demand, while slowing relative to years past, is still expected to
grow by 0.5 mb/d in 2019, according to Barclays, the same rate of expansion as
2018.
• Next year, however, China's demand growth could slow a bit more, dipping below
0.4 mb/d, continuing a gradual deceleration in demand growth.
Senator Brian Schatz (D-Hawaii) is expected to introduce a new tax bill today. The senator
says his bill would tax the sale of stocks, bonds and derivatives at a 0.1 rate. It would apply
to any transaction in the United States. The senator says his proposal would clamp down on
speculation and some high frequency trading that artificially creates more market
volatility.
Mars Descending? U.S. Security Alliances and the International Status of the Dollar
A
decade after the global financial crisis, the dollar continues to maintain its status as the
chief international currency. Possible alternatives such as the euro or renminbi lack the broad
financial markets that the U.S. possesses, and in the case of China the financial openness that
allows foreign investors to enter and exit at will. Any change in the dollar's predominance,
therefore, will likely occur in response to geopolitical factors.
Linda S. Goldberg and Robert Lerman of the Federal Reserve Bank of New York provide an
update on the dollar's various roles. The dollar remains the dominant reserve currency,
with a 63% share of global foreign exchange reserves, and serves as the anchor currency for
about 65% of those countries with fixed exchange rates. The dollar is also widely utilized for
private international transactions. It is used for the invoicing of 40% of the imports of
countries other than the U.S., and about half of all cross-border bank claims are denominated
in dollars.
This wide use of the dollar gives the U.S. government the ability to fund an increasing debt
burden at relatively low interest rates. Moreover, as pointed out by the New York
Times , the Trump administration can enforce its sanctions on countries such as Iran
and Venezuela because global banks cannot function without access to dollars. While European
leaders resent this dependence, they have yet to evolve a financial system that could serve as
a viable alternative.
The dollar's continued predominance may also reflect other factors. Barry Eichengreen of UC-Berkeley and Arnaud J. Mehl and
Livia Chitu of the European Central Bank have examined the effect of geopolitical factors
-- the "Mars hypothesis" -- versus pecuniary factors -- the "Mercury hypothesis" -- in
determining the currency composition of the international reserves of 19 countries during the
period of 1890-1913. Official reserves during this time could be held in the form of British
sterling, French francs, German marks, U.S. dollars and Dutch guilders.
The authors find evidence that both sets of factors played roles. For example, a military
alliance between a reserve issuing country and one that held reserves would boost the share of
the currency of the reserve issuer by almost 30% if there was a military alliance between these
nations. They conjecture that the reserve issuer may have used security guarantees to obtain
financing from the security-dependent nation, or to serve the role of financial center when the
allied country needed to borrow internationally.
Eichengreen, Mehl and Chitu then use their parameter estimates to measure by how much the
dollar share of the international reserves of nations that currently have security arrangements
with the U.S. would fall if such arrangements no longer existed. South Korea, for example,
currently holds 84% of its foreign reserves in dollars; this share would fall to 54% in the
absence of its security alliance with the U.S.
Similarly, the dollar component of German foreign exchange reserves would decline from 98% to
68%.
The dollar may be safe from replacement on economic grounds. But the
imminent shrinkage of the British financial sector due to the United Kingdom's withdrawal
from the European Union shows that political decisions follow their own logic, sometimes
without regard for the economic consequences. If the dollar lose some of its dominance, it may
be because of self-inflicted wounds.
What is this amazingly accurate indicator of a coming recession? The unemployment rate
trend. I first came across this idea on the Philosophical Economics blog ,
whose author has adopted the pseudonym Jesse Livermore, in honor of the 20th-century
investor.
This Livermore conducted a rigorous analysis in search of the perfect recession indicator.
He evaluated several potential signals, including real retail sales growth, industrial
production growth, real S&P 500 earnings-per-share growth, employment growth, real personal
income growth, and housing starts growth. While some of these indicators were promising, none
of them compared to the predictive ability of the unemployment rate trend.
Note that it's the unemployment rate trend that's the great predictor of a recession and not
the unemployment rate itself. The unemployment rate is a lagging indicator of a recession. In
other words, the rate goes up significantly only after a recession is in effect.
But before the unemployment rate moves significantly higher, the unemployment rate trend
must change from downward to upward. And that's what Livermore found was a great leading
indicator, or predictor, of an economic recession. This change in trend is determined by simply
seeing when the latest unemployment rate is higher than the 12-month simple moving average of
previous monthly unemployment rates.
So how well does this predictor work? Over the last 70 years, a change in the unemployment
rate trend predicted every recession that occurred. In two cases, the recession came
immediately after the change in the unemployment rate trend. In other cases, the trend changed
several months in advance of the start of a recession.
The U.S. hasn't experienced an economic recession since the Great Recession of 2008 and
2009. Unemployment rates remain low. However, the U.S. unemployment rate for January, which was
reported in early February, moved higher than the 12-month simple moving average of previous
monthly unemployment rates.
The subtle signal that has proven to be accurate at predicting the onset of a recession has
flashed. And if a recession is indeed on the way, the bull market will soon end.
One
drawback
Is there a catch? Yep. While the unemployment rate trend has been uncannily accurate at
indicating recessions, it also sometimes provides a false signal. In other words, the trend
changes but a recession doesn't occur.
This scenario happened as recently as September 2016. The unemployment rate rose above the
12-month simple moving average for previous unemployment rates for one month. A recession
didn't ensue, though, and the bull market kept on trucking.
Late last year, the S&P 500 ( ^GSPC ) tumbled 20% from its Oct. 3 intraday high
to its Dec. 24 intraday. And despite the market's sharp 17% rally from those lows, Bond king
Jeffrey Gundlach says we're in a bear market and that we could see new lows.
"A bear market has nothing to do with this 20% arbitrary thing," Gundlach, the CEO of $121
billion DoubleLine Capital, told Yahoo Finance in an exclusive interview. "It has to do with
something crazy happening first, and then the crazy thing gives it up. And yet more traditional
things continue to march on. But one by one they give it up." December's dip buyers will
sell at lower levels
The market has since been saved by the Fed's pivot to be "patient" on monetary policy and
the subsequent rally in the bond market, all of which has kept interest rates low. For now.
"If the long end of rates starts to rise, as I expect, and if we break through 3.50% on the
30-year, I think it's over," Gundlach added. "Because the competition from the bond market,
particularly against a climate of limiting one of the engines of stock price appreciation,
which is buybacks , is thought to be potentially in jeopardy."
Gundlach believes that investors who bought during December's dip will likely end up selling
at a lower point.
"... The CAPE aims to correct for those distortions. It smooths the denominator by using not current profits, but a ten-year average, of S&P 500 earnings-per-share, adjusted for inflation. Today, the CAPE for the 500 reads 29.7. It's only been that high in two previous periods: Before the crash of 1929, and during the tech bubble from 1998 to 2001, suggesting that when stocks are this expensive, a downturn may be at hand. ..."
"... is 36.1% higher ..."
"... Here's the problem that the CAPE highlights. Earnings in the past two decades have been far outpacing GDP; in the current decade, they've beaten growth in national income by 1.2 points (3.2% versus 2%). That's a reversal of long-term trends. ..."
"... Right now, earnings constitute an unusually higher share of national income. That's because record-low interest rates have restrained cost of borrowing for the past several years, and companies have managed to produce more cars, steel and semiconductors while shedding workers and holding raises to a minimum. ..."
"... t's often overlooked that although profits grow in line with GDP, which by the way, is now expanding a lot more slowly than two decades ago, earnings per share ..."
"... The reason is dilution. Companies are constantly issuing new shares, for everything from expensive acquisitions to stock option redemptions to secondary offerings. New enterprises are also challenging incumbents, raising the number of shares that divide up an industry's profits faster than those profits are increasing. Since total earnings grow with GDP, and the share count grows faster than profits, it's mathematically impossible for EPS growth to consistently rise in double digits, although it does over brief periods––followed by intervals of zero or minuscule increases. ..."
"... The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably high profits are artificially depressing the former. and that profits are bound to stagnate at best, and more likely decline. ..."
"... In an investing world dominated by hype, the CAPE is a rare truth-teller ..."
For the past half-decade, a controversial yardstick called the CAPE has been flashing red,
warning that stock prices are extremely rich, and vulnerable to a sharp correction. And over
the same period, the Wall Street bulls and a number of academics led by Jeremy Siegel of the
Wharton School, have been claiming that CAPE is a kind of fun house mirror that makes
reasonable valuations appear grotesquely stretched.
CAPE, an acronym "Cyclically-adjusted price-to-earnings ratio," was developed by economist
Robert Shiller of Yale to correct for a flaw in judging where stock prices stand on the
continuum from dirt cheap to highly expensive based on the current P/E ratio. The problem:
Reported earnings careen from lofty peaks to deep troughs, so that when they're in a funk,
multiples jump so high that shares appear overpriced when they're really reasonable, and when
profits explode, they can skew the P/E by creating the false signal that they're a great
buy.
The CAPE aims to correct for those distortions. It smooths the denominator by using not
current profits, but a ten-year average, of S&P 500 earnings-per-share, adjusted for
inflation. Today, the CAPE for the 500 reads 29.7. It's only been that high in two previous
periods: Before the crash of 1929, and during the tech bubble from 1998 to 2001, suggesting
that when stocks are this expensive, a downturn may be at hand.
The CAPE's critics argue that its adjusted PE is highly inflated, because the past decade
includes a portion of the financial crisis that decimated earnings. That period was so unusual,
their thinking goes, that it makes the ten-year average denominator much too low, producing
what looks like a dangerous number when valuations are actually reasonable by historical norms.
They point to the traditional P/E based on 12-month trailing, GAAP profits. By that yardstick
today's multiple is 19.7, a touch above the 20-year average of 19, though exceeding the
century-long norm of around 16.
I've run some numbers, and my analysis indicates that the CAPE doesn't suffer from those
alleged shortcoming, and presents a much truer picture than today's seemingly reassuring P/E.
Here's why. Contrary to its opponents' assertions, the CAPE's earnings number is not
artificially depressed. I calculated ten year average of real profits for six decade-long
periods starting in February of 1959 and ending today, (the last one running from 2/2009 to
2/2019). On average, the adjusted earnings number rose 22% from one period to the next. The
biggest leap came from 1999 to 2009, when the 10-year average of real earnings advanced
42%.
So did profits since then languish to the point where the current CAPE figure is
unrealistically big? Not at all. The Shiller profit number of $91 per share is 36.1%
higher than the reading for the 1999 to 2009 period, when it had surged a record 40%-plus
over the preceding decade. If anything, today's denominator looks high, meaning the CAPE of
almost 30 is at least reasonable, and if anything overstates what today's investors will reap
from each dollar they've invested in stocks.
Indeed, in the latest ten-year span, adjusted profits have waxed at a 3.2% annual pace,
slightly below the 3.6% from 1999 to 2009, but far above the average of 1.6% from 1959 to
1999.
Here's the problem that the CAPE highlights. Earnings in the past two decades have been
far outpacing GDP; in the current decade, they've beaten growth in national income by 1.2
points (3.2% versus 2%). That's a reversal of long-term trends. Over our entire 60 year
period, GDP rose at 3.3% annually, and profits trailed by 1.3 points, advancing at just 2%. So
the rationale that P/Es are modest is based on the assumption that today's earnings aren't
unusually high at all, and should continue growing from here, on a trajectory that outstrips
national income.
It won't happen. It's true that total corporate profits follow GDP over the long term,
though they fluctuate above and below that benchmark along the way. Right now, earnings
constitute an unusually higher share of national income. That's because record-low interest
rates have restrained cost of borrowing for the past several years, and companies have managed
to produce more cars, steel and semiconductors while shedding workers and holding raises to a
minimum.
Now, rates are rising and so it pay and employment, forces that will crimp profits. I
t's often overlooked that although profits grow in line with GDP, which by the way, is now
expanding a lot more slowly than two decades ago, earnings per share grow a lot
slower, as I've shown, lagging by 1.3 points over the past six decades.
An influential study from 2003 by Rob Arnott, founder of Research Affiliates, and co-author
William J. Bernstein, found that EPS typically trails overall profit and economic growth by
even more, an estimated 2 points a year.
The reason is dilution. Companies are constantly issuing new shares, for everything from
expensive acquisitions to stock option redemptions to secondary offerings. New enterprises are
also challenging incumbents, raising the number of shares that divide up an industry's profits
faster than those profits are increasing. Since total earnings grow with GDP, and the share
count grows faster than profits, it's mathematically impossible for EPS growth to consistently
rise in double digits, although it does over brief periods––followed by intervals
of zero or minuscule increases.
The huge gap between the official PE of 19 and the CAPE at 30 signals that unsustainably
high profits are artificially depressing the former. and that profits are bound to stagnate at
best, and more likely decline. The retreat appears to have already started. The Wall
Street "consensus" Wall Street earnings forecast compiled by FactSet calls for an EPS decline
of 1.7% for the first quarter of 2017, and zero inflation-adjusted gains for the first nine
months of the year.
In an investing world dominated by hype, the CAPE is a rare truth-teller .
Oil climbed as Saudi Arabia was said to curtail some output from its Safaniyah offshore oil
field, the largest in the world.
Futures in New York rose as much as 2.2 percent Friday, pushing toward its biggest weekly
gain in a month. Saudi Arabia was said to trim supply from Safaniyah to repair a damaged power
cable, while Russia plans to accelerate the output cuts it agreed to with OPEC+.
... ... ...
Saudi Arabian Oil Co.'s Safaniyah field has the capacity to pump 1.2 million to 1.5 million
barrels of crude a day, and is a major component of the Arab Heavy grade. The cable was damaged
in an accident about two weeks ago and repairs are expected to be completed by early March,
people with knowledge of the matter said.
IEA is one-half EU marketing agency with the explisit goal to keep oil price low, and one
half a research organization. In different reports one role can be prevalent.
The U.S. Energy Information Administration (EIA) estimates that margins for U.S. Gulf Coast
refiners have declined to the lowest levels since late 2014, based on recent price trends in
certain grades of crude oil and petroleum products. https://www.eia.gov/petroleum/weekly/
Comment on Yahoo are absolutly idiotic. I have dount only a couple more or less reasonable
comment in the first 48. This level of incompetence and brainwashing is simply amazing.
The "call" on OPEC crude is now forecast at 30.7 million bpd in 2019, down from the IEA's
last estimate of 31.6 million bpd in January.
U.S. sanctions on Iran and Venezuela have choked off supply of the heavier, more sour crude
that tends to yield larger volumes of higher-value distillates, as opposed to gasoline. The
move has created disruption for some refiners, but has not led to a dramatic increase in the
oil price in 2019.
"In terms of crude oil quantity, markets may be able to adjust after initial logistical
dislocations (from Venezuela sanctions)", the Paris-based IEA said.
"Stocks in most markets are currently ample and ... there is more spare production capacity
available."
Venezuela's production has almost halved in two years to 1.17 million bpd, as an economic
crisis decimated its energy industry and U.S. sanctions have now crippled its exports.
Brent crude futures have risen 20 percent in 2019 to around $63 a barrel, but most of that
increase took place in early January. The price has largely plateaued since then, in spite of
the subsequent imposition of U.S. sanctions.
"Oil prices have not increased alarmingly because the market is still working off the
surpluses built up in the second half of 2018," the IEA said.
"In quantity terms, in 2019, the U.S. alone will grow its crude oil production by more than
Venezuela's current output. In quality terms, it is more complicated. Quality
matters."
dlider909, 7 hours ago Story will change in 30 days.
Robert, 7 hours ago ... ... ...
What this report fails to do is to pay the appropriate homage to American oilfield
roughnecks...
ralf
7 hours ago Nonsense. I see military action against Venezuela soon, just because of
our thirst for oil.
Talk about shale is like talk about Moon conquests, not supported by hard facts.
Saudi Arabia planning to drop March crude output by more than a half a million barrels per
day below its initial pledge.
... ... ...
OPEC said on Tuesday it had reduced oil production almost 800,000 bpd in January to 30.81
million bpd under its voluntary global supply pact.
Saudi Arabia Energy Minister Khalid al-Falih told the Financial Times that the kingdom would
reduce cut production to about 9.8 million bpd in March to bolster oil prices.
Microsoft co-founder Bill Gates does not think the way
to increase U.S. tax
revenue is through policies like raising the tax rate on the wealthy to 70 percent – as
has been floated by some Democratic lawmakers like New York Rep. Alexandria Ocasio-Cortez.
During a podcast interview with
The Verge , Gates responded to a question about whether raising the top rate to 70 percent
in order to fund social programs – like infrastructure initiatives – appeals to him
by saying government can be more effective in running social programs, but that's not the best
way to raise revenue.
"You finally have some politicians who are so extreme that I'd say, 'No, that's even
beyond,'" Gates said. "You do start to create tax dodging and disincentives, and an incentive
to have the income show up in other countries and things."
Gates added that the country's richest people often don't pay the highest rate because their
wealth doesn't always show up as income, it can be in the value of their stock, for
example.
"So it's a misfocus," he added. "If you focus on that, you're missing the picture."
The billionaire businessman, however, does believe there are ways to make the current tax
code more progressive. Some of those ways include more progressive policies regarding the
estate tax, the tax on capital, or reforming FICA and Social Security taxes. Independent
Vermont Sen. Bernie Sanders recently released a proposal to expand the estate tax to a rate of
77
percent for those passing on assets in excess of $1 billion.
Bill Gates also called modern
monetary theory (MMT) – which asserts that because the government controls its own
currency, there is no need to worry about balancing the budget – "some crazy talk."
Ocasio-Cortez recently indicated she was open to supporting MMT.
Gates is one of the richest people in the world. He has said, despite the fact that he has
paid more in taxes than most, he should be
paying more .
Middle East oil benchmarks Dubai and DME Oman have nudged above prices for Brent crude, an
unusual move as U.S. sanctions on Venezuela and Iran along with output cuts by OPEC tighten
supply of medium to heavy oil, traders and analysts said.
Heavier grades, mainly produced in the Middle East, Canada and Latin America, typically have
a high sulphur content and are usually cheaper than Brent, the benchmark for lighter oil in the
Atlantic Basin.
DUBAI/LONDON (Reuters) - Saudi Arabia, the world's top oil exporter, cut its crude output in
January by about 400,000 barrels per day (bpd), two OPEC sources said, as the kingdom follows
through on its pledge to reduce production to prevent a supply glut.
Riyadh told OPEC that the kingdom pumped 10.24 million bpd in January, the sources said.
That's down from 10.643 million bpd in December, representing a cut that was 70,000 bpd deeper
than targeted under the OPEC-led pact to balance the market and support prices.
The Organisation of the Petroleum Exporting Countries, Russia and other non-OPEC producers -
an alliance known as OPEC+ - agreed in December to reduce supply by 1.2 million bpd from Jan.
1.
The agreement stipulated that Saudi Arabia should cut output to 10.311 million bpd, but
energy minister Khalid al-Falih has said it will exceed the required reduction to demonstrate
its commitment.
Crude shipments to the U.S. from OPEC and its partners fell to 1.41 million barrels a day in
January, the lowest in five years, according to data from cargo-tracking and intelligence
company Kpler. Shrinking Iraqi imports and deep output cuts by Saudi Arabia fueled the
decline
New York collected $2.3 billion less income-tax revenue than predicted for December and
January, a development that Governor Andrew Cuomo blamed on wealthy residents leaving for
second homes in Florida and other states that received more favorable treatment in the tax law
enacted by President Donald Trump and the Republican Congress.
The shortfall will require a new look at the $175 billion budget Cuomo submitted to the
legislature last month, he said. If the trend continues, the governor said it would affect
spending on high-expense items such as health, education, infrastructure and a planned
middle-class tax cut.
"There is no doubt that the budget we put forward is not supported by the revenue," the
Democratic governor said during a news conference in Albany. "If even a small number of
high-income taxpayers leave, it has a great effect on this tax base. You are relying on a very
small number of people for the vast amount of your tax dollars."
While acknowledging that stock market volatility is among several factors that may have
suppressed income-tax revenue in the past two months, the governor placed most of the blame on
Trump and the Republican-dominated Congress of 2017, which enacted a tax plan limiting federal
deductions on real estate and other local taxes.
Related: New York's Income-Tax Revenue Falls 'Abruptly' Under Forecast
"It was politically diabolical and also highly effective," Cuomo said. "And if your goal is
to help Republican states and hurt Democratic states this is the way to do it."
The bank expects oil supply to tighten in the first quarter as top exporter Saudi Arabia
cuts production , but Citi's Ed Morse also forecasts a soft spot for demand in the opening
months of 2019. Further complicating matters are a series of geopolitical and market dramas
that will play out through the beginning of May.
This follows a three-month period that saw oil prices spike to nearly four-year highs as the
market braced for U.S. sanctions on Iran. Prices then tumbled more then 40 percent to 18-month
lows, blowing up long-held trading strategies and forcing drillers to rethink their 2019
budgets.
"The volatility every year is a good $20 to $25 a barrel between low and high," Morse said.
"December was kind of the nightmare for the world where the swings were $50 at a low, $86 at a
high and $68 for the average of Brent."
... ... ...
Citi expects Brent crude to continue rising into the mid-$60 range and hit $70 before year
end. That will be enough to keep in play another wild card: surging U.S. oil production.
Financial industry has inherent trend toward parasitism and gangsterism and as such should be
as tightly regulated as gambling. Probably even more. But under neoliberalism where financial
oligarchy a the ruling class this is a pipe dream. I do not see any significant countervailing
force other the far right nationalism. Far right nationalism has power to brake bankers spine,
but usually they allied with them (fascism)
Those that have been following events for several years know they are under attack by an
enemy that has no face and means to do them great harm. Nothing less than their sovereignty and
freedom is at stake.
Absolute control over people and resources is the ultimate goal.
...the bankers want to show up after the population has lost everything in a collapse,
to be their savior and gain control of everyone by offering resources in exchange for
compliance.
In the end these bankers are just people . They yield NO power other than a
cheap magi c trick called money. They are simply losers pulling levers behind the curtain .
They are terrified of real people. They are terrified of being exposed. They are worthless
conjurers of useless paper. Their power is a cheap spell. They always have known that once
people are aware of the trick, they are done. They are afraid of elevated souls. They are
afraid of the awakened. They are terrified of the big red pill that is coming for the masses. Game over.
Technological superiority is a weapon and the USA know how to use it.
Notable quotes:
"... Made in China 2025 is the Chinese government's 10-year plan to update the country's 10 high-tech manufacturing industries, which include information technology, robotics, aerospace, rail transport, and new-energy vehicles, among others. ..."
"... Without U.S. semis, China will not be able to process the technology necessary to push forward the Made in China 2025 program. "American chips in many ways form the backbone of China's tech economy," Shah said. ..."
"... The Trump Administration's tariffs on Chinese goods were intended to severely disrupt the Chinese tech-advancement initiative. But Shah says that making U.S. chips more expensive for China could have consequences for the U.S. as well. ..."
"... "Over 50% of Chinese semiconductor consumption is supplied by U.S. firms In 2017, China consumed $138bn in integrated circuits (ICs), of which it only produced $18.5bn domestically, implying China imported $120bn of semis in 2017, up from $98bn in 2016 and $73bn in 2012." ..."
"... If the two leaders are unable to come to some sort of trade resolution at the meeting, U.S. tariffs on over $200 billion worth of Chinese goods will increase from 10% to 25% on January 1, 2019. ..."
"... While US has the upper hand on semis, a trade embargo on semis will (1) slows down China's move towards achieving Made in China 2025, (2) at the same time give China the impetus to rush ahead will all resources available to achieve the originally omitted goal of being self-sufficient in tech skills and technology, and (3) seriously hurt companies like Intel, AMD, Micron, and Qualcom as a huge percentage of their businesses are with China, and with that portion of their business gone, all these companies will end up in a loss and without the needed financial resources to invest into new technology in the near future. ..."
As trade tensions run hot between the U.S. and China, President Trump might have one key advantage in the trade war, according
to Nomura.
Analyst Romit Shah explained that China's dependence on U.S.-made advanced microchips could give Trump the upper hand.
"We believe that as China-U.S. tensions escalate, U.S. semiconductors give Washington a strong hand because the core components
of Made in China 2025 (AI, smart factories, 5G, bigdata and full self-driving electric vehicles) can't happen without advanced microchips
from the U.S.," Shah said in a note to clients.
BEIJING, CHINA – NOVEMBER 9, 2017: US President Donald Trump (L) and China's President Xi Jinping shake hands at a press conference
following their meeting at the Great Hall of the People in Beijing. Artyom Ivanov/TASS (Photo by Artyom Ivanov\TASS via Getty Images)
Made in China 2025 is the Chinese government's 10-year plan to update the country's 10 high-tech manufacturing industries, which
include information technology, robotics, aerospace, rail transport, and new-energy vehicles, among others.
One of Made in China 2025's main goals is to become semiconductor self sufficient. China hopes that at least 40% of the semiconductors
used in China will be made locally by 2020, and at least 70% by 2025. "Made in China 2025 made abundantly clear China's commitment
to semiconductor self-sufficiency. Made in China 2025 will upgrade multiple facets of the Chinese economy," Shah said.
According to Nomura's estimates, China is currently about 3 to 5 years behind the U.S. in dynamic random-access memory (DRAM)
chip production. However, Shah explained that if the trade war persists, the consequences could set Chinese chip production behind
by 5 to 15 years.
Without U.S. semis, China will not be able to process the technology necessary to push forward the Made in China 2025 program.
"American chips in many ways form the backbone of China's tech economy," Shah said.
Consequences for U.S.
The Trump Administration's tariffs on Chinese goods were intended to severely disrupt the Chinese tech-advancement initiative.
But Shah says that making U.S. chips more expensive for China could have consequences for the U.S. as well.
One concern centers around intellectual property theft. The Department of Justice (DOJ) has been working hard to punish China
for allegedly attempting to commit espionage. For example, the DOJ believes China was attempting to spy on the U.S. through Huawei
and asked U.S. allies to drop
the Chinese tech equipment maker.
However, while many U.S. chipmakers, such as Advanced Micro Devices (
AMD ), Qualcomm (
QCOM ) and Micron (
MU ), expressed gratitude that the DOJ was intervening
to prevent intellectual property theft, the companies are also concerned that it could spark retaliation from their Chinese business
partners and result in loss of access to the Chinese market. "Joint ventures, IP sharing agreements and manufacturing partnerships
are the price of admission into China, and thus far, companies are playing ball," Shah explained.
Shah essentially calls the Chinese tariffs a double-edged sword. While tariffs will hurt the Chinese if they can't have access
to freely source U.S. chips, it could also hurt U.S. chipmakers if they lose their business in China. According to Shah's research,
"Over 50% of Chinese semiconductor consumption is supplied by U.S. firms In 2017, China consumed $138bn in integrated
circuits (ICs), of which it only produced $18.5bn domestically, implying China imported $120bn of semis in 2017, up from $98bn in 2016 and $73bn
in 2012."
Trump
and China's President Xi Jinping are scheduled to meet at the G20 summit in Buenos Aires, Argentina, on Thursday for a two-day
meeting. If the two leaders are unable to come to some sort of trade resolution at the meeting, U.S. tariffs on over $200 billion
worth of Chinese goods will increase from 10% to 25% on January 1, 2019.
"China could source equipment from Europe and Japan; however, we believe there are certain mission-critical tools that can only
be purchased from the U.S. We believe that U.S.-China trade is the biggest theme for U.S. semis and equipment stocks in 2019. Made
in China 2025 can't happen without U.S. semis, and U.S. semis can't grow without China. We hope this backdrop drives resolution,"
Shah said.
Heidi Chung is a reporter at Yahoo Finance. Follow her on Twitter:
@heidi_chung .
R
While US has the upper hand on semis, a trade
embargo on semis will (1) slows down China's move towards achieving Made in China 2025, (2) at the same time give China the impetus
to rush ahead will all resources available to achieve the originally omitted goal of being self-sufficient in tech skills and
technology, and (3) seriously hurt companies like Intel, AMD, Micron, and Qualcom as a huge percentage of their businesses are
with China, and with that portion of their business gone, all these companies will end up in a loss and without the needed financial
resources to invest into new technology in the near future.
Apart from semis, China holds the throat of the US in the supply of
rare earth (used in semis, military weaponry, ans astronomical), as well as antibiotics..
This is a classic, textbook example of financial astrology... You probably should read it in full to appreciate the depth of junk
science here. But this is financial casino my friends, and they try to entice you with naked girls and drinks...
A gain in January has foretold an annual gain 87 percent of the time with only 9 major errors going back to 1950, according
to the Stock Trader's Almanac.
The S&P 500 was up 7.9 percent in January, its best performance for the first month of the year since 1987.
Some market pros are skeptical of the January barometer, but Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac, says
it makes sense because that's when Wall Street expectations are reset for the year.
Stocks had their best January gains in more than 30 years, and that should mean 2019 will be a pretty good year for the
market.
That's what the widely watched January barometer tells you - as goes January, so goes the year. According to Stock Trader's Almanac,
going back to 1950, that metric of January's performance predicting the year has worked 87 percent of the time with only nine major
errors, through 2017. In the years January was positive, going back to 1945, the market ended higher 83 percent of the time, according
to CFRA.
But the indicator also signaled a positive year last year, and the market suffered an unusual late-year sell-off, wiping out all
of the gains. The S&P 500 ended 2018 down 6.6 percent, despite rising 5.6 percent in January. But the S&P also defied history with
a terrible December decline of 9.6 percent , the biggest loss for the final month of the year since 1931.
This January, the S&P 500 was up 7.9 percent. The best January performance since 1987, when it rose 13.2 percent. It was its best
overall month since October 2015.
Some market pros worry the sharp snapback in stocks since the late December low means January could be stealing the gains from the
rest of the year. Some also believe there could be another test at lower levels in the not too distant future. Yet, Wall Street forecasters
have a median target of 2,950 for the S&P 500 at year end, a big leap from the current 2,704.
"I'm still struck between the contrast of a year ago and now," said James Paulsen, chief investment strategist at Leuthhold Group.
"We came in last year with nothing but optimism. At this point last year, we had synchronized global growth, confidence had spiked
to record post-war highs, and everyone knew we had this steroid-induced earnings boost coming. The thought was how could stocks lose,
and of course they did."
The market has sprung back from December's low, with the S&P gaining 15 percent since Dec. 26.
"This year, we came in with nothing but bad news - the economy was slowing down. ... The rest of the world is slowing. We have trade
wars. We have the shutdown, and analysts are revising earnings lower," Paulsen added. "We're worried about a recession and a bear
market. It's strikingly different, and yet it's kind of like how can stocks win, but they are and I think they will."
Strategists also point to the differences in the way the market traded in each January. This January has been full of volatile swings,
with ultimately larger gains than losses. Last year, the market was at the end of a long smooth glide path higher.
Last year didn't work
Stocks did well through most of January 2018, but by the end of the month, a correction started. "On January 30, in 2018, it was
the first 1 percent decline in 112 days. That was basically the start of the fall off the cliff. In terms of percent gains, this
January is similar to last, but in terms of where we've come from, it's very different. That was one of the calmest advances in history,"
said Frank Cappelleri, executive director at Instinet.
Cappelleri said it's important to put this year's market move in context, when considering the January barometer. "You have one of
the biggest snapbacks after a very bad December, so the odds were in the market's favor to do better than that. I think maybe you
have to look where we are now. You're up 15, 20 percent from the low depending on where you look. Are we going to go up that much
more for the rest of the year?" he said.
Paulsen sees the gains continuing, after a possible pause. "I think it's going to continue to be a fairly good year, and I think
we probably go up and get close to the highs or 3,000 on the S&P, and I'm not expecting hardly anything on the economy, and earnings
are going to be weak, if not flat or maybe down," Paulsen said.
He said the slowing economy and a potential U.S.-China trade deal could push the dollar down and that would be a positive for stocks.
At the same time, the Fed has paused in interest rate hikes and may even stop its balance sheet unwind.
Jeff Hirsch, editor-in-chief of the Stock Trader's Almanac, said there's another set of statistics that are in the market's favor
for a positive 2019, though they also failed last year. He said for the years when the S&P 500 was positive in the first five days
of the year, plus gained during the Santa rally period, and was up for the month of January, the S&P 500 had a positive year 27 out
of 30 times. It also had an average gain of 17.1 percent in those years, since 1950.
Nick 29 minutes ago
Job growth is solid. Unemployment remains near all time lows even while labor force participation increases. Wage growth outpaced
inflation last year. The economy is humming right along...its just the liberal media wants to bombard us with articles claiming
the Trump recession is imminent.
I'm surprised they actually published an article sayings its going to be a good year.
Parade of eminent astrologists ;-) Those financial prostitutes of casino capitlism, aka financial analysts most often are wrong
year after year, but still have a solid coverage by the neoliberal media due to the shire wieght of the companies they represent. This
bets are not connected with some kind of possible financial loss so they just talking up this firms portfolio, which of course is heavily
tilted in favor of stocks. God even Vanguard retirement 2015 fund has 40% in stock, while formula 100-age would give you less then 35%.
If this is bullish bias I do not know what is. Of course, they play with "other people money" and commissions are everything...
Notable quotes:
"... Their guesses about a great market in 2018 was kind of a miss. But they only had like 340 days so far. They still have 25 days left to turn in around. ..."
"... These guys are seldom right. I've been tracking these predictions more closely since 2014, usually 12-15 of the large financial institutions. Last year's average consensus was the SP at 2874. We closed Tuesday (Dec 4) at 2700. ..."
"... The average of the figures cited in the article is 3068. I think that is wishful thinking considering the slow downs in many sectors, slowing GDP and a flattening yield curve. ..."
"... With regard to upside potential, these all sound wildly optimistic to me. Ten years of printing money out of thin air and exploding deficits does not a future robust economy make, IMO. ..."
"... They cannot say 2500 cause people will not invest (and no commissions); they have to say equal or higher than today. To me it is screaming between the lines the index will hit 2500. ..."
"... So all of them predict the S&P will be higher then it is today even though many are saying we are already in a Bear Market...these people only make money if the market goes up so don't trust them! ..."
Morgan Stanley (Target: 2,750; EPS: $176) -- Beware tightening financial conditions and decelerating growth. (Price
target as of December 17)
Bank of America (Target: 2,900; EPS: $170) -- 'Wildcards' will make for more volatility. (Price target as of November
20)
Jefferies (Target: 2,900; EPS: $173) -- It's a 'mature, not end of, cycle.' (Price target as of December 9)
Oppenheimer (Target: 2,960; EPS: $175) -- Negative sentiment is 'setting the stage for upward surprises' (Price target
as of December 31)
Goldman Sachs (Target: 3,000; EPS: $173) -- Get defensive. (Price target as of December 14)
David
Kostin, chief equity strategist at Goldman Sachs, has a main message for investors going into 2019: Start getting defensive.
Barclays (Target 3,000; EPS $176) -- Growth will revert to trend. (Price target as of November 19)
Wells Fargo Securities (Target: 3,079*; EPS: $173) -- Sell-off will create 'double-digit opportunity' (*Note: Harvey
reduced his price target for 2019 to 2,665 and expected EPS to $166 as of December 21)
Citi (Target: 3,100; EPS: $172.50) -- Bearish sentiment makes for bullish outcomes. (*Levkovich
reduced his S&P 500 price
target for the year-end 2019 to 2,850 as of December 31, 2018)
JP Morgan (Target 3,100; EPS $178) -- A pain trade to the upside. (Price target as of December 7)
BMO (Target 3,150; EPS $174) -- Take a longer-term perspective. (Price target as of November 16)
UBS (Target: 3,200; EPS $175) -- A rough 2018 should make for a better 2019. (Price target as of November 13)
Deutsche Bank (Target: 3,250; EPS: $175) -- A while to "regain its prior peak." (Price target as of November 19)
Credit Suisse (Target: 3,350*; EPS $174) -- Bet on multiples expanding. (*Golub
reduced his S&P 500 price target
for the year-end 2019 to 2,925 as of December 18, 2018)
Joseph, 2 months
ago
So their best guess is a relatively flat to roughly a 20% gain...thanks for narrowing it down. Their guesses about a great market in 2018 was kind of a miss. But they only had like 340 days so far. They still have 25 days
left to turn in around.
M 2 months ago
These guys are seldom right. I've been tracking these predictions more closely since 2014, usually 12-15 of the large financial
institutions. Last year's average consensus was the SP at 2874. We closed Tuesday (Dec 4) at 2700.
We will need a 7% Santa Claus
rally to get there.
In 2017 the consensus was 2367; the year closed at 2673.
2016 was very close with a predicted average of 2223
and a close of 2238.
However, the market was far behind until the post-election rally.
The average of the figures cited in the article is 3068. I think that is wishful thinking considering the slow downs in
many sectors, slowing GDP and a flattening yield curve. I'll take 3068, but not going to bet a lot of money on it.
Omnipotent, 2 months ago
With regard to upside potential, these
all sound wildly optimistic to me. Ten years of printing money out of thin air and exploding deficits does not a future robust
economy make, IMO.
Linda, 2 months ago
Wall Street Strategists predicted G20 China meeting was the best news for markets and were looking for strong upside , market
tanked 800 points 2 days after. Enough said .
Gilad, 2 months ago
They cannot say 2500 cause people will not invest (and no commissions); they have to say equal or higher than today. To me it
is screaming between the lines the index will hit 2500.
PathFinder ofWhatis, 2 months ago
Not a single prediction says the market will finally have a Bear Market decline of 20%.... even after a 10 year Bull Market?
Is that called Group Think?
Todd2 months ago
So all of them predict the S&P will be higher then it is today even though many are saying we are already in a Bear Market...these
people only make money if the market goes up so don't trust them!
"... Big tech companies have bullied competitors and outrun ethical standards in an effort to "own the world," Jean Case, the CEO of the Case Foundation and a former senior executive at AOL, told Yahoo Finance this week. "Many of those big companies are crowding out new innovations of young upstarts. That's not healthy," she said, in response to a question about Google and Facebook. ..."
Big tech companies have bullied competitors and outrun ethical standards in an
effort to "own the world," Jean Case, the CEO of the Case Foundation and a former
senior executive at AOL, told Yahoo Finance this week.
"Many of those big companies are crowding out new innovations of young upstarts.
That's not healthy," she said, in response to a question about Google and
Facebook.
"On the technology side, look, things have changed so fast," Case said. "I think
we just haven't kept pace with some of the ethics policies and frameworks that we
need to put around this stuff...used by millions of millions before thought is
given to implications."
Case made the comments in a conversation that aired on Yahoo Finance on Thursday
at 5 p.m. EST in an episode of "
Influencers
with Andy Serwer
," a weekly interview series with leaders in business,
politics, and entertainment. In addition to her comments on big tech, Case
explained why a woman can be elected president, what National Geographic has done
to thrive amid media industry tumult, and how it felt at AOL in the heady early
days of the internet.
"... In the meantime, the strategy for oil and gas executives to appease investors is to focus on "quick cash, quarterly payouts and fast talk," Sanzillo says. "Either way the stocks lack a long-term value rationale." ..."
"... Meanwhile, the Wall Street Journal reports that the U.S. shale industry has been over-hyping the production potential from their wells. The WSJ compared well-productivity estimates from shale companies to those from third parties. After looking at the production data at thousands of wells and how much oil and gas those wells were on track to produce over the course of their lifespans, the WSJ found that company forecasts seemed to be misleading. ..."
"... Schlumberger, for instance, has reported that secondary shale wells near older wells in West Texas have been 30 percent less productive than the initial wells, the WSJ found. Also, many shale companies used data from their best wells and extrapolated forward, projecting enormous growth numbers that have not panned out. ..."
Of course, that is largely just a reflection of the sharp decline in oil prices. But the share prices of most oil and gas companies
are also largely based on oil price movements. So, the steep slide in oil prices in the final two months of 2018 led to disaster
for investors in energy stocks.
"The stock market went to hell in December. And when it got there, it found that the energy sector had already moved in, signed
a lease and decorated the place," Tom Sanzillo, Director of Finance at the Institute for Energy Economics and Financial Analysis
(IEEFA), wrote in a
commentary
.
The energy sector was at or near the bottom of the S&P 500 for the second year in a row, Sanzillo pointed out. And that was true
even within segments of the oil and gas industry. For instance, companies specializing in hydraulic fracturing fell by 30 percent,
while oil and gas supply companies lost 40 percent. "The fracking boom has produced a lot of oil and gas, but not much profit," Sanzillo
argued.
Looking forward, there are even larger hurdles, especially in the medium- to long-term. Oil demand growth is flat in developed
countries and slowing beginning to slow in China and elsewhere. The EV revolution is just getting started.
The last great hope for the oil industry is to pile into
petrochemicals
, as oil demand for transportation is headed for a peak. But profits in that sector could also prove elusive. "The industry's rush
to invest in petrochemicals to maintain demand for oil and gas is likely to continue, but the profit potential in this sector is
more limited than oil and gas exploration, and is likely to keep the energy sector at or near the bottom of the S&P 500," Sanzillo
concluded.
In the meantime, the strategy for oil and gas executives to appease investors is to focus on "quick cash, quarterly payouts
and fast talk," Sanzillo says. "Either way the stocks lack a long-term value rationale."
Meanwhile, the Wall Street Journal reports that the U.S. shale industry has been over-hyping the production potential from their
wells. The WSJ compared well-productivity estimates from shale companies to those from third parties. After looking at the production
data at thousands of wells and how much oil and gas those wells were on track to produce over the course of their lifespans, the
WSJ found that company forecasts seemed to be misleading.
"Two-thirds of projections made by the fracking companies between 2014 and 2017 in America's four hottest drilling regions appear
to have been overly optimistic, according to the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins
in Texas and North Dakota," reporters for the
WSJ wrote . "Collectively, the companies that made projections are on track to pump nearly 10% less oil and gas than they forecast
for those areas, according to the analysis of data from Rystad Energy AS, an energy consulting firm."
Schlumberger, for instance, has reported that secondary shale wells near older wells in West Texas have been 30 percent less
productive than the initial wells, the WSJ found. Also, many shale companies used data from their best wells and extrapolated forward,
projecting enormous growth numbers that have not panned out.
The upshot is that shale companies will have to step up spending in order to hit the promised production targets. However, so
many of them have struggled to turn a profit, and the recent downturn in oil prices has put even more pressure on them to rein in
costs.
That raises questions about the production potential not just from individual shale companies, but also from the U.S. as a whole.
"... The Trump administration's $1.5 trillion in tax cuts appears to have not made any major impact on businesses' capital investment or hiring plans, according to a new survey. ..."
"... "A large majority of respondents, 84%, indicate that one year after its passage, the corporate tax reform has not caused their firms to change hiring or investment plans," NABE President Kevin Swift said in a release. "Fewer firms increased capital spending compared to the October survey responses, but the cutback appeared to be concentrated more in structures than in information and communication technology investments." ..."
"... The lower tax rates did have an impact in the goods-producing sector, NABE found, with 50% of respondents reporting increased investments at their companies, and 20% saying they redirected hiring and investments to the US from abroad. ..."
The Trump administration's $1.5 trillion in tax cuts
appears to have not made any major impact on businesses' capital investment or hiring plans,
according to a new survey.
A quarterly poll from the National Association for Business Economics
published Monday found that some companies reported accelerating investments because of
lower corporate taxes, but a whopping 84% of respondents said they had not changed their plans.
That's up slightly from 81% in the previous survey published in October,
Reuters reports.
The White House had said the massive stimulus package, which cut the corporate tax rate to
21% from 35%, would boost business spending and job growth. The tax cuts that came into effect
in January 2018 were the biggest overhaul of the U.S. tax code in more than 30 years.
"A large majority of respondents, 84%, indicate that one year after its passage, the
corporate tax reform has not caused their firms to change hiring or investment plans," NABE
President Kevin Swift said in a release. "Fewer firms increased capital spending compared to
the October survey responses, but the cutback appeared to be concentrated more in structures
than in information and communication technology investments."
The lower tax rates did have an impact in the goods-producing sector, NABE found, with 50%
of respondents reporting increased investments at their companies, and 20% saying they
redirected hiring and investments to the US from abroad.
An analysis of how S&P 500 firms were reacting to the tax cut by researchers at the
University
of Michigan found that 4% of the sample said in Q1 of 2018 they would pay some of their tax
savings back to workers, and 22% mentioned in earnings conference calls they would increase
investment because of the tax cuts.
Though for small businesses, a new survey from the
National Federation of Independent Business released earlier this month found 61% of owners
reported making capital investments, unchanged from last month but 5 points higher than in
August. In December, 35% of small-business owners reported increasing employee compensation and
24% reported planned increases in the next few months.
Q: I am 62. Last year, I got a Social Security calculation showing that when I am
66-plus-years-old, I will receive $400-plus in Social Security benefits per month. Because of
my health, I started to work only three days a week. Will this reduce the amount of my
benefits? If l decide to quit my job, but not apply for my Social Security benefits until I'm
66-plus, will it reduce my monthly Social Security benefits?
A: Social Security calculates your monthly benefit by taking your highest 35 years of
earnings and your age, says Rick Fingerman, a managing partner with Financial Planning
Solutions. "So, if you stop working before your full retirement age or FRA, as you suggest, you
could see a lower benefit if you do not have 35 years of higher earnings already."
The same answer applies if you quit your job altogether at 62 and wait until 66 to collect,
he says.
One option, says Fingerman, could be if you were going to wait until your FRA and you have a
spouse that is already collecting on their own benefit. "You might receive a higher monthly
benefit on their record as you would get 50% of what they are receiving, which could be more
than the $400 a month under your own benefit," he says.
Of course, nobody can predict exactly how long they'll live -- the average man and woman
turning 65 today can expect to live until age 84 and 86, respectively, according to the Social
Security Administration. However, if you're facing health issues and don't expect to live that
long, it may be wiser to claim as early as possible rather than waiting until you have only a
few years left to enjoy your benefits.
... ... ...
Your
full retirement age (FRA) is the age at which you'll receive 100% of the benefits to which
you're entitled. So if your FRA is 67, and you wait until then to claim, you'd receive $1,300
per month. If you claim at 62, your benefits will be cut by 30% -- leaving you with just $910
per month.
... ... ...
If you wait until your FRA to claim, you'll receive 100% of your entitled benefits. But if
you wait beyond that age, you'll receive a bonus on top of your full amount to make up for all
the months you weren't receiving benefits at all. If your FRA is, say, 67 and you wait to claim
benefits until 70, you'll receive a 24% bonus over your full amount. So if you would have
received $1,300 per month by claiming at 67, you'd receive $1,612 by waiting until 70. (Keep in
mind, too, that this bonus maxes out at age 70, so there's no additional benefit to waiting to
claim until after that age.)
This can be a lifesaver for those who are
seriously behind on saving for retirement . If you're going to rely on Social Security to
make ends meet, it's in your best interest to maximize those benefits.
The amount you receive in benefits will be locked in once you claim. If you delay and
receive that boost, you'll continue receiving that boost for the rest of your life. Likewise,
if you claim early and your benefits are reduced, you'll receive those smaller checks for life.
So delaying can play out in your favor if you spend several decades in retirement -- the longer
you live, the more you will receive over your lifetime.
While delaying claiming benefits by a few years will result in bigger checks, you may not
actually receive more over a lifetime than you would if you had claimed earlier. Although
you're receiving more each month, that's just to make up for the years you weren't receiving
any benefits at all. If you don't reach your "break even age" -- or the age at which you've
received more over a lifetime by waiting to claim than you would have received by claiming
early -- it may not be worth it to wait.
For example, say your FRA is 67. If you claim early at 62, you'd receive $910 per month (or
$10,920 per year), and if you delay until 70, you'd receive $1,612 per month ($19,344 per
year). Here's how much you'd have received in total benefits at different ages:
Age at Death
Total Lifetime Benefits When Claiming at 62
Total Lifetime Benefits When Claiming at 70
70
$87,360
N/A
75
$141,960
$96,720
80
$196,560
$193,440
85
$251,160
$290,160
Source: Author's calculations
So in this scenario, you'll have to live past age 80 in order to "break even" and earn more
in lifetime benefits by delaying rather than claiming early. That can be a good thing if you
expect to live a long time, but if you don't expect to live past 80, it may be more
advantageous to claim earlier rather than later.
[Video] He views housing prices as a leading indicator, but he is not ready to forecast
slowdown yet. Yes Home
Sales Sank 6.4% in December . No, a recession isn't about to hit. The International Monetary
Fund still thinks the global economy will grow
a respectable 3.5% this year . By with the recent downgrade risks are higher and probably
highest since 2010.
As for 2019 he said we are always at risk entering the recession. He thinks that as in June
there will be the longest recession, that might be time for a recession including in housing
market. Inverted curve is a sign of such comes are coming.
Housing market is closing down and that can lead to recession, but he is not giving it
probability higher that 50 for this year. He also mentions that real interest rate of short end
there are not much above inflation.
Yale Economics Professor and Nobel Laureate Robert Shiller spoke with Yahoo Finance at
Davos, telling Editor-in-Chief Andy Serwer: "People are starting to think housing is expensive,
and that could lead to a turnaround and a drop in home prices. But I'm not ready to forecast
that yet."
Interesting discussion... He said tariff might not work as expected. He does not think
recession in probable in 2018 but later it might became inveitable
14% are functionally illiterate. Those people are at he bottom and will stay at the
bottom.
David Rubenstein, Co-Founder and Co-Executive Chairman of The Carlyle Group, sits down for a
one on one with Yahoo Finance editor-in-chief Andy Serwer at the World Economic Forum's annual
meeting in Davos, Switzerland. They discuss U.S.-China relations, Alexandria Ocasio-Cortez,
income inequality, the government shutdown, and more.
Speaking at a panel discussion on the first day of the
World Economic Forum (WEF) , Dalio said: "The US, Europe, China – all of those will
experience a greater level of slowing, probably a greater level of disappointment.
"I think there's a reasonable chance that by end of that, monetary policy and fiscal policy
will have to become easier relative to what is now discounted in the markets.
He added: " What scares me the most longer-term is that we have limitations to monetary
policy, which is our most valuable tool, at the same time as we have greater political and
social antagonism.
"So the next downturn worries me the most. There are a lot of parallels with the late
1930s.
"In 1929-1932 we had a debt crisis, and interest rates hit zero. Then there was a lot of
printing of money and purchases of financial assets which drives financial assets higher.
"It creates also a polarity, a populism and an antagonism. We also had at that time the
phenomenon of a rising power, like China, dealing with conflict with an existing power.
"These types of political issues are now very connected to economic issues in policy."
Asked at the summit
in Switzerland about increasing debt levels and signs of a global slowdown, Dalio said the
world economy was in the later stages of a short-term debt cycle.
He said there had been an "inappropriate, mistaken desire to tighten monetary policy at a
level that was faster than what the capital markets could handle."
He said: "W hen we cut corporate taxes and made interest rates low enough that it was
attractive enough to buy financial assets, particularly by companies having mergers and
acquisitions, that caused a lot of growth in corporate debt. And that growth in corporate debt
was used to finance the purchases. That is going to be less."
He suggested a slowdown could increase the link between politics and economic policy, and
predicted increased debate over a 70% income tax rate next year.
yesterday How does he on
one hand say that the Fed has little room to lower rates in case of a downturn and at the
same time blame the Fed for raising rates in order to prepare for such an eventuality?
Seriously, I'm asking. I'm not wagging my finger at him, because I sure don't pretend to
know more than he does. I asking somebody to further explain, because I don't get it. I'm
raising my hand in class. Anybody? 2 days ago democracy has become a slave
for finance - that is what an actual worry is brought in by fitting words - 26 people own
more than 4billion other people 2 days ago The rich have to pay higher
marginal tax rates. Period. "To those who are given much, much is expected." - Former NY
governor Elliott Spitzer. yesterday Of course. If we
had been unable to loosen monetary policy after Bush crashed the economy, we would have
been in the 2nd great depression. Trump is hurtling us towards the next economic disaster,
but without the tools to dig out. And his comments that the fed is raising interest rates
too fast is counter productive (like everything else Trump does). 2 days ago How He hedging when people
panic about his bias comment ??
Remember ... He is a Hedge Fund manager , makes money from panic and quick market moves
!
enough said ...
I
yesterday So what does all that mean for the economy and stock market? With a growing
disparity in distribution of income something needs to change before we start to see social
and political upheaval. The top 1% to 5% can't get 80% of all the wealth.
Billionaire Michael Dell, chief executive officer of the eponymous technology giant, rejected a suggestion by U.S. Representative
Alexandria Ocasio-Cortez of a 70-percent marginal tax rate on the wealthiest Americans.
"No, I'm not supportive of that," Dell said at a Davos panel on making digital globalization inclusive. "And I don't think it
will help the growth of the U.S. economy. Name a country where that's worked."
She may not be in Davos, but the New York representative's influence is being felt on the slopes of the Swiss Alps. Three weeks
after Ocasio-Cortez floated the idea in an interview on "60 Minutes" to raise the top marginal tax rate on Americans' income of more
than $10 million to 70 percent, it was a hot topic at the gathering of the global financial and political elite.
... ... ...
"My wife and I set up a foundation about 20 years ago and we would've contributed quite a bit more than a 70 percent tax rate
on my annual income," Dell said. "I feel much more comfortable with our ability as a private foundation to allocate those funds than
I do giving them to the government."
Erik Brynjolfsson, a professor at the Massachusetts Institute of Technology who was on the panel with Dell, said such a rate worked
in the U.S. after World War II. But other executives were opposed, including Salesforce.com Inc. Co-Chief Executive Officer Keith
Block.
... ... ...
Billionaire investor Ray Dalio suggested that the idea may have legs in the run-up to the U.S. presidential election. Discussing
the outlook for a slowing world economy Tuesday, Dalio said that next year will see "the beginning of thinking about politics and
how that might affect economic policy beyond. Something like the talk of the 70 percent income tax, for example, will play a bigger
role." He didn't mention Ocasio-Cortez by name.
Currently in the U.S., the top marginal tax rate is 37 percent, which takes effect on income of more than $510,300 for individuals
and $612,350 for married couples, according to the Tax Foundation.
The fortunes of a dozen attendees at the World Economic Forum in 2009 have soared by a combined $175 billion, a Bloomberg analysis
found. The same cannot be said for people on the other end of the social spectrum: A report from Oxfam on Monday revealed that the
poorest half of the world saw their wealth fall by 11 percent last year.
Credit Suisse came out today with a doozy of a 90-page "study" looking at global debt
levels. A shout out like this in the report does nothing to engender confidence in risk assets:
"Defaults are likely to rise in segments of the corporate debt markets once economic growth
weakens more markedly or if monetary policy tightens further; in such a situation, an unwinding
of positions could generate significant market stress due to illiquidity."
Credit Suisse Chairman Urs Rohner suggests on the first page of the report that a full-scale
global debt blowup is unlikely. But the overall scope of the report is bearish to stocks, trust
this writer who read the study in its entirety.
The International Monetary Fund just uncorked a sobering outlook on the global
economy and asset markets for the elite billionaires huddled up in Davos,
Switzerland for the World Economic Forum to ponder.
In its latest World Economic Update report, the IMF said Monday the global
economy is projected to grow at a meager 3.5% this year and only accelerate to
3.6% in 2020. The outlooks for 2019 and 2020 are 0.2 percentage point and 0.1
percentage point below the IMF's projections issued in October.
Hat tips to the ongoing U.S. trade war with China, tightening financial
conditions globally and more volatile risk asset markets.
The finer points:
The IMF pretty much had nothing good to say on
the outlooks for developed and emerging markets. Although that is nothing unusual
for the IMF -- who often takes a cautious stance on its outlooks for economies and
financial markets -- it may give many investors a wake up call amid a somewhat hot
start to the stock market in 2019.
Of note, U.S. growth is seen slowing to 2.5% in 2019 and dipping to 1.9% in 2020
at the hands of the unwinding of fiscal stimulus (see Trump tax cuts), higher
interest rates and the U.S. trade war with China. The IMF tossed the U.S. a bone
by noting the pace of expansion is above the country's estimated potential growth
in both years.
As for Europe, the IMF is now more bearish on growth compared to its October
outlook. Growth for emerging and developing Europe in 2019 is forecast to cool to
0.7% (from 3.8% in 2018) and then bounce to 2.4% in 2020. Previously, the IMF was
looking for growth of 2% and 2.8% in 2019 and 2020, respectively. Lackluster
growth in Italy, France and Germany as well as policy tightening in Turkey are
the main culprits for the IMF's European growth downgrade.
Growth in emerging and developing Asia is expected to drop from 6.5% in 2018 to
6.3% in 2019 and reach 6.4% in 2020, said the IMF. The IMF expects growth in
China to be 6.2% both in 2019 and 2020 versus 6.6% in 2018.
Interestingly, the IMF incorporates the impact of continued tariffs by the U.S.
on China and vice versa in its baseline forecast. In other words, the
organization does not expect there to be a trade truce between the countries on
their self-imposed March 1 deadline.
For the investors out there:
For those bulls that have returned
to beaten up stocks in January, the IMF does its best to squash the hopium
infiltrating your brains. "A range of catalyzing events in key systemic economies
could spark a broader deterioration in investor sentiment and a sudden, sharp
repricing of assets amid elevated debt burdens. Global growth would likely fall
short of the baseline projection if any such events were to materialize and
trigger a generalized risk-off episode," cautioned the IMF.
China's growth slowdown is also a risk that the IMF suggests investors don't
fully appreciate.
"As seen in 2015–16, concerns about the health of China's economy can trigger
abrupt, wide reaching sell-offs in financial and commodity markets that place its
trading partners, commodity exporters, and other emerging markets under
pressure," the IMF pointed out.
The bottom line:
The IMF isn't exactly super plugged into global
asset markets in the same vein as forecasters at Goldman Sachs and Morgan
Stanley. But their latest assessment of the global economy and risk markets
offers up a good counterbalance to the enthusiasm that has begun to creep back
into financial markets after the October 2017 through December 2018 rout.
Happy trading, folks.
Brian Sozzi is an editor-at-large at Yahoo Finance. Follow him on
Twitter
The stock market has staged a rebound in January, but Morgan Stanley sees a number of
bearish indicators. Indeed, they estimate that odds of the U.S. economy slipping into a
recession are now the highest since the financial crisis of 2008, and they project that the
S&P 500 Index (SPX) ultimately will settle back to a value of 2,400 in 2019, revisiting the
recent lows seen in December and more than 18% below the record high set in September 2018. "We
expect upcoming negative data will prove 2600-2650 [on the S&P 500] to be a good sale
before a proper retest of the December lows," Morgan Stanley says in the latest Weekly Warm-Up
report from their U.S. equity strategy team headed by Michael Wilson.
People who are kicked out of their IT jobs around 55 now has difficulties to find even
full-time McJobs... Only part time jobs are available. With the current round of layoff and job
freezes, neoliberalism in the USA is entering terminal phase, I think.
A survey by
Transamerica Center for Retirement Studies found on average Americans are retiring at age
63, with more than half indicating they retired sooner than they had planned. Among them, most
retired for health or employment-related reasons.
... ... ...
On April 3, 2018, Linda LaBarbera received the phone call that changed her life forever. "We
are outsourcing your work to India and your services are no longer needed, effective today,"
the voice on the other end of the phone line said.
... ... ...
"It's not like we are starving or don't have a home or anything like that," she says. "But
we did have other plans for before we retired and setting ourselves up a little better while we
both still had jobs."
... ... ...
Linda hasn't needed to dip into her 401(k) yet. She plans to start collecting Social
Security when she turns 70, which will give her the maximum benefit. To earn money and keep
busy, Linda has taken short-term contract editing jobs. She says she will only withdraw money
from her savings if something catastrophic happens. Her husband's salary is their main source
of income.
"I am used to going out and spending money on other people," she says. "We are very generous
with our family and friends who are not as well off as we are. So we take care of a lot of
people. We can't do that anymore. I can't go out and be frivolous anymore. I do have to look at
what we spend - what I spend."
Vogelbacher says cutting costs is essential when living in retirement, especially for those
on a fixed income. He suggests moving to a tax-friendly location if possible.
Kiplinger ranks Alaska, Wyoming, South Dakota, Mississippi, and Florida as the top five
tax-friendly states for retirees. If their health allows, Vogelbacher recommends getting a
part-time job. For those who own a home, he says paying off the mortgage is a smart financial
move.
... ... ...
Monica is one of the 44 percent of unmarried persons who rely on Social Security for 90
percent or more of their income. At the beginning of 2019, Monica and more than 62 million
Americans received a 2.8 percent cost
of living adjustment from Social Security. The increase is the largest since 2012.
With the Social Security hike, Monica's monthly check climbed $33. Unfortunately, the new
year also brought her a slight increase in what she pays for Medicare; along with a $500
property tax bill and the usual laundry list of monthly expenses.
"If you don't have much, the (Social Security) raise doesn't represent anything," she says
with a dry laugh. "But it's good to get it."
"... On Tuesday, Dimon and JPMorgan CFO Marianne Lake said they think the current outlook for growth is positive considering the consumer is still strong and healthy. ..."
During an interview with FOX Business earlier this month, Dimon told FOX Business' Maria Bartiromo that while it didn't look like
a recession was imminent, there will eventually be a meaningful slowdown.
"There will be a recession one day. So when people say, 'Is there going to be a recession?' Yeah, I don't know when it's going
to be, but there will be one and something will trigger it and it will be a little bit different than the last one," he said.
On Tuesday, Dimon and JPMorgan CFO Marianne Lake said they think the current outlook for growth is positive considering the
consumer is still strong and healthy.
For the fourth quarter, the largest U.S. bank by assets reported lower-than-expected profit despite gains from higher interest
rates and a bump within its loan sector. Losses were driven by market volatility, global growth worries and an ongoing trade war
between the U.S. and China.
Ryan S 8 hours ago
Yes the pending recession will cause many debt bubbles to burst and not just isolated primarily to banking and housing sector.
Think of what happens to the college/university system when student can no longer get loans for subsidized rates. A house
or vehicle can serve as an asset to be used as collateral to control rate ceilings. However, there is no collateral in Billy
and Genie's BA History degree. Good luck to all these ivory tower universities when your funding dries up and nobody can afford
your way overpriced programs. Anubis 9 hours ago I have read Americans
hold over 50 trillion in debt yet over half the population has only $1,000 in savings.
Bob 9 hours ago
Why is the US increasing deficit spending doing a good economy???? Reply
s 8 hours ago
Why does no one ask....why does higher education cost so much compared to other costs? The rate of increases in higher education
is never challenged by anyone. It is automatically assumed good. People are so blind and accepting.
Bart 7 hours ago
"At some point in the future we will have a recession and it will be a little bit different from the last recession." He is
paid $28,500,000.00 a year and sounds like my car mechanic.
buddhist 8 hours ago
Same like it was in 2007. Everything in the world was fine until Lehmann declared bankruptcy and hell started to break. May
be this time around it's Deutsche bank's turn.
Sam 5 hours ago
Signs of the economy slowing are everywhere. Company earnings are down and layoffs are increasingly more common. Min wage jobs
might be plentiful right now, but that will change in less than a year. Better hold on and you better keep your job. Next recession
will eliminate a lot of jobs. Those over 40 - forget it.
Chinas Love 8 hours ago
The next recession will occur when the US government hit over $25 Trillion in debt thus surpassing out total GDP thus making
the US bankrupt or Trump enacts the remaining $600 billion of the $820 Billion in tariffs on China and the rest of the world
because China trade deficit has grown under his watch to historic levels each each!
"... I watched Greg Hunter's show on this. Very disturbing because of it's currency. This backdoor off-the-books financing of whatever they want is as she says, the introduction of free fascism in the US. ..."
"... Deep State is REAL: https://www.youtube.com/watch?v=LLTzpDFGWjI ..."
Investment advisor and former Assistant Secretary of Housing Catherine Austin Fitts says it
looks like a "global recession is coming."
Is that going to cause the debt reset we've been hearing about for years? Fitts says, " Make
no mistake about it, there is no reason for the federal government to default or monkey with
any debt because they can literally print the currency..."
" The question is how do they make sure whatever they are printing really holds any kind
of store of value. I think the reason you are seeing them reengineer the federal bureaucracy
and financial transactions infrastructure is because they want much greater and tighter
control to do whatever they do, and that includes to continue to debase the currency. They
could do this (reset) entirely by debasing the currency...
What we are watching . . . is essentially a coup. We had a financial coup, and now we are
watching a legal coup to consolidate that financial coup. I would keep my eye on the
fundamental governance structure of the U.S. The important thing is not what they do. The
important thing is who controls no matter what they do. Now, we have created a mechanism for
them to control entirely in secret and create policies entirely in secret, including around
the back of a U.S. President... It's pirating by the 'just do it' method. I said to someone
the other day, what is it about secret money for secret private armies that you don 't
understand? "
$21 trillion in "missing money" at the DOD and HUD that was discovered by Dr. Mark Skidmore
and Catherine Austin Fitts in 2017 has now become a national security issue.
The federal government is not talking or answering questions, even though the DOD recently
failed its first ever audit. Fitts says, "This is basically an open running bailout..."
"Under this structure, you can transfer assets out of the federal government into private
ownership, and nobody will know and nobody can stop it. There is no oversight whatsoever. You
can't even know who is doing it. I'm telling you they just took the United States government,
they just changed the governance model by accounting policy to a fascist government. If you
are an investor, you don't know who owns those assets, and there is no evidence that you
do...
If the law says you have to produce audited financial statements and you refuse to do so
for 20 years, and then when somebody calls you on it, you proceed to change the accounting
laws that say you can now run secret books for all the agencies and over 100 related entities
."
In closing, Fitts says, "We cannot sit around and passively depend on a guy we elected
President..."
"The President cannot fix this. We need to fix this...
This is Main Street versus Wall Street. This is honest books versus dirty books. If you
want the United States in 10 years to resemble anything what it looked like 20 years ago, you
are going to have to do it, and there is no one else who can do it. You have to first get the
intelligence to know what is happening."
Join Greg Hunter as he goes One-on-One with Catherine Austin Fitts, Publisher of "The Solari Report."
"If the law says you have to produce audited financial statements and you refuse to do so
for 20 years, and then when somebody calls you on it, you proceed to change the accounting
laws that say you can now run secret books for all the agencies and over 100 related entities
."
She's referring to FASB standards, but those dont sound like a Constitutional Amendment to
me.
Article i, Section 9, paragraph 7: "No Money shall be drawn from the Treasury, but in
Consequence of Appropriations made by Law; and a regular Statement and Account of the
Receipts and Expenditures of all public Money shall be published from time to time."
Perhaps when $20+ trillion are involved, the Constitution be damned, I suppose. Or perhaps
the govt boys will claim the $20T didn't come from an appropriation but instead from their
own "industrious" activities...you know, like drug and gun running, and human trafficking
perhaps?
I watched Greg Hunter's show on this. Very disturbing because of it's currency. This
backdoor off-the-books financing of whatever they want is as she says, the introduction of
free fascism in the US.
One of the smartest women out there. Huge fan here. She almost got snuffed for blowing the
whistle at HUD (two sets of books and all). It's only recently that she's come out and said
that there's no such thing as the "money being lost". It's digital and 100% traceable.
Fitts is correct and her approach is sound. Money flows are traceable. The problem is more
complicated, though. As Enron proved and the Parmalat scandal cemented, the CRONY CUT is
fatal. The Auditors gave up fiduciary duties for FIDOCIARIES riches. They rolled over and played
dead.
They've already tried to off her. They broke her financially and she bounced back. She
made a lot of enemies but luckily she has some good friends in high places too. Watch a few
Vids about what they did to her after she blew the whistle at HUD. She's lucky to be above
ground.
Her extensive studies and reports that follow crack cocaine being dumped into various
areas the subsequent drug related violence and BS "WOD" response and then what happened to
the real estate, as in, WHO WINDS UP BUYING block after block after block of blighted
buildings is absolutely fascinating . She should have gotten more recognition for those
exhaustive studies.
There's a VERY LARGE HAND at work there...for profit.
"... However, despite the signs, Goldman Sachs assumes the indicators are wrong and that "recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just below 2,600. ..."
Confidence in continued economic growth has been waning. A huge majority of chief financial officers
around the world say a recession will happen by the end of 2020. Most voters think one will hit by the end
of this year.
Now the Goldman
Sachs economic research team says that the
market shows a roughly 50% chance of a recession over the next year, according to
Axios.
Goldman Sachs looked at two different measures: the yield curve slope and credit spreads.
The former refers to a graph of government bond interest rates versus the years attaining
maturity requires. In a growing economy, interest rates are higher the longer the investment
because investors have confidence in the future. A frequent sign of a recession is the
inversion of the slope, when investors are uncertain about the future, so are less willing to
bet on it.
Credit spreads compare the interest paid by government bonds, which are considered the
safest. Corporate bonds, which are riskier, of the same maturity have to offer higher interest
rates. As a recession approaches, credit spreads tend to expand, as investors are more worried
about companies defaulting on their debt.
However, despite the signs, Goldman Sachs assumes the indicators are wrong and that
"recession risk remains fairly low, in the neighborhood of 15% over the next year." The bank
has predicted that the S&P 500 will finish 2019 at 3,000, up from the current value just
below 2,600.
ABU DHABI (Reuters) - United Arab Emirates Energy Minister Suhail al-Mazrouei said on
Saturday the average oil price in 2018 was $70 a barrel.
The Organization of the Petroleum Exporting Countries and other leading global oil producers
led by Russia agreed in December to cut their combined oil output by 1.2 million barrels per
day to balance the oil market starting from January.
"Today we look at an average year of around $70 for Brent," Mazrouei told an industry news
conference in Abu Dhabi, adding that this level would help encourage global oil investments. An
energy ministry spokesman said the minister was referring to the average oil price in 2018.
I especially like the phase "This directive was particularly surprising in the context of
Canada's free market economy" That's really deep understanding of the situation ;-) . It is so
difficult to understand that Canada as a large oil producer, needs higher oil prices and it does
not make sense from the point of market economy to pollute the environment and at the same time
lose money in the process ?
Notable quotes:
"... Alberta's oil production has been cut 8.7 percent according to the mandate set by the province's government under Rachel Notley with the objective of cutting out around 325,000 barrels per day from the Canadian market. ..."
"... So far, the government-imposed productive caps have been extremely successful. In October Canadian oil prices were so depressed that the Canadian benchmark oil Western Canadian Select (WCS) was trading at a whopping $50 per barrel less than United States benchmark oil West Texas Intermediate (WTI). now, in the wake of production cuts, the price gap between WCS and WTI has diminished by a dramatic margin to a difference of just under $13 per barrel. ..."
"... The current production caps in Canada are only intended to last through the middle of this year, at which point Canadian oil companies will be permitted to decrease their cutbacks to just 95,000 barrels per day fewer than the numbers from November 2018's production rates. ..."
In an attempt to combat a ballooning oil glut and dramatically plummeting prices, the
premier of Alberta Rachel Notley introduced an unprecedented measure at the beginning of
December when she is mandating that oil companies in her province cut production. This
directive was particularly surprising in the context of Canada's free market economy, where oil
production is rarely so directly regulated.
Canada's recent oil glut woes are not due to a lack of demand, but rather a severe lack of
pipeline infrastructure. There is plenty of demand, and more than enough supply, but no way to
get the oil flowing where it needs to go. Canada's pipelines are running at maximum capacity,
storage facilities are filled to bursting, and the pipeline bottleneck has only continued to
worsen .
Now, in an effort to alleviate the struggling industry, Alberta's oil production has been
cut 8.7 percent according to the mandate set by the province's government under Rachel Notley
with the objective of cutting out around 325,000 barrels per day from the Canadian
market.
Even before the government stepped in, some private oil companies had already self-imposed
production caps in order to combat the ever-expanding glut and bottomed-out oil prices. Cenovus
Energy, Canadian Natural Resource, Devon Energy, Athabasca Oil, and others announced
curtailments that totaled around 140,000 barrels a day and Cenovus Energy, one of Canada's
major producers, even went so far as to plead with the government to impose production caps
late last year.
So far, the government-imposed productive caps have been extremely successful. In
October Canadian oil prices were so depressed that the Canadian benchmark oil Western Canadian
Select (WCS)
was trading at a whopping $50 per barrel less than United States benchmark oil West Texas
Intermediate (WTI). now, in the wake of production cuts, the price gap between WCS and WTI has
diminished by a dramatic margin to a difference of just under $13 per barrel.
While on the surface this would seem to be a roundly glowing review of the production caps
in Alberta, production cuts are not a long-term solution for Canada's oil glut woes. The
current production caps in Canada are only intended to last through the middle of this year, at
which point Canadian oil companies will be permitted to decrease their cutbacks to just 95,000
barrels per day fewer than the numbers from November 2018's production rates. The cuts are
a just a treatment, not a cure, for oversupply in Alberta. The problem needs to be addressed at
its source--the pipelines.
Unfortunately, the pipeline shortage in Alberta has no quick and easy fix. While there are
multiple major pipeline projects underway, the two largest, the Keystone XL pipeline and the
Trans Mountain pipeline, are stalled indefinitely thanks to legal woes and seemingly endless
litigation. The Enbridge Line 3 pipeline, intended to replace one of the region's already
existing pipelines, is currently under construction and
projected to be up and running by the end of the year, but will not go a long way toward
fixing the bottleneck.
Even if the Albertan government re-evaluates the present mid-2019 expiration date for the
current stricter production cuts, extending the production caps could have enduring negative
consequences in the region's oil industry. Keeping a long-term cap on production in Alberta
would potentially discourage investment in future production as well as in the infrastructure
the local industry so sorely needs. According to some
reporting , the cuts will not be able to control the gap between Canadian and U.S. oil for
much longer anyway, just another downside to drawing out what should be a short-term solution.
The government will need to weigh the possible outcomes very carefully as the expiration date
approaches, when the and the pipeline shortage is still a long way from being solved and the
price of oil remains dangerously variable.
(Bloomberg) -- Jeffrey Gundlach said yet again that the U.S. economy is gorging on debt.
Echoing many of the themes from his annual "Just Markets" webcast on Tuesday, Gundlach took
part in a round-table of 10 of Wall Street's smartest investors for Barron's. He highlighted
the dangers especially posed by the U.S. corporate bond market.
Prolific sales of junk bonds and significant growth in investment grade corporate debt,
coupled with the Federal Reserve weaning the market off quantitative easing, have resulted in
what the DoubleLine Capital LP boss called "an ocean of debt."
The investment manager countered President Donald Trump's claim that he's presiding over the
strongest economy ever. The growth is debt-based, he said.
Gundlach's forecast for real GDP expansion this year is just 0.5 percent. Citing numbers
spinning out of the USDebtClock.org website, he pointed out that the U.S.'s unfunded
liabilities are $122 trillion -- or six times GDP.
"I'm not looking for a terrible economy, but an artificially strong one, due to stimulus
spending," Gundlach told the panel. "We have floated incremental debt when we should be doing
the opposite if the economy is so strong."
Stock Bear
Gundlach is coming off another year in which his Total Return Bond Fund outperformed its
fixed-income peers. It returned 1.8 percent in 2018, the best performance among the 10 largest
actively managed U.S. bond funds, according to data compiled by Bloomberg.
Gundlach expects further declines in the U.S. stock market, which recently have steadied
after reeling for most of December since the Great Depression. Equities will be weak early in
the year and strengthen later in 2019, effectively a reversal of what happened last year, he
said.
"So now we are in a bear market, which isn't defined by me as stocks being down 20 percent.
A bear market is determined by the way stocks are acting," he said.
Rupal Bhansali, chief investment officer of International & Global Equities at Ariel
Investments, picked up on Gundlach's debt theme in the Barron's cover story. Citing General
Electric's woes, she urged investors to focus more on balance-sheet risk rather than whether a
company could beat or miss earnings. Companies with net cash are worth looking at, she
said.
One of the most sought-after visa programs in the U.S., the H-1B, could see some significant
changes in 2019, according
to President Trump , including a potential path to citizenship for recipients of the
non-immigrant visa.
The H-1B visa program allows U.S. employers to hire graduate-level workers in specialty occupations, like IT,
finance, accounting, architecture, engineering, science and medicine. Any job that requires
workers to have at least a bachelor's degree falls under the H-1B for specialty
occupations.
Each year, the U.S. Citizenship and Immigration Services (USCIS) allots about 85,000 of the
H-1B visas -- 65,000 for applicants with a bachelor's degree or equivalent, and 20,000 for
those with a master's degree or higher.
As of April 2017, when Trump signed an executive order -- "Buy American and Hire American"
-- it's become more difficult for U.S. companies to hire people via H-1B. It directs the
Department of Homeland Security to only grant the visas to the "most-skilled or highest-paid
beneficiaries."
Here's a look at the American companies (and industries) that benefited the most from the
program in 2017.
Cognizant: The IT services business had a whopping 3,194 H-1B initial petitions approved in
2017, the most of any U.S. company by almost 600.
Amazon: In 2017, the e-commerce behemoth hired 2,515 employees via
the H-1B visa program, according to data compiled by the
National Foundation for American Policy . That was about a 78 percent increase from 2016,
or 1,099 more employees.
Microsoft: Microsoft hired 1,479 workers through H-1B in 2017, the second most of U.S.
companies -- an increase in 334 employees from the year prior, or close to 29 percent.
IBM: In 2017, IBM employed about 1,231 workers through the H-1B visa program.
Intel: The California-based company employed 1,230 workers through H-1B in 2017, 200 more
workers -- or a 19 percent increase -- compared to 2016.
Google: The search engine giant had 1,213 H-1B initial petitions approved for fiscal year
2017, a 31 percent increase of about 289 from 2016.
"... You should have come here in the 90's to see a shock of the Doctrine to face social trauma of "PGR"(Huge National Farms) workers (it's the electorate of PiS (Law and Justice)), Miners near Wałbrzych, workers of textile industry near łódź bereft of everything from day to day (literally). Even the contemporary visit might ensure you quite a thrill if you knew where to look. Most of the firms that would easily survive if given some protectionism were hostily taken over by a foreigner capital and shut down with their production instantly replaced by imported goods. ..."
"... I do remember his speeches well. Form the spectrum offered by the Chicago boys he chosen the hardest option. It was Michnik and Kuroń who opted for less "Chicago" direction. But they were in minority. The prevailing Zeitgeist of the period caused words "social", "common" to be treated as a curse and socially stigmatizing. ..."
"... For a better understanding what went wrong you may take example of railroad privatization and compare it to the Czech way. ..."
"... the global elite perspective is that a quick way to rid the globe of the problems we face is to kill off enough people so that the problem dissipates -- war, fraud, nationalism/racism used to point the finger at the other (making it easier for people to harm one another or look the other way (Arendt). ..."
"... Efficiency requires a variety of gains, returns, profits and fairness. Otherwise it is simply theft. And when all is accounted for there might not be any profit to be had in the real world. Only in the minds of the neoliberals. Efficiency is something that should be accounted for carefully so that no vital systems are harmed. ..."
The level of the naivety of Barkley Rosser is astounding.
Poland was a political project, the showcase for the neoliberal project in Eastern Europe and the USSR. EU was pressed to provide
large subsidies, and that marionette complied. The commenter ilpalazzo (above) is right that there has been " a tremendous development
in real estate and infrastructure mostly funded by the EU that has been a serious engine of growth." Like in Baltics and Ukraine,
German, French, Swedish and other Western buyers were most interested in opening market for their products and getting rid of
local and xUSSR competitors (and this supported and promoted Russophobia). With very few exceptions. University education system
also was partially destroyed, but still fared better than most manufacturing industries.
I remember talking to one of the Polish professors of economics when I was in Poland around 1992. He said that no matter how
things will develop, the Polish economy will never be allowed to fail as the USA is interested in propelling it at all costs.
Still, they lost quite a bit of manufacturing: for example all shipbuilding, which is ironic as Lech Wałęsa and Solidarity emerged
in this industry.
Eventually, Poland emerged as the major US agent of influence within the EU (along with GB) with the adamant anti-Russian stance.
Which taking into account the real state of Polish manufacturing deprived of the major market is very questionable. Later by joining
sanctions, they lost Russian agricultural market (including all apple market in which they have a prominent position).
But they have a large gas pipeline on their territory, so I suspect that like Ukraine they make a lot of money via transit
fees simply due to geographic. So they parochially live off rent -- that why they bark so much at North Stream 2.
Polish elite is a real horror show, almost beyond redemption, and not only in economics. I do not remember, but I think it
was Churchill who said " Poland is a greedy hyena of Europe." This is as true now as it was before WWII.
Gosh! I used to actively fight the commies here in the 80's. But then with Balcerowicz I almost regretted it. as to your words:
"Balcerowicz himself at one point advocated something pretty much like what came to pass, a gradual privatization and
maintaining most of the sociaal safety net while advocating shock monetary policies to bring inflation under control."
– They derail.
You should have come here in the 90's to see a shock of the Doctrine to face social trauma of "PGR"(Huge National Farms)
workers (it's the electorate of PiS (Law and Justice)), Miners near Wałbrzych, workers of textile industry near łódź bereft of
everything from day to day (literally). Even the contemporary visit might ensure you quite a thrill if you knew where to look.
Most of the firms that would easily survive if given some protectionism were hostily taken over by a foreigner capital and shut
down with their production instantly replaced by imported goods.
I do remember his speeches well. Form the spectrum offered by the Chicago boys he chosen the hardest option. It was Michnik
and Kuroń who opted for less "Chicago" direction. But they were in minority. The prevailing Zeitgeist of the period caused words
"social", "common" to be treated as a curse and socially stigmatizing.
For a better understanding what went wrong you may take example of railroad privatization and compare it to the Czech way.
Don't believe the official statistics, we have a huge part of our working poors here. Their voice will never be heard as they
live in a subsistence economy and the've got neither time nor power to shout struggling to survive..
One wonders why there is a need to revisit Klein's thesis to debunk parts of it in this moment?
And the point is so small in this article about Poland, that one wonders why a James Madison prof of econ does not have more
time to look at significant problems everywhere instead of parse the progressive beast?
In my lifetime, I have not witnessed a time where more of the political machinery has drifted to the right -- caught in the
headlights of what Chris Hedges calls the illusion of democracy in the decay of capitalism.
Its important to not forget Gina Haspel's contribution here and torture -- how torture (economic, physical, and social shock)
is implicated, vaulting her to the head of our top Spy agency --
It reminds me of a recent article from Arundhati Roy's, that the global elite perspective is that a quick way to rid the
globe of the problems we face is to kill off enough people so that the problem dissipates -- war, fraud, nationalism/racism used
to point the finger at the other (making it easier for people to harm one another or look the other way (Arendt).
China is wisely looking at the efficiency of state owned enterprises with a reluctance to privatize them. It will become very
clear now that everyone is sobering up from the collapse of the USSR that neoliberal capitalist efficiency (profits) can only
be made by socializing costs and externalizing everything that reduces their bottom line with answers like "That ain't mine."
If even the doofuses at Davos are looking at various forms of "capital" (social, political, civil, environmental, etc.) they
have begun to mitigate their global catastrophe.
Efficiency requires a variety of gains, returns, profits and fairness. Otherwise it is simply theft. And when all is accounted
for there might not be any profit to be had in the real world. Only in the minds of the neoliberals. Efficiency is something that
should be accounted for carefully so that no vital systems are harmed.
Barkley insists on a left-right split for his analysis of political parties and their attachment to vague policy tendencies
and that insistence makes a mess of the central issue: why the rise of right-wing populism in a "successful" economy?
Naomi Klein's book is about how and why centrist neoliberals got control of policy. The rise of right-wing populism is often
supposed (see Mark Blyth) to be about the dissatisfaction bred by the long-term shortcomings of or blowback from neoliberal policy.
Barkley Rosser treats neoliberal policy as implicitly successful and, therefore, the reaction from the populist right appears
mysterious, something to investigate. His thesis regarding neoliberal success in Poland is predicated on policy being less severe,
less "shocky".
In his left-right division of Polish politics, the centrist neoliberals -- in the 21st century, Civic Platform -- seem to disappear
into the background even though I think they are still the second largest Party in Parliament, though some seem to think they
will sink in elections this year.
Electoral participation is another factor that receives little attention in this analysis. Politics is shaped in part by the
people who do NOT show up. And, in Poland that has sometimes been a lot of people, indeed.
Finally, there's the matter of the neoliberal straitjacket -- the flip-side of the shock in the one-two punch of "there's no
alternative". What the policy options for a Party representing the interests of the angry and dissatisfied? If you make policy
impossible for a party of the left, of course that breeds parties of the right. duh.
Likbez,
Bruce,
Blowback from the neoliberal policy is coming. I would consider the current situation in the USA as the starting point
of this "slow-motion collapse of the neoliberal garbage truck against the wall." Neoliberalism like Bolshevism in 1945 has
no future, only the past. That does not mean that will not limp forward in zombie (and pretty bloodthirsty ) stage for another
50 years. But it is doomed, notwithstanding recently staged revenge in countries like Ukraine, Argentina, and Brazil.
Excessive financialization is the Achilles' heel of neoliberalism. It inevitably distorts everything, blows the
asset bubble, which then pops. With each pop, the level of political support of neoliberalism shrinks. Hillary defeat would
have been impossible without 2008 events.
At least half of Americans now hate soft neoliberals of Democratic Party (Clinton wing of Bought by Wall Street technocrats),
as well as hard neoliberal of Republican Party, which created the " crisis of confidence" toward governing neoliberal elite in
countries like the USA, GB, and France. And that probably why the intelligence agencies became the prominent political players
and staged the color revolution against Trump (aka Russiagate ) in the USA.
The situation with the support of neoliberalism now is very different than in 1994 when Bill Clinton came to power.
Of course, as Otto von Bismarck once quipped "God has a special providence for fools, drunkards, and the United States of America."
and another turn of the technological spiral might well save the USA. But the danger of never-ending secular stagnation is substantial
and growing. This fact was admitted even by such dyed-in-the-wool neoliberals as Summers.
This illusion that advances in statistics gave neoliberal access to such fine-grained and timely economic data, that now it
is possible to regulated economy indirectly, by strictly monetary means is pure religious hubris. Milton Friedman would
now be laughed out the room if he tried to repeat his monetarist junk science now. Actually he himself discarded his monetarist
illusions before he died.
We probably need to the return of strong direct investments in the economy by the state and nationalization of some assets,
if we want to survive and compete with China. Australian politicians are already openly discussing this, we still lagging because
of "walking dead" neoliberals in Congress like Pelosi, Schumer, and company.
But we have another huge problem, which Australia and other countries (other than GB) do not have: neoliberalism in the USA
is a state religion which completely displaced Christianity (and is hostile to Christianity), so it might be that the lemming
will go off the cliff. I hope not.
The only thing that still keeps neoliberalism from being thrown out to the garbage bin of history is that it is unclear what
would the alternative. And that means that like in 1920th far-right nationalism and fascism have a fighting chance against
decadent neoliberal oligarchy.
Previously financial oligarchy was in many minds associated with Jewish bankers. Now people are more educated and probably
can hang from the lampposts Anglo-Saxon and bankers of other nationalities as well ;-)
I think that in some countries neoliberal oligarchs might soon feel very uncomfortable, much like Soros in Hungary.
As far as I understood the level of animosity and suppressed anger toward financial oligarchy and their stooges including some
professors in economics departments of the major universities might soon be approaching the level which existed in the Weimar
Republic. And as Lenin noted, " the ideas could become a material force." This true about anger as well.
There is probably an optimum size of financial sector after which it easily go out of control
and start grabbing political power. So it is important to prohibit banksters to participate in
political activity of any kind or in lobbing. Lobbing by financial sector should be criminalized.
They also should be prohibited from hired any for government employee for 10 years after he/she
left this/her position in government (revolving door style of corruption).
The other interesting point is that taxes can server as powerful inhibitor of destructive
behaviour of financial sector. So the fight for the level of taxation of particular social groups
is the most important political fight in modern society.
Also some actions of banksters sho</blockquote>uld be criminalized with high duration
of jail term, just to create negative incentives for certain types of behavior. For example
selling insurance without adequate capital to cover loses. Also important is to criminalize
changing more then a minimum fees (say, 0.25% a year) in 401K accounts as well as provided
insufficiently diversified 401k portfolios.
This was a fascinating piece, very readable for those of us with minimal financial
education. However, since this is such a good explainer for the layman, I think it would be
very beneficial to explain how big a difference 1% in fees makes for an investor over a
lifetime. I know personally when I used to compare funds the difference between 1 and 2% in
fees seemed negligible. But then I saw that fantastic PBS Frontline on this topic
and saw how much that 1% could cost me over a lifetime! I now have everything that I
personally manage in index funds!
You can't really argue with what has been said, and all (of us) involved in the sector
know it is massive rip off.
While a free market advocate, I think a first step would be to introduce meaningful fee
caps on all state promoted or mandated saving arrangements (eg ISAS, and Pensions), on the
grounds that the market is skewed by the government intervention that creates the glut of
forced buyers, and so to correct that imbalance the market (i.e. consumers) need protection
through fee caps. I'd say no more than 20 – 25bps should be permitted for all ISAS and
pension savings (DC or DB). Individual wealthy investors (investments of more than say
£5m?) can pay what they like.
>>The job of the finance sector is simply to manage existing resources. It creates
nothing.
This is a dubious assertion, but you clearly believe it. How then, can you in good
conscience, charge 1.25% (plus indirect costs for the funds you hold in client portfolios) to
manage people's money when you yourself admit you are adding no value?
(source: http://strubelim.com/wp/our-funds/ar-fund/
)
There are 6000 publicly traded companies. Some of them will have rising stock prices, some
falling. If a money manager can steer you to the rising ones, he is doing something of value.
It doesn't mean he created anything physical that didn't exist before. He's doing a service
for you that would otherwise have taken you some time and effort to do, and that's what you
pay for.
Yes, it's a different definition of value. The growth of financial services has been
outpacing the growth of other sectors to a monstrous scale, and that makes this distinction
important. It signals a kind of corruption that can only mean high inflation and decoupling
money from economic output.
I don't follow. How is financial services different from any other kind of services, in
the impact on inflation? Why not also actors, barbers, or any other service profession?
The growth of the financial sector might be explained by the fact that it is the industry
most able to exploit computers, and the first to do so on a large scale.
The corruption is, I think, a separate issue that is present whenever other people's money
is involved. Financial services and government are simply more involved that way than most
other industries, and have been all along, dating to long before the recent growth.
Corruption is not impossible in any industry, just more attractive when the numbers are
larger.
Corruption is never a separate in ANY corporate activity. The TAX CODE treats the wealth
of the .01% radically different than Income from Labor, because all Taxes on Capital Gains
are deferred until taken and are not TAXED as ordinary income. The TAX CODE is responsible
for the corruption of our government because it has put real POWER, the Power of Wealth in
the hands of the .01%, to buy whatever it wants, while labor and the poor spend everything
they earn or are given , every single year to survive in a economic culture designed for the
benefit of the .01%, something no one will write about!
Change the TAX CODE and the Corruption of Society will end!
Barbers and actors being paid for their labor do not have the same impact on inflation as
a bank giving out loans and consumer credit at interest. It's not equivalent at all.
Corruption in financial industries is what this article is discussing. If it's a separate
issue, I'm confused as to the point of talking about this at all!
No, I wasn't, though I have heard that. My theory of markets, and human group behavior in
general, is a statistical approach. There are averages, distributions, and temporary
equilibriums, but the interesting parts are the outliers. I guess that is more of a quantum
flavor than Newtonian. Over time, economies behave cyclically. Much of nature and human group
behavior is cyclical.
"This argument hinges on everyone that purchases these services knowing their true
value."
In a literal sense, you are correct, it is an imperfect measure of value. However, I think
it is far and away the most reliable one we have as value is extremely subjective. I don't
think it is right or prudent for third, non cost bearing parties to preempt decisions made by
consenting adults, rather, I would accord them the dignity of free choice. There are many
things that consumers purchase that I do not understand, why anyone would pay a premium for a
fast car seems like a waste of money to me, for example. Why anyone would pay money to golf,
not to mention the huge cost in terms of time it takes to get through 18 holes, seems like a
waste of money to me. These are things that make no sense to me because I do not see the
value there. But, I recognize that people have various tastes and preferences, and I respect
that and presume that individuals know themselves and their own tastes and preferences better
than I (or someone else) does. Therefore, when someone values something that I do not
understand, I tend to believe it is a result of a difference in preference, rather than they
are too dumb to figure out what they like, or that they are "tricked" into buying something
and hence need protection delivered by those who fancy themselves as enlightened enough to
see the real truth. Nothing about this is unique to the financial industry, by the way.
"Countless services and products we rely on were funded by taxes to make them profitable.
They are "worthwhile" but apparently not "profitable" enough to invest in. Making money and
creating value aren't the same thing. Ideally, everyone decides what is worthwhile."
Apparently not enough people decided these services and products were worthwhile, so
politicians decided they were worthwhile and used the force and power of government to get
them done. Substituting preferences of politicians, spending other people's money for those
of millions of individuals spending their own money does not seem like an efficient way to
allocate resources.
"... The following is a transcript of CounterPunch Radio – Episode 19 (originally aired September 21, 2015). Eric Draitser interviews Michael Hudson. ..."
"... The Troika and IMF doctrine of austerity and privatization ..."
ED: Thanks so much for coming on. As I mentioned already, the title of your book –
Killing the Host: How Financial Parasites and Debt Bondage Destroy the Global Economy –
is an apt metaphor. So parasitic finance capital is really what you're writing about. You
explain that it essentially survives by feeding off what we might call the real economy. Could
you draw out that analogy a little bit? What does that mean? How does finance behave like a
parasite toward the rest of the economy?
MH: Economists for the last 50 years have used the term "host economy" for a country that
lets in foreign investment. This term appears in most mainstream textbooks. A host implies a
parasite. The term parasitism has been applied to finance by Martin Luther and others, but
usually in the sense that you just talked about: simply taking something from the host.
But that's not how biological parasites work in nature. Biological parasitism is more
complex, and precisely for that reason it's a better and more sophisticated metaphor for
economics. The key is how a parasite takes over a host. It has enzymes that numb the host's
nervous system and brain. So if it stings or gets its claws into it, there's a soporific
anesthetic to block the host from realizing that it's being taken over. Then the parasite sends
enzymes into the brain. A parasite cannot take anything from the host unless it takes over the
brain.
The brain in modern economies is the government, the educational system, and the way that
governments and societies make their economic policy models of how to behave. In nature, the
parasite makes the host think that the free rider, the parasite, is its baby, part of its body,
to convince the host actually to protect the parasite over itself.
That's how the financial sector has taken over the economy. Its lobbyists and academic
advocates have persuaded governments and voters that they need to protect banks, and even need
to bail them out when they become overly predatory and face collapse. Governments and
politicians are persuaded to save banks instead of saving the economy, as if the economy can't
function without banks being left in private hands to do whatever they want, free of serious
regulation and even from prosecution when they commit fraud. This means saving creditors
– the One Percent – not the indebted 99 Percent.
It was not always this way. A century ago, two centuries ago, three centuries ago and all
the way back to the Bronze Age, almost every society has realized that the great destabilizing
force is finance – that is, debt. Debt grows exponentially, enabling creditors ultimately
to foreclose on the assets of debtors. Creditors end up reducing societies to debt bondage, as
when the Roman Empire ended in serfdom.
About a hundred years ago in America, John Bates Clark and other pro-financial ideologues
argued that finance is not external to the economy. It's not extraneous, it's part of the
economy, just like landlords are part of the economy. This means that if the financial sector
takes more revenue out of the economy as interest, fees or monopoly charges, it's because
finance is an inherent and vital part of the economy, adding to GDP, not merely siphoning it
off from producers to pay Wall Street and the One Percent. So our economic policy protects
finance as if it helps us grow, not siphons off our growth.
A year or two ago, Lloyd Blankfein of Goldman Sachs said that the reason Goldman Sachs'
managers are paid more than anybody else is because they're so productive. The question is,
productive of what? The National Income and Product Accounts (NIPA) say that everybody is
productive in proportion to the amount of money they make/take. It doesn't matter whether it's
extractive income or productive income. It doesn't matter whether it's by manufacturing
products or simply taking money from people, or simply by the fraud that Goldman Sachs,
Citigroup, Bank of America and others paid tens of millions of dollars in fines for committing.
Any way of earning income is considered to be as productive as any other way. This is a
parasite-friendly mentality, because it denies that there's any such thing as unearned income.
It denies that there's a free lunch. Milton Friedman got famous for promoting the idea that
there's no such thing as a free lunch, when Wall Street knows quite well that this is what the
economy is all about. It's all about how to get a free lunch, with risks picked up by the
government. No wonder they back economists who deny that there's any such thing!
ED: To get to the root of the issue, what's interesting to me about this analogy that we're
talking about is that we hear the term neoliberalism all the time. It is an ideology I that's
used to promote the environment within which this parasitic sort of finance capital can
operate. So could you talk a bit about the relationship between finance capital and
neoliberalism as its ideology.
MH: Today's vocabulary is what Orwell would call DoubleThink. If you're going to call
something anti-liberal and against what Adam Smith and John Stuart Mill and other classical
economists described as free markets, you pretend to be neoliberal. The focus of Smith, Mill,
Quesnay and the whole of 19th-century classical economics was to draw a distinction between
productive and unproductive labor – that is, between people who earn wages and profits,
and rentiers who, as Mill said, "get rich in their sleep." That is how he described landowners
receiving groundrent. It also describes the financial sector receiving interest and "capital"
gains.
The first thing the neoliberal Chicago School did when they took over Chile was to close
down every economics department in the country except the one they controlled at the Catholic
University. They started an assassination program of left wing professors, labor leaders and
politicians, and imposed neoliberalism by gunpoint. Their idea is you cannot have anti-labor,
deregulated "free markets" stripping away social protections and benefits unless you have
totalitarian control. You have to censor any idea that there's ever been an alternative, by
rewriting economic history to deny the progressive tax and regulatory reforms that Smith, Mill,
and other classical economists urged to free industrial capitalism from the surviving feudal
privileges of landlords and predatory finance.
This rewriting of the history of economic thought involves inverting the common vocabulary
that people use. So, the idea of the parasitism is to replace the meaning of everyday words and
vocabulary with their opposite. It's DoubleThink.
Democratic vs. oligarchic government and their respective economic doctrines
ED: I don't want to go too far off on a tangent, but you mentioned the example of Chile's 1973
coup and the assassination of Allende to impose the Pinochet dictatorship. That was a
Kissinger/Nixon operation as we know, but what's interesting about that is Chile was
transformed into a sort of experimental laboratory to impose the Chicago school economic model
of what we now would call neoliberalism. Later in our conversation I want to talk a bit about
some recent laboratories we have seen in Eastern Europe, and now in Southern Europe as well.
The important point about neoliberalism is the relationship between totalitarian government and
this form of economics.
MH: That's right. Neoliberals say they're against government, but what they're really
against is democratic government. The kind of governments they support are pre-referendum
Greece or post-coup Ukraine. As Germany's Wolfgang Schäuble said, "democracy doesn't
count." Neoliberals want the kind of government that will create gains for the banks, not
necessarily for se the economy at large. Such governments basically are oligarchic. Once high
finance takes over governments as a means of exploiting the 99 Percent, it's all for active
government policy – for itself.
Aristotle talked about this more than 2,000 years ago. He said that democracy is the stage
immediately proceeding oligarchy. All economies go through three stages repeating a cycle: from
democracy into oligarchy, and then the oligarchs make themselves hereditary. Today, Jeb Bush
wants to abolish the estate tax to help the emerging power elite make itself into a hereditary
aristocracy. Then, some of the aristocratic families will fight among themselves, and take the
public into their camp and promote democracy, so you have the cycle going all over again.
That's the kind of cycle we're having now, just as in ancient Athens. It's a transition from
democracy to oligarchy on its way to becoming an aristocracy of the power elite.
ED: I want to return to the book in a second but I have to interject that one particular
economist hasn't been mentioned yet: Karl Marx. It's an inversion of Marx as well, because
Marx's labor theory of value was that that value ultimately is derived from labor. Parasitic
finance capital is the opposite of that. It may increase prices without value.
MH: Correct, but I should point out that there's often a misinterpretation of the context in
which the labor theory of value was formulated and refined. The reason why Marx and the other
classical economists – William Petty, Smith, Mill and the others – talked about the
labor theory of value was to isolate that part of price that wasn't value. Their purpose was to
define economic rent as something that was not value. It was extraneous to production, and was
a free lunch – the element of price that is charged to consumers and others that has no
basis in labor, no basis in real cost, but is purely a monopoly price or return to privilege.
This was mainly a survival of the feudal epoch, above all of the landed aristocracy who were
the heirs of the military conquers, and also the financial sector of banking families and their
heirs.
The aim of the labor theory of value was to divide the economy between excessive price
gouging and labor. The objective of the classical economists was to bring prices in line with
value to prevent a free ride, to prevent monopolies, to prevent an absentee landlord class so
as to free society from the legacy of feudalism and the military conquests that carved up
Europe's land a thousand years ago and that still underlies our property relations.
The concept and theory of economic rent
ED: That's a great point, and it leads me into the next issue that I want to touch on. You've
mentioned the term already a number of times: the concept of economic rent. We all know rent in
terms of what we have to pay every month to the landlord, but we might not think about what it
means conceptually. It's one of the fabrics with which you've woven this book together. One of
the running themes, rent extraction, and its role in the development of what we've now termed
this parasitic relationship. So, explain for laymen what this means – rent extraction
– and how this concept evolved.
MH: To put the concept of economic rent in perspective, I should point out when I went to
get my PhD over a half a century ago, every university offering a graduate economics degree
taught the history of economic thought. That has now been erased from the curriculum. People
get mathematics instead, so they're unexposed to the concept of economic rent as unearned
income. It's a concept that has been turned on its head by "free market" ideologues who use
"rent seeking" mainly to characterize government bureaucrats taxing the private sector to
enhance their authority – not free lunchers seeking to untax their unearned income. Or,
neoclassical economists define rent as "imperfect competition" (as if their myth of "perfect
competition" really existed) stemming from "insufficient knowledge of the market," patents and
so forth.
Most rent theory was developed in England, and also in France. English practice is more
complex than America. The military conquers imposed a pure groundrent fee on the land, as
distinct from the building and improvements. So if you buy a house from a seller in England,
somebody else may own the land underneath it. You have to pay a separate rent for the land. The
landlord doesn't do anything at all to collect land rent, that's why they call them rentiers or
coupon clippers. In New York City, for example, Columbia University long owned the land
underneath Rockefeller Center. Finally they sold it to the Japanese, who lost their shirt. This
practice is a carry-over from the Norman Conquest and its absentee landlord class.
The word "rent" originally was French, for a government bond (rente). Owners received a
regular income every quarter or every year. A lot of bonds used to have coupons, and you would
clip off the coupon and collect your interest. It's passively earned income, that is, income
not actually earned by your own labor or enterprise. It's just a claim that society has to pay,
whether you're a government bond holder or whether you own land.
This concept of income without labor – but simply from privileges that had been made
hereditary – was extended to the ideas of monopolies like the East India Company and
other trade monopolies. They could produce or buy goods for, let's say, a dollar a unit, and
sell them for whatever the market will bear – say, $4.00. The markup is "empty pricing."
It's pure price gouging by a natural monopoly, like today's drug companies.
To prevent such price gouging and to keep economies competitive with low costs of living and
doing business, European kept the most important natural monopolies in the public domain: the
post office, the BBC and other state broadcasting companies, roads and basic transportation, as
well as early national airlines. European governments prevented monopoly rent by providing
basic infrastructure services at cost, or even at subsidized prices or freely in the case of
roads. The guiding idea is for public infrastructure – which you should think of as a
factor of production along with labor and capital – was to lower the cost of living and
doing business.
But since Margaret Thatcher led Britain down the road to debt peonage and rent serfdom by
privatizing this infrastructure, she and her emulators other countries turned them into
tollbooth economies. The resulting economic rent takes the form of a rise in prices to cover
interest, stock options, soaring executive salaries and underwriting fees. The economy ends up
being turned into a collection of tollbooths instead of factories. So, you can think of rent as
the "right" or special legal privilege to erect a tollbooth and say, "You can't get television
over your cable channel unless you pay us, and what we charge you is anything we can get from
you."
This price doesn't have any relation to what it costs to produce what they sell. Such
extortionate pricing is now sponsored by U.S. diplomacy, the World Bank, and what's called the
Washington Consensus forcing governments to privatize the public domain and create such
rent-extracting opportunities.
In Mexico, when they told it to be more "efficient" and privatize its telephone monopoly,
the government sold it to Carlos Slim, who became one of the richest people in the world by
making Mexico's phones among the highest priced in the world. The government provided an
opportunity for price gouging. Similar high-priced privatized phone systems plague the
neoliberalized post-Soviet economies. Classical economists viewed this as a kind of theft. The
French novelist Balzac wrote about this more clearly than most economists when he said that
every family fortune originates in a great theft. He added that this not only was undiscovered,
but has come taken for granted so naturally that it just doesn't matter.
If you look at the Forbes 100 or 500 lists of each nation's richest people, most made their
fortunes through insider dealing to obtain land, mineral rights or monopolies. If you look at
American history, early real estate fortunes were made by insiders bribing the British Colonial
governors. The railroad barrens bribed Congressmen and other public officials to let them
privatize the railroads and rip off the country. Frank Norris's The Octopus is a great novel
about this, and many Hollywood movies describe the kind of real estate and banking rip-offs
that made America what it is. The nation's power elite basically begun as robber barons, as
they did in England, France and other countries.
The difference, of course, is that in past centuries this was viewed as corrupt and a crime.
Today, neoliberal economists recommend it as the way to raise "productivity" and make countries
wealthier, as if it were not the road to neofeudal serfdom.
The Austrian School vs. government regulation and pro-labor policies
ED: I don't want to go too far off on a tangent because we have a lot to cover specific to your
book. But I heard an interesting story when I was doing a bit of my own research throughout the
years about the evolution of economic thought, and specifically the origins of the so-called
Austrian School of Economics – people like von Mises and von Hayek. In the early 20th
century they were essentially, as far as I could tell, creating an ideological framework in
which they could make theoretical arguments to justify exorbitant rent and make it seem almost
like a product of natural law – something akin to a phenomenon of nature.
MH: The key to the Austrian School is their hatred of labor and socialism. It saw the danger
of democratic government spreading to the Habsburg Empire, and it said, "The one thing we have
to stop is democracy. Their idea of a free market was one free of democracy and of democratic
government regulating and taxing wealthy rentiers. It was a short step to fighting in the
streets, using murder as a "persuader" for the particular kind of "free markets" they wanted
– a privatized Thatcherite deregulated kind. To the rentiers they said: "It's either our
freedom or that of labor."
Kari Polanyi-Levitt has recently written about how her father, Karl Polanyi, was confronted
with these right-wing Viennese. His doctrine was designed to rescue economics from this school,
which makes up a fake history of how economics and civilization originated.
One of the first Austrian's was Carl Menger in the 1870s. His "individualistic" theory about
the origins of money – without any role played by temples, palaces or other public
institutions – still governs Austrian economics. Just as Margaret Thatcher said, "There's
no such thing as society," the Austrians developed a picture of the economy without any
positive role for government. It was as if money were created by producers and merchants
bartering their output. This is a travesty of history. All ancient money was issued by temples
or public mints so as to guarantee standards of purity and weight. You can read Biblical and
Babylonian denunciation of merchants using false weights and measures so see why money had to
be public. The major trading areas were agora spaces in front of temples, which kept the
official weights and measures. And much exchange was between the community's families and the
public institutions.
Most important, money was brought into being not for trade (which was conducted mainly on
credit), but for paying debts. And most debts were owed to the temples and palaces for pubic
services or tribute. But to the Austrians, the idea was that anything the government does to
protect labor, consumers and society from rentiers and grabbers is deadweight overhead.
Above all, they opposed governments creating their own money, e.g. as the United States did
with its greenbacks in the Civil War. They wanted to privatize money creation in the hands of
commercial banks, so that they could receive interest on their privilege of credit creation and
also to determine the allocation of resources.
Today's neoliberals follow this Austrian tradition of viewing government as a burden,
instead of producing infrastructure free of rent extraction. As we just said in the previous
discussion, the greatest fortunes of our time have come from privatizing the public domain.
Obviously the government isn't just deadweight. But it is becoming prey to the financial
interests and the smashers and grabbers they have chosen to back.
ED: You're right, I agree 100%. You encounter this ideology even in the political
sociological realm like Joseph Schumpeter, or through the quasi-economic realm like von Hayek
in The Road to Serfdom.
MH: Its policy conclusion actually advocates neo-serfdom. Real serfdom was when families had
to pay all their income to the landlords as rent. Centuries of classical economists backed
democratic political reform of parliaments to roll back the landlords' power (and that of
bankers). But Hayek claimed that this rollback was the road to serfdom, not away from it. He
said democratic regulation and taxation of rentiers is serfdom. In reality, of course, it's the
antidote.
ED: It's the inversion you were talking about earlier. We're going to go into a break here
in a minute but before we do I want to touch on one other point that is important in the book,
again the book, Killing the Host: How Financial Parasites and Debt Bondage Destroyed the Global
Economy, available from CounterPunch – very important that people pick up this book.
MH: And from Amazon! You can get a hard copy for those who don't want to read on
computers.
Finance as the new mode of warfare
ED: Yes, and on amazon as well, thank you. This issue that I want to touch on before we go to
the break is debt. On this program a couple of months ago I had the journalist John Pilger. He
and I touched on debt specifically as a weapon, and how it is used as a weapon. You can see
this in the form of debt enslavement, if you want to call it that, in postcolonial Africa. You
see the same thing in Latin America where, Michael, I know you have a lot of experience in
Latin America in the last couple of decades. So let's talk a little bit, if we could, before we
go to the break, about debt as a weapon, because I think this is an important concept for
understanding what's happening now in Greece, and is really the framework through which we have
to understand what we would call 21st-century austerity.
MH: If you treat debt as a weapon, the basic idea is that finance is the new mode of
warfare. That's one of my chapters in the book. In the past, in order to take over a country's
land and its public domain, its basic infrastructure and its mineral resources, you had to have
a military invasion. But that's very expensive. And politically, almost no modern democracy can
afford a military invasion anymore.
So the objectives of the financial sector – of Wall Street, the City of London or
Frankfurt in Germany – is to obtain the land. You can look at what's happening in Greece.
What its creditors, the IMF and European Central Bank (ECB) want are the Greek islands, and
they want the gas rights in the Aegean Sea. They want whatever buildings and property there is,
including the museums.
Matters are not so much different in the private sector. If you can get a company or
individual into debt, you can strip away the assets they have when they can't pay. A
Hayek-style government would block society from protecting itself against such asset stripping.
Defending "property rights" of creditors, such "free market" ideology deprives the rest of the
economy – businesses, individuals and public agencies. It treats debt writedowns as the
road to serfdom, not the road away from debt dependency.
In antiquity, private individuals obtained labor services by making loans to families in
need, and obliging their servant girls, children or even wives to work off the loan in the form
of labor service. My Harvard-based archaeological group has published a series of five books
that I co-edited, most recently Labor in the
Ancient World . Creditors (often palace infrastructure managers or collectors) would get
people into bondage. When new Bronze Age rulers started their first full year on the throne, it
was customary to declare an amnesty to free bond servants and return them to their families,
and annul personal debts as well as to return whatever lands were forfeited. So in the Bronze
Age, debt serfdom and debt bondage was only temporary. The biblical Jubilee law was a literal
translation of Babylonian practice that went back two thousand years.
In America, in colonial times, sharpies (especially from Britain) would lend farmers money
that they knew the farmer couldn't pay, then they would foreclose just before the crops came
in. Right now you have corporate raiders, who are raiding whole companies by forcing them into
debt, and then smashing and grabbing. You now have the IMF, European Central Bank and
Washington Consensus taking over whole countries like Ukraine. The tactic is to purposely lend
them the money that clearly cannot be repaid, and say, "Oh you cannot pay? Well, we're not
going to take a loss. We have a solution." The solution is to sell off public enterprises, land
and natural resources. In Greece's case, 50 billion euros of its property, everything that it
has in the public sector. The country is to be sold off to foreigners (including domestic
oligarchs working out of their offshore accounts). Debt leverage is thus the way to achieve
what it took armies to win in times past.
ED: Exactly. One last point on that as well. I want to get your comment on and we see this
in post-colonial Africa, especially when the French and the British had to nominally give up
control of their colonies. You saw debt become an important tool to maintain hegemony within
their spheres of influence. Of course, asset stripping and seizing control, smashing and
grabbing was part of that. But also it is the debt servicing payments, it is the cycle of debt
repayment and taking new loans on top of original loans to service the original loans –
this process this cycle is also really an example of this debt servitude or debt bondage.
MH: That's correct, and mainstream economics denies any of this. It began with Ricardo,
who's brothers were major bankers at the time, and he himself was the major bank lobbyist in
England. Right after Greece won its independence from Turkey, the Ricardo brothers made a
rack-renting loan to Greece at far below par (that is, below the face value that Greece
committed itself to pay). Greece tried to pay over the next century, but the terms of the loan
ended up stripping and keeping it on the edge of bankruptcy well into the 20th century.
But Ricardo testified before Parliament that there could be no debt-servicing problem. Any
country, he said, could repay the debts automatically, because there is an automatic
stabilization mechanism that enables every country to be able to pay. This is the theory that
underlines Milton Friedman and the Chicago School of monetarism: the misleading idea that debt
cannot be a problem.
That's what's taught now in international trade and financial textbooks. It's false
pleading. It draws a fictitious "What If" picture of the world. When criticized, the authors of
these textbooks, like Paul Samuelson, say that it doesn't matter whether economic theory is
realistic or not. The judgment of whether an economic theory is scientific is simply whether it
is internally consistent. So you have these fictitious economists given Nobel Prizes for
promoting an inside out, upside down version of how the global economy actually works.
ED: One other thing that they no longer teach is what used to be called political economy.
The influence of the Chicago School, neoliberalism and monetarism has removed classical
political economy from academia, from the Canon if you will. Instead, as you said, it's all
about mathematics and formulas that treat economics like a natural science, when in fact it
really should be more of a historically grounded social science.
MH: The formulas that they teach don't have government in them,. If you have a theory that
everything is just an exchange, a trade, and that there isn't any government, then you have a
theory that has nothing to do with the real world. And if you assume that the environment
remains constant instead of using economics to guide public and national policy, you're using
economics for the opposite of what the classical economists did. Adam Smith, Mill, Marx, Veblen
– they all developed their economic theory to reform the world. The classical economists
were reformers. They wanted to free society from the legacy of feudalism – to get rid of
land rent, to take money creation and credit creation into the public domain. Whatever their
views, whether they were right wingers or left wingers, whether they were Christian socialists,
Ricardian socialists or Marxian socialists, all the capitalist theorists of the 19th century
called themselves socialists, because they saw capitalism as evolving into socialism.
But what you now have, since World War I, is a reaction against this, stripping away of the
idea that governments have a productive role to play. If government is not the director and
planner of the economy, then who is? It's the financial sector. It's Wall Street. So the
essence of neoliberalism that you were mentioning before, is indeed a doctrine of central
planning. It states that the central planning should be done by Wall Street, by the financial
sector.
The problem is, what is the objective of central planning by Wall Street? It's not to raise
living standards, and it's not to increase employment. It is to smash and grab. That is the
society we're in now.
A number of chapters of my book (I think five), describe how the Obama administration has
implemented this smash and grab, doing the exact opposite of what he promised voters. Obama has
implemented the Rubin-omics [Robert Rubin] doctrine of Wall Street to force America into what
looks like a chronic debt depression.
ED: Exactly right. I couldn't agree more. Let's take a short break and we'll continue the
discussion. Again, I'm chatting with Michael Hudson about his new book, Killing the Host: How
Financial Parasites and Debt Bondage Destroy the Global Economy.
The case of Latvia: Is it a success story, or a neoliberal disaster?
ED: I want to go back to some of the important issues that we introduced or alluded to in the
first part of our discussion. As I was mentioning to you off-air, a couple years ago I twice
interviewed your colleague Jeffrey Sommers, with whom you've worked and co-published a number
of papers. We talked a lot about many of the same issues that you and I are touching on.
Specifically Sommers – and I know you as well – did a lot of work in Latvia, a
country in the former Soviet space in Eastern Europe on the Baltic Sea. Your book has a whole
chapter on it, as well as references throughout the book.
So let's talk about how Latvia serves as a template for understanding the austerity model.
It is touted by technocrats of the financial elite as a major success story – how
austerity can work. I find it absurd on so many different levels. So tell us what happened in
Latvia, what the real costs were, and why neoliberals claim it as a success story.
MH: Latvia is the disaster story of the last two decades. That's why I took it as an object
lesson. You're right, it was Jeff Sommers who first brought me over to Latvia. I then became
Director of Economic Research and Professor of Economics at the Riga Graduate School of
Law.
When Latvia was given its independence when the Soviet Union broke up in 1991, a number of
former Latvians had studied at George Washington University, and they brought neoliberalism
over there – the most extreme grabitization and de-industrialization of any country I
know. Latvians, Russians and other post-Soviet countries were under the impression that U.S.
advisors would help them become modernized like the U.S. economy – with high living and
consumption standards. But what they got was advice to emulate American experience. It got
something just the opposite – how to enable foreign investors and bankers to carve it up,
dismantle its industry and become a bizarre neoliberal experiment.
You may remember the Republican presidential candidate Steve Forbes, who in 2008 proposed a
flat tax to replace progressive taxation. The idea never could have won in the United States,
but Latvia was another story. The Americans set the flat tax at an amazingly low 12 percent of
income – and no significant property tax on real estate or capital gains. It was a
financial and real estate dream, and created a classic housing and financial bubble.
Jeff and I visited the head of the tax authority, who told us that she was appointed because
she had done her PhD dissertation on Latvia's last land value assessment – which was in
1917. They hadn't increased the assessments since then, because the Soviet economy didn't have
private land ownership and didn't even have a concept of rent-of-location for planning
purposes. (Neither did Russia.)
Latvia emerged from the Soviet Union without any debt, and also with a lot of real estate
and a highly educated population. But its political insiders turned over most of the government
enterprises to themselves. Latvia had been a computer center and also the money-laundering
center of the Soviet leadership already in the late 1980s (largely as a byproduct of Russian
oil exports through Ventspils), and Riga remains the money-laundering city for today's
Russia.
Privatizing housing and other property led to soaring real estate prices. But this bubble
wasn't financed by domestic banks. The Soviet Union didn't have private banks, because the
government had simply created the credit to fund the economy as needed. The main banks in a
position to lend to Latvia were Swedish and other Scandinavian banks. They pounce on the
lending opportunities to opened up by an entire nation whose real estate had almost no tax on
it. The result was the biggest real estate bubble in the world, along with Russia's. Latvians
found that in order to buy housing of their own, they had to go deeply into debt. Assets were
only given to insiders, not to the people.
A few years ago there was a reform movement in Latvia to stop the economic bleeding. Jeff
and I brought over American property appraisers and economists. We visited the leading bank,
regulatory agencies. Latvia was going broke because its population had to pay so much for real
estate. And it was under foreign-exchange pressure because debt service on its mortgage loans
was being paid to the Swedish and foreign banks. The bank regulator told us that her problem
was that her agency's clients are the banks, not the population. So the regulators thought of
themselves as working for the banks, even though they were foreign-owned. She acknowledged that
the banks were lending much more money than property actually was worth. But her regulatory
agency had a solution: It was to have not only the buyer be obligated to pay the mortgage, but
also the parents, uncles or aunts. Get the whole family involved, so that if the first signer
couldn't pay the cosigners would be obligated.
That is how Latvia stabilized its banking system. But it did so by destabilizing the
economy. The result is that Latvia has lost 20 percent of its population over the past decade
or so. For much the same reasons that Greece has lost 20 percent of its population, with
Ireland in a similar condition. The Latvians have a joke "Will the last person who leaves in
2020 please turn off the lights at the airport."
The population is shrinking because the economy is being run by looters, domestic and
foreign. I was shown an island in the middle of the Daugava river that runs to the middle of
Latvia, and was sold for half a million dollars. Our appraisers said that it's worth half a
billion dollars, potentially. There are no plans to raise the property tax to recapture these
gains for the country – so that it can lower its heaviest labor taxes in the world,
nearly half each paycheck for income tax and "social security" spending so that finance and
real estate won't be taxed.
A few years ago, I was at the only meeting of INET (George Soros's group) that I was invited
to, and in the morning one of the lead talks was on how Latvia was a model that all countries
could follow to balance the budget. Latvia has balanced the budget by cutting back public
spending, reducing employment and lowering wage levels while indebting its population and
forcing to immigrate. The neoliberal strategy is to balance by selling off whatever remains in
the public domain. Soros funded a foundation there (like similar ones he started in other
post-Soviet countries) to get a part of the loot.
These giveaways at insider prices have created a kleptocracy obviously loyal to neoliberal
economics. I go into the details in my chapter. It's hard to talk about it without losing my
temper, so I'm trying to be reasonable but it's a country that was destroyed and smashed. That
was the U.S. neoliberal model alternative to post-Stalinism. It wasn't a new American economy.
It was a travesty.
Why then does the population continue to vote for these neoliberals? The answer is, the
neoliberals say, the alternative is Stalinism. To Latvians, this means exile, deportations and
memories of the old pro-Russian policy. The Russian-speaking parties are the main people
backers of a social democracy party. But neoliberals have merged with Latvian nationalists.
They are not only making the election over resentment against the Russian-speaking population,
but the fact that many are Jewish.
I find it amazing to see someone who is Jewish, like George Soros, allying with anti-Semitic
and even neo-Nazi movements in Latvia, Estonia, and most recently, of course, Ukraine. It's an
irony that you could not have anticipated deductively. If you had written this plot in a
futuristic novel twenty years ago, no one would have believed that politics could turn more on
national and linguistic identity politics than economic self-interest. The issue is whether you
are Latvian or are Russian-Jewish, not whether you want to untax yourself and make? Voting is
along ethnic lines, not whether Latvians really want to be forced to emigrate to find work
instead of making Latvia what it could have been: an successful economy free of debt. Everybody
could have gotten their homes free instead of giving real estate only to the kleptocrats.
The government could have taxed the land's rental value rather than letting real estate
valuation be pledged to pay banks – and foreign banks at that. It could have been a
low-cost economy with high living standards, but neoliberals turned in into a smash and grab
exercise. They now call it an idea for other nations to follow. Hence, the U.S.-Soros strategy
re Ukraine.
ED: That's an excellent point. It's a more extreme case for a number of reasons in Ukraine
– the same tendency. They talk about, "Putin and his gaggle of Jews." That's the idea,
that Putin and the Jews will come in and steal everything – while neoliberals plan to
appropriate Ukraine's land and other resources themselves. In this intersection between
economics and politics, Latvia, Lithuania, Estonia – the Baltic States of the former
Soviet Union – are really the front lines of NATO expansion. They were some of the first
and most pivotal countries brought into the NATO orbit. It is the threat of "Russian
aggression" via the enclave at Kaliningrad, or just Russia in general. That is the threat they
use to justify the NATO umbrella, and simultaneously to justify continuing these economic
policies. So in many ways Russia serves as this convenient villain on a political, military and
economic level.
MH: It's amazing how the popular press doesn't report what's going on. Primakov, who died a
few months ago, said during the last crisis a few years ago that Russia has no need to invade
Latvia, because it owns the oil export terminals and other key points. Russia has learned to
play the Western game of taking countries over financially and acquiring ownership. Russia
doesn't need to invade to control Latvia any more than America needs to invade to control Saudi
Arabia or the Near East. If it controls exports or access to markets, what motive would it have
to invade? As things stand, Russia uses Latvia it as a money laundering center.
The same logic applies to Ukraine today. The idea is that Russia is expansionary in a world
where no one can afford to be militarily expansionary. After Russia's disaster in Afghanistan,
no country in the world that's subject to democratic checks, whether it's America after the
Vietnam War or Russia or Europe, no democratic country can invade another country. All they can
do is drop bombs. This can't capture a country. For that you need major troop commitments.
In the trips that I've taken to Russia and China, they're in a purely defensive mode.
They're wondering why America is forcing all this. Why is it destroying the Near East, creating
a refugee problem and then telling Europe to clean up the mess it's created? The question is
why Europe is willing to keep doing this. Why is Europe part of NATO fighting in the Near East?
When America tells Europe, "Let's you and Russia fight over Ukraine," that puts Europe in the
first line of fire. Why would it have an interest in taking this risk, instead of trying to
build a mutual economic relationship with Russia as seemed to be developing in the 19th
century?
ED: That's the ultimate strategy that the United States has used – driving a wedge
between Russia and Europe. This is the argument that Putin and the Russians have made for a
long time. You can see tangible examples of that sort of a relationship even right now if you
look at the Nord Stream pipeline connecting Russian energy to German industrial output –
that is a tangible example of the economic relationship, that is only just beginning between
Russia and Europe. That's really what I think the United States wanted to put the brakes on, in
order to be able to maintain hegemony. The number one way it does that is through NATO.
MH: It's not only put the brakes on, it has created a new iron curtain. Two years ago,
Greece was supposed to privatize 5 billion euros of its public domain. Half of this, 2.5
billion, was to be the sale of its gas pipeline. But the largest bidder was Gazprom, and
America said, "No, you can't accept the highest bidder if its Russian." Same thing in Ukraine.
It has just been smashed economically, and the U.S. says, "No Ukrainian or Russian can buy into
the Ukrainian assets to be sold off. Only George Soros and his fellow Americans can buy into
this." This shows that the neoliberalism of free markets, of "let's everybody pay the highest
price," is only patter talk. If the winner in the rigged market is not the United States, it
sends in ISIS or Al Qaeda and the assassination teams, or backs the neo-Nazis as in
Ukraine.
So, we're in a New Cold War. Its first victims, apart from Southern Europe, will be the rest
of Europe. You can imagine how this is just beginning to tear European politics apart, with
Germany's Die Linke and similar parties making a resurgence.
The Troika and IMF doctrine of austerity and privatization
ED: I want to return us back to the book and some other key issues that you bring up that I
think are most important. One that we hear in the news all the time, and you write extensively
about it in the book, is the Troika. That's the IMF, the European Central Bank (ECB) and the
European Commission. It could be characterized as the political arm of finance capital in
Europe, one that imposes and manages austerity in the interest of the ruling class of finance
capital, as I guess we could call them. These are technocrats, not academically trained
economists primarily (maybe with a few exceptions), but I want you to talk a bit about how the
Troika functions and why it's so important in what we could call this crisis stage of
neoliberal finance capitalism.
MH: Basically, the Troika is run by Frankfurt bankers as foreclosure and collection agents.
If you read recently what former Greek finance minister Yanis Varoufakis has written, and his
advisor James Galbraith, they said that when Syriza was elected in January, they tried to
reason with the IMF. But it said that it could only do what the European Central Bank said, and
that it would approve whatever they decided to do. The European Central Bank said that its role
wasn't to negotiate democracy. Its negotiators were not economists. They were lawyers. "All we
can say is, here's what you have to pay, here's how to do it. We're not here to talk about
whether this is going to bankrupt Greece. We're just interested in in how you're going to pay
the banks what they're owe. Your electric companies and other industry will have to go to
German companies, the other infrastructure to other investors – but not from Russia."
It's much like England and France divided up the Near East after World War I. There's a kind
of a gentlemen's agreement as to how the creditor economies will divide up Greece, carving it
up much like neighboring Yugoslavia to the north.
In 2001 the IMF made a big loan to Argentina (I have a chapter on Argentina too), and it
went bad after a year. So the IMF passed a rule, called the No More Argentinas rule, stating
that the Fund was not going to participate in a loan where the government obviously can not
pay.
A decade later came the Greek crisis of 2011. The staff found that Greece could not possibly
pay a loan large enough to bail out the French, German and other creditors. So there has to be
a debt write-down of the principal. The staff said that, and the IMF's board members agreed.
But its Managing Director, Strauss-Kahn wanted to run for the presidency of France, and most of
the Greek bonds were held by French banks. French President Sarkozy said "Well you can't win
political office in France if you stiff the French banks." And German Chancellor Merkel said
that Greece had to pay the German banks. Then, to top matters, President Obama came over to the
G-20 meetings and they said that the American banks had made such big default insurance
contracts and casino gambles betting that Greece would pay, that if it didn't, if the Europeans
and IMF did not bail out Greece, then the American banks might go under. The implicit threat
was that the U.S. would make sure that Europe's financial system would be torn to pieces.
ED: And Michael, I just want to clarify, I guess it's sort of a question: about what you're
talking about here in terms of Geithner and Obama coming in: These would be credit default
swaps and collateralized debt obligations?
MH: Yes. U.S. officials said that Wall Street had made so many gambles that if the French
and German banks were not paid, they would turn to their Wall Street insurers. The Wall Street
casino would go under, bringing Europe's banking system down with it. This prompted the
European Central Bank to say that it didn't want the IMF to be a part of the Troika unless it
agreed to take a subordinate role and to support the ECB bailout. It didn't matter whether
Greece later could pay or not. In that case, creditors would smash and grab. This lead the some
of the IMF European staff to resign, most notably Susan Schadler, and later to act as whistle
blowers to write up what happened.
The same thing happened again earlier this year in Greece. Lagarde said that the IMF doesn't
do debt reduction, but would give them a little longer to pay. Not a penny, not a euro will be
written down, but the debt will be stretched out and perhaps the interest rate will be lowered
– as long as Greece permits foreigners to grab its infrastructure, land and natural
resources.
The staff once again leaked a report to the Financial Times (and maybe also the Wall Street
Journal) that said that Greece couldn't pay, there's no way it can later sell off the IMF loan
to private bondholders, so any bailout would be against the IMF's own rules. Lagarde was
embarrassed, and tried to save face by saying that Germany has to agree to stretch out the
payments on the debt – as if that somehow would enable it to pay, while its assets pass
into foreign hands, which will remit their profits back home and subject Greece to even steeper
deflation.
Then, a few weeks ago, you have the Ukraine crisis and the IMF is not allowed to make loans
to countries that cannot pay. But now the whole purpose is to make loans to countries who can't
pay, so that creditors can turn around and demand that they pay by selling off their public
domain – and implicitly, force their population to emigrate.
ED: Also, technically they're not supposed to be making loans to countries that are at war,
and they're ignoring that rule as well.
MH: That's the second violation of IMF rules. At least in the earlier Greek bailout, Strauss
Kahn got around the "No More Argentinas" rule by having a new IMF policy that if a country is
systemically important, the IMF can lend it the money even if it can't pay, even though it's
not credit-worthy, if its default would cause a problem in the global financial system (meaning
a loss by Wall Street or other bankers). But Ukraine is not systemically important. It's part
of the Russian system, not the western system. Most of its trade is with Russia.
As you just pointed out, when Lagarde made the IMF's last Ukrainian loan, she said that she
hoped its economy would stabilize instead of fighting more war in its eastern export region.
The next day, President Poroshenko said that now that it had got the loan, it could go to war
against the Donbass, the Russian speaking region. Some $1.5 billion of the IMF loan was given
to banks run by Kolomoisky, one of the kleptocrats who fields his own army. His banks send the
IMF's gift abroad to his own foreign banks, using his domestic Ukrainian money to pay his own
army, allied with Ukrainian nationalists flying the old Nazi SS insignia fighting against the
Russian speakers. So in effect, the IMF is serving as an am of the U.S. military and State
Department, just as the World Bank has long been.
ED: I want to interject two points here for listeners who haven't followed it as closely.
Number one is the private army that you're talking about – the Right Sector which is
essentially a mercenary force of Nazis in the employ of Kolomoisky. They're also part of what's
now called the Ukrainian National Guard. This paramilitary organization that is being paid
directly by Kolomoisky. Number two – and this relates back to something that you were
saying earlier, Michael – that IMF loan went to pay for a lot of the military equipment
that Kiev has now used to obliterate the economic and industrial infrastructure of Donbass,
which was Ukraine's industrial heartland. So from the western perspective it's killing two
birds with one stone. If they can't strip the assets and capitalize on them, at least they can
destroy them, because the number one customer was Russia.
MH: Russia had made much of its military hardware in Ukraine, including its liftoff engines
for satellites. The West doesn't want that to continue. What it wants for its own investors is
Ukraine's land, the gas rights in the Black Sea, electric and other public utilities, because
these are the major tollbooths to extract economic rent from the economy. Basically, US/NATO
strategists want to make sure, by destroying Ukraine's eastern export industry, that Ukraine
will be chronically bankrupt and will have to settle its balance-of-payments deficit by selling
off its private domain to American, German and other foreign buyers.
ED: Yes, that's Monsanto, and that's Hunter Biden on the Burisma board (the gas company).
It's like you said earlier, you wouldn't even believe it if someone would have made it up. It's
so transparent, what they're doing in Ukraine.
Financialization of pension plans and retirement savings
I want to switch gears a bit in the short time we have remaining, because I have two more
things I want to talk about. Referring back to this parasitical relationship on the real
economy, one aspect that's rarely mentioned is the way in which many regular working people get
swindled. One example that comes to my mind is the mutual funds and other money managers that
control what pension funds and lots of retirees invest in. Much of their savings are tied up in
heavily leveraged junk bonds and in places like Greece, but also recently in Puerto Rico which
is going through a very similar scenario right now. So in many ways, US taxpayers and
pensioners are funding the looting and exploitation of these countries and they're then
financially invested in continuing the destruction of these countries. It's almost like these
pensioners are human shields for Wall Street.
MH: This actually is the main theme of my book – financialization. Mutual funds are
not pension funds. They're different. But half a century ago a new term was coined: pension
fund capitalism, sometimes called pension fund socialism. Then we got back to Orwellian
doublethink when Pinochet came to power behind the natural alliance of the Chicago School with
Kissinger at the State Department. They immediately organized what they called labor
capitalism. n labor capitalism labor is the victim, not the beneficiary. The first thing they
did was compulsory setting aside of wages in the form of ostensible pension funds controlled by
the employers. The employers could do whatever they wanted with it. Ultimately they invested
their corporate pension funds in their own stocks or turned them over to the banks, around
which their grupo conglomerates were organized. They then simply drove the businesses with
employee pension funds under, wiping out the pension fund liabilities – after moving the
assets into their captive banks. Businesses were left as empty corporate shells.
Something similar happened in America a few years ago with the Chicago Tribune. Real estate
developer Sam Zell borrowed money, bought the Tribune, using the Employee Stock Ownership Plan
(ESOP) essentially to pay off the bondholders. He then drove/looted the Tribune into bankruptcy
and wiped out the stockholders. Employees brought a fraudulent conveyance suit.
Already fifty years ago, critics noted that about half of the ESOPs are wiped out, because
they're invested by the employers, often in their own stock. Managers give themselves stock
options, which are given value by employee purchases. Something similar occurs with pension
funds in general. Employee wages are paid into pension funds, which bid up the stock prices in
general. On an economy-wide basis, employees are buying the stock that managers give
themselves. That's pension fund capitalism.
The underlying problem with this kind of financialization of pensions and retirement savings
is that modern American industry is being run basically for financial purposes, not for
industrial purposes. The major industrial firms have been financialized. For many years General
Motors made most of its profits from its financial arm, General Motors Acceptance Corporation.
Likewise General Electric. When I was going to school 50 years ago, Macy's made most of its
money not by selling products, but by getting customers to use its credit cards. In effect, it
used its store to get people to use its credit cards.
Last year, 92% of the earnings of the Fortune 100 companies were used for stock buy-backs --
corporations buying back their stock to support its price – or for dividend payouts, also
to increase the stock's price (and thus management bonuses and stock options). The purpose of
running a company in today's financialized world is to increase the price of the stock, not to
expand the business. And who do they sell the stock to? Essentially, pension funds.
There's a lot of money coming in. I don't know if you remember, but George W. Bush wanted to
privatize Social Security. The idea was to spend all of its contributions – the 15+% that
FICA withholds from workers paychecks every month – into the stock market. This would
fuel a giant stock market boom. Money management companies, the big banks, would get an
enormous flow of commissions, and speculators would get rich off the inflow. It would make
billionaires into hundred-billionaires. All this would soar like the South Sea Bubble, until
the American population began to age – or, more likely, begin to be unemployed. At that
point the funds would begin to sell the stocks to pay retirees. This would withdraw money from
the stock market. Prices would crash as speculators and insiders sold out, wiping out the
savings that workers had put into the scheme.
The basic idea is that when Wall Street plays finance, the casino wins. When employees and
pension funds play the financial game, they lose and the casino wins.
ED: Right, and just as an example for listeners – to make what Michael was just
talking about it even more real – if we think back to 2009 and the collapse of General
Motors, it was not General Motors automotive manufacturing that was collapsing. It was GMAC,
their finance arm, which was leveraged on credit default swaps, collateralized debt obligations
and similar financial derivatives – what they call exotic instruments. So when Obama
comes in and claimed that he "saved General Motors," it wasn't really that. He came in for the
Wall Street arm of General Motors.
Obama's demagogic role as Wall Street shill for the Rubinomics gang
MH: That's correct. He was the Wall Street candidate, promoted by Robert Rubin, who was
Clinton's Treasury Secretary. Basically, American economic policies can run by a combination of
Goldman Sachs and Citigroup, often interchangeably.
ED: This was demonstrated very clearly in the first days of Obama taking office. Who does he
meet with to talk about the financial crisis? He invites the CEOs of Goldman Sachs and JP
Morgan, Bank of America, Citi and all of the rest of them. They're the ones who come to the
White House. It's been written about in books, in the New Yorker and elsewhere. Obama basically
says, "Don't worry guys, I got this."
MH: Ron Suskind wrote this. He said that Obama said, "I'm the only guy standing between you
and the pitchforks. Listen to me: I can basically fool them." (I give the actual quote in my
book.) The interesting thing is that the signs of this meeting were all erased from the White
House website, but Suskind has it in his book. Obama emerges as one of the great demagogues of
the century. He may be even worse than Andrew Jackson.
ED: So much of it is based on obvious policies and his actions. The moment he came to power
was a critical moment when action was needed. Not only did he not take the right action, he did
exactly what Wall Street wanted. In many ways we can look back to 2008 when he was championing
the TARP, the bailout, and all the rest of that. None of that would have been possible without
Obama. That's something that Democrats like to avoid in their conversations.
MH: That's exactly the point. It was Orwellian rhetoric. He ran as the candidate of Hope and
Change, but his real role was to smash hope and prevent change. By keeping the debts in place
instead of writing them down as he had promised, he oversaw the wrecking of the American
economy.
He had done something similar in Chicago, when he worked as a community organizer for the
big real estate interests to tear up the poorer neighborhoods where the lower income Blacks
lived. His role was to gentrify them and jack up property prices to move in higher-income
Blacks. This made billions for the Pritzker family. So Penny Pritzker introduced him to Robert
Rubin. Obama evidently promised to let Rubin appoint his cabinet, so they appointed the vicious
anti-labor Rahm Emanuel, now Chicago's mayor, as his Chief of Staff to drive any Democrat to
the left of Herbert Hoover out of the party. Obama essentially pushed the Democrats to the
right, as the Republicans gave him plenty of room to move rightward and still be the "lesser
evil."
So now you have people like Donald Trump saying that he's for what Dennis Kucinich was for:
a single payer healthcare program. Obama fought against this, and backed the lobbyists of the
pharmaceutical and health insurance sectors. His genius is being able to make most voters
believe that he's on their side when he's actually defending the Wall Street special interests
that were his major campaign contributors.
ED: That's true. You can see that in literally every arena in which Obama has taken action.
From championing so-called Obamacare, which is really a boon for the insurance industry, to the
charter schools to privatize public education and also become a major boon for Wall Street, for
Pearson and all these major education corporations. In terms of real estate, in the
gentrification, all the rest. Literally every perspective, every angle from which you look at
Obama, he is a servant of finance capital of investors, not of the people. And that's what the
Democratic Party has become, delivering its constituency to Wall Street.
A left-wing economic alternative
MH: So here's the problem: How do we get the left to realize this? How do we get it to talk
about economics instead of ethnic identity and sexual identity and culture alone? How do we get
the left to do what they were talking about a century ago – economic reform and how to
take the side of labor, consumers and debtors? How do we tell the Blacks that it's more
important to get a well paying job? That's the way to gain power. I think Deng said: "Black
cat, white cat, it doesn't matter as long as it catches mice." How do we say "Black president,
white president, it doesn't matter, as long as they give jobs for us and help our community
economically?"
ED: I think that's important and I want to close with this issue: solutions. One of the
things I appreciate in reading your book is that it is broken up into sections. The final
section, I think, is really important. You titled it: "There Is An Alternative." That is of
course a reference to Margaret Thatcher's TINA (There Is No Alternative). That ideology and
mindset took over the left, or at least the nominally left-wing parties. So you're saying that
there is an alternative. In that section you propose a number of important reforms. You argue
that they would restore industrial prosperity. Now, I'm not asking you to name all of them, to
run down the list, but maybe touch on a little bit of what you included, and why that's
important for beginning to build this alternative.
MH: There are two main aims that classical economists had 200 years ago. One was to free
society from debt. You didn't want people to have to spend their lives working off the debt,
whether for a home, for living or to get an education. Second, you wanted to fund industry, not
by debt but by equity. That is what the Saint-Simonians and France did. It's what German
banking was famous for before World War I. There was a debate in the English speaking
countries, especially in England saying that maybe England and the Allies might lose World War
I because the banks are running everything, and finance should be subordinated to fund
industry. It can be used to help the economy grow, not be parasitic.
But instead, our tax laws make debt service tax deductible. If a company pays $2 billion a
year in dividends, a corporate raider can buy it on credit and, if there's a 50% stock rate, he
can pay $4 billion to bondholders instead of $2 billion to stockholders. Over the past twenty
years the American stock market has become a vehicle for corporate raiding, replacing equity
with debt. That makes break-even costs much higher.
The other point I'm making concerns economic rent. The guiding idea of an economic and tax
system should be to lower the cost of living and doing business. I show what the average
American wage earner has to pay. Under the most recent federal housing authority laws, the
government guarantees mortgage loans that absorb up to 43% of family income. Suppose you pay
this 43% of income for your home mortgage, after the 15% of your wages set aside for Social
Security under FICA.
Instead of funding Social Security out of the general budget and hence out of what is still
progressive taxation, Congress has said that the rich shouldn't pay for Social Security; only
blue-collar workers should pay. So if you make over $115,000, you don't have to pay anything.
In addition to that 15% wage tax, about 20% ends up being paid for other taxes – sales
taxes, income taxes, and various other taxes that fall on consumers. And perhaps another 10%
goes for bank loans besides mortgages – credit card loans, student loans and other
debts.
That leaves only about 25% of what American families earn to be spent on goods and services
– unless they borrow to maintain their living standards. This means that if you would
give wage earners all of their food, all their transportation, all their clothing for nothing,
they still could not compete with foreign economies, because so much of the budget has to go
for finance, insurance and real estate (FIRE). That's why our employment is not going to
recover. That's why our living standards are not going to recover.
Even if wages do go up for some workers, they're going to have to pay it to the bank for
education loans, mortgage loans (or rent), bank debt and credit card debt, and now also for our
amazingly expensive and rent-extracting medical insurance and health care and medications. The
result is that if they try to join the middle class by getting higher education and buying a
home, they will spend the rest of their lives paying the banks. They don't end up keeping their
higher wages. They pay them to the banks.
ED: You don't have to tell me. I'm living that reality. Interestingly, in that final section
of your book you talk about alternatives, like a public banking option that many people have
discussed. You talk about the Social Security cap that you were just mentioning, and focus on
taxing economic rent. Some critics would suggest that these sorts of reforms are not going to
be able to salvage the capitalist model that is so ensconced in the United States. So I want to
give you a chance to sort of present that argument or maybe rebut it.
MH: I won't rebut that criticism, because it's right. Marx thought that it was the task of
industrial capitalism to free economies from the economic legacies of feudalism. He saw that
the bourgeois parties wanted to get rid of the "excrescences" of the industrial capitalist
marketplace. They wanted to get rid of the parasites, the landowners and usurious creditors.
Marx said that even if you get rid of the parasites, even if you socialize finance and land
that he dealt with in volume II and III of Capital, you're still going to have the Volume I
problem. You're still going to have the exploitation problem between employers and employees
– the labor/capital problem.
My point is that most academic Marxists and the left in general have focused so much on the
fight of workers and labor unions against employers that they tend to overlook that there's
this huge FIRE sector – Finance, Insurance, and Real Estate – tsunami is swamping
the economy. Finance is wrecking industry and government, along with labor. The reforms that
Marx expected the bourgeois parties to enact against rentiers haven't occurred. Marx was overly
optimistic about the role of industrial capitalism and industrialized banking to prepare the
ground for socialism.
This means that until you complete the task of freeing of society from feudalism –
corrosive banking and economic rent as unearned income – you can't solve the industrial
problems that Marx dealt with in Volume I. And of course even when you do solve them, these
problems of labor exploitation and markets will still exist.
ED: Yes, absolutely. Well we're out of time. I want to thank you for coming onto the
program. Listeners, you heard it. There's so much information to digest here. The book is
really brilliant, I think essential reading, required reading – Killing the Host: How
Financial Parasites and Debt Bondage Destroy the Global Economy, available through
CounterPunch, as well as on Amazon. Michael Hudson professor of economics at University of
Missouri Kansas City, his work is all over the place. Find it regularly on CounterPunch, as
well as on his website michael-hudson.com. Michael Hudson thanks so much for coming on
CounterPunch Radio.
MH: It's great to be here. It's been a wonderful discussion.
The key point is that financial industry needs to be strictly regulated and suppressed, because after a cirtain point it stage
coup d'état, banksters come to power and turn the industry into cancer for the society with it uncontrolled parasitic growth.
Notable quotes:
"... In economics, the financial sector is typically lumped in with the insurance sector and real estate (the financial portion of the real estate sector, not construction) sector. Together, the sectors are often abbreviated and called the FIRE sector. In this article I will talk mainly about the finance portion of the FIRE sector since it is by far the largest, most visible, and most corrupt. ..."
"... The job of the finance sector is simply to manage existing resources . It creates nothing. Therefore, the smaller the financial sector is the more real wealth there is for the rest of society to enjoy. The bigger the financial sector becomes the more money it siphons off from the productive sectors. ..."
"... Neither of these two friendly fellows actually does much, if anything, in the way of actual investing. Sure, they learn the lingo, dress sharply, and probably know more than the average Joe, but they don't call the shots. That happens at Big Bank HQ. ..."
"... Somewhere in the belly of the beast there is a gaggle of highly paid, largely worthless economists and market technicians. Using some combination of tea leaves, voodoo, crystal balls, and tarot cards, these guys come up with the selection of one-size-fits-most, happy-meal portfolios that clients will be invested in. Actually, scratch that. Portfolios aren't assembled using all kinds of mystical methods; they are assembled using cold hard cash. (It's the finance sector. Did you think they spoke a language other than green?) See, various mutual fund companies pay marketing fees and other dubiously legal payments to the advisory firms to get them to sell their funds. In 2010, mutual fund companies paid $3.5B in perfectly legal "pay to play" schemes to get their funds featured in various investment lineups. ..."
"... One significant source of profit for the financial sector has been exploiting public, taxpayer-owned infrastructure. It should be blatantly obvious that these deals are bad for citizens, as the fees charged to citizens for use of the asset must not only cover servicing costs and maintenance capital expenditures but must also generate profit for the firms buying the assets. ..."
"... As the financial sector funnels more and more resources into lobbying and bribes (let's face it, campaign contributions are nothing more than legal bribery), it has been able to strip an ever-greater amount of state-owned assets from the public. Public asset strip mining is one of the chief causes of the increasing profitability of the financial sector. ..."
Before I begin this article want to make the point that what I'm about to say doesn't apply to everyone in the industry. While
the average mutual fund, broker, wealth manager, and hedge fund charges high fees and delivers poor results it doesn't apply to everyone.
I know lots of good, honest hedge fund managers that charge reasonable fees. I know lots of wealth managers that act in their client's
best interest and don't gouge them on fees. Unfortunately these are the exceptions rather than the rule.
Over the past year or so, the issue of rising income inequality in the United States (and even worldwide) has come front and center.
Most of what I've read has focused on wages, union membership, unemployment, taxation, government subsidy, and executive pay issues.
There is one issue whose role I think is overlooked in the mainstream media: the role the financial sector plays in exacerbating
income inequality. In fact, I believe the financial sector is one of the prime causes, and at its current point is perhaps the greatest
parasite in human history. It is sucking wealth from the productive sectors of the economy at an unprecedented rate.
Before we go any further, I want to define the term "income inequality." When I use that term, I am referring to the fact that,
on average, the incomes and standard of living of American workers is not keeping pace with productivity. I'm also using the term,
in part, to explain why workers and executives in some parts of the economy are overpaid in relation to the benefits they provide.
What I am not doing is making a blanket statement that money should be taken away from successful, hardworking people and
given or "redistributed" to the lazy.
The Role of the Financial Sector
In economics, the financial sector is typically lumped in with the insurance sector and real estate (the financial portion
of the real estate sector, not construction) sector. Together, the sectors are often abbreviated and called the FIRE sector.
In this article I will talk mainly about the finance portion of the FIRE sector since it is by far the largest, most visible, and
most corrupt.
The problem is that the financial, insurance, and real estate (FIRE) sectors do not actually produce any goods or services. If
you go on Google Finance you'll see it divides the economy into ten sectors: energy, basic materials, industrials, cyclical consumer
goods, non-cyclical consumer goods, financials, healthcare, technology, telecommunications, and utilities.
The nine nonfinancial sectors all produce goods or services. For example, the energy sector companies drill for our oil and refine
it into gasoline (e.g., ExxonMobil); the basic materials sector mines our iron (BHP Billiton) and refines it into steel (Nucor);
the industrial sector produces the mining equipment (Caterpillar) used by the previously mentioned sectors; the cyclical consumer
goods sector produces our cars (Ford) or sells our everyday items (Wal-Mart); the non-cyclical consumer goods sector sells the things
we need no matter what, such as groceries (Safeway); the healthcare sector provides the medicines that heal us (Johnson & Johnson);
the technology sector gives us the computers and software we use (Apple); the telecommunications sector gives us the ability to communicate
(Verizon); and the utility sector gives us the power to run our homes and businesses (Duke Energy).
The financial sector? Well, according to Harvard professor Greg Mankiw, chief academic apologist for the financial sector, this
is what it's supposed to do:
Those who work in banking, venture capital, and other financial firms are in charge of allocating the economy's investment resources.
They decide, in a decentralized and competitive way, which companies and industries will shrink and which will grow.
The job of the finance sector is simply to manage existing resources . It creates nothing. Therefore, the smaller
the financial sector is the more real wealth there is for the rest of society to enjoy. The bigger the financial sector becomes the
more money it siphons off from the productive sectors.
The graph below shows how the financial sector has grown since 1960. The figures are shown as a percentage of investment (using
both gross and net investment).
Graphic source: Jacobin Magazine
As you can see, the financial sector has almost doubled or tripled in size since 1960. That means it is extracting double or triple
the amount of money from the real economy!
Just how much?
I want to go through several areas of the economy to show you how the financial sector is extracting money and offering no benefit.
The Grift in Your Retirement Plan
I want to start with the industry I work in, wealth management. When I started my business, I was cognizant of how investors were
ill served by the traditional model of wealth management and vowed to run my business differently. Unfortunately, a vast majority
of the financial industry has built an unrivaled apparatus for extracting huge sums of money from retirees and mom-and-pop investors.
Say, you're sitting on your couch, watching TV and thinking about retirement. You just got part of your inheritance and think
investing it for the future would be a sensible idea. Imagine you haven't the slightest idea how to get started. Then a commercial
comes on with Tommy Lee Jones telling you how trustworthy Ameriprise is. Maybe you hear the reassuring voice of John Houseman pitching
Smith Barney, or you might see the iconic bull charging across the desert for Merrill Lynch.
Say you decide to go down to your local brokerage and meet with a financial advisor. His (or her) pitch sounds good, so you decide
to become a client.
The first problem is the guy you met. Remember how he told you he has his finger on the pulse of the market, he has access to
the best investment research, he is always taking continuing education classes, and he is always monitoring your portfolio? He isn't.
He could be a complete moron. He got hired (and survived and thrived) because he is a good salesman. Nothing less and nothing more.
He takes his orders on what to sell from the top -- the gaggle of people with their fingers in your retirement pie, helping themselves
to regular bites.
The first person behind the scenes telling our hapless salesman what to do is some sort of office, district, or regional manager.
This is manager is just like the salesman but with more ambition. Almost all of these guys were promoted from sales, and their job
is do an impersonation of Alec Baldwin from Glengarry Glen Ross, yelling at the underperformers ("Coffee is for closers!") to get
out there and sell the turd of the month. ("XYZ Mutual Fund Company just paid our firm $200M," this manager says, "so get out there
and sell their funds! And, Jones, if you don't gross $20,000 by the end of this month you're fired! Meeting adjourned.")
Neither of these two friendly fellows actually does much, if anything, in the way of actual investing. Sure, they learn the
lingo, dress sharply, and probably know more than the average Joe, but they don't call the shots. That happens at Big Bank HQ.
Somewhere in the belly of the beast there is a gaggle of highly paid, largely worthless economists and market technicians.
Using some combination of tea leaves, voodoo, crystal balls, and tarot cards, these guys come up with the selection of one-size-fits-most,
happy-meal portfolios that clients will be invested in. Actually, scratch that. Portfolios aren't assembled using all kinds of mystical
methods; they are assembled using cold hard cash. (It's the finance sector. Did you think they spoke a language other than green?)
See, various mutual fund companies pay marketing fees and other dubiously legal payments to the advisory firms to get them to sell
their funds. In 2010, mutual fund companies
paid $3.5B in perfectly legal "pay to play" schemes to get their funds featured in various investment lineups.
You, the investor, are usually charged somewhere around 1% to 1.5% of assets annually for this "service." I've seen clients charged
as much as 1.65% and I've come across firms advertising fees as high as 2% per year for clients with small account balances. For
large portfolios (typically $1M or more) the fees start going down and I've seen rates as low as .5% or less. These fees are split
up between your advisor, the district manager, and the firm itself. Keep in mind that these are fees before any investments have
been made!
So who actually makes the investments in stocks and bonds? It's the portfolio managers at the mutual fund companies. According
to the Investment Company Institute 2011 Fact Book (the ICI is a pro-mutual fund organization), the average mutual fund in
2010 charged 1.47% of assets annually. That's in addition to an average up-front sales charge of 1%.
Why so expensive? Well, the funds are towing a lot of dead weight. According to the ICI 2013 Fact Book, only 42% of mutual
fund employees were employed in fund management positions or fund administrative positions. The rest, 58%, were employed in either
investor servicing (34%) or sales and distribution (24%) job functions.
Like any good infomercial says, "But wait! There's more!" When you buy a stock or bond, you can't just go grab it off the shelf
like you are shopping at Wal-Mart. You need to go through a brokerage. A 1999 study by Chalmers, Edelen, and Kadlec found that the
average mutual fund incurs trading expenses of .78% per annum. A newer study in 2004 by Karceski, Livingston, and O'Neal found brokerage
commissions cost funds around .38% per annum, or .58% if you account for the effect trading large blocks of stock has on the bid-ask
spread.
But wait! There's more! Mutual funds and your average retail investor are relatively unsophisticated, so a new industry has popped
up to take advantage of them. It's called "high frequency trading" or HFT for short. These are powerful computers programmed to take
advantage of "dumb" traders in the market. These HFT firms place their computers physically next to the stock exchange computers
in the datacenters and buy access to market quotes milliseconds before they are made public. They use these and other advantages
to skim
profits from other legitimate investors (that is, people buying stocks because they want to own part of the underlying company).
All told, it's not uncommon to see investors incurring annual expenses of 2%, all the way up to 4% per year.
Institutions and the Rich Have the Same Problem
The problem isn't just limited to Joe Six-pack Retiree. Large institutional investors, such as pension funds, and "sophisticated"
rich investors get taken to the cleaners too.
Once upon a time someone came up with a great idea: Since an all-stock portfolio is volatile, why not "hedge" the portfolio and
sell some stocks short? If you bet that good stocks will go up (buying stocks in the good companies or going long) and bad stocks
will go down (selling the stock short) then you could limit volatility and maybe make some extra money. (You'd make money both when
the good stocks went up and the bad stocks went down). It was and is a pretty good idea when done correctly. Unfortunately, the term
"hedge fund," like the term "mutual fund," has lost its original meaning. The term hedge fund is now used to refer to any type of
pooled investment vehicle that is limited to select clients (usually rich, sophisticated investors and institutions, although the
rules vary worldwide).
The rule of thumb is that hedge funds charge a 2% per year management fee and keep 20% of all profits, the proverbial "2 and 20"
compensation. According to a
WSJ article , this
old adage isn't too far off; the average hedge fund charges 1.6% per year and keeps 18% of profits.
In 2012, hedge funds removed $50.5B from their investors' pockets. In fact, according to an article in Jacobin Magazine, the top
25 hedge fund managers make more money than the CEOs of all S&P 500 companies combined. Combined!
Have they earned it? Well, the answer seems to be no. I pulled the last four years of return data for two hedge fund indices:
the Barclays Hedge Fund Index and the Credit Suisse AllHedge Index. These two indices track thousands of hedge funds across the globe.
I compared them with the returns of the Vanguard Total World Stock Index Fund and the Vanguard Total World Bond Market Index Fund
as well as a 50/50 portfolio of the two Vanguard Funds. All returns shown are net of fees.
The Vanguard stock fund trounced both hedge fund indices, and the Credit Suisse index managed only to beat the returns of bonds
by .01%.
Right about now you will hear the howls of the "hedgies" complaining. I wasn't quite fair to the hedge funds. A lot, but not all,
of them are hedged so returns in down markets will be better and four years isn't a terribly long time to look at.
The two graphs below show the returns for the Credit Suisse index since 2004 and the maximum drawdowns (losses) since 2004.
First, over 10 years the returns for hedge funds are atrocious, only about 25% in total. They do have a point that the draw downs
are lower. The maximum losses experienced during the downturn only averaged about 25%. Fine, but the Vanguard Total Bond Market Index
had barely any draw downs during the crisis and returned over 50% during a similar time period.
Unfortunately, Vanguard does not have return data for any of its World Stock funds for a complete 2008 calendar year so I was
unable to get exact data for my 50/50 portfolio. But I'd be willing to bet it beats the hedge fund indices on a risk adjusted basis.
When you hear about underfunded pension plans, part of the blame lies with pension investment committees and their investments
in hedge funds. These funds, in aggregate, have not earned the fees they charge and have instead funneled the money of retirees into
the hands of a wealthy few.
I'm not alone in reaching this conclusion. Pension funds are slowly starting to see the light and
reducing their allocations to "alternative" investments, such as hedge funds, and
reallocating the capital to indexed products or negotiating with the funds for lower fees.
It's not just the traditional investment arena where the financial sector has run wild. Its unending quest for siphoning money
from the economy has spilled out into other areas.
Speculation in Commodities Costs Main Street Billions
Speculation by the financial sector in the commodities market is impacting the entire world. The passage of the Commodities Futures
Modernization Act (CFMA) has allowed big banks to engage in almost limitless speculation in the commodities market. Wall Street has
convinced everyone from individual investors to pension funds and endowments that they need to include commodities in their portfolios
for deworsification, I mean, diversification purposes. Between investors plowing more than $350B into the commodities market and
what appears to be outright manipulation of commodities prices, the financial sector has increased the costs of everything from wheat
to heating oil and aluminum to gasoline.
An executive for MillerCoors testified that manipulation of the aluminum market cost manufacturers over $3B. The World Bank estimated
that in 2010, 44 million people worldwide were pushed into poverty because of high food prices. The chief cause?
More than 100 studies
agree the cause is speculation in the commodities market. (Goldman Sachs made
$440M in 2012
from food market speculation.) For Americans who love their cars (and SUVs), the biggest impact might be felt at the gas pump where
experts estimate
that financial speculation has added anywhere from $1 to $1.50 to gas prices.
For more information on speculation in the commodities, I recommend Matt Taibbi's
excellent pieces, in-depth information at Better Markets , or some
of myarticles on commodities.
If you think it's bad enough that Wall Street is raising the price of your food, heating oil, gasoline, and Pepsi, then wait until
you get a load of one of the Street's other ingenious ideas for helping themselves to more of your money.
Corruption of Public Infrastructure
One significant source of profit for the financial sector has been exploiting public, taxpayer-owned infrastructure. It should
be blatantly obvious that these deals are bad for citizens, as the fees charged to citizens for use of the asset must not only cover
servicing costs and maintenance capital expenditures but must also generate profit for the firms buying the assets.
The first and most obvious examples of this type of fraud (I choose to use the term "fraud" because I believe that is exactly
what these deals are) are government entities selling public, taxpayer-owned infrastructure, such as road, bridges, parking facilities,
and ports, to the private sector so that they can extract rent from the users. The deals are usually touted as saving taxpayers money
and letting the "more efficient" private sector better manage the asset. This is false. Many studies show private ownership of public
goods does not lead to any cost savings. A comprehensive econometric
study done in 2010 of all available public vs. private studies by Germa Bel, Xavier Fageda, Mildred E. Warner at the University
of Barcelona found no cost saving in privatizing public water or solid waste management services and infrastructure.
The case is no different when it comes to public roads. A
2007 paper by US PIRG found that
privatizing roads never benefits citizens. Financial firms were typically able to buy the assets on the cheap and then raise toll
rates while usually sneaking language into the agreements that prevented governments from building competing infrastructure. The
paper presented evidence that the Indiana Toll Road lease will cost taxpayers at least $7.5B.
One of the most egregious examples of the financial sector extracting rent is the
2009 sale of Chicago's parking meters
to a consortium led by Morgan Stanley. Shortly after the lease was finalized, rates at many parking meters increased (in some case
by quadruple the amount). The Chicago Inspector General found that the city was underpaid by almost $1B for the lease. Meanwhile,
in 2010 Morgan Stanley banked $58 million in profits from the parking meters. With
no way
out of the deal , the citizens of Chicago are now paying Morgan Stanley for the right to use assets they used to own!
The second way in which taxpayers are exploited by the financial sector is so-called public-private partnerships (also referred
to as PPP or P 3 ). There is no set definition for what constitutes a PPP arrangement, and it is possible some might be
beneficial in limited circumstances. I want to focus on one specific type of PPP that enriches the financial sector: when public
projects are privately financed. There is absolutely no reason for any government project to ever require paying "rent" to the financial
sector in the form of financing.
The United States federal government is the monopoly supplier of US dollars. It can add them to the economy at will through deficit
spending or remove them via taxation. There is no earthly reason for a public entity to be forced to depend on the private sector
to provide any type of financing. The only constraint on whether or not money should be spent is whether the economy is at full capacity
(full employment and full industrial capacity utilization) where the additional deficit spending may cause inflation.
State and local governments are unable to issue currency and therefore must depend on revenue raised via taxation, distributions
from the federal government, or money raised through bond issuance. Even then, studies have shown that PPPs are more expensive compared
to the state or local entity securing financing through the municipal bond market.
As the financial sector funnels more and more resources into lobbying and bribes (let's face it, campaign contributions are
nothing more than legal bribery), it has been able to strip an ever-greater amount of state-owned assets from the public. Public
asset strip mining is one of the chief causes of the increasing profitability of the financial sector.
So far we've dealt with examples that are pretty easy to see. Everyone who owns a car knows that gas prices have been rising too
fast and food is more expensive. The citizens of Chicago know they are getting shafted on the parking meter deal since parking rates
have quadrupled. But there are hidden areas of the economy where the financial sector is ripping off the public too.
Interest Rate Manipulation
Do you know what LIBOR is? And what it's used for? A lot of financial types read my newsletters, so I'm sure some of you do. But
the average man or woman on the street likely does not.
LIBOR stands for London Interbank Offered Rate and is the average interest rate banks in London estimate that they would be charged
if they borrowed from other banks. This rate is used worldwide by mortgage lenders, credit card agencies, banks, and other financial
institutions to set interest rates. By some estimates, more than $350T in financial products, derivatives, and contracts are tied
to LIBOR.
In 2012, it was discovered that, since 1991, banks were falsely inflating or deflating the interest rates they reported. (Remember
banks essentially make up their own interest rates and report them with the results being essentially averaged and reported as LIBOR.)
The banks did this in order to profit from trades or to make themselves look more creditworthy than they were.
The Macquarie Group estimated that the
manipulation of LIBOR cost investors $176B. (Keep in mind this is an estimate coming from a financial firm, so it would be prudent
to assume it's on the low end.)
Andrew Lo, a finance professor at MIT, said the fraud "dwarfs by orders of magnitude any financial scam in the history of the
markets."
Food Stamps (SNAP) and Welfare (TANF)
I highly doubt any of my clients or readers are beneficiaries of the SNAP or "food stamps" program and are probably not very familiar
with it. While it is nominally a government program it has been corrupted by the big banks. Benefits are provided electronically
via debit cards (EBT cards). JP Morgan
has made over $500M
from 2004 to 2012 providing EBT benefits to 18 states. The banks then are free to reap fees from users for such things as cash
withdraws for TANF benefits, out of network ATM fees, lost card replacement fees, and even customer service calls.
I believe you can judge how profitable a service is to a company how much it spends on lobbying. In the case of JPMorgan, its
bribes, I mean campaign contributions to Agriculture Committee (SNAP is part of the Department of Agriculture) members increased
sharply after it entered the EBT market in 2004.
(Graphic source: GAI via data from CRP) Summary
A bloated and out-of-control financial sector does not add any value to society. Society benefits when the financial sector is
kept as small as possible.
The financial sector is a parasite that depends on its host organism, the productive sector of the economy, to fuel its profits.
The larger the financial sector grows, the more wealth it extracts from the productive sectors of the economy. With all due respect
to Matt Taibbi, Goldman Sachs isn't a vampire squid; the entire financial sector is the vampire squid with its tentacles reaching
into the pockets of citizens everywhere and sucking out money.
Quite a damning critique, and if I may step away from the main point I have to ask: why is it that some guys involved with
finance, Strubel as well as Auerback, Mosler and Ritholtz, talk like this while so many in the field do not? Does everyone involved
"know" all this but most simply choose to put on blinders?
Great Article about the .01% "Taker Class". This can all end by the 99% demanding a change to the TAX CODE! Yet another clear
indication of the manipulation of the "Giver Class" by government!
Its truly frightening to see how the public has been blindsided/mislead about the root causes of rapid income inequality. As
a social worker I am somwhat familiar with the SNAP benefit program Depressing to think JP Morgan Chase skimmed at least 500m
over an eight year period for SNAP and welfare benefits. I suppose this is the new age enclosure movement where Wall Street is
picking up public assets for pennies on the dollar and charging enormous rents..
The questions is.. what happens when it is used up?? A scorched wasteland of dysfunctional infrastruture/gated communites housing
a tiny elite protected from beggars, street criminals, and gang bandits??
Excellent article. Easy for a layperson to understand and covers a good portion of the pervasive, ongoing, worldwide financial
system theft. I worked for a stock brokerage firm years ago while studying for the series 7. Once I figured out they were all
just well-dressed telemarketers, I quit and found a more productive job. Remember 'dogs of the Dow' ?
A very well-written and eye-opening post – thanks, Ben. I think the formulation of this central point may be a little skewed,
though: " the smaller the financial sector is the more real wealth there is for the rest of society to enjoy. The bigger the financial
sector becomes the more money it siphons off from the productive sectors."
I think this formulation may be somewhat muddling the real-vs.-financial dichotomy that MMT revolves around. Sort of by definition,
the financial sector is 100 percent nominal – even when it posits ownership of real assets, it is really just money-valuing them,
applying the unit-of-account property of money. The ownership is an abstraction. The owner of a share of stock or a gold ETF has
no concrete interaction with the company or commodity in question. So, contrasting the total size of the financial sector to the
totality of real wealth available – for those members of society who do *not* receive income from the financial sector – leaves
me scratching my head. I'm not clear what is being measured. I know that profits flowing to the financial sector have exploded
from around two percent of total corporate profits in the 1950s to around forty percent now. This means it is over-charging for
its so-called services, but I think the real-economy effects are non-linear, and more complex than this.
Regarding the financial sector's growing tendency to siphon off money from the productive sectors – yes, they do this. But
it is up to the state, with its currency-issuing and taxing powers, to regulate how far this process goes and what happens next.
In a recent post, J.D. Alt took note of the ephemeral nature of the financial sector's nominal money-wealth. It is "fictitious
capital". Electronic poker chips. Just zeros and ones, really. As long as the plutocrats simply hoard them – use them to keep
score – the state can just replace them by increasing spending. I also tend to think that the consumption spending of the .01
percent is rather inelastic. They already have everything they want. Keynes' attitude was to let them live it up, up to a point,
and then tax the excess back when they die.
For me, the most important part of your post is the section on commodity speculation and infrastructure privatization. This
truly is a huge deal, a clear interaction with the real economy and a terrible crime, actually. Again, though, it is up to the
state to permit these outrages or ban them – we used to ban them but we stopped. So. One more big thank-you to the Big Dog, I
guess. To think – before Clinton, America actually based aid to poor children on their ages and their poverty rather than the
supposed moral imperfections of their parents. We even had no-fee food stamps.
Obviously, the other reason we can't just let the one percent play their casino games is that they eventually blow up the real
economy, as a totality, through financial crises and destabilization. And, due to all the fabulist monetary propaganda out there,
there is now a big reservoir of public opinion and political will *in favor* of financial collapse. The libertarians and other
Paul-Partiers think it would do us all good. And bring back the gold standard. And "End the Fed", and all the rest of that good
19th Century stuff. I'm not a ready-for-Hillary kind of guy in general, but is it possible to imagine a scarier idea than President
Rand?
While most of your specific criticisms are quite valid, I think your brush is a bit too broad. "The problem is that the financial,
insurance, and real estate (FIRE) sectors do not actually produce any goods or services. "
This is obviously false. I have many times used services provided by banks, credit unions, insurance companies, and real estate
brokers and agents. It would be practically impossible to find the right house to buy, to sell it for a fair price, to get the
loan necessary to buy it, or to protect myself and my family from a catastrophic loss without their services.
It is undoubtedly true that most of the volatility of the FIRE sector since 1990 is due to speculation and parasitical activities,
but there is undoubtedly also some growth of useful services that has facilitated growth of the other sectors, not detracted from
it. Thus it is not always true that "the smaller the financial sector is the more real wealth there is for the rest of society
to enjoy".
Bottom line, you have a good point. Excessively broad statements might be more dramatic, but if they are not true they don't
help your cause.
I have gotten real value from real estate brokers. Did you ever try to sell a house without one? Qualify the serious buyers
and deal with the lookie-loos? And the government paperwork!! I've always gotten my money's worth.
No, the fire doesn't care if you have insurance, but the insurance company will advise you on how to prevent fires and minimize
the damage. Paying an insurance company has protected me from paying the unaffordable high cost of the insured risks. The service
provided by insurance is not incident prevention, it is management of financial risk, and it does that very well. My claims have
been handled quickly and fairly. I had one unusual case where I thought the insurance company should have paid me more than their
original offer (the nation-wide blue book value of the car didn't reflect the unique situation in my State), and after discussion
they agreed with me and paid. I've been with them for over 40 years and I'm very happy with their services.
If you want your bank to create wealth for you, you're looking in the wrong place. Banks are good for storing and protecting
your money, and many will do that for you without fees, and even pay you interest. They'll let you use their computers to pay
your creditors, also without charge. They'll even give you short-term interest-free loans, and pay you cash rebates, if you use
their credit cards. I like my banks' services, too. And, of course, if you want to borrow money they will lend it to you and if
your payment is late they don't break your legs. They will make a profit, though. That's why they do it. You don't have to participate
if you don't want to.
Not every bank is Goldman Sachs, and not every insurance company is AIG. Those are good examples of companies that often serve
no useful purpose, but there are many others who do provide useful services at a reasonable cost.
Although I can be sympathetic of the no-value creation thesis in the financial industry, comparing the performance of hedge
funds with the recent performance of bonds is a no big no-no, because it assumes a negative correlation between equities and bonds.
If one look at the world markets in the last 100 years, that has been the exception rather than the rule.
And you forgot to mention the important roles of capital markets in deploying capital and financing companies through IPOs,
bond offers, etc.
You missed another big point, negative real interest rates. The Fed Funds Rate is currently 0%-0.25%, while real inflation
is much higher. (The CPI is not an accurate measure of inflation.) Big banks can profit by borrowing at 0% and buying stuff (bonds,
stocks, commodities, real estate, politicians, whatever).
On LIBOR, here's another interesting bit. Cities and states lost a TON of money on interest rate swaps with banks. What was
sold as a "hedge" wound up blowing up and costing a fortune.
This was a fascinating piece, very readable for those of us with minimal financial education. However, since this is such a
good explainer for the layman, I think it would be very beneficial to explain how big a difference 1% in fees makes for an investor
over a lifetime. I know personally when I used to compare funds the difference between 1 and 2% in fees seemed negligible. But
then I saw that fantastic PBS Frontline
on this topic and saw how much that 1% could cost me over a lifetime! I now have everything that I personally manage in index
funds!
You can't really argue with what has been said, and all (of us) involved in the sector know it is massive rip off.
While a free market advocate, I think a first step would be to introduce meaningful fee caps on all state promoted or mandated
saving arrangements (eg ISAS, and Pensions), on the grounds that the market is skewed by the government intervention that creates
the glut of forced buyers, and so to correct that imbalance the market (i.e. consumers) need protection through fee caps. I'd
say no more than 20 – 25bps should be permitted for all ISAS and pension savings (DC or DB). Individual wealthy investors (investments
of more than say £5m?) can pay what they like.
>>The job of the finance sector is simply to manage existing resources. It creates nothing.
This is a dubious assertion, but you clearly believe it. How then, can you in good conscience, charge 1.25% (plus indirect
costs for the funds you hold in client portfolios) to manage people's money when you yourself admit you are adding no value?
I know this was for Ben, but there's a pretty simple answer to that question: They don't charge 1.25% because they create value,
they're charging a fee to access the profit created by companies they invest in. Say I told you that I knew a guy named Jimmy
who was going to make three bucks for every buck he gets, and I asked if you'd lend me a dollar to give to Jimmy with the promise
that he'd give me 1.50 cents of it. I'd want to keep 25 cents but you can have 1.25, and so you agree. I didn't create the 2 extra
dollars of value -- Jimmy did -- but I feel justified in asking for a cut because I gave you the tip about Jimmy's value creation
ability.
At least, that is my understanding of Ben's statement.
There are 6000 publicly traded companies. Some of them will have rising stock prices, some falling. If a money manager can
steer you to the rising ones, he is doing something of value. It doesn't mean he created anything physical that didn't exist before.
He's doing a service for you that would otherwise have taken you some time and effort to do, and that's what you pay for.
Yes, it's a different definition of value. The growth of financial services has been outpacing the growth of other sectors
to a monstrous scale, and that makes this distinction important. It signals a kind of corruption that can only mean high inflation
and decoupling money from economic output.
I don't follow. How is financial services different from any other kind of services, in the impact on inflation? Why not also
actors, barbers, or any other service profession? The growth of the financial sector might be explained by the fact that it is
the industry most able to exploit computers, and the first to do so on a large scale.
The corruption is, I think, a separate issue that is present whenever other people's money is involved. Financial services
and government are simply more involved that way than most other industries, and have been all along, dating to long before the
recent growth. Corruption is not impossible in any industry, just more attractive when the numbers are larger.
Corruption is never a separate in ANY corporate activity. The TAX CODE treats the wealth of the .01% radically different than
Income from Labor, because all Taxes on Capital Gains are deferred until taken and are not TAXED as ordinary income. The TAX CODE
is responsible for the corruption of our government because it has put real POWER, the Power of Wealth in the hands of the .01%,
to buy whatever it wants, while labor and the poor spend everything they earn or are given , every single year to survive in a
economic culture designed for the benefit of the .01%, something no one will write about!
Change the TAX CODE and the Corruption of Society will end!
Barbers and actors being paid for their labor do not have the same impact on inflation as a bank giving out loans and consumer
credit at interest. It's not equivalent at all.
Corruption in financial industries is what this article is discussing. If it's a separate issue, I'm confused as to the point
of talking about this at all!
I don't think your explanation is correct. Why wouldn't I go directly to Jimmy in that case and cut out the middle man since
he is offering no value add? The fact is, the middle man, Ben, in this case, believes that he can identify superior companies
to invest his clients money in and earn a greater return. This is Ben's value add and why he charges 1.25%.
Golfer John is correct and that point, essentially, blows a hole in Ben's thesis here that the financial sector adds no value
because they only manage "existing resources". Steering capital to the good ideas that improve consumer wealth and generate a
return is a value add and the fact that millions of transactions like this happen voluntarily between consenting adults further
supports this.
Physics tells us that matter cannot be created or destroyed, so the same resources that are on this earth today are the same
ones that were here 10,000 years ago. So, in that sense, Apple is simply managing "existing resources" when they build the iphone,
Toyota simply managing "existing resources" when they build a car, and UPS and US Mail are merely moving "existing resources"
from one location to another when they make deliveries, must be no value add there right?
Asserting that the financial sector only manages existing resources, and then citing that as proof of no value add is simply
a non sequiter.
No, I wasn't, though I have heard that. My theory of markets, and human group behavior in general, is a statistical approach.
There are averages, distributions, and temporary equilibriums, but the interesting parts are the outliers. I guess that is more
of a quantum flavor than Newtonian. Over time, economies behave cyclically. Much of nature and human group behavior is cyclical.
Paul -- That's true, and a good analogy, except you're getting a bit reductive with the term "existing resources". I agree
that "no value" is a bit extreme, which is why I became more interested in the -type- of value.
John – My physics is flawed to the extent that the law of conservation of matter is flawed, this I admit. I am much more economist
than physicist though so better that I get my physics wrong and econ right! I see a lot of similarities between the two, as well
as crucial differences, but I don't want to get too off topic.
Briana – "No Value is a bit extreme"
I agree, and as the absurdly hyperbolic title* of this article states, the author takes it to an even greater extreme – namely
that the financial sector is actually a systematic destroyer of value (parasite) that is created by all of the other industries.
The crux of his assertion rests on that they only "manage existing resources" and also calling Greg Mankiw an apologist, neither
strikes me as an intellectually rigorous argument.
And interestingly, on his own firm's website, the author apparently contradicts the thesis of this article when advertising
his financial services and the fees he charges for his own value add. I can think of several explanations for this, none of which
are particularly flattering, others can draw their own conclusions.
*a worse parasite than all of the murderous dictatorial regimes in human history that have institutionalized the slaughter
and torture of millions? Really? I note this because it is so obviously false that it makes the rest of the content seem unserious
and shallow even if valid points exist. Acidic comments tend to preach to the already converted, but perhaps that is the goal
here.
Yeah, ok. I should know better, Paul. My brain tried to rationalize the argument by making it less extreme. The goal probably
was to mobilize the choir to go Occupy Wall Street for a few more months, haha.
Those valid points shouldn't be ignored because of the poorly handled hyperbole, though. The financial sector does have a great
capacity to act as a parasite by overvaluing their services and squandering wealth generated by other industries instead of reinvesting
it in worthwhile, valuable enterprises; or using that wealth to essentially 'gamble' or invent money that is not attached to any
real value (i.e. shorting or credit default swaps). As the fruits of these behaviors are becoming obvious, it gets harder to justify
policies that allow them to happen.
In many ways that is my point. You found those "valid points" obviously correct before reading the article, so it rang true
despite the extreme hyperbole. I did not find those points self-evidently true so this poorly constructed argument relying on
clearly false assumptions struck me as uncompelling.
For example, how does one "overvalue their services"? If one charges too much, no one is forced to buy. I may find Ben's management
fee of 1.25% to be overvaluing himself, but I have the option of not paying and instead going to less expensive alternatives.
Why wouldn't the financial industry invest in "worthwhile valuable enterprises" if they provide a worthwhile return? After
all, aren't they driven by an insatiable desire for profit? Who determines what enterprises are worthwhile?
I do not see anything inherently wrong with short selling. Indeed, the ability to short a stock is simply expressing a view
about its value, and leads to greater and more accurate price discovery. What is wrong with shorting a stock if one believes it
is overpriced relative to its instrinsic value? Is it not preferable that prices reflect underlying economic fundamentals rather
than being disconnected from such? Shorting puts downward pressure on prices, and helps prevent overvaluation.
Credit Default Swaps are nothing more than insurance against a bond default. There is nothing inherently wrong with insurance.
I'm not suggesting that you, here in the comments, need to write a paper elaborating on those, just that this article did a
poor job of pursuading, though again, I am coming to the realization that I am likely not the intended audience.
This discussion in the comments has actually been more fruitful than the article itself.
(Sorry for the late response, I've been away for a few days.)
"For example, how does one "overvalue their services"?"
This argument hinges on everyone that purchases these services knowing their true value. It's very simplistic to say that if
someone purchases it, that is the real value. It gets complicated when you take into account the psychological pressures of purchasing
behavior, such as "middle-price" preferences, "money you don't see is money you don't miss" and other tricks that are employed
to get people to pay higher prices.
"Why wouldn't the financial industry invest in "worthwhile valuable enterprises" if they provide a worthwhile return? After
all, aren't they driven by an insatiable desire for profit? Who determines what enterprises are worthwhile?"
Countless services and products we rely on were funded by taxes to make them profitable. They are "worthwhile" but apparently
not "profitable" enough to invest in. Making money and creating value aren't the same thing. Ideally, everyone decides what is
worthwhile.
"I do not see anything inherently wrong with short selling."
Shorting is basically a bucket shop in disguise.
"Credit Default Swaps are nothing more than insurance against a bond default. There is nothing inherently wrong with insurance."
"This argument hinges on everyone that purchases these services knowing their true value."
In a literal sense, you are correct, it is an imperfect measure of value. However, I think it is far and away the most reliable
one we have as value is extremely subjective. I don't think it is right or prudent for third, non cost bearing parties to preempt
decisions made by consenting adults, rather, I would accord them the dignity of free choice. There are many things that consumers
purchase that I do not understand, why anyone would pay a premium for a fast car seems like a waste of money to me, for example.
Why anyone would pay money to golf, not to mention the huge cost in terms of time it takes to get through 18 holes, seems like
a waste of money to me. These are things that make no sense to me because I do not see the value there. But, I recognize that
people have various tastes and preferences, and I respect that and presume that individuals know themselves and their own tastes
and preferences better than I (or someone else) does. Therefore, when someone values something that I do not understand, I tend
to believe it is a result of a difference in preference, rather than they are too dumb to figure out what they like, or that they
are "tricked" into buying something and hence need protection delivered by those who fancy themselves as enlightened enough to
see the real truth. Nothing about this is unique to the financial industry, by the way.
"Countless services and products we rely on were funded by taxes to make them profitable. They are "worthwhile" but apparently
not "profitable" enough to invest in. Making money and creating value aren't the same thing. Ideally, everyone decides what is
worthwhile."
Apparently not enough people decided these services and products were worthwhile, so politicians decided they were worthwhile
and used the force and power of government to get them done. Substituting preferences of politicians, spending other people's
money for those of millions of individuals spending their own money does not seem like an efficient way to allocate resources.
I agree with you on purchasing decisions. People should be free to determine value. I'm not saying people are always dumb,
but I do think they are manipulated. If you want to believe they are not, that is up to you, but apparently you've never seen
advertising. The financial industry advertises itself heavily, especially in consumer credit markets and insurance. But if we're
going to gauge something as nebulous as "true value", it requires a level of conscientiousness from everyone, and accepting whatever
people purchase as reflecting it's actual value is a quick way to guarantee abuse, especially when you have something like consumer
credit. If people are free to determine value, they should also be held to the consequences of their choices, which is currently
not the case in the financial industry and increasingly in the general population.
"Apparently not enough people decided these services and products were worthwhile, so politicians decided they were worthwhile
and used the force and power of government to get them done. Substituting preferences of politicians, spending other people's
money for those of millions of individuals spending their own money does not seem like an efficient way to allocate resources."
You mean like electricity, phone services, railroads, airlines, fortified wheat, water treatment, the internet, satellites,
healthcare.. the list could go on and on. It is less efficient (a word that really needs to be defined clearly, but I'll assume
I know what you mean!), and it happens because otherwise it wouldn't be possible, and yet it becomes widely adopted and lauded
none-the-less; progress, they say. Like I said, worthwhile and profitable are not 1-to-1 correlation, just as willingness to purchase
doesn't necessarily indicate true value.
I thought you might have some interesting opinion on the CDS as money creation I'm still trying to figure that one out!
"... Bankers, pharmaceutical giants, Google, Facebook ... a new breed of rentiers are at the very top of the pyramid and they're sucking the rest of us dry @rcbregman ..."
"... 'A big part of the modern banking sector is essentially a giant tapeworm gorging on a sick body' ..."
"... This piece is about one of the biggest taboos of our times. About a truth that is seldom acknowledged, and yet – on reflection – cannot be denied. The truth that we are living in an inverse welfare state. These days, politicians from the left to the right assume that most wealth is created at the top. By the visionaries, by the job creators, and by the people who have "made it". By the go-getters oozing talent and entrepreneurialism that are helping to advance the whole world. ..."
"... To understand why, we need to recognise that there are two ways of making money. The first is what most of us do: work. That means tapping into our knowledge and know-how (our "human capital" in economic terms) to create something new, whether that's a takeout app, a wedding cake, a stylish updo, or a perfectly poured pint. To work is to create. Ergo, to work is to create new wealth. ..."
"... But there is also a second way to make money. That's the rentier way : by leveraging control over something that already exists, such as land, knowledge, or money, to increase your wealth. You produce nothing, yet profit nonetheless. By definition, the rentier makes his living at others' expense, using his power to claim economic benefit. ..."
"... For those who know their history, the term "rentier" conjures associations with heirs to estates, such as the 19th century's large class of useless rentiers, well-described by the French economist Thomas Piketty . These days, that class is making a comeback. (Ironically, however, conservative politicians adamantly defend the rentier's right to lounge around, deeming inheritance tax to be the height of unfairness.) But there are also other ways of rent-seeking. From Wall Street to Silicon Valley , from big pharma to the lobby machines in Washington and Westminster, zoom in and you'll see rentiers everywhere. ..."
"... It may take quite a mental leap to see our economy as a system that shows solidarity with the rich rather than the poor. So I'll start with the clearest illustration of modern freeloaders at the top: bankers. Studies conducted by the International Monetary Fund and the Bank for International Settlements – not exactly leftist thinktanks – have revealed that much of the financial sector has become downright parasitic. How instead of creating wealth, they gobble it up whole. ..."
"... In other words, a big part of the modern banking sector is essentially a giant tapeworm gorging on a sick body. It's not creating anything new, merely sucking others dry. Bankers have found a hundred and one ways to accomplish this. The basic mechanism, however, is always the same: offer loans like it's going out of style, which in turn inflates the price of things like houses and shares, then earn a tidy percentage off those overblown prices (in the form of interest, commissions, brokerage fees, or what have you), and if the shit hits the fan, let Uncle Sam mop it up. ..."
"... Bankers are the most obvious class of closet freeloaders, but they are certainly not alone. Many a lawyer and an accountant wields a similar revenue model. Take tax evasion . Untold hardworking, academically degreed professionals make a good living at the expense of the populations of other countries. Or take the tide of privatisations over the past three decades, which have been all but a carte blanche for rentiers. One of the richest people in the world, Carlos Slim , earned his millions by obtaining a monopoly of the Mexican telecom market and then hiking prices sky high. The same goes for the Russian oligarchs who rose after the Berlin Wall fell , who bought up valuable state-owned assets for song to live off the rent. ..."
"... Even paragons of modern progress like Apple, Amazon, Google , Facebook, Uber and Airbnb are woven from the fabric of rentierism. Firstly, because they owe their existence to government discoveries and inventions (every sliver of fundamental technology in the iPhone, from the internet to batteries and from touchscreens to voice recognition, was invented by researchers on the government payroll). And second, because they tie themselves into knots to avoid paying taxes, retaining countless bankers, lawyers, and lobbyists for this very purpose. ..."
"... Even more important, many of these companies function as "natural monopolies", operating in a positive feedback loop of increasing growth and value as more and more people contribute free content to their platforms. Companies like this are incredibly difficult to compete with, because as they grow bigger, they only get stronger. ..."
"... Most of Mark Zuckerberg's income is just rent collected off the millions of picture and video posts that we give away daily for free. And sure, we have fun doing it. But we also have no alternative – after all, everybody is on Facebook these days. Zuckerberg has a website that advertisers are clamouring to get onto, and that doesn't come cheap. Don't be fooled by endearing pilots with free internet in Zambia. Stripped down to essentials, it's an ordinary ad agency. In fact, in 2015 Google and Facebook pocketed an astounding 64% of all online ad revenue in the US. ..."
"... Rentierism is, in essence, a question of power. That the Sun King Louis XIV was able to exploit millions was purely because he had the biggest army in Europe. It's no different for the modern rentier. He's got the law, politicians and journalists squarely in his court. That's why bankers get fined peanuts for preposterous fraud, while a mother on government assistance gets penalised within an inch of her life if she checks the wrong box. ..."
"... The biggest tragedy of all, however, is that the rentier economy is gobbling up society's best and brightest. Where once upon a time Ivy League graduates chose careers in science, public service or education, these days they are more likely to opt for banks, law firms, or trumped up ad agencies like Google and Facebook. When you think about it, it's insane. We are forking over billions in taxes to help our brightest minds on and up the corporate ladder so they can learn how to score ever more outrageous handouts. ..."
"... One thing is certain: countries where rentiers gain the upper hand gradually fall into decline. Just look at the Roman Empire. Or Venice in the 15th century. Look at the Dutch Republic in the 18th century. Like a parasite stunts a child's growth, so the rentier drains a country of its vitality. ..."
Bankers, pharmaceutical giants, Google, Facebook ... a new breed of rentiers are at the very top of the pyramid and they're
sucking the rest of us dry @rcbregman
'A big part of the modern banking sector is essentially a giant tapeworm gorging on a sick body'.
This piece is about one of the biggest taboos of our times. About a truth that is seldom acknowledged, and yet – on reflection
– cannot be denied. The truth that we are living in an inverse welfare state. These days, politicians from the left to the right assume that most wealth is created at the top. By the visionaries, by the job
creators, and by the people who have "made it". By the go-getters oozing talent and entrepreneurialism that are helping to advance
the whole world.
Now, we may disagree about the extent to which success deserves to be rewarded – the philosophy of the left is that the strongest
shoulders should bear the heaviest burden, while the right fears high taxes will blunt enterprise – but across the spectrum virtually
all agree that wealth is created primarily at the top.
So entrenched is this assumption that it's even embedded in our language. When economists talk about "productivity", what they
really mean is the size of your paycheck. And when we use terms like "
welfare
state ", "redistribution" and "solidarity", we're implicitly subscribing to the view that there are two strata: the makers and
the takers, the producers and the couch potatoes, the hardworking citizens – and everybody else.
In reality, it is precisely the other way around. In reality, it is the waste collectors, the nurses, and the cleaners whose shoulders
are supporting the apex of the pyramid. They are the true mechanism of social solidarity. Meanwhile, a growing share of those we
hail as "successful" and "innovative" are earning their wealth at the expense of others. The people getting the biggest handouts
are not down around the bottom, but at the very top. Yet their perilous dependence on others goes unseen. Almost no one talks about
it. Even for politicians on the left, it's a non-issue.
To understand why, we need to recognise that there are two ways of making money. The first is what most of us do: work. That means
tapping into our knowledge and know-how (our "human capital" in economic terms) to create something new, whether that's a takeout
app, a wedding cake, a stylish updo, or a perfectly poured pint. To work is to create. Ergo, to work is to create new wealth.
But there is also a second way to make money.
That's the rentier way : by leveraging control over something that already exists, such as land, knowledge, or money, to increase
your wealth. You produce nothing, yet profit nonetheless. By definition, the rentier makes his living at others' expense, using his
power to claim economic benefit.
'From Wall Street to Silicon Valley, zoom in and you'll see rentiers everywhere.'
For those who know their history, the term "rentier" conjures associations with heirs to estates, such as the 19th century's large
class of useless rentiers, well-described by the
French economist
Thomas Piketty . These days, that class is making a comeback. (Ironically, however, conservative politicians adamantly defend
the rentier's right to lounge around, deeming inheritance tax to be the height of unfairness.) But there are also other ways of rent-seeking.
From Wall Street to Silicon Valley , from big
pharma to the lobby machines in Washington and Westminster, zoom in and you'll see rentiers everywhere.
There is no longer a sharp dividing line between working and rentiering. In fact, the modern-day rentier often works damn hard.
Countless people in the financial sector, for example, apply great ingenuity and effort to amass "rent" on their wealth. Even the
big innovations of our age – businesses like Facebook
and Uber – are interested mainly in expanding the rentier economy. The problem with most rich people therefore is not that they are
coach potatoes. Many a CEO toils 80 hours a week to multiply his allowance. It's hardly surprising, then, that they feel wholly entitled
to their wealth.
It may take quite a mental leap to see our economy as a system that shows solidarity with the rich rather than the poor. So I'll
start with the clearest illustration of modern freeloaders at the top: bankers. Studies conducted by the
International Monetary Fund and the
Bank for International Settlements – not exactly leftist
thinktanks – have revealed that much of the financial sector has become downright parasitic. How instead of creating wealth, they
gobble it up whole.
In other words, a big part of the modern banking sector is essentially a giant tapeworm gorging on a sick body. It's not creating
anything new, merely sucking others dry. Bankers have found a hundred and one ways to accomplish this. The basic mechanism, however,
is always the same: offer loans like it's going out of style, which in turn inflates the price of things like houses and shares,
then earn a tidy percentage off those overblown prices (in the form of interest, commissions, brokerage fees, or what have you),
and if the shit hits the fan, let Uncle Sam mop it up.
The financial innovation concocted by all the math whizzes working in modern banking (instead of at universities or companies
that contribute to real prosperity) basically boils down to maximizing the total amount of debt. And debt, of course, is a means
of earning rent. So for those who believe that pay ought to be proportionate to the value of work, the conclusion we have to draw
is that many bankers should be earning a negative salary; a fine, if you will, for destroying more wealth than they create.
Bankers are the most obvious class of closet freeloaders, but they are certainly not alone. Many a lawyer and an accountant wields
a similar revenue model.
Take
tax evasion . Untold hardworking, academically degreed professionals make a good living at the expense of the populations of
other countries. Or take the tide of privatisations over the past three decades, which have been all but a carte blanche for rentiers.
One of the richest people in the world,
Carlos Slim , earned his millions by obtaining a monopoly of the Mexican telecom market and then hiking prices sky high. The
same goes for the Russian oligarchs who rose after the
Berlin Wall fell , who bought up valuable state-owned assets for song to live off the rent.
But here comes the rub. Most rentiers are not as easily identified as the greedy banker or manager. Many are disguised. On the
face of it, they look like industrious folks, because for part of the time they really are doing something worthwhile. Precisely
that makes us overlook their massive rent-seeking.
Take the pharmaceutical industry. Companies like
GlaxoSmithKline and
Pfizer regularly
unveil new drugs, yet most real medical breakthroughs are made quietly at government-subsidised labs. Private companies mostly manufacture
medications that resemble what we've already got. They get it patented and, with a hefty dose of marketing, a legion of lawyers,
and a strong lobby, can live off the profits for years. In other words, the vast revenues of the pharmaceutical industry are the
result of a tiny pinch of innovation and fistfuls of rent.
Even paragons of modern progress like Apple, Amazon, Google
, Facebook, Uber and Airbnb are woven from the fabric of rentierism. Firstly, because they owe their existence to government discoveries
and inventions (every sliver of fundamental technology in the iPhone, from the internet to batteries and from touchscreens to voice
recognition, was invented by researchers on the government payroll). And second, because they tie themselves into knots to avoid
paying taxes, retaining countless bankers, lawyers, and lobbyists for this very purpose.
Even more important, many of these companies function as "natural monopolies", operating in a positive feedback loop of increasing
growth and value as more and more people contribute free content to their platforms. Companies like this are incredibly difficult
to compete with, because as they grow bigger, they only get stronger.
Aptly characterising this "platform capitalism" in an article,
Tom Goodwin writes : "Uber, the world's largest taxi company, owns no vehicles. Facebook, the world's most popular media owner,
creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world's largest accommodation provider,
owns no real estate."
Facebook
Twitter
Pinterest 'Every sliver of fundamental technology in the iPhone, from the internet to batteries and from touchscreens to voice
recognition, was invented by researchers on the government payroll.' Photograph: Regis Duvignau/Reuters
So what do these companies own? A platform. A platform that lots and lots of people want to use. Why? First and foremost, because
they're cool and they're fun – and in that respect, they do offer something of value. However, the main reason why we're all happy
to hand over free content to Facebook is because all of our friends are on Facebook too, because their friends are on Facebook because
their friends are on Facebook.
Most of Mark Zuckerberg's income is just rent collected off the millions of picture and video posts that we give away daily for
free. And sure, we have fun doing it. But we also have no alternative – after all, everybody is on Facebook these days. Zuckerberg
has a website that advertisers are clamouring to get onto, and that doesn't come cheap. Don't be fooled by endearing pilots with
free internet in Zambia. Stripped down to essentials, it's an ordinary ad agency. In fact, in 2015 Google and Facebook pocketed an
astounding
64% of all online ad revenue in the US.
But don't Google and Facebook make anything useful at all? Sure they do. The irony, however, is that their best innovations only
make the rentier economy even bigger. They employ scores of programmers to create new algorithms so that we'll all click on more
and more ads.
Uber has
usurped the whole taxi sector just as
Airbnb has upended the hotel industry and Amazon has overrun the book trade. The bigger such platforms grow the more powerful
they become, enabling the lords of these digital feudalities to demand more and more rent.
Think back a minute to the definition of a rentier: someone who uses their control over something that already exists in order
to increase their own wealth. The feudal lord of medieval times did that by building a tollgate along a road and making everybody
who passed by pay. Today's tech giants are doing basically the same thing, but transposed to the digital highway. Using technology
funded by taxpayers, they build tollgates between you and other people's free content and all the while pay almost no tax on their
earnings.
This is the so-called innovation that has Silicon Valley gurus in raptures: ever bigger platforms that claim ever bigger handouts.
So why do we accept this? Why does most of the population work itself to the bone to support these rentiers?
I think there are two answers. Firstly, the modern rentier knows to keep a low profile. There was a time when everybody knew who
was freeloading. The king, the church, and the aristocrats controlled almost all the land and made peasants pay dearly to farm it.
But in the modern economy, making rentierism work is a great deal more complicated. How many people can explain a
credit default swap
, or a collateralised debt obligation ? Or the revenue
model behind those cute Google Doodles? And don't the folks on Wall Street and in Silicon Valley work themselves to the bone, too?
Well then, they must be doing something useful, right?
Maybe not. The typical workday of Goldman Sachs' CEO may be worlds away from that of King Louis XIV, but their revenue models
both essentially revolve around obtaining the biggest possible handouts. "The world's most powerful investment bank," wrote the journalist
Matt Taibbi about
Goldman Sachs , "is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything
that smells like money."
But far from squids and vampires, the average rich freeloader manages to masquerade quite successfully as a decent hard worker.
He goes to great lengths to present himself as a "job creator" and an "investor" who "earns" his income by virtue of his high "productivity".
Most economists, journalists, and politicians from left to right are quite happy to swallow this story. Time and again language is
twisted around to cloak funneling and exploitation as creation and generation.
However, it would be wrong to think that all this is part of some ingenious conspiracy. Many modern rentiers have convinced even
themselves that they are bona fide value creators. When current Goldman Sachs CEO
Lloyd Blankfein
was asked about the purpose of his job, his straight-faced answer was that he is "
doing God's
work ". The Sun King would have approved.
The second thing that keeps rentiers safe is even more insidious. We're all wannabe rentiers. They have made millions of people
complicit in their revenue model. Consider this: What are our financial sector's two biggest cash cows? Answer: the housing market
and pensions. Both are markets in which many of us are deeply invested.
Recent decades have seen more and more people contract debts to buy a home, and naturally it's in their interest if
house
prices continue to scale new heights (read: burst bubble upon bubble). The same goes for pensions. Over the past few decades
we've all scrimped and saved up a mountainous pension piggy bank. Now pension funds are under immense pressure to ally with the biggest
exploiters in order to ensure they pay out enough to please their investors.
The fact of the matter is that feudalism has been democratised. To a lesser or greater extent, we are all depending on handouts.
En masse, we have been made complicit in this exploitation by the rentier elite, resulting in a political covenant between the rich
rent-seekers and the homeowners and retirees.
Don't get me wrong, most homeowners and retirees are not benefiting from this situation. On the contrary, the banks are bleeding
them far beyond the extent to which they themselves profit from their houses and pensions. Still, it's hard to point fingers at a
kleptomaniac when you have sticky fingers too.
So why is this happening? The answer can be summed up in three little words: Because it can.
Rentierism is, in essence, a question of power. That the Sun King Louis XIV was able to exploit millions was purely because he
had the biggest army in Europe. It's no different for the modern rentier. He's got the law, politicians and journalists squarely
in his court. That's why bankers get fined peanuts for preposterous fraud, while a mother on government assistance gets penalised
within an inch of her life if she checks the wrong box.
The biggest tragedy of all, however, is that the rentier economy is gobbling up society's best and brightest. Where once upon
a time Ivy League graduates chose careers in science, public service or education, these days they are more likely to opt for banks,
law firms, or trumped up ad agencies like Google and Facebook. When you think about it, it's insane. We are forking over billions
in taxes to help our brightest minds on and up the corporate ladder so they can learn how to score ever more outrageous handouts.
One thing is certain: countries where rentiers gain the upper hand gradually fall into decline. Just look at the Roman Empire.
Or Venice in the 15th century. Look at the Dutch Republic in the 18th century. Like a parasite stunts a child's growth, so the rentier
drains a country of its vitality.
What innovation remains in a rentier economy is mostly just concerned with further bolstering that very same economy. This may
explain why the big dreams of the 1970s, like flying cars, curing cancer, and colonising Mars, have yet to be realised, while bankers
and ad-makers have at their fingertips technologies a thousand times more powerful.
Yet it doesn't have to be this way. Tollgates can be torn down, financial products can be banned, tax havens dismantled, lobbies
tamed, and patents rejected. Higher taxes on the ultra-rich can make rentierism less attractive, precisely because society's biggest
freeloaders are at the very top of the pyramid. And we can more fairly distribute our earnings on land, oil, and innovation through
a system of, say, employee shares, or a
universal basic
income .
But such a revolution will require a wholly different narrative about the origins of our wealth. It will require ditching the
old-fashioned faith in "solidarity" with a miserable underclass that deserves to be borne aloft on the market-level salaried shoulders
of society's strongest. All we need to do is to give real hard-working people what they deserve.
And, yes, by that I mean the waste collectors, the nurses, the cleaners – theirs are the shoulders that carry us all.
"... "The entire US economy today is about the quick buck." ..."
"... " When market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort in history giving us a grand total of over $15 trillion." ..."
Central banks are founded for one reason only: to save
[private] banks from bankruptcy, invariably at the cost of society at large. They'll bring down markets
and societies just to make sure banks don't go under. They'll also, and even, do that when
these banks have taken insane risks. It's a battle societies can't possibly win as long as
central banks can raise unlimited amounts of 'money' and shove it into private banks. Ergo:
societies can't survive the existence of a central bank that serves the interests of its
private banks.
For years critics of U.S. central-bank policy have been dismissed as Negative Nellies,
but the ugly truth is staring us in the face: Stock-market advances remain a game of
artificial liquidity and central-bank jawboning, not organic growth. And now the jig is up.
As I've been saying for a long time: There is zero evidence that markets can make or sustain
new highs without some sort of intervention on the side of central banks. None. Zero. Zilch.
And don't think this is hyperbole on my part. I will, of course, present evidence.
In March 2009 markets bottomed on the expansion of QE1 (quantitative easing, part one),
which was introduced following the initial announcement in November 2008. Every major
correction since then has been met with major central-bank interventions: QE2, Twist, QE3 and
so on. When market tumbled in 2015 and 2016, global central banks embarked on the largest
combined intervention effort in history. The sum: More than $5 trillion between 2016 and
2017, giving us a grand total of over $15 trillion, courtesy of the U.S. Federal Reserve, the
European Central Bank and the Bank of Japan:
When did global central-bank balance sheets peak? Early 2018. When did global markets
peak? January 2018. And don't think the Fed was not still active in the jawboning business
despite QE3 ending. After all, their official language remained "accommodative" and their
interest-rate increase schedule was the slowest in history, cautious and tinkering so as not
to upset the markets.
With tax cuts coming into the U.S. economy in early 2018, along with record buybacks,
the markets at first ignored the beginning of QT (quantitative tightening), but then it all
changed. And guess what changed? Two things. In September 2018, for the first time in 10
years, the U.S. central bank's Federal Open Market Committee (FOMC) removed one little word
from its policy stance: "accommodative." And the Fed increased its QT program. When did U.S.
markets peak? September 2018.
[..] don't mistake this rally for anything but for what it really is: Central banks
again coming to the rescue of stressed markets. Their action and words matter in heavily
oversold markets. But the reality remains, artificial liquidity is coming out of these
markets. [..] What's the larger message here? Free-market price discovery would require a
full accounting of market bubbles and the realities of structural problems, which remain
unresolved. Central banks exist to prevent the consequences of excess to come to fruition and
give license to politicians to avoid addressing structural problems.
is it $15 trillion, or is it 20, or 30? How much did China add to the total? And for what?
How much of it has been invested in productivity? I bet you it's not even 10%. The rest has
just been wasted on a facade of a functioning economy. Those facades tend to get terribly
expensive.
Western economies would have shrunk into negative GDP growth if not for the $15-20 trillion
their central banks injected over the past decade. And that is seen, or rather presented, as
something so terrible you got to do anything to prevent it from happening. As if it's
completely natural, and desirable, for an economy to grow forever.
It isn't and it won't happen, but keeping the illusion alive serves to allow the rich to put
their riches in a safe place, to increase inequality and to prepare those who need it least to
save most to ride out the storm they themselves are creating and deepening. And everyone else
can go stuff themselves.
And sure, perhaps a central bank could have some function that benefits society. It's just
that none of them ever do, do they? Central banks benefit private banks, and since the latter
have for some braindead reason been gifted with the power to issue our money, while we could
have just as well done that ourselves, the circle is round and we ain't in it.
No, the Fed doesn't hide the ugly truth. The Fed is that ugly truth. And if we don't get rid
of it, it will get a lot uglier still before the entire edifice falls to pieces. This is not
complicated stuff, that's just what you're made to believe. Nobody needs the Fed who doesn't
want to pervert markets and society, it is that simple.
The word your looking for "abyss"
definition --
a catastrophic situation seen as likely to occur to the people with wealth that is built
upon "leverage."
Leverage results from using borrowed capital as a funding source when investing to expand
the firm's asset base and generate returns on risk capital. Leverage is an investment
strategy of using borrowed money -- specifically, the use of various financial instruments
or borrowed capital -- to increase the potential return of an investment. Leverage can also
refer to the amount of debt a firm uses to finance assets. When one refers to a company,
property or investment as "highly leveraged," it means that item has more debt than
equity.
"The entire US economy today is about the quick buck."
Even the stock market these days seems to be about the quick buck. In the US, the
average holding period for stocks has dropped from 8 years (1960), to 5 years (1970), to 2
years (1990), to 4 months (in the past few years).
The policies of the Fed (as well as the Board of Directors of the companies) are
evidently geared towards the short-term benefits of the owners who will be leaving in a few
months. The long-term health of the companies, the economy, and the overall society (mostly
non-owners) is evidently not so important to the Fed and the CEOs.
" When market tumbled in 2015 and 2016, global central banks embarked on the largest combined intervention effort
in history giving us a grand total of over $15 trillion."
Those $15 trillion in assets being held by the central banks propped the global stock market capitalization up to around
$75 trillion. Short term thinking that gives short-term benefits. Take away the props and of course that sucker is going to
fall.
What were they thinking, the overweight patient with all of those systemic problems is going to be able to walk just
fine when the crutches are taken away?
"... At least in nature, "smart" parasites may perform helpful functions, such as helping their host find food. But as the host weakens, the parasite lays eggs, which hatch and devour the host, killing it. That is what predatory finance is doing to today's economies. It's stripping assets, not permitting growth or even letting the economy replenish itself. ..."
"... MH: The financial sector is a rentier sector – external to the "real" economy of production and consumption, and therefore a form of overhead. As overhead, it should be a subtracted from GDP. ..."
"... In the name of saving "the market," the Fed and ECB therefore overruled the market. Today, over 80 percent of U.S. home mortgages are guaranteed by the Federal Housing Authority. Banks won't make loans without the government picking up the risk of non-payment. So bankers just pretend to be free market. That's for their victims. ..."
"... The "flight to security" is a move out of the stock and bond markets into government debt. Stocks and bonds may go down in price, some companies may go bankrupt, but national governments can always print the money to pay their bondholders. Investors are mainly concerned about keeping whatthey have – security of principal. They are willing to be paid less income in exchange for preserving what they have taken. ..."
"... But the way Wall Street administrators at the Treasury and Fed plan the crisis is for small savers to lose out to the large institutional investors. So the bottom line that I see is a slow crash. ..."
"... U.S. diplomats radically changed IMF lending rules as part of their economic sanctions imposed on Russia as result of the coup d'état by the Right Sector, Svoboda and their neo-Nazi allies in Kiev. The ease with which the U.S. changed these rules to support the military coup shows how the IMF is simply a tool of President Obama's New Cold War policy. ..."
"... The main financial innovation by Apple has been to set up a branch office in Ireland and pretend that the money it makes in the Untied States and elsewhere is made in Ireland – which has only a 15 percent income-tax rate ..."
"... It would seem to be an anomaly to borrow from banks and pay dividends. But that is the "cannibalism" stage of modern finance capitalism, U.S.-style. For the stock market as a whole, some 92 percent of earnings recently were used to pay dividends or for stock buybacks. ..."
Michael Hudson: The financial sector today is decoupled from industrialization. Its main
interface with industry is to provide credit to corporate raiders. Their objective isasset
stripping, They use earnings to repay financial backers (usually junk-bond holders), not to
increase production. The effect is to suck income from the company and from the economy to pay
financial elites.
These elites play the role today that landlords played under feudalism. They levy interest
and financial fees that are like a tax, to support what the classical economists called
"unproductive activity." That is what I mean by "parasitic."
If loans are not used to finance production and increase the economic surplus, then interest
has to be paid out of other income. It is what economists call a zero-sum activity. Such
interest is a "transfer payment," because it that does not play a directly productive function.
Credit may be a precondition for production to take place, but it is not a factor of
production as such.
The situation is most notorious in the international sphere, especially in loans to
governments that already are running trade and balance-of-payments deficits. Power tends to
pass into the hands of lenders, so they lose control – and become less democratic.
To return to my use of the word parasite, any exploitation or "free lunch" implies a host.
In this respect finance is a form of war, domestically as well as internationally.
At least in nature, "smart" parasites may perform helpful functions, such as helping their
host find food. But as the host weakens, the parasite lays eggs, which hatch and devour
the host, killing it. That is what predatory finance is doing to today's economies. It's
stripping assets, not permitting growth or even letting the economy replenish itself.
The most important aspect of parasitism that I emphasize is the need of parasites to control
the host's brain. In nature, a parasite first dulls the host's awareness that it is being
attacked. Then, the free luncher produces enzymes that control the host's brain and make it
think that it should protect the parasite – that the outsider is part of its own body,
even like a baby to be specially protected.
The financial sector does something similar by pretending to be part of the industrial
production-and-consumption economy. The National Income and Product Accounts treat the
interest, profits and other revenue that Wall Street extracts – along with that of the
rentier sectors it backs (real estate landlordship, natural resource extraction and
monopolies) – as if these activities add to Gross Domestic Product. The reality is that
they are a subtrahend, a transfer payment from the "real" economy to the Finance, Insurance and
Real Estate Sector. I therefore focus on this FIRE sector as the main form of economic overhead
that financialized economies have to carry.
What this means in the most general economic terms is that finance and property ownership
claims are not "factors of production." They are external to the production process. But they
extract income from the "real" economy.
They also extract property ownership. In the sphere of public infrastructure – roads,
bridges and so forth – finance is moving into the foreclosure phase. Creditors are trying
to privatize what remains in the public domains of debtor economies. Buyers of these assets
– usually on credit – build interest and high monopoly rents into the prices they
charge.
JR: What is your vision for the next few decades of the global economy?
MH: The financial overhead has grown so large that paying interest, amortization and fees
shrinks the economy. So we are in for years of debt deflation. That means that people have to
pay so much debt service for mortgages, credit cards, student loans, bank loans and other
obligations that they have less to spend on
goods and services. So markets shrink. New investment and employment fall off, and the economy
is falls into a downward spiral.
My book therefore
devotes a chapter to describing how debt deflation works. The result is a slow crash. The
economy just gets poorer and poorer. More debtors default, and their property is transferred to
creditors. This happens not only with homeowners who fall into arrears, but also corporations
and even governments. Ireland and Greece are examples of the kind of future in store for
us.
Financialized economies tend to polarize between creditors and debtors. This is the dynamic
that Thomas Piketty leaves out of his book, but his statistics show that all growth in income
and nearly all growth in wealth or net worth has accrued to the One Percent, almost nothing for
the 99 Percent.
Basically, you can think of the economy as the One Percent getting the 99 Percent
increasingly into debt, and siphoning off as interest payments and other financial charges
whatever labor or business earns. The more a family earns, for instance, the more it can borrow
to buy a nicer home in a better neighborhood – on mortgage. The rising price of housing
ends up being paid to the bank – and over the course of a 30-year mortgage, the banker
receives more in interest than the seller gets.
Economic polarization is also occurring between creditor and debtor nations. This
issplitting the eurozone between Germany, France and the Netherlands in the creditor camp,
against Greece, Spain, Portugal, Ireland and Italy (the PIIGS) falling deeper into debt,
unemployment and austerity – followed by emigration and capital flight.
This domestic and international polarization will continue until there is a political fight
to resist the creditors. Debtors will seek to cancel their debts. Creditors will try to
collect, and the more they succeed, the more they will impoverish the economy.
Background
JR: Let's talk about your history, why did you become an economist?
MH: I started out wanting to be a musician – a composer and conductor. I wasn't very
good at either, but I was a very good interpreter, thanks to working with Oswald Jonas in
Chicago studying the musical theories of Heinrich Schenker. I got my sense of aesthetics from
music theory, and also the idea of modulation from one key to another. It is dissonance that
drives music forward, to resolve in a higher key or overtone.
When I was introduced to economics by the father of a schoolmate, I found it as aesthetic as
music, in the sense of a self-transforming dynamic through history by challenge and response or
resolution. I went to work for banks on Wall Street, and was fortunate enough to learn about
how central mortgage lending and real estate were for the economy. Then, I became Chase
Manhattan's balance-of-payments economist in 1964, and got entranced with tracing how the
surplus was buried in the statistics – who got it, and what they used it for. Mainly the
banks got it, and used it to make new loans.
I viewed the economy as modulating from one phase to the next. A good interpretation would
explain history. But the way the economy worked was nothing like what I was taught in school
getting my PhD in economics at New York University. So I must say, I enjoyed contrasting
reality with what I now call Junk Economics.
In mainstream textbooks there is no exploitation. Even fraudulent banks, landlords and
monopolists are reported as "earning" whatever they take – as if they are contributing to
GDP. So I found the economics discipline ripe for a revolution.
JR: What is the difference between how economics is taught vs. what you learned in your
job?
MH: For starters, when I studied economics in the 1960s there was still an emphasis on the
history of economic thought, and also on economic history. That's gone now.
One can easily see why. Adam Smith, John Stuart Mill and other classical economists sought
to free their societies from the legacy of feudalism: landlordism and predatory finance, as
well as from the monopolies that bondholders had demanded that governments create as a means of
paying their war debts.
Back in the 1960s, just like today, university courses did not give any training in actual
statistics. My work on Wall Street involved National Income and Product Accounts and the
balance-of-payments statisticspublished by the Commerce Department every three months, as well
as IMF andFederal Reserve statistics. Academic courses didn't even make reference to accounting
– so there was no conceptualization of "money," for instance, in terms of the liabilities
side of the balance sheet.
New York University's money and banking course was a travesty. It was about helicopters
dropping money down – to be spent on goods and services, increasing prices. There was no
understanding that the Federal Reserve's helicopter only flies over Wall Street, or that banks
create money on its own computers. It was not even recognized that banks lend to customers
mainly to buy real estate, or speculate in stocks and bonds, or raid companies.
Economics is taught like English literature. Teachers explain the principle of "suspension
of disbelief." Readers of novels are supposed to accept the author's characters and setting. In
economics, students are told to accept just-pretend parallel universe assumptions, and then
treat economic theory as a purely logical exercise, without any reference to the world.
The switch from fiction to reality occurs by taking the policy conclusions of these
unrealistic assumptions as if they do apply to the real world: austerity, trickle-down
economics shifting taxes off the wealthy, and treating government spending as "deadweight" even
when it is on infrastructure.
The most fictitious assumption is that Wall Street and the FIRE sector add to
output, rather than extracting revenue from the rest of the economy.
JR: What did you learn in your work on the US oil industry?
MH: For starters, I learned how the oil industry became tax-exempt. Not only by the
notorious depletion allowance, but by offshoring profits in "flags of convenience" countries, in
Liberia and Panama. These are not real countries. They do not have their own currency, but use
U.S. dollars. And they don't have an income tax.
The international oil companies sold crude oil at low prices from the Near East or Venezuela
to Panamanian or Liberian companies – telling the producing countries that oil was not
that profitable. These shipping affiliates owned tankers, and charged very high prices to
refineries and distributors in Europe or the Americas. The prices were so high that these
refineries and other "downstream" operations marketing gas to consumers did not show a profit
either. So they didn't have to pay European or U.S. taxes. Panama and Liberia had no income tax.
So the global revenue of the oil companies was tax-free.
I also learned the difference between a branch and an affiliate. Oil wells and oil fields
are treated as "branches," meaning that their statistics are consolidated with the head office
in the United States. This enabled the companies to take a depletion allowance for emptying out
oil fields abroad as well as in the United States.
My statistics showed that the average dollar invested by the U.S. oil industry was returned
to the United States via balance-of-payments flows in just 18 months. (This was not a profit
rate, but a balance-of-payments flow.) That finding helped the oil industry get exempted from
President Lyndon Johnson's "voluntary" balance-of-payments controls imposed in 1965 when the
Vietnam War accounted for the entire U.S. payments deficit. Gold was flowering out to France,
Germany and other countries running payments surpluses.
The balance-of-payments accounting format I designed for this study led me to go to work for
an accounting firm, Arthur Andersen, to look at the overall U.S. balance of payments. I found
that the entire deficit was military spending abroad, not foreign aid or trade.
Junk Economics
JR: Why do you think there is a disconnect between academic economic theory and the way
that international trade and finance really works?
MH: The aim of academic trade theory is to tell students, "Look at the model, not at how
nations actually develop." So of all the branches of economic theory, trade theory is the most
wrongheaded.
For lead nations, the objective of free trade theory is to persuade other countries not to
protect their own markets. That means not developing in the way that Britain did under its
mercantilist policies thatmade it the first home of the Industrial Revolution. It means not
protecting domestic industry, as the United States and Germany did in order to catch up with
British industry in the 19 th century and overtake it in theearly 20 th
century.
Trade theorists start with a conclusion: either free trade or (in times past) protectionism.
Free trade theory as expounded by Paul Samuelson and others starts by telling students to
assume a parallel universe – one that doesn't really exist. The conclusion they start
with is that free trade makes everyone's income distribution between capital and labor similar.
And because the world has a common price for raw materials and dollar credit, as well as for
machinery, the similar proportions turn out to mean equality. All the subsequent assumptions
are designed to lead to this unrealistic conclusion.
But if you start with the real world instead of academic assumptions, you see that the world
economy is polarizing. Academic trade theory can't explain this. In fact, it denies that
today's reality can be happening at all!
A major reason why the world is polarizing is because of financial dynamics between creditor
and debtor economies. But trade theory starts by assuming a world of barter. Finally, when the
transition from trade theory to international finance is made, the assumption is that countries
running trade deficits can "stabilize" by imposing austerity, by lowering wages, wiping out
pension funds and joining the class war against labor.
All these assumptions were repudiated already in the 18 th century, when Britain
sought to build up its empire by pursuing mercantilist policies. The protectionist American
School of Economics in the 19 th century put forth the Economy of High Wages
doctrine to counter free-trade theory. None of this historical background appears in today's
mainstream textbooks. (I provide a historical survey in Trade, Development and
Foreign Debt , new ed., 2002. That book summarizes my course in international trade
and finance that I taught at the New School from 1969 to 1972.)
In the 1920s, free-trade theory was used to insist that Germany could pay reparations far
beyond its ability to earn foreign exchange. Keynes, Harold Moulton and other economists
controverted that theory. In fact, already in 1844, John Stuart Mill described how paying
foreign debts lowered the exchange rate. When that happens, what is lowered is basically wages.
So what passes for today's mainstream trade theory is basically an argument for reducing wages
and fighting a class war against labor.
You can see this quite clearly in the eurozone, above all in the austerity imposed on
Greece. The austerity programs that the IMF imposed on Third World debtors from the 1960s
onward. It looks like a dress rehearsal to provide a cover story for the same kind of
"equilibrium economics" we may see in the United States.
JR: Can the US pay its debts permanently? Does the amount of federal debt, $18 or $19
trillion even matter? Should we pay down the national debt?
MH: It is mainly anti-labor austerity advocates who urge balancing the budget, and even to
run surpluses to pay down the national debt. The effect must be austerity.
A false parallel is drawn with private saving. Of course individuals should get out of debt
by saving what they can. But governments are different. Governments create money and spend it
into the economy by running budget deficits. The paper currency in your pocket is technically a
government debt. It appears on the liabilities side of the public balance sheet.
When President Clinton ran a budget surplus in the late 1990s, that sucked revenue
out of the U.S. economy. When governments do not run deficits, the economy is
obliged to rely on banks – which charge interest for providing credit. Governments can
create money on their own computers just as well. They can do this without having to pay
bondholders or banks.
That is the essence of Modern Monetary Theory (MMT). It is elaborated mainly at the
University of Missouri at Kansas City (UMKC), especially by Randy Wray – who has just
published a number of books on money – and Stephanie Kelton, whom Bernie Sanders
appointed as head of the Senate Democratic Budget Committee.
If the government were to pay off its debts permanently, there would be no money –
except for what banks create. That has never been the case in history, going all the way back
to ancient Mesopotamia. All money is a government debt, accepted in payment of taxes
This government money creation does not mean that governments can pay foreign
debts. The danger comes when debts are owed in a foreign currency. Governments are unable to
tax foreigners. Paying foreign debts puts downward pressure on exchange rates. This leads to
crises, which often end by relinquishing political control to the IMF and foreign banks. They
demand "conditionalities" in the form of anti-labor legislation and privatization.
In cases where national economies cannot pay foreign debts out of current
balance-of-payments revenue, debts should be written down, not paid off. If they are not
written down, you have the kind of austerity that is tearing Greece apart today.
JR: You say that mainstream economic theory and academic study is pro-creditor? Why is
this the case?
MH: Thorstein Veblen pointed out that vested interests are the main endowers and backers of
the higher learning in America. Hardly by surprise, they promote a bankers'-eye view of the
world. Imperialists promote a similar self-serving worldview.
Economic theory, like history, is written by the winners. In today's world that means the
financial sector. They depict banks as playing a productive role, as if loans are made to help
borrowers earn the money to pay interest and still keep something for themselves. The pretense
is that banks finance industrial capital formation, not asset stripping.
What else would you expect banks to promote? The classical distinction between productive
and unproductive (that is, extractive) loans is not taught. The result has been to turn
mainstream economics as a public-relations advertisement for the status quo, which meanwhile
becomes more and more inequitable and polarizes the economy.
JR: What can be learned by studying the history of economic thought? What did Adam Smith
and the people in his era and those which followed him understand that would be useful to us
now?
MH: If you read Adam Smith and subsequent classical economists, you see that their main
concern was to distinguish between productive and unproductive economic activity. They wanted
to isolate unproductive rentier income, and unproductive spending and credit.
To do this, they developed the labor theory of value to distinguish value from price –
with "economic rent" being the excess of price over socially necessary costs of production.
They wanted tofree industrial capitalism from the legacy of feudalism: tax-like groundrent paid
to a hereditary landed aristocracy. They also opposed the monopolies that bondholders had
insisted that governments create to sell off to pay the public debt. That was why the East
India Company and the South Sea Company were created with their special privileges.
Smith and his followers are applauded as the founding fathers of "free market" economics.
But they defined free markets in a diametrically opposite way from today's self-proclaimed
neoliberals. Smith and other classical economists urged markets free from economic
rent.
These classical reformers realized that progressive taxation to stop favoring
rentiers required a government strong enough to take on society's most powerful and
entrenched vested interests. The 19 th -century drive for Parliamentary reform in
Britain aimed at enabling the House of Commons to override the House of Lords and tax the
landlords. (This rule finally passed in 1910 after a constitutional crisis.) Now there has been
a fight by creditors to nullify democratic politics, most notoriously in Greece.
Today's neoliberals define free markets as those free for rent-seekers and
predatory bankers from government regulation and taxes.
No wonder the history of economic thought has been stripped away from the curriculum.
Reading the great classical economists would show how the Enlightenment's reform program has
been inverted. The world is now racing down a road to the Counter-Enlightenment, a neo-
rentier economy that is bringing economic growth to a halt.
JR: Why does economic thought minimize the role of debt? I.e. I read Paul Krugman and he
says the total amount of debtisn't a problem, for example you can't find the internet bust in
GDP or the 1987 crash?
MH: When economists speak of money, they neglect that all money and credit is debt. That is
the essence of bookkeeping and accounting. There are always two sides to the balance sheet. And
one party's money or savings is another party's debt.
Mainstream economic models describe a world that operates on barter, not on credit. The
basic characteristic of credit and debt is that it bears interest. Any rate of interest can be
thought of as a doubling time. Already in Babylonia c. 1900 BC, scribes were taught to c
alculate compound interest, and how long it took a sum to double (5 years) quadruple (10 years)
or multiply 64 times (30 years). Martin Luther called usury Cacus, the monster that absorbs
everything. And in Volume III of Capital and also his Theories of Surplus
Value , Marx collected the classical writings about how debts mount up at interest by
purely mathematical laws, without regard for the economy's ability to pay.
The problem with debt is not only interest. Shylock's loan against a pound of flesh was a
zero-interest loan. When crops fail, farmers cannot even pay the principal. They then may lose
their land, which is their livelihood. Forfeiture is a key part of the credit/debt dynamic. But
the motto of mainstream neoliberal economics is, "If the eye offends thee, pluck it out."
Discussing the unpayability of debt is offensive to creditors.
Anyone who sets out to calculate the ability pay quickly recognizes that the overall volume
of debts cannot be paid. Keynes that made point in the 1920s regarding Germany's inability to
pay reparations.
Needless to say, banks and bondholders do not want to promote any arguments explaining the
limits to how much can be paid without pushing economies into depression. That is what my
Killing the
Host is about. It is the direction in which the eurozone is now going, and the United
States also issuffering debt deflation.
Turning to the second part of your question, Krugman and others say that debt doesn't matter
because "we owe it to ourselves." But the "we" who owe it are the 99 Percent; the people who
are "ourselves" are the One Percent. So the 99 Percent Owe the One Percent. And they owe more
and more,thanks to the "magic of compound interest."
Krugman has a blind spot when it comes to understanding money. In his famous debate with
Steve Keen, he denied that banks create money or credit. He insists that commercial banks only
lend out deposits. But Keen and the Modern Monetary Theory (MMT) school show that loans
create deposits , not the other way around. When a banker writes a loan on his computer
keyboard, he creates a deposit as the counterpart.
Endogenous money is easily created electronically. That privilege enables banks to charge
interest. Governments could just as easily create money on their own computers. Neoliberal
privatizers want to block governments from doing this, so that economies will have to rely on
commercial banks for the money and credit they need to grow.
The mathematics of compound interest means that economies can only pay their debts by
creating a financial bubble – more and more credit to bid up asset prices for real
estate, stocks and bonds, enabling banks to make larger loans. Today's economies are obliged to
develop into Ponzi schemes to keep going – until they collapses\ in a crash.
JR: The models of the macroeconomy to forecast the future and to develop policy at
institutions like the IMF, often consider finance and banking as just another sector of
industry, like construction or manufacturing. How do these institutions consider their model of
the financial sector?
MH: The IMF acts as the collection agent for global bondholders. Its projections begin by
assuming that all debts can be paid, if economies will cut wages and wiping out pension funds
so as to pay banks and bondholders.
As long as creditors remain in control, they are quite willing to sacrifice the 99 Percent
to pay the One Percent. When IMF "stabilization" programs end up destabilizing their hapless
victims, mainstream media blame the collapse on the debtor country for not shedding enough
blood to impose even more austerity.
Economists often define their discipline as "the allocation of scarce resources among
competing ends." But when resources or money really become scarce, economists call it
a crisis and say that it's a question for politicians, not their own department. Economic
models are only marginal – meaning, small changes, not structural.
The only trend that does grow inexorably is that of debt. The more it grows, the
more it slows the "real" economy of production and consumption. So something must give: either
the economy, or creditor claims. And that does indeed change the structure of the economy. It
is a political as well as an economic change.
Regarding the second part of your question – how creditor institutions model the
financial sector – when they look at prices they only consider wages and consumer prices,
not asset prices. Yet most bank credit is tied to asset prices, because loans are made to buy
homes or commercial real estate, stocks or bonds, not bread and butter.
Not looking at what is obviously important requires a great effort of tunnel vision. But as
Upton Sinclair noted, there are some jobs – like being a central banker, or a New
York Times editorial writer – that require the applicant not to understand
the topic they are assigned to study. Hence, you have Paul Krugman on money and banking, the
IMF on economic stabilization, and Rubinomics politicians on bailing out the banks instead of
saving the economy.
If I can add a technical answer: The IMF does not recognize that the "budget problem"
– squeezing domestic currency out of the economy by taxing wages and industry – is
quite different from the "transfer problem" of converting this money into foreign exchange.
That distinction was the essence of the German reparations debate in the 1920s. It is a focus
of my history of theories of Trade, Development and
Foreign Debt .
Drawing this distinction shows why austerity programs do not help countries pay their
foreign debt, but tears them apart and induces emigration and capital flight.
JR: Does the financial sector add to GDP?
MH: The financial sector is a rentier sector – external to the "real" economy
of production and consumption, and therefore a form of overhead. As overhead, it should be a
subtracted from GDP.
JR: In the way that oil industry funded junk science on global warming denial, Wall
Street funds and endows junk economics and equilibrium thinking?
Falling on your face is a state of equilibrium. So is death – and each moment of
dying. Equilibrium is simply a cross section in time. Water levels 20 or 30 feet higher would
be another form of equilibrium. But to the oil industry, "equilibrium" means their earnings
continuing to grow at the present rate, year after year. This involves selling more and more
oil, even if this raises sea levels and floods continents. That is simply ignored as not
relevant to earnings. By the time that flooding occurs, today's executives will have taken
their bonuses and capital gains and retired.
That kind of short-termism is the essence of junk economics. It is tunnel-visioned.
What also makes economics junky is assuming that any "disturbance" sets in motion
countervailing forces that return the economy to its "original" state – as if this were
stable, not moving down the road to debt peonage and similar economic polarization.
The reality is what systems analysts call positive feedback: When an economy gets out of
balance, especially as a result of financial predators, the feedback and self-reinforcing
tendencies push it further and further out of balance.
My trade theory book traced the history of economists who recognize this. Once a class or
economy falls into debt, the debt overhead tends to grow steadily until it stifles market
demand and subjects the economy to debt deflation. Income is sucked upward to the creditors,
who then foreclose on the assets of debtors. This shrinks tax revenue, forcing public budgets
into deficit. And when governments are indebted, they becomemore subject to pressure to
privatization of public enterprise. Assets are turned over to monopolists, who further shrink
the economy by predatory rent seeking.
An economy going bankrupt such as Greece and having to sell off its land, gas rights, ports
and public utilities is "in equilibrium" at any given moment that its working-age population is
emigrating, people are losing their pensions and suffering.
When economists treat depressions merely as self-curing "business downturns," they are
really saying that no government action is required from "outside" "the market" to rectify
matters and put the economy back on track to prosperity. So equilibrium thinking isbasically
anti-government libertarian theory.
But when banks are subjected to "equilibrium" by writing down debts in keeping with the
ability of borrowers to pay, WallStreet's pet politicians and economic journalists call this a
crisis and insist that the banks and bondholders must be saved or there will be a crisis. This
is not a solution. It makes the problem worse and worse.
There is an alternative, of course. That is to understand the dynamics at work transforming
economic and socialstructures. That's what classical economics was about.
The post-classical revolution was marginalist. That means that economists only look at small
changes, not structural changes. That isanother way of saying that reforms are not necessary
– because reforms change structures, not merely redistribute a little bit of income as a
bandage.
What used to be "political economy" gave way to just plain "economics" by World War I. As it
became increasingly abstract and mathematical, students who studied the subject because they
wanted to make the world better were driven out, into other disciplines. That was my experience
teaching at the New School already nearly half a century ago. The discipline has become much
more tunnel-visioned since then.
Present state of financial world
JR: We see around the world something like 25% of all national debt is now has a yield
priced in negative interest rates? What does this mean? Do you see this continuing?
MH: On the one hand, negative interest rates reflect a flight to security by investors. They
worry that the debts can't be paid and that there are going to be defaults.
They also see that the United States and Europe are in a state of debt deflation, where
people and businesses have to pay banks instead of spending their income on goods and services.
So markets shrink, sales and profits fall, and the stock market turns down.
This decline was offset by the Federal Reserve and the European Central Bank trying to
re-inflate the Bubble Economy by Quantitative Easing – providing reserves to the banks in
exchange for their portfolio of mortgages and other loans. Otherwise, the banks would have had
to sell these loans in "the market" at falling prices.
In the name of saving "the market," the Fed and ECB therefore overruled the market. Today,
over 80 percent of U.S. home mortgages are guaranteed by the Federal Housing Authority. Banks
won't make loans without the government picking up the risk of non-payment. So bankers just
pretend to be free market. That's for their victims.
The "flight to security" is a move out of the stock and bond markets into government debt.
Stocks and bonds may go down in price, some companies may go bankrupt, but national governments
can always print the money to pay their bondholders. Investors are mainly concerned about
keeping whatthey have – security of principal. They are willing to be paid less income in
exchange for preserving what they have taken.
Here's the corner that the economy has backed itself into. The solution to most problems
creates new problems – blowback or backlash, which often turn out to be even bigger
problems. Negative interest rates mean that pension funds cannot invest in securities that
yield enough for them to pay what they have promised their contributors. Insurance companies
can't earn the money to pay their policyholders. So something has to give.
There will be breaks in the chain of payments. But the way Wall Street administrators at the
Treasury and Fed plan the crisis is for small savers to lose out to the large institutional
investors. So the bottom line that I see is a slow crash.
JR: Could there be a more symbiotic relationship with global financial institutions? For
money to have value, doesn't it need a functioning economy, rather than an
entirelyfinancialized one?
MH: Money is debt. It is a claim on some debtor. Government money is a claim by its
holder on the government, settled by the government accepting it as payment for tax debts.
Being a claim on a debtor, money does not necessarily need a functioning economy. It can be
part of a foreclosure process, transferring property to creditors. A financialized economy
tends to strip the economy of money, by sucking up to the creditor One Percent on top. That
is what happened in Rome, and the result was the Dark Age.
JR: In 2007/2008 we had a subprime crash and since 2014 we've had a commodities crash
where oil prices are low, is this because of what's going on in emerging market economies? Are
emerging market economies and China the next subprime?
MH: The current U.S. and Eurozone depression isn't because of China. It's because of
domestic debt deflation. Commodity prices and consumer spending are falling, mainly because
consumers have to pay most of their wages to the FIRE sector for rent or mortgage payments,
student loans, bank and credit card debt, plus over 15 percent FICA wage withholding for Social
Security and Medicare (actually, to enable the government to cut taxes on the higher income
brackets), as well income and sales taxes. After all this is paid, consumers don't have that
much left to spend on commodities. So of course commodity prices are crashing.
Oil is a special case. Saudi Arabia is trying to drive U.S. fracking rivals out of business,
while also hurting Russia. This lowers gas prices for U.S. and Eurozone consumers, but not by
enough to spur economic recovery.
JR: You've written that we're entering a financial cold war – the IMF and the US
have been very strict on debt repayment for loans from debtor nations, but in Ukraine they've
made an exception regarding Russia, could you discuss your recent writing on that?
MH: U.S. diplomats radically changed IMF lending rules as part of their economic sanctions
imposed on Russia as result of the coup d'état by the Right Sector, Svoboda and their
neo-Nazi allies in Kiev. The ease with which the U.S. changed these rules to support the
military coup shows how the IMF is simply a tool of President Obama's New Cold War policy.
The
aim was to enable the IMF to keep lending to the military junta even though Ukraine is in
default of its $3 billion debt to Russia, even though it refuses to negotiate payment, and even
though IMF money has been used to fund kleptocrats such as Kolomoisky to field his own army
against Russian speakers in Donbas. Ukraine has no foreseeablemeans of paying off the IMF and
other creditors, given its destruction of its export industry in the East. My articles on this
are on my website, michael-hudson.com
.
JR: Today's economy has some truly amazing technology from companies like Apple, but
Apple is also example of financial engineering, you outline this in your book, what financial
innovations havebeen associated with the story of Apple's stock?
MH: The main financial innovation by Apple has been to set up a branch office in Ireland and
pretend that the money it makes in the Untied States and elsewhere is made in Ireland –
which has only a 15 percent income-tax rate
The problem is that if Apple remits this income back to the United States, it will have to
pay U.S. income tax. It wants to avoid this – unless Wall Street can convince politicians
to declare a "tax holiday" would let tax avoiders bring all their foreign money back to the
United States "tax free." That would be a tax amnesty only for the very wealthy, not for the 99
Percent.
JR: This tax angle explains why Apple, almost the wealthiest company in the world, has
been urged by activist shareholders to borrow. Why should the richest company have to go into
debt?
MH: The answer is that Apple can borrow from U.S. banks at a low interest rate to pay
dividends on its stock, instead of paying these dividends by bringing its income back home and
paying the taxes that are due.
It would seem to be an anomaly to borrow from banks and pay dividends. But that is the
"cannibalism" stage of modern finance capitalism, U.S.-style. For the stock market as a whole,
some 92 percent of earnings recently were used to pay dividends or for stock buybacks.
JR: What is the eventual outcome of all theses corporate buybacks to pump up share
prices?
MH: The problem with a company using its revenue simply to buy its own shares to support
their price (and hence, enable CEOs to increase their salaries and bonuses, and make more
capital gains on their stock options) is that the price fillip is temporary. Last year saw the
largest volume of U.S. stock buybacks on record. But since January 1, the market has fallen by
about 20 percent. The debts that companies took on to buy stocks remain in place; and the
earnings that companies used to buy these stocks are now gone.
Corporations did not use their income to invest in long-term expansion. The financial time
frame always has been short-term. Projects with long-term paybacks are cut back, because CEOs
and financial managers simply want to take their money and run. That is the financial
mentality.
JR: What is the outcome of all theses corporate buybacks to pump up share
prices?
MH: When the dust settles, companies financialized in this way are left as debt-leveraged
shells. CEOs then go to their labor unions and threaten to declare bankruptcy if the unions
don't scale back their pension demands. So there is a deliberate tactic to force companies into
debt for short-term earnings and stock-price gains in the short term, and a more intensive
class war against present and past employees and pensioners as a longer-term policy.
JR: Why do business schools endorse of financialization? Reversing
short-termism?
MH: The financial sector is the major endower of business schools. They have become training
grounds for Chief Financial Officers. AtHarvard, Prof. Jensen reasoned that managers should aim
at serving stockholders, not the company as such. The result was an "incentive" system tying
management bonuses to the stock price. So naturally, CFOs used corporate earnings for stock
buybacks and dividend payouts that provided a short-term jump in the stock price.
The ideological foundation of today's business schools is that economic control should be
shifted out of government hands into those of financial managers – that is, Wall Street.
That is their idea of freeenterprise. Its inevitable tendency is to end in more centralized
planning by Wall Street than in Washington.
The aim of this financial planning is quite different from that of governments. As I wrote
in Killing the
Host : "The euro and the ECB were designed in a way that blocks government money
creation for any purpose other than to support the banks and bondholders. The financial sector
takes over the role of economic planner, putting its technicians in charge of monetary and
fiscal policy without democratic voice or referendums over debt and tax policies."
Financial planning always has been short-term. That is why planning should not be consigned
to banks and bondholders. Their mentality is extractive, and that ends up hit-and-run. What
passes for mainstream financial analysis is simply to add up how much is owed and demand
payment, not help the economy grow. To financial managers, economic prosperity and unemployment
is an "externality" – that is, not part of the equation that they are concerned with.
Future
JR: The story of Greece in recent years is relevant to our discussion because the
political party Syriza took over with ideas that were traditionally representing the left? Does
the body of traditional left ideas have the ability to solve some of the challenges regarding
financial warfare?
MH: The left and former Social Democratic or Labour parties have dome to focus on political
and cultural issues, not the economic policy that led to their original creation. What is
lacking is a focus on rent theory and financial analysis. Part of the explanation probably is
covert U.S. funding and sponsorship of Blair-type neoliberals.
The eurozone threatened Greece with domestic destabilization if it did not surrender to the
Troika's demands. Syriza's leaders worried that the ensuing turmoil would bring a right-wing
neo-Nazi group such as Golden Dawn into power, or a military dictatorship as a client oligarchy
for U.S. and German neoliberals.
So the political choice today is much like the 1930s, when the global economy also broke
down. The choice is between nationalism and populism on the right, or socialism reviving what
used to be left-wing politics.
JR: Could there be a debt write down? Isn't someone's debts another person's savings, i.e.
pension funds, 401k, retirement funds?
MH: The problem is indeed that one party's debt finds its counterpart in some other party's
savings. Not paying debts therefore involves annulling some other party's financial claims on
the debtor. What happens to the savings on the other side of the savings/debt balance
sheet?
JR: The political question is, who will lose first?
MH: The answer is, the least politically protected. The end game is "Big fish eat little
fish." Pension funds are in the front line of sacrifice, while government bondholders are the
most secure. Greek pensionsalready have been written down, and the savings of U.S. pension
funds, Social Security and other social programs are the first to be annulled.
The only way to achieve a fair debt cancellation is to write down the debts of the
wealthiest, not the most needy. That is the opposite of how matters are being resolved today.
That is why southern Europe is being radicalized over the debt issue.
JR: Will financialized economies implode? Leaving the non-financialized ones?
MH: The One Percent who hold most of the economy's savings are quite willing to plunge
society into depression to collect on their savings claims. Their greed is why we are in an
economic war much like Rome's Conflict of the Orders that shaped the Republic, and its century
of civil war between creditors and debtors, 133-29 BC.
Argentina has been imploding, just as Third World debtors were obliged to do when they
accepted IMF austerity programs and "conditionalities" for loans to keep their currencies from
depreciating. To avoid being forced to adopt such self-defeating and anti-democratic policies,
it looks like countries will have to move out of the U.S. and Eurozone orbit into that of the
BRICS. That is why today's financial crisis is leading to a New Cold War. It is as much
financial as it is military.
JR: How would you advise a politician to restore prosperity in the future?
MH: The problem is who to give advice to. Most politicians today – at least in the
United States – are proxies for their campaign contributors. President Obama is basically
a lobbyist for his Wall Street in the Democratic Party's Robert Rubin gang. That kind of
demagogue wouldn't pay any attention to policies that I or other economists would make. Their
job is not to make the economy better, but to defend their campaign contributors among the One
Percent at the economy's expense.
But when I go to China or Russia, here's what I advise (without much success so far, I
admit):
First, tax land rent and other economic rent. Make it the tax base. Otherwise, this rental
value will end up being pledged to banks as interest on credit borrowed to buy rent-yielding
assets.
Second, make banks into public utilities. Credit creation is like land or air: a monopoly
created by society. As organs of public policy they would not play the derivatives casino, or
make corporatetakeover loans to raiders, or falsify mortgage documents.
Third, do not privatize basic utilities. Public ownership enables basic services to be
provided at cost, on a subsidized basis, or freely. That will make the economy more
competitive. The cost of upgrading public infrastructure can be defrayed by basing the tax
system on economic rent, not wages.
Does it have to be this way ?
The Eurozone die is cast. Countries must withdraw from the euro so that governments can
create their own money once again, and resist creditor demands to carve up and privatize their
public domain.
For the United States, I don't see a concerted alternative to neoliberalism squeezing more
and more interest and rent out of the economy, making the present slump even deeper in
debt.
How won't debts be paid?
There are two ways not to pay debts: either by annulling or repudiating them, or by
foreclosure when creditors take or demand property in lieu of monetary payment.
The first way not to pay is to default or proclaim a Clean Slate. The most successful
example in modern times is the German Economic Miracle – the Allied Monetary Reform of
1948. That cancelled Germany's internal debts except for wages owed by employers, and minimum
working balances.
The United States Government has fought against creation of an international court to
adjudicate the ability of national economies to pay debts. If such a court is not
created, the global economy will fracture. That is occurring in what looks like a New Cold War
pitting the United States and its NATO satellites against the BRICS (China, Russia, South
Africa, Brazil and India) along with Iran and other debtors.
The US preferred policy is for countries to sell off whatever is in their public domain when
they lack the money to pay their debts. This is the "foreclosure" stage.
Short of these two ways of not paying debts, economies are submitting to debt deflation.
That strips income from producers and consumers, businesses and governments to pay creditors.
As the debtor economy weakens, the debt arrears mount up – often at rising interest rates
to reflect the risk of non-payment as creditors realize that there is no "business as usual'
way in which the debts can be paid.
Debtor countries may postpone the inevitable by borrowing from the IMF or U.S. Treasury to
buy out bondholders. This saves the latter from taking a loss – leaving the debtor
country with debts that are even harder to annul, because they are to foreign governments and
international institutions. That is why it is a very bad policy for countries to move from
owing money to private bondholders to owing the IMF or European Central Bank, whose demands are
unforgiving.
In the long term, debts won't be paid in the way that Rome's debts were not paid. The money
economy itself was stripped, and the empire fell into a prolonged Dark Age. That is the fate
that will befall the West if it continues to support the "rights" of creditors over the right
of nations and economies to survive.
This is a transcript from an interview on the
XE Podcast conducted by Justin Ritchie.
America is now the largest producer of oil in the world. For the U.S., this is great news as
the dream of energy independence grows and maybe one day we can tell OPEC to go take a
hike.
However, while the shale oil revolution has helped change the energy landscape forever, we
cannot take shale for granted. We can't just assume that the industry can withstand any price
and that production can keep rising despite the market conditions. We can't assume that shale
oil producers can match OPEC production cuts barrel for barrel.
We also can't assume OPEC, weakened by falling prices of late, won't strike back like they
did in 2014. That's when OPEC declared a production war on U.S. shale producers. The then de
facto head of the OPEC Cartel Ali al-Naimi spoke about market share rivalry with the United
States and said that they wanted a battle with the U.S. There were no winners in that
production war. Ali al-Naimi was sacked as he almost bankrupted Saudi Arabia. It took its toll
on U.S. producers as well, as many were forced into bankruptcy despite making significant
progress on efficiency and cost cutting.
With 2019 underway, OPEC, along with Russia, agreed to remove 1.2 million barrels per day
off the market for the first six months of the year. Early reports on OPEC compliance to the
agreed upon production cuts is overwhelming at a time when there are new questions about how
shale oil producers are faring after this recent oil price drop.
Private forecasters are showing that there are major cuts in Saudi exports and even signs
that OPEC production is falling sharply. Bloomberg News confirmed that by reporting "observed
crude exports from Saudi Arabia fell to 7.253 million barrels per day in December on lower
flows to the U.S. and China." Furthermore, other private trackers believe that the drop may be
the biggest in exports since Bloomberg began tracking shipments in early 2017. Oil saw another
boost after Bloomberg reported that OPEC oil production had the biggest monthly drop in two
years falling by 530,000 barrels a day to 32.6 million a day last month. It's the sharpest
pullback since January 2017.
Rewind to 2017, there was talk that shale oil producers would make up the difference and the
cut would not matter, but that was proven wrong. This time expect the same because it is likely
that shale oil producers may have to cut back as the sharp price drop has put them in a bad
position. The Wall Street Journal pointed out that, even now, some shale oil wells are not
producing as much oil as expected. This coupled with a large declining production rate in shale
swells means that they need capital to keep drilling to keep those record production numbers
moving higher. "Two-thirds of projections made by the fracking companies between 2014 and 2017
in America's four hottest drilling regions appear to have been overly optimistic, according to
the analysis of some 16,000 wells operated by 29 of the biggest producers in oil basins in
Texas and North Dakota. Collectively, the companies that made projections are on track to pump
nearly 10% less oil and gas than they forecast for those areas, according to the analysis of
data from Rystad Energy AS, an energy consulting firm. That is the equivalent of almost one
billion barrels of oil and gas over 30 years, worth more than $30 billion at current prices.
Some companies are off track by more than 50% in certain regions" the Journal reported.
"While U.S. output rose to an all-time high of 11.5 million barrels a day, shaking up the
geopolitical balance by putting U.S. production on par with Saudi Arabia and Russia. The
Journal's findings suggest current production levels may be hard to sustain without greater
spending, because operators will have to drill more wells to meet growth targets. Yet shale
drillers, most of whom have yet to consistently make money, are under pressure to cut spending
in the face of a 40% crude-oil price decline since October."
Of course, none of this matters if we see a prolonged slowdown in the global economy, Demand
may indeed turn out to be the great equalizer. Yet if growth comes back, say if we get a China
trade deal or if they ever reopen the U.S. government, we will most likely see a very tight
market in the new year. The OPEC cuts will lead to a big drawdown in supply and shale oil
producers will find it hard to match OPEC and demand growth barrel for barrel.
While Apple's profit warning was truly a shocker -- the first time in 16.5 years the company
had issued such a guidance release, according to Bespoke Research -- the forces pressuring
global equity markets today are more macro than micro. To put it simply: the yield curve looks
horrible. The table at the bottom of this report contains the details, but with a
near-inversion of the 12-month/10-year Treasury yield spread the market's demand for stocks is
understandably pressured.
"... The 30-year U.S. yield fell to 2.91 percent on Thursday, the lowest since January 2018 ..."
"... The other interpretation is that the company chose to refinance with long-term fixed-rate debt because it sees the big drop in 30-year yields as unsustainable ..."
Berkshire, with the third-highest credit rating from both Moody's Investors Service and
S&P Global Ratings, is expected to price the debt on Thursday with a spread of 150 to 155
basis points above benchmark Treasuries. The 30-year U.S. yield fell to 2.91 percent on
Thursday, the lowest since January 2018.
The other interpretation is that the company chose to refinance with long-term fixed-rate
debt because it sees the big drop in 30-year yields as unsustainable. After all, if a borrower
expects interest rates to rise in the future, it would prefer to lock in a fixed rate now
rather than face higher payments down the road.
OPEC oil supply fell by 460,000 barrels per day (bpd) between November and December, to
32.68 million bpd, a Reuters survey found on Thursday, as top exporter Saudi Arabia made an
early start to a supply-limiting accord, while Iran and Libya posted involuntary declines.
OPEC, Russia and other non-members - an alliance known as OPEC+ - agreed last December to
reduce supply by 1.2 million bpd in 2019 versus October 2018 levels. OPEC's share of that cut
is 800,000 bpd.
"If OPEC is faithful to its agreed output cut together with non-OPEC partners, it would take
3-4 months to mop up the excess inventories," energy consultancy FGE said.
No sooner did you pass the fake fireplace than you heard an ungodly roar, like the roar of a
mob ... It was the sound of well-educated young white men baying for money on the bond
market.
TOM WOLFE, The Bonfire of the Vanities. 1987
We are Wall Street. It's our job to make money. Whether it's a commodity, stock, bond, or
some hypothetical piece of fake paper, it doesn't matter. We would trade baseball cards if it
were profitable. ...
We get up at 5am & work till 10pm or later. We're used to not getting up to pee when we
have a position. We don't take an hour or more for a lunch break. We don't demand a union. We
don't retire at 50 with a pension. We eat what we kill, and when the only thing left to eat is
on your dinner plates, we'll eat that....
We aren't dinosaurs. We are smarter and more vicious than that, and we are going to
survive.
Reported by STACY-MARIE ISHMAEL, FT Alphaville, 30 April 2010
Looks like Guardian start turning away from neoliberalism.
Notable quotes:
"... What price is paid when a promise is broken? Because for much of my life, and probably yours, the political class has made this pledge: that the best way to run an economy is to hack back the public realm as far as possible and let the private sector run free. That way, services operate better, businesses get the resources they need, and our national finances are healthier. ..."
"... I don't wish to write about the everyday failings of neoliberalism – that piece would be filed before you could say "east coast mainline". Instead, I want to address the most stubborn belief of all: that running a small state is the soundest financial arrangement for governments and voters alike. Because 40 years on from the Thatcher revolution, more and more evidence is coming in to the contrary. ..."
"... The other big reason for the UK's financial precarity is its privatisation programme, described by the IMF as no less than a "fiscal illusion". British governments have flogged nearly everything in the cupboard, from airports to the Royal Mail – often at giveaway prices – to friends in the City. Such privatisations, judge the fund, "increase revenues and lower deficits but also reduce the government's asset holdings". ..."
"... IMF research shows is that the Westminster classes have been asset-stripping Britain for decades – and storing up financial trouble for future generations ..."
The fund reports that Britain's finances are weaker than all other nations except Portugal,
and says privatisation is to blame
Columnists usually proffer answers, but today I want to ask a question, a big one. What price
is paid when a promise is broken? Because for much of my life, and probably yours, the
political class has made this pledge: that the best way to run an economy is to hack back the
public realm as far as possible and let the private sector run free. That way, services operate
better, businesses get the resources they need, and our national finances are healthier.
It's why your tax credits keep
dropping , and your mum has to wait half a year to see a hospital consultant –
because David Cameron slashed public spending, to stop it "crowding out" private money. It's
why water bills are so high and train services can never be counted on – because both
industries have been privatised.
From the debacle of universal credit to the forced conversion of state schools into
corporate-run academies, the ideology of the small state – defined by no less a body than
the International Monetary Fund as neoliberalism – is all pervasive. It decides how much
money you have left at the end of the week and what kind of future your children will enjoy,
and it explains why your elderly relatives can't get a decent carer.
I don't wish to write about the everyday failings of neoliberalism – that piece would
be filed before you could say "east coast mainline". Instead, I want to address the most
stubborn belief of all: that running a small state is the soundest financial arrangement for
governments and voters alike. Because 40 years on from the Thatcher revolution, more and more
evidence is coming in to the contrary.
Let's start with the IMF itself. Last week it published
a report that barely got a mention from the BBC or in Westminster, yet helps reframe the
entire debate over austerity. The fund totted up both the public debt and the publicly owned
assets of 31 countries, from the US to Australia, Finland to France, and found that
the UK had among the weakest public finances of the lot. With less than £3 trillion
of assets against £5tn in pensions and other liabilities, the UK is more than £2tn
in the red . Of all the other countries examined by researchers, including the Gambia and
Kenya, only Portugal's finances look worse over the long run. So much for fixing the
roof.
'British governments have flogged nearly everything in the cupboard from airports to
the Royal Mail – often at giveaway prices – to friends in the City.' Photograph:
Amer Ghazzal/Rex/Shutterstock
Almost as startling are the IMF's reasons for why Britain is in such a state: one way or
another they all come back to neoliberalism. Thatcher loosed finance from its shackles and used
our North Sea oil money to pay for swingeing tax cuts. The result is an overfinancialised
economy and a government that is £1tn worse off since the banking crash. Norway has
similar
North Sea wealth and a far smaller population, but also a sovereign wealth fund. Its net
worth has soared over the past decade.
The other big reason for the UK's financial precarity is its privatisation programme,
described by the IMF as no less than a "fiscal illusion". British governments have flogged
nearly everything in the cupboard, from airports to the Royal Mail – often at giveaway
prices – to friends in the City. Such privatisations, judge the fund, "increase revenues
and lower deficits but also reduce the government's asset holdings".
Throughout the austerity decade, ministers and economists have pushed for spending cuts by
pointing to the size of the government's annual overdraft, or budget deficit. Yet there are two
sides to a balance sheet, as all accountants know and this IMF work recognises. The same goes
for our public realm: if Labour's John McDonnell gets into No 11 and renationalises the
railways, that would cost tens of billions – but it would also leave the country with
assets worth tens of billions that provided a regular income.
Instead, what this IMF research shows is that the Westminster classes have been
asset-stripping Britain for decades – and storing up financial trouble for future
generations.
Privatisation and austerity have not only weakened the country's financial position –
they have also handed unearned wealth to a select few. Just look at
a new report from the University of Greenwich finding that water companies could have
funded all their day-to-day running and their long-term investments out of the bills paid by
customers. Instead of which, managers have lumbered the firms with £51bn of debt to pay
for shareholders' dividends. Those borrowed billions, and the millions in interest, will be
paid by you and me in our water bills. We might as well stuff the cash directly into the
pockets of shareholders.
Instead of competitively run utilities, record investment by the private sector and sounder
public finances, we have natural monopolies handed over to the wealthy, banks that can dump
their liabilities on the public when things get tough, and an outsourcing industry that feasts
upon the carcass of the public sector. As if all this weren't enough, neoliberal voices
complain that we need to cut taxes and red tape, and further starve our public services.
This is a genuine scandal, but it requires us to recognise what neoliberalism promised and
what it has failed to deliver. Some of the loudest critics of the ideology have completely
misidentified it. Academics will daub the term "neoliberal" on any passing phenomenon. Fitbits
are apparently neoliberal, as is Ben & Jerry's ice-cream and Kanye West. Pundits will say
that neoliberalism is about markets and choice – tell that to any commuter wedged on a
Southern rail train. And centrist politicians claim that the great failing of neoliberalism is
its carelessness about identity and place, which is akin to complaining that the boy on a moped
who snatched your smartphone is going too fast.
Let us get it straight. Neoliberalism has ripped you off and robbed you blind. The evidence
of that is mounting up – in your bills, in your services and in the finances of your
country.
• Aditya Chakrabortty is a Guardian columnist and senior economics commentator
Overinvestment in stocks of retires is very common under neoliberalism.
There are several factors here: one is greed cultivated by neoliberal MSM, the second is
insufficient retirement funds (gambling with retirement savings) and the last and not least is
lack of mathematical skills an inability to use Excel for viewing their portfolio and making
informed decisions.
Notable quotes:
"... At the end of 2016, 69 percent of investors in their 60s had at least 40 percent of their 401(k) portfolio invested in stocks, up from 65 percent in 2007, according to the Employee Benefit Research Institute in Washington. ..."
"... 19 percent had more than 80 percent of their 401(k) invested in stocks in 2016 ..."
"... "We had lousy forecasts in 2008. The housing market was in a tailspin," said 76-year-old John Bauer, who worked for McDonnell Douglas and Boeing Co for 36 years in St. Louis. "Today, employment is way up. The housing market is steady and corporations are flush." ..."
BOSTON (Reuters) - Nancy Farrington, a retiree who turns 75 next month, admits to being in a
constant state of anxiety over the biggest December stock market rout since Herbert Hoover was
president.
"I have not looked at my numbers. I'm afraid to do it," said Farrington, who recently moved
to Charleston, South Carolina, from Boston. "We've been conditioned to stand pat and not panic.
I sure hope my advisers are doing the same."
Retirees are worrying about their nest eggs as this month's sell-off rounds out the worst
year for stocks in a decade, and some fear they are headed for a day of reckoning like the 2008
market meltdown or dot-com crash of the early 2000s.
Retirees have less time to recover from bad investment moves than younger workers. If they
or their advisers panic and sell during a brief downturn, they may lock in a more meager
retirement. But their portfolio could be even more at risk if they hold on too long in a
prolonged decline.
"I have no way of riding it out if that happens," said Farrington. "I can feel the anxiety
in my stomach all the time."
While many industrialized countries still have generous safety nets for retirees, pensions
for U.S. private-sector workers largely have been supplanted by 401(k) accounts and other
private saving plans. That means millions of older Americans are effectively their own pension
managers.
Workers in countries like Belgium, Canada, Germany, France and Italy receive, on average,
about 65 percent of their income replaced by mandatory pensions. In the Netherlands the ratio
of benefits to lifetime average earnings is abut 97 percent, according to a 2017 Organization
for Economic Cooperation and Development report.
The OECD says the comparable U.S. replacement rate from Social Security benefits is about 50
percent.
U.S. retirees had watched their private accounts mushroom during a bull stock market that
began in early 2009. Meanwhile, the Federal Reserve kept interest rates near zero for years,
enticing retirees deeper into stocks than previous generations as investments like certificates
of deposit, government bonds and money-market funds generated paltry income.
At the end of 2016, 69 percent of investors in their 60s had at least 40 percent of their
401(k) portfolio invested in stocks, up from 65 percent in 2007, according to the Employee
Benefit Research Institute in Washington.
Still, fewer have gone all in on stocks in recent years. Just 19 percent had more than 80
percent of their 401(k) invested in stocks in 2016, down from 30 percent at year-end 2007,
according to nonprofit research group EBRI.
"Nothing has gone wrong, but it seems the market is trying to figure out what could go
wrong," said Brooke McMurray, a 69-year-old New York retiree who says she became a financial
news junkie after the 2007-2009 financial crisis.
"Unlike before, I now know what I own and I constantly read up on my companies," she
said.
The three major U.S. stock indexes have tumbled about 10 percent this month, weighed by
investor worries including U.S.-China trade tensions, a cooling economy and rising interest
rates, and are on track for their worst December since 1931.
The S&P 500 is headed for its worst annual performance since 2008, when Wall Street
buckled during the subprime mortgage crisis. But some are not quite ready to draw
comparisons.
"We had lousy forecasts in 2008. The housing market was in a tailspin," said 76-year-old
John Bauer, who worked for McDonnell Douglas and Boeing Co for 36 years in St. Louis. "Today,
employment is way up. The housing market is steady and corporations are flush."
Still, Bauer said he is uneasy about White House leadership. He and several other retirees
referenced U.S. Treasury Secretary Steve Mnuchin's recent calls to top bankers, which did more
to rattle than assure markets. U.S. stocks tumbled more than 2 percent the day before the
Christmas holiday.
Nevertheless, Bauer is prepared to ride out any market turmoil without making dramatic moves
to his retirement portfolio. "When it's up, I watch it. When it's down, I don't," he said. And there are some factors helping take the sting out of the market rout, said Larry Glazer,
managing partner of Boston-based Mayflower Advisors LLC.
Compare with "That's set to worsen in the new year, experts told CNBC on Monday, pointing to
risks including the Federal Reserve likely raising interest rates further and mounting concerns
about a global economic slowdown." The problem iether expecting rally or expecting further
downturn is that stock prices are so detached from reality that everything is possible.
Wall Street will see a "relief rally" in stocks that would offer a better selling
opportunity for investors, technical analyst Katie Stockton says.
The rally would last for several weeks and would be up to 8 percent higher than where
the markets closed on Friday, she says.
The S&P crashed below its bear market level of 2352.7 - the lowest since April 2017 -
ending the longest bull market in history. This is the worst December for the S&P 500 since
The Great Depression
Volatility on Wall Street has led shares worldwide on a wild ride in recent months,
resulting in a number of stock markets dipping into bear territory -- typically defined as
20 percent or more off a recent peak.
That's set to worsen in the new year, experts told CNBC on Monday, pointing to risks
including the Federal Reserve likely raising interest rates further and mounting concerns
about a global economic slowdown.
"I think the worst is yet to come next year, we're still in the first half of a global
equity bear market with more to come next year," said Mark Jolley, global strategist at CCB
International Securities. Volatility on Wall Street has led shares worldwide on a wild ride
in recent months, resulting in a number of stock markets dipping into bear territory --
typically defined as 20 percent or more off a recent peak.
That's set to worsen in the new year, experts told CNBC on Monday, pointing to risks
including the Federal Reserve likely raising interest rates further and mounting concerns
about a global economic slowdown.
"I think the worst is yet to come next year, we're still in the first half of a global
equity bear market with more to come next year," said Mark Jolley, global strategist at CCB
International Securities.
It was over two years ago that Wells Fargo's fake accounts scandal burst into the headlines, and since then, there has been an
unrelenting torrent of bad news. In late October, the American Banker
reported
that two executives were placed on leave after they received notifications of pending sanctions from the Office of the Comptroller
of the Currency. In November, Federal Reserve chairman Jerome Powell sent a
letter
to Senator Elizabeth Warren saying the Fed will not lift a cap on Wells's growth until the bank addresses deficiencies in oversight
and risk management. "The underlying problem at the firm was a strategy that prioritized growth without ensuring that risks were
managed, and as a result the firm harmed many of its customers," Powell wrote.
In early November, Jay Welker, who was the head of the private bank, which sits within the bank's wealth management business,
retired . Under Welker,
the private bank
pushed wealth advisors to vigorously sell
high-fee products . There may be more bad news about this aspect of the embattled bank. The Justice Department, the SEC, the
Labor Department, and Wells Fargo's own board are conducting ongoing investigations into its wealth management business that have
yet to be resolved.
There's still one aspect of how the wealth management business pushed for growth that former Wells Fargo employees say hasn't
gotten the scrutiny it should. For four years, starting in 2012 and through the end of 2015, Wells incentivized some of its advisors
in that business through something called the "Growth Award." Some former employees say these awards led to behavior that was not
in the best interest of clients, including steering them towards higher-fee products. The Growth Award was much discussed internally,
says a former investment strategist at Wells, although not everyone was privy to the details of how it worked.
Last summer, the Wall Street Journal
reported
the existence of the growth award, but not the details of how the money worked. Essentially, the growth award was a way of motivating
advisors to grow their businesses. In and of itself, that isn't unusual. The industry has for years offered successful brokers incentives,
often in the form of elaborate trips to exotic locales.The SEC is
weighing new rules that may curtail the use of such rewards under the theory that they could make brokers "predominantly motivated"
by "self enrichment." Firms have also long used rich packages to lure successful brokers to move their business.
But firms are cutting back on the use of such packages, according to industry insiders. When told about the details of the growth
award, three financial advisors at other firms with whom Yahoo Finance spoke expressed shock at both the sheer size and the way it
incentivized advisors for short-term growth, rather than long-term business building. (Another advisor thought that in the context
of the packages that were used to incentivize brokers to switch, it wasn't so surprising.) Or as former Wells Fargo executive, who
was in the retail brokerage industry for decades, says, "If a free golf outing is bad business, then the Growth Award is bad business
on steroids."
In a statement to Yahoo Finance, spokesperson Shea Leordeanu said, "At Wells Fargo Wealth and Investment Management, we are committed
to taking care of our clients' financial needs every day and take seriously our responsibility to help them preserve and invest their
hard-earned savings. Our primary goal is to be a trusted advisor to our clients and to act in their best interests. And we have supervisory
processes and controls in place so that, if a team member acts in a manner not in line with our values and our policies, we take
appropriate action."
An enormous, compounding bonus for bringing revenue to Wells Fargo
The Growth Award wasn't available to the entire army of some 14,000 advisors, who make up the broad group of Wells Fargo Advisors.
(Many others, most prominently those who came with the 2008 Wachovia merger, had different compensation plans with lock-ups that
are just now expiring, leading to something of an
exodus , according to press reports.) This Growth Award, on the other hand, was meant for the 3,000 or so advisors who were part
of something known as Wealth Brokerage Services, or WBS. These advisors are located in the bank branches, or in hubs -- Wells Fargo
buildings in cities -- that housed wealth management personnel among others like business bankers. (Wells Fargo subsequently
announced a reorganization
that is expected to combine what were separate groups of advisors.) To be eligible, you couldn't be a newbie -- you needed a two
year minimum at the bank -- and you had to be doing more than $350,000 in annual revenue. The former executive and another advisor
estimate that narrowed the group down to about 2,000 people.
The amounts people stood to make were extraordinary. Here's how the math worked. The goal was for an individual financial advisor
to increase his or her revenue by at least 15% for each of the four years that the Growth Award was in place. The award multiplied
each year the goal was achieved. So if you achieved 15% growth in the first year, you received a 15% bonus. If you achieved 15% growth
again in the second year, you received a 30% bonus. If you achieved 15% growth in the third year, you received a 45% bonus. Finally,
if you achieved 15% growth again in the 4th year, you received a whopping 60% bonus.
If you didn't achieve the goal, you were not penalized, but you didn't receive the bonus.
To get specific about just what these percentages could mean, say you generated $1 million in revenue in 2011, and you achieved
precisely 15% growth each year for the next 4 years. In year one, your revenue would be $1,150,000, and your bonus, at 15% of that,
would be $172,500. The new 2013 goal would be $1,322,500 (a 15% increase from the $1,150,000.). If you hit that goal, your Growth
Award bonus for 2013 would be $396,393. And so on. If you hit the goals for 2014 and 2015, you stood to make a bonus of $684,393
and $1,049,403, respectively. That means you stood to make $2.3 million in total Growth Award bonuses. In other words, the financial
incentives to hit the numbers were enormous.
Perhaps for the very reason the incentives were so enormous, more advisors hit the numbers than Wells had expected. (Of course,
there was also a strong bull market during that period.) The Journal reported that Wells had allotted $250 million for the Growth
Award bonuses. Instead, Wells had to pay $750 million between 2012 and 2015. "It's widely known inside Wells that they were so way
over budget," says another former advisor. "I personally know brokers who were awarded bonuses of over $2 million, which is a stunning
amount of money," says a former investment advisor.
Roughly two-thirds of the 2,000 or so eligible advisors earned an award.
"When you throw that kind of money out, it incentivizes."
Now consider the Growth Award from the perspective of a client, who might wander into a bank branch, maybe having gotten an unexpected
inheritance. "You have to connect the dots," the former executive says. "This is where the sales pressure in the bank branches meets
the wealth and investment management business."
The staff of the branch was incentivized to steer clients to a Wells financial advisor, because investment management referrals
helped them meet their sales goals, and that advisor, in turn had incentives -- really big incentives -- to steer the clients toward
products that generate upfront revenue. "If you don't have a high moral background, it'll put you in a position to do things for
clients that aren't in their best interest," says a former advisor. "I'm always looking at what's best for the client but it's also
what's best for my paycheck." "You are absolutely incentivizing advisors to sell the products with the highest upfront fees," says
the former executive.
"Yeah, when you throw that kind of money out, it incentivizes," says another former advisor. "Jesus would probably be okay. But
the disciples probably would have had some morals put to the test on that one."
Multiple sources say the Growth Award helps explain why annuity sales at Wells Fargo were so high, especially after the bank tried
to tamp down on the amount the Award was going to cost them. In 2014, Wells Fargo decided to stop "fee fronting," which allowed advisors
to count fees that would be paid in subsequent years toward their annual tally. So advisors began to search for products with high
initial fees, one former advisor said.
Annuities come with high upfront revenues for the broker, making them an obvious choice for someone who is trying to hit a revenue
target -- but maybe not the optimal choice for the client. "You think Wells Fargo's Bankers Are Bad? Take a Look at its Brokers,"
was the headline of an October 2016 piece in thestreet.com. The piece
noted that Wells had argued to the Securities and Exchange Commission that it should not be subject to rules to put its investors
first in cases where its advisors were making referrals for products including annuities, and that in 2015, Wells was number one
in the country for annuity sales.
"It's pretty stunning that a firm that has just half the assets of its larger competitors sells more annuities," says a former
advisor. "I think that just speaks to the emphasis on making sales numbers and a need to sell more of the highest payout products."
Indeed, the Journal reported and several former advisors corroborate that internally, 2015 was dubbed "The Year of the Annuity."
It wasn't just annuities. One former advisor also noted that advisors trying to chase the growth award also favored mutual funds
with high upfront fees. "You'd think if revenue was going up by 15% a year, your AUM would at least go up at least 12% or 13%," a
former advisor said. "That was not the case. The award was only revenue based -- there was nothing in there for AUM, longevity, or
anything like that. Strictly show us the money and we'll show you the money."
All the fees were disclosed to Wells Fargo's clients. But what clients didn't know was the incentive structure that was in place
for their advisor. So yes, clients understood the fees -- but they were in the dark as to at least part of the reason one product
might have been recommended over another. "Imagine that it's November," says the former executive. "You have to do $250,000 in revenue,
or you going to leave a million dollars on the table. What are you doing to do?" He continues, "Every client of WBS has to go back
and look at every trade, every single decision, from 2012 to 2015 and scrutinize whether it was impacted by the Growth Award." "I
think if clients and the public knew that Wells Fargo Advisors had given such substantial and amazing well-timed retention bonuses
to lock up their advisors, they would begin to wonder whether their advisors were giving the best advice to their clients," says
another former investment strategist.
There could be another problem, too. "If you achieved the goal early, you would stop doing business so you didn't have the higher
base to start from in the next year," says the former executive. "You'd sand bag -- and that might not be in the client's best interest
either."
A golden handcuff at a very good time for Wells Fargo
The Growth Award may also help explain why Wells has been able to retain as many advisors as it has, despite the ongoing scandals.
Six months before the end of the Growth Award program, midway through 2015, Wells Fargo asked those advisors who had qualified for
the award how they would like to receive their pay. There were two options. The first option essentially allowed the advisor to unlock
all the money at the end of February 2021. If the advisor left before that, the money was forfeited. A third of the advisors who
earned awards chose this option.
The other option paid out a tenth of the bonus each year for 10 years. If the advisor so chose, they could get that money up front
as a forgivable loan. Every year the advisor remained at Wells Fargo, he or she would simply pay the interest on their bonus, and
a tenth of the principle would be forgiven. But if the advisor left, he or she had to pay back the unforgiven principle. (Or if the
advisor hadn't taken the forgivable loan, the annual checks would stop.) Two-thirds of advisors opted for this route.
The Growth Award also had the potential to create another problem for advisors. The nice thing about building a fee-based business
is that it's an annuity for the advisor. Every year, there's a fee. If, on the other hand, the advisors put clients' money into things
that generate a one-time pop of revenue, the advisor doesn't get the same type of ongoing fees. So, the former executive says, some
advisors are in a hole, where they owe taxes on the Growth Award, while their income has shrunk dramatically. "I know guys who got
it who built or bought a huge house and are now stuck," he says.
The golden handcuff of the Growth Award has been good for the bank in the face of all of the scandals. One advisor told Yahoo
Finance that the growth in the number of clients also shrank dramatically amid the unrelenting negative news.
"I went from around 30 referrals to two in six months after the scandal hit," this person said. What had been a solid stream of
clients slowed to a trickle. But the only out for advisors would have been to have another firm hire them away and pay off their
loan.
Perhaps the most interesting thing about the Growth Award is how deliberate it was. "It was not a computer glitch or an oversight,"
as the former executive says. "It was not perpetrated by a few rogue employees. The Growth Award was conceived by the Compensation
Committee. The Compensation Committee is the most senior of senior management. The goal was to drive growth and drive growth it did."
But perhaps at a price for clients -- making the Growth Award, in its way, the most telling evidence yet of the cultural issues within
Wells Fargo.
Chinese refineries that used to purchase U.S. oil regularly said they had not resumed buying
due to uncertainty over the outlook for trade relations between Washington and Beijing, as well
as rising freight costs and poor profit-margins for refining in the region.
Costs for shipping U.S. crude to Asia on a supertanker are triple those for Middle eastern
oil, data on Refinitiv Eikon showed.
A senior official with a state oil refinery said his plant had stopped buying U.S. oil from
October and had not booked any cargoes for delivery in the first quarter.
"Because of the great policy uncertainty earlier on, plants have actually readjusted back to
using alternatives to U.S. oil ... they just widened our supply options," he said.
He added that his plant had shifted to replacements such as North Sea Forties crude,
Australian condensate and oil from Russia.
"Maybe teapots will take some cargoes, but the volume will be very limited," said a second
Chinese oil executive, referring to independent refiners. The sources declined to be named
because of company policy.
A sharp souring in Asian benchmark refining margins has also curbed overall demand for crude
in recent months, sources said.
Despite the impasse on U.S. crude purchases, China's crude imports could top a record 45
million tonnes (10.6 million barrels per day) in December from all regions, said Refinitiv
senior oil analyst Mark Tay.
Russia is set to remain the biggest supplier at 7 million tonnes in December, with Saudi
Arabia second at 5.7-6.7 million tonnes, he said.
19 hours ago This is an
economic/political tight rope for both countries. China is the largest auto market in the
world with numerous manufacturers located inside its borders. Apple sales will disappoint
inside China after Meng's arrest over Iran sanctions (Huawei is a world heavy weight in terms
of sales), and this has already begun inside China due to national pride. Canada has already
seen one trade agreement postponed over her detention. US firm on the main have already
issued orders to not have key employees travel to their Chinese plants unless absolutely
necessary for fear of retaliation. Brussels is actively working on a plan to bypass US
Iranian sanctions, which are deeply unpopular in Europe.
The key to this solution might be in automotive. Oil is possibly on the endangered bargaining
list. Russia is a key trading partner (for years) with China and, along with Saudi Arabia and
Iran (or even without Iran) will be able to supply their needs. Our agricultural sector,
particularly in soybeans, has been hit hard, forcing the US govt. into farm subsidies. Brazil
just recorded a record harvest in soybeans. The US could counter with lifting Meng from
arrest in return for an agricultural break, but those negotiations won't make the mainstream
news. Personally, I think her arrest was a very ill-thought move on the part of law
enforcement, as the benefits don't even begin to outweigh the massive retaliation to US firms
operating inside their borders. It is almost akin to arresting Tim Cook of Apple or Apple's
CFO. You don't kill a bug with a sledge hammer.
Flynn "treason" is not related to Russia probe and just confirm that Nueller in engaged in witch hunt.
I believe half of Senate and House of Representative might go to jail if they were dug with the ferocity Mueller digs Flynn's past.
So while Flynn behavior as Turkey lobbyist (BTW Turkey is a NATO country and not that different int his sense from the US -- and you
can name a lot of UK lobbyists in high echelons of the US government, starting with McCabe and Strzok) is reprehensible, this is still a witch hunt
When American law enforcement and intelligence officials, who carry Top Secret clearances and authority to collect intelligence
or pursue a criminal investigation, decide to employ lies and intimidation to silence or intimidates those who worked for Donald
Trump's Presidency, we see shadow of Comrage Stalin Great Terror Trials over the USA.
Former U.S. national security adviser Michael Flynn passes by members of the
media as he departs after his sentencing was delayed at U.S. District Court in
Washington, U.S., December 18, 2018. REUTERS/Joshua Roberts
By Jan Wolfe and Ginger Gibson
WASHINGTON (Reuters) - A U.S. judge fiercely criticized President Donald
Trump's former national security adviser Michael Flynn on Tuesday for lying to
FBI agents in a probe into Russian interference in the 2016 election, and
delayed sentencing him until Flynn has finished helping prosecutors.
U.S. District Judge Emmet Sullivan told Flynn, a retired U.S. Army
lieutenant general and former director of the Defense Intelligence Agency,
that he had arguably betrayed his country. Sullivan also noted that Flynn had
operated as an undeclared lobbyist for Turkey even as he worked on Trump's
campaign team and prepared to be his White House national security adviser.
Flynn pleaded guilty to lying to FBI agents about his December 2016
conversations with Sergei Kislyak, then Russia's ambassador in Washington,
about U.S. sanctions imposed on Moscow by the administration of Trump's
Democratic predecessor Barack Obama, after Trump's election victory but before
he took office.
Special Counsel Robert Mueller, leading the investigation into possible
collusion between Trump's campaign team and Russia ahead of the election, had
asked the judge not to sentence Flynn to prison because he had already
provided "substantial" cooperation over the course of many interviews.
But Sullivan sternly told Flynn his actions were abhorrent, noting that
Flynn had also lied to senior White House officials, who in turn misled the
public. The judge said he had read additional facts about Flynn's behavior
that have not been made public.
At one point, Sullivan asked prosecutors if Flynn could have been charged
with treason, although the judge later said he had not been suggesting such a
charge was warranted.
"Arguably, you sold your country out," Sullivan told Flynn. "I'm not hiding
my disgust, my disdain for this criminal offense."
Flynn, dressed in a suit and tie, showed little emotion throughout the
hearing, and spoke calmly when he confirmed his guilty plea and answered
questions from the judge.
Sullivan appeared ready to sentence Flynn to prison but then gave him the
option of a delay in his sentencing so he could fully cooperate with any
pending investigations and bolster his case for leniency. The judge told Flynn
he could not promise that he would not eventually sentence him to serve prison
time.
Flynn accepted that offer. Sullivan did not set a new date for sentencing
but asked Mueller's team and Flynn's attorney to give him a status report by
March 13.
Prosecutors said Flynn already had provided most of the cooperation he
could, but it was possible he might be able to help investigators further.
Flynn's attorney said his client is cooperating with federal prosecutors in a
case against Bijan Rafiekian, his former business partner who has been charged
with unregistered lobbying for Turkey.
Rafiekian pleaded not guilty on Tuesday to those charges in federal court
in Alexandria, Virginia. His trial is scheduled for Feb. 11. Flynn is
expected to testify.
Prosecutors have said Rafiekian and Flynn lobbied to
have Washington extradite a Muslim cleric who lives in the United States
and is accused by Turkey's government of backing a 2016 coup attempt. Flynn
has not been charged in that case.
'LOCK HER UP!'
Flynn was a high-profile adviser to Trump's campaign team. At the
Republican Party's national convention in 2016, Flynn led Trump's
supporters in cries of "Lock her up!" directed against Democratic candidate
Hillary Clinton.
A group of protesters, including some who chanted "Lock him up,"
gathered outside the courthouse on Tuesday, along with a large inflatable
rat fashioned to look like Trump. Several Flynn supporters also were there,
cheering as he entered and exited. One held a sign that read, "Michael
Flynn is a hero."
Flynn became national security adviser when Trump took office in January
2017, but lasted only 24 days before being fired.
He told FBI investigators on Jan. 24, 2017, that he had not discussed
the U.S. sanctions with Kislyak when in fact he had, according to his plea
agreement. Trump has said he fired Flynn because he also lied to Vice
President Mike Pence about the contacts with Kislyak.
Trump has said Flynn did not break the law and has voiced support for
him, raising speculation the Republican president might pardon him.
"Good luck today in court to General Michael Flynn. Will be interesting
to see what he has to say, despite tremendous pressure being put on him,
about Russian Collusion in our great and, obviously, highly successful
political campaign. There was no Collusion!" Trump wrote on Twitter on
Tuesday morning.
After the hearing, White House spokeswoman Sarah Sanders told reporters
the FBI had "ambushed" Flynn in the way agents questioned him, but said his
"activities" at the center of the case "don't have anything to do with the
president" and disputed that Flynn had committed treason.
"We wish General Flynn well," Sanders said.
In contrast, Trump has called his former long-time personal lawyer
Michael Cohen, who has pleaded guilty to separate charges, a "rat."
Mueller's investigation into Russia's role in the 2016 election and
whether Trump has unlawfully sought to obstruct the probe has cast a shadow
over his presidency. Several former Trump aides have pleaded guilty in
Mueller's probe, but Flynn was the first former Trump White House official
to do so. Mueller also has charged a series of Russian individuals and
entities.
Trump has called Mueller's investigation a "witch hunt" and has denied
collusion with Moscow.
Russia has denied meddling in the election, contrary to the conclusion
of U.S. intelligence agencies that have said Moscow used hacking and
propaganda to try to sow discord in the United States and boost Trump's
chances against Clinton.
Lying to the FBI carries a statutory maximum sentence of five years in
prison. Flynn's plea agreement stated that he was eligible for a sentence
of between zero and six months.
(Reporting by Jan Wolfe and Ginger
Gibson; Additional reporting by Susan Heavey; Editing by Kieran Murray and
Will Dunham)
Matt o'Brien and Barbara Ortutay, AP Technology Writers
,
Associated Press
•
December
17, 2018
<img alt="Key takeaways from new reports on Russian disinformation" src="https://s.yimg.com/ny/api/res/1.2/9VGA29inJ83dPeqC.cvqTg--~A/YXBwaWQ9aGlnaGxhbmRlcjtzbT0xO3c9ODAwO2lsPXBsYW5l/http://globalfinance.zenfs.com/images/US_AHTTP_AP_HEADLINES_BUSINESS/e66de17c8e1a4cecaf1da81f2bf87093_original.jpg" itemprop="url"/>
Some suspected Russian-backed fake social media accounts on Facebook.
Russians seeking to influence U.S. elections through social media had their
eyes on Instagram and the black community.
These were among the findings in two reports released Monday by the Senate
intelligence committee. Separate studies from University of Oxford researchers
and the cybersecurity firm New Knowledge reveal insights into how Russian
agents sought to influence Americans by saturating their favorite online
services and apps with hidden propaganda.
Here are the highlights:
INSTAGRAM'S "MEME WARFARE"
Both reports show that misinformation on Facebook's Instagram may have had
broader reach than the interference on Facebook itself.
The New Knowledge study says that since 2015, the Instagram posts generated
187 million engagements, such as comments or likes, compared with 77 million
on Facebook.
And the barrage of image-centric Instagram "memes" has only grown since the
2016 election. Russian agents shifted their focus to Instagram after the
public last year became aware of the widespread manipulation on Facebook and
Twitter.
NOT JUST ADS
Revelations last year that Russian agents used rubles to pay for some of their
propaganda ads drew attention to how gullible tech companies were in allowing
their services to be manipulated.
But neither ads nor automated "bots" were as effective as unpaid posts
hand-crafted by human agents pretending to be Americans. Such posts were more
likely to be shared and commented on, and they rose in volume during key dates
in U.S. politics such as during the presidential debates in 2016 or after the
Obama administration's post-election announcement that it would investigate
Russian hacking.
"These personalized messages exposed U.S. users to a wide range of
disinformation and junk news linked to on external websites, including content
designed to elicit outrage and cynicism," says the report by Oxford
researchers, who worked with social media analysis firm Graphika.
DEMOGRAPHIC TARGETING
Both reports found that Russian agents tried to polarize Americans in part by
targeting African-American communities extensively. They did so by campaigning
for black voters to boycott elections or follow the wrong voting procedures in
2016, according to the Oxford report.
The New Knowledge report added that agents were "developing Black audiences
and recruiting Black Americans as assets" beyond how they were targeting
either left- or right-leaning voters.
The reports also support previous findings that the influence operations
sought to polarize Americans by sowing political divisions on issues such as
immigration and cultural and religious identities. The goal, according to the
New Knowledge report, was to "create and reinforce tribalism within each
targeted community."
Such efforts extended to Google-owned YouTube, despite Google's earlier
assertion to Congress that Russian-made videos didn't target specific segments
of the population.
PINTEREST TO POKEMON
The New Knowledge report says the Russian troll operation worked in many ways
like a conventional corporate branding campaign, using a variety of different
technology services to deliver the same messages to different groups of
people.
Among the sites infiltrated with propaganda were popular image-heavy services
like Pinterest and Tumblr, chatty forums like Reddit, and a wonky geopolitics
blog promoted from Russian-run accounts on Facebook and YouTube.
Even the silly smartphone game "Pokemon Go" wasn't immune. A Tumblr post
encouraged players to name their Pokemon character after a victim of police
brutality.
WHAT NOW?
Both reports warn that some of these influence campaigns are ongoing.
The Oxford researchers note that 2016 and 2017 saw "significant efforts" to
disrupt elections around the world not just by Russia, but by domestic
political parties spreading disinformation.
They warn that online propaganda represents a threat to democracies and public
life. They urge social media companies to share data with the public far more
broadly than they have so far.
"Protecting our democracies now means setting the rules of fair play before
voting day, not after," the Oxford report says.
4 hours
ago
so where's the evidence that Russian
facebook or twitter posts changed a single vote?
"... If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting ... If you can think – and not make thoughts your aim ... If you can trust yourself when all men doubt you ... Yours is the Earth and everything that's in it. ..."
The stock market has had a volatile year, and it's not over yet: The Dow Jones Industrial
Average lost more than 520 points on Monday and the S&P 500 fell 2.1 percent. Both are in
correction and on pace for their worst December performance since the Great Depression in
1931.
But for the average person, shifts in the market , even ones as dramatic as the ones we've
seen this year, shouldn't be cause for panic. During times of volatility, seasoned investor
Warren Buffett says it's best to stay calm and stick to the basics, meaning, buy-and-hold for
the long term.
So, during downturns, "heed these lines" from the classic 19th century Rudyard Kipling poem
"If -- " which help illustrate this lesson, Buffett wrote in his 2017 Berkshire Hathaway
shareholder letter :
If you can keep your head when all about you are losing theirs ...
If you can wait and not be tired by waiting ...
If you can think – and not make thoughts your aim ...
If you can trust yourself when all men doubt you ...
Yours is the Earth and everything that's in it.
Market downturns are inevitable, Buffett pointed out, using his own company as an example:
"Berkshire, itself, provides some vivid examples of how price randomness in the short term can
obscure long-term growth in value. For the last 53 years, the company has built value by
reinvesting its earnings and letting compound interest work its magic. Year by year, we have
moved forward. Yet Berkshire shares have suffered four truly major dips."
He went on to cite each of the steep share-price drops, including the most recent one from
September 2008 to March 2009, when Berkshire shares plummeted 50.7 percent.
Major declines have happened before and are going to happen again, he says: "No one can tell
you when these will happen. The light can at any time go from green to red without pausing at
yellow."
Rather than watch the market closely and panic, keep a level head. Market downturns "offer
extraordinary opportunities to those who are not handicapped by debt," he says, which brings up
another important investing lesson: Never borrow money to buy stocks .
"There is simply no telling how far stocks can fall in a short period," writes Buffett.
"Even if your borrowings are small and your positions aren't immediately threatened by the
plunging market, your mind may well become rattled by scary headlines and breathless
commentary. And an unsettled mind will not make good decisions."
Don't miss: Warren Buffett and Ray Dalio agree on what to do when the stock market
tanks
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Stock Sell-Off Defies Everything the Bulls Hoped Would Stop It
(Bloomberg) -- Valuations aren't stopping it. Jerome Powell's softer tone failed
to soothe anyone. The moratorium on tariffs is a fading memory and now the
sturdiest chart level of the year is in danger of giving way.
A stock rout that bulls thought was finished three different times since October
is in a new and ominous phase, with the Dow Jones Industrial Average losing 1,004
points in two days. No Santa Claus rally. Instead, the S&P 500 Index is hurtling
toward the second-worst December on record.
"The stock market doesn't care what looks good now. It's wondering if
fundamentals will deteriorate in the future," said Peter Mallouk, co-chief
investment officer of Creative Planning, which has around $36 billion under
management. "You have a lot of people that are scared, and they're sitting on the
sidelines to wait it out."
Waiting it out is starting to look like the only viable strategy. On Monday, the
S&P 500 briefly pierced a level that had been a psychological foundation for 10
months, its intraday low from Feb. 9. Valuations shrink and shrink -- computer
and software stocks trade at 15 times next year's earnings estimates, cheaper
than utilities and soapmakers -- and the selling just gets worse.
With Monday's 54-point loss, the S&P has now fallen 2 percent or more six times
this quarter. The Nasdaq Composite has done it 10 times. Both are the most since
the third quarter of 2011.
Pinning a single cause on the carnage has become an exercise in absurdity, with
analysts cycling through a rotating list of reasons that include trade, Donald
Trump's legal travails, China data, sinking oil and cooling home prices. Anyone
daring to suggest economic growth may slow in 2019 is pointed to charts showing
factories, employment and profits are booming -- but those assurances are
starting to fall on deaf ears.
While S&P 500 Index futures indicated a potential respite in Asian trading
Tuesday, rising as much as 0.5 percent, traders remained cautious.
Investors "are too worried, but that's the big driver behind the declines we've
seen recently, overall worries about U.S. growth and worries about global
growth," said Kate Warne, investment strategist at Edward Jones. "Investors have
gotten very nervous about the changes they're seeing ahead and they're uncertain
about what they mean."
A troubling sign for Americans: equity pain, which all year has been worse
overseas, is landing with more force in the U.S. The Russell 2000 Index of small
caps, a proxy for domestically oriented companies, slid into a bear market
Monday, falling 21 percent since Aug. 31.
On the other hand, since hitting a 19-month low in late October, the MSCI
Emerging Markets Index has trended higher, even as the S&P 500 Index keeps making
new lows. Stocks in the EM gauge have outperformed the S&P 500 for three
consecutive weeks, the most since late January, data compiled by Bloomberg show.
To comfort themselves in the face of such depressing facts, beaten-up investors
have looked at past corrections and noticed that this one is still playing out
according a relatively benign plan. Under the pattern, major swoons that have
interrupted the bull market that began in 2009 have taken around 100 days to tire
out before dip-buyers swooped in to put things right.
At the same time, anyone betting the New Year will bring an end to the volatility
should be aware that bull markets can die slow deaths. The 88-day sell-off has
been going on roughly one-third as long as it has taken for the S&P 500 to fall
into the 11 bear markets it's suffered going back to World War II.
How many more sellers than buyers were there on Monday? The volume of stocks
trading lower on the New York Stock Exchange reached 1 billion shares, compared
with 158 million that were bought. The difference in trading volume, at 883
million shares, is on track to become the biggest weekly gap since 2016, data
compiled by Bloomberg show.
That the worst two-day sell-off since October landed on the same week Powell's
Federal Reserve is expected to announce its ninth interest rate hike was grist
for those who see central bank policy behind everything. As willingly as the Fed
chairman has walked back his most hawkish pronouncements, nobody thinks monetary
policy is likely to loosen even as growth in the economy and earnings slows from
this year's pace.
"That's what the market is struggling with right now -- do they believe in a
growth slowdown to trend or something more sinister than that?" said Phil
Camporeale, managing director of multi-asset solutions for JPMorgan Asset
Management. "I don't think people really want to take risk, but especially
trying to catch a falling knife on equity prices."
(Adds details on S&P 500 futures trading in seventh paragraph.)
j
3 hours ago
Don't borrow money to buy stocks. Got
that ? No margin accounts. Ever.
H
5
hours ago
This has been a long, ho-hum recovery
from the Great Recession. Asset prices got way ahead of the
fundamentals. Everything returns to the mean; margins, interest
rates, unemployment, etc. Count your blessings, a nine year
bull is rare.
s
3
hours ago
To make matters worse I read a
story earlier today indicating that the hedge funds in
Europe are literally being wiped out and those are their
favourite & biggest ones. Yup, Alex Jones (yeah I know
how everyone in mainstream media loves to hate the guy
and even censors him) predicted what would happen back in
2008 or 2009. He said that the recession then was just
the start of it. That the powers that be would facilitate
a come back, so that people could get into EVEN BIGGER
DEBTS (which they did with the 0% interest rates) and
then they'd engineer an even more massive crash that
would suck all the liquidity and equity out of the
markets towards the big wigs that controls everything -
read BOIS (Bank of International Settlements) which is
owned by a few very wealthy secretive people and they are
the ones that basically owns and operates the banks the
world over - and dictating all the banking laws too. They
just keep getting richer & richer at our expense. Like as
if they need all that wealth.
K
1 hour ago
40 years watching markets and people
just do not understand that forward PE's get cut in half or go
as low as 5x PE with a recession -- all the fluff on the upside
gets parsed out and once the income flows slow the gratuitous
accounting stops and suddenly there is transparency and people
wait 10 years to get even-maybe 20 this cycle- and the public
realizes they have been hoodwinked
b
2 hours
ago
Maybe POTUS can rehire Yellin after he
fires Powell (if only he could)
"... Jeffrey Gundlach, chief executive of DoubleLine Capital, on Monday said the S&P 500 stock index is headed to new lows and that U.S. equities are in a long-term bear market. ..."
"... "I think it is a bear market. I think we've had the first leg down and the second leg down is usually more painful than the first leg down," said Gundlach, who oversees more than $123 billion. ..."
"... "I think this lasts a long time. It has a lot to do with the fact that, I believe, that we're in a situation that is ... highly unusual - that we're increasing the budget deficit so spectacularly so late in the cycle while the Fed is hiking interest rates." ..."
"... The intraday low for the year in the S&P was on Feb. 9, when it bottomed at 2532.69. The low close for the year was on April 2 at 2581.88. On Monday, the S&P closed 2545.94. ..."
<img alt="FILE PHOTO: Jeffrey Gundlach, CEO of DoubleLine Capital, speaks during the Sohn Investment Conference in New York" src="https://s.yimg.com/it/api/res/1.2/BXVsdhZsK0OiZdcOd8_ffw--~A/YXBwaWQ9eW5ld3M7c209MTt3PTQ1MDtoPTMwMDtpbD1wbGFuZQ--/http://media.zenfs.com/en_us/News/Reuters/2018-12-17T182416Z_1_LYNXMPEEBG1NJ_RTROPTP_2_FUNDS-DOUBLELINE-GUNDLACH.JPG.cf.jpg" itemprop="url"/>
NEW YORK (Reuters) -
Jeffrey Gundlach, chief executive of DoubleLine Capital,
on Monday said the S&P 500 stock index is headed to new lows and that U.S.
equities are in a long-term bear market.
Gundlach, speaking on CNBC TV, said passive investing has reached "mania status"
and will exacerbate market problems.
"I think it is a bear market. I think we've had the first leg down and the
second leg down is usually more painful than the first leg down," said
Gundlach, who oversees more than $123 billion.
"I think this lasts a long time. It has a lot to do with the fact that, I
believe, that we're in a situation that is ... highly unusual - that we're
increasing the budget deficit so spectacularly so late in the cycle while the
Fed is hiking interest rates."
The S&P 500 briefly erased its losses in late-morning trade on Monday but resumed
its steep decline and pierced through Gundlach's target after he made his "bear
market" comments.
The intraday low for the year in the S&P was on Feb. 9, when it bottomed at
2532.69. The low close for the year was on April 2 at 2581.88. On Monday, the S&P
closed 2545.94.
Investors are also bracing for the Federal Reserve's last rate decision of the
year on Wednesday, when they are expected to raise U.S. interest rates for a
fourth time for 2018.
Gundlach said the Fed should not raise rates this week but will. "The bond market
is basically saying, 'You know, Fed, there's no way you should be raising
interest rates'," he said.
The U.S. central bank's quantitative tightening campaign has made markets nervous
because of the ultra-low levels that have remained in place for several years,
Gundlach said.
"The problem is that the Fed shouldn't have kept them (rates) so low for so long.
The problem is, we shouldn't have had negative interest rates like we still have
in Europe. We shouldn't have had done quantitative easing, which is a circular
financing scheme," he said.
Gundlach also said the China-U.S. trade war gets worse from here. "China doesn't
like to be told what to do by President Trump," he said. For its part, "I think
they (the United States) will probably ratchet up the tariffs."
The remarks by Gundlach, who in April recommended investors short Facebook Inc,
extended losses in Facebook shares on Monday after he characterized the social
media giant as a "diabolical data-collection monster that would ultimately fall
victim to regulation." The stock closed 2.69 percent lower.
Gundlach took a shot at passive investment strategies such as index funds,
declaring the investing strategy a "mania" that is causing widespread problems in
global stock markets.
"I'm not at all a fan of passive investing. In fact, I think passive investing
... has reached mania status as we went into the peak of the global stock
market," Gundlach said. "I think, in fact, that passive investing and robo
advisers ... are going to exacerbate problems in the market because it's hurting
behavior," he said.
(Bloomberg Opinion) -- Traders and investors will be glad to see the back of 2018. It's been
the worst rout since 1901, by Deutsche Bank AG's reckoning, with almost every asset class
delivering losses. These charts illustrate the backdrop to what went wrong this year –
and hint at what could go better in 2019.
$14,889,930,106,680
That's how much the total value of companies listed on the world's stock markets has
declined since peaking at $87,289,962,917,450 on Jan 28. In other words, almost $15 trillion
has been wiped off the global equity market this year.
The list of potential motivations for the sell-off is long and includes rising geopolitical
risks, the prospect of trade wars erupting, the risk that a slowdown in global growth that
could degenerate into a worldwide recession, and the evergreen what-goes-up-must-come-down. But
might it just be possible that investors start to take the view stocks have fallen far and fast
enough to offer value next year?
Talkin' About a Recession
It's clear that one of the fundamental worries spooking investors is that the period of
coordinated global growth that propelled stock markets higher in recent years is coming to an
end.
The R word is increasingly cropping up in news articles. But economists put the chances of a
recession in the coming year at 15 percent in the U.S. and 18 percent in the euro zone,
according to Bloomberg surveys. Even the Brexit-battered U.K. economy is only at a 20 percent
risk, while for Japan the likelihood rises to 30 percent. Perhaps those concerns about a
recession are overdone.
Curving to Inversion
Or perhaps not. One trend was omnipresent in 2018 – the relentless flattening of the
yield curve in the U.S.
Yields at the short end of the Treasury market pushed higher with every quarterly increase
in the Fed's benchmark interest rate. Longer-dated bonds danced to a different beat,
particularly as the October equity shakeout drove a flight to quality.
An inverted yield curve – when yields on shorter-dated bonds are higher than their
longer-dated counterparts – is often seen as an indicator of impending recession. It's
finally happened: yields on five-years are below those for two-years. A key question for 2019
will be how the feedback loop develops between the Federal Reserve's policy intentions and the
shape of the curve.
Quantitative Tightening
The Fed has been reducing its economic stimulus by not replacing the bonds it bought under
its Quantitative Easing program as they mature.
But this "normalization" is already taking its toll as the sharp equity market sell off in
October showed. The Fed has a tricky choice to make in 2019 about whether it can persist both
with hiking rates and reducing quantitative easing. Is the world ready yet to stand on its own
feet without ongoing central bank support?
No Alarms and No Surprises
Economic surprise indexes – which measure actual economic data compared to forecasts
– are designed to be portents of the future. And for 2018 they largely did their job.
U.S. strength is waning and Brexit is taking a toll on the U.K. In particular the third-quarter
weakness in euro-zone growth, when both Germany and Italy turned negative, was well-flagged
from as early as the first quarter.
For 2019 there is a more neutral outlook, but it is interesting that the U.S. economic data
is much more evenly balanced in terms of expectations. Europe continues to be the worst
performer – quite something considering the predicament the U.K. is in.
Europe Stumbles
Europe has seen growth falter this year, with Italy's political crisis and Germany's diesel
vehicle emissions scandal taking their toll.
Italy's third-quarter growth was revised to -0.1 percent, beating only Germany. The
prospects for 2019 are none-too-rosy, bar the notable exception of Spain, as momentum has
evaporated. Europe remains in the sick bay of the developed world – just as the European
Central Bank prepares to remove its monetary stimulus to the economy.
Relying on China
China came to the global economy's rescue in the wake of the financial crisis, but it is
starting to pay the price for increasing its debt to create additional GDP growth. Total social
financing as a percentage of gross domestic product – a broad measure of credit creation
– is flat-lining. Adding extra debt to boost the economy is becoming a less effective
measure. It is not just the threat of a trade war with America that has pushed Chinese equities
down by 20 percent in 2018.
China faces the classic emerging-market middle-income trap where growth fueled by credit
runs out of road. This debt bubble will not be easily fixed.
Finding Reverse Again
Japanese Prime Minister's famous three economic arrows are failing to hit their mark. Debt
that stands in excess of 250 percent of GDP is hampering all efforts to resuscitate inflation
and sustainable growth in the world's third-largest economy. Third-quarter GDP contracted 2.5
percent on an annualized basis, the worst performance for four years.
Tokyo might be hosting the Olympics in 2020, but there is little benefit flowing through so
far. Japan, like the rest of the once dominant Asian export powerhouses, is just as beholden to
the outcome of the trade war with Trump as China is.
Hunting for Neutral
Until very recently, many economists were anticipating at least four more rate increases
from the Fed next year at a pace of one per quarter. While the futures market still suggests a
Dec. 19 hike is a done deal, the outlook for monetary policy in 2019 has shifted significantly
in recent weeks.
Goldman Sachs Group Inc. has trimmed its forecast for number of potential Fed rate increases
in 2019; billionaire fund manager Paul Tudor Jones said earlier this month that he's not
expecting any additional tightening from the U.S. central bank next year. A halt to the hikes
might prove as pleasing to financial markets as to President Donald Trump.
Credit Squeeze
Companies with dollar bonds have seen their borrowing costs soar relative to those of the
U.S. government as the Fed has driven its benchmark interest rate higher this year. Investors
have seen a corresponding slump in the value of the corporate debt they own.
Any slowdown in the ascent of U.S. borrowing costs as the Fed pauses for breath should give
succor to corporate bonds – provided it isn't accompanied by a rise in defaults.
Other People's Money
It's been a terrible year for the stocks of firms that manage other people's money for a
living.
Fund managers tend to invest in each other's shares. And you'd expect them to have
better-than-average insight into the business prospects of their peers. So watch for an
inflection point in asset management stocks – it might be a sign of a turning point for
the wider market.
Happy Birthday to the Euro
The common European currency celebrates its 20th birthday at the start of January. During
the two decades of its existence, rumors of the euro's demise have been proven to be greatly
exaggerated.
The European debt crisis at the beginning of this decade posed an existential threat to the
euro's well-being. The currency survived. At several points in the past few years, Greece
seemed on the verge of either quitting or being ousted from the project. Its membership
survived. And Italy's election of a populist government earlier this year raised the prospect
of a founding member threatening to leave if it wasn't allowed to break the bloc's budget
rules. Still, the euro survives.
In fact, as the chart above shows, investors are close to the most relaxed they've been
about the euro fracturing in more than five years based on the Sentix Euro Break-Up Index, a
monthly gauge of investor concern about the threat. So let's end by wishing the euro many happy
returns.
To contact the editor responsible for this story: Edward Evans at [email protected]
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP
and its owners.
Mark Gilbert is a Bloomberg Opinion columnist covering asset management. He previously was
the London bureau chief for Bloomberg News. He is also the author of "Complicit: How Greed and
Collusion Made the Credit Crisis Unstoppable."
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three
decades in the banking industry, most recently as chief markets strategist at Haitong
Securities in London.
"... christophere steele admitted before a british court today that he was hired by the clintons/obama/DNC to make up the dossier as a weapon to use against trump as a backup plan in case he won the election.. this proves the DNC lied, paid for a fake dossier, and comey admitted he knew the fake dossier was false before using it to get a FISC warrant and to spy on trump, which was used as an excuse for the mueller investigation.. yahoo news and leftwing media arent covering the story.. educate yourselves ..."
1 hour ago
When I read articles like this I look to see who wrote it, printed it etc. When I see
Bloomberg, Yahoo, HuffPo I approach it as fake news. Now I no longer watch any of Fox news
as they are fast becoming just like the rest of the propaganda outlets. This is just
inflammatory anti Trump drivel with no basis in fact.
O 1 hour
ago Was this the interview report that was written 7 months after the interview?
R 44 minutes ago
Actually this story is not accurate. Mueller released copies of the 302 memos, which are in
effect official documentation to a case file. The 302 was dated seven months after the
interview, when the FBI policy requires such reports to be filed within five days. The
judge will ask tomorrow for copies of agent's contemporaneous interview notes and any other
documents supporting what is written in the 302, as well as an explanation for the delay in
filing the memo. 1
hour ago You mean the notes the FBI, in the person of one Peter Strzok, (yes that Strozk)
made seven months after he was interviewed? with the required 302 documents that are either
to be taken extemporaneously or done within days of the interview being dated months later?
You mean those notes?!!!! Nice try Bloomberg, but no amount of yellow journalism spin will
stop this case from being thrown out! 15 minutes ago christophere steele
admitted before a british court today that he was hired by the clintons/obama/DNC to make
up the dossier as a weapon to use against trump as a backup plan in case he won the
election.. this proves the DNC lied, paid for a fake dossier, and comey admitted he knew
the fake dossier was false before using it to get a FISC warrant and to spy on trump, which
was used as an excuse for the mueller investigation.. yahoo news and leftwing media arent
covering the story.. educate yourselves 1 hour ago Not so bias garbage news .. they
entrapped him what 302 form you want to go with .. FBI doctored the original.. FBI
curuption runs rampant.. comey lied so much about knowing about fake dossier.. then what
the hell was he doing.. comey the tall guy phony
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives ..."
"... Wall Street Journal ..."
"... Wall Street Journal ..."
"... The idea that examiners should not criticize any bank misconduct, predation, or 'unsafe and unsound practice' that does not constitute a felony is obviously insane. ..."
"... The trade association complaint that examiners dare to criticize non-felonious bank conduct – and the WSJ ..."
"... I have more than a passing acquaintance with banking, banking regulation, and banking's rectitude (such an old fashioned word) in the importance for Main Street's survival, and for the country's as a whole survival as a trusted pivot point in world finance , or for the survival of the whole American project. I know this sounds like an over-the-top assertion on my part, however I believe it true. ..."
"... Obama et al confusing "banking" with sound banking is too ironic, imo. ..."
"... It was actually worse than this. The very deliberate strategy was to indoctrinate employees of federal regulatory agencies to see the companies they regulated not as "partners" but as "customers" to be served. This theme is repeated again and again in Bush era agency reports. Elizabeth Warren was viciously attacked early in the Obama Administration for calling for a new "watchdog" agency to protect consumers. The idea that a federal agency would dedicate itself to protecting citizens first was portrayed as dangerously radical by industry. ..."
"... Models on Clinton and Bush. What's not to like? Why isn't msm and dem elites showing him the love when he's following their long term policies? And we might assume these would be hills policies if she had been pushed over the line. A little thought realizes that in spite of the pearl clutching they far prefer him to Bernie. ..."
By Bill Black, the author of The Best Way to Rob a Bank is
to Own One, an associate professor of economics and law at the University of Missouri-Kansas
City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives
The Wall Street Journal published an article
on December 12, 2018 that should warn us of coming disaster: "Banks Get Kinder, Gentler
Treatment Under Trump." The last time a regulatory head lamented that regulators were not
"kinder and gentler" promptly ushered in the Enron-era fraud epidemic. President Bush made
Harvey Pitt his Securities and Exchange Commission (SEC) Chair in August 2001 and, in one of
his early major addresses, he spoke on October 22, 2001 to a group of accounting
leaders.
Pitt, as a private counsel, represented all the top tier audit firms, and they had
successfully pushed Bush to appoint him to run the SEC. The second sentence of Pitt's speech
bemoaned the fact that the SEC had not been "a kinder and gentler place for accountants." He
concluded his first paragraph with the statement that the SEC and the auditors needed to work
"in partnership." He soon reiterated that point: "We view the accounting profession as our
partner" and amped it up by calling accountants the SEC's "critical partner."
Pitt expanded on that point: "I am committed to the principle that government is and must be
a service industry." That, of course, would not be controversial if he meant a service agency
(not "industry") for the public. Pitt, however, meant that the SEC should be a "service
industry" for the auditors and corporations.
Pitt then turned to pronouncing the SEC to be the guilty party in the "partnership." He
claimed that the SEC had terrorized accountants. He then stated that he had ordered the SEC to
end this fictional terror campaign.
[A]ccountants became afraid to talk to the SEC, and the SEC appeared to be unwilling to
listen to the profession. Those days are ended.
This prompted Pitt to ratchet even higher his "partnership" language.
I speak for the entire Commission when I say that we want to have a continuing dialogue,
and partnership, with the accounting profession,
Recall that Pitt spoke on October 22, 2001. Here are the relevant excerpts from the NY
Times' Enron
timeline :
Oct. 16 – Enron announces $638 million in third-quarter losses and a $1.2 billion
reduction in shareholder equity stemming from writeoffs related to failed broadband and water
trading ventures as well as unwinding of so-called Raptors, or fragile entities backed by
falling Enron stock created to hedge inflated asset values and keep hundreds of millions of
dollars in debt off the energy company's books.
Oct. 19 – Securities and Exchange Commission launches inquiry into Enron
finances.
Oct. 22 – Enron acknowledges SEC inquiry into a possible conflict of interest
related to the company's dealings with Fastow's partnerships.
Oct. 23 – Lay professes confidence in Fastow to analysts.
Oct. 24 – Fastow ousted.
The key fact is that even as Enron was obviously spiraling toward imminent collapse (it
filed for bankruptcy on December 2) – and the SEC knew it – Pitt offered no warning
in his speech. The auditors and the corporate CEOs and CFOs were not the SEC's 'partners.'
Thousands of CEOs and CFOs were filing false financial statements – with 'clean' opinions
from the then 'Big 5' auditors. Pitt was blind to the 'accounting control fraud' epidemic that
was raging at the time he spoke to the accountants. Thousands of his putative auditor
'partners' were getting rich by blessing fraudulent financial statements and harming the
investors that the SEC is actually supposed to serve.
Tom Frank aptly characterized the Bush appointees that completed the destruction of
effective financial regulation as "The Wrecking Crew." It is important, however, to understand
that Bush largely adopted and intensified Clinton's war against effective regulation. Clinton
and Bush led the unremitting bipartisan assault on regulation for 16 years. That produced the
criminogenic environment that produced the three largest financial fraud epidemics in history
that hyper-inflated the real estate bubble and drove the Great Financial Crisis (GFC).
President Trump has renewed the Clinton/Bush war on regulation and he has appointed banking
regulatory leaders that have consciously modeled their assault on regulation on Bush and
Clinton's 'Wrecking Crews.'
Bill Clinton's euphemism for his war on effective regulation was "Reinventing Government."
Clinton appointed VP Al Gore to lead the assault. (Clinton and Gore are "New Democrat" leaders
– the Wall Street wing of the Democratic Party.) Gore decided he needed to choose an
anti-regulator to conduct the day-to-day leadership. We know from Bob Stone's memoir the sole
substantive advice he gave Gore in their first meeting that caused Gore to appoint him as that
leader. "Do not 'waste one second going after waste, fraud, and abuse.'" Elite insider fraud
is, historically, the leading cause of bank losses and failures, so Stone's advice was sure to
lead to devastating financial crises. It is telling that it was the fact that Stone gave
obviously idiotic advice to Gore that led him to select Stone as the field commander of Clinton
and Gore's war on effective regulation.
Stone convinced the Clinton-Gore administration to embrace the defining element of crony
capitalism as its signature mantra for its war on effective regulation. Stone and his troops
ordered us to refer to the banks, not the American people, as our "customers." Peters' foreword
to Stone's book admits the action, but is clueless about the impact.
Bob Stone's insistence on using the word "customer" was mocked by some -- but made an
enormous difference over the course of time. In general, he changed the vocabulary of public
service from 'procedure first' to 'service first.'"
That is a lie. We did not 'mock' the demand that we treat the banks rather than the American
people as our "customer" – we openly protested the outrageous order that we embrace and
encourage crony capitalism. Crony capitalism's core principle – which is unprincipled
– is that the government should treat elite CEOs as their 'customers' or 'partners.' A
number of us publicly expressed our rage at the corrupt order to treat CEOs as our customers.
The corrupt order caused me to leave the government.
Our purpose as regulators is to serve the people of the United States – not bank CEOs.
It was disgusting and dishonest for Peters to claim that our objection to crony capitalism
represented our (fictional) disdain for serving the public. Many S&L regulators risked
their careers by taking on elite S&L frauds and their powerful political fixers. Many of us
paid a heavy personal price because we acted to protect the public from these elite frauds. Our
efforts prevented the S&L debacle from causing a GFC – precisely because we
recognized the critical need to spend most of our time preventing and prosecuting the elite
frauds that Stone wanted us to ignore..
Trump's wrecking crew is devoted to recreating Clinton and Bush's disastrous crony
capitalism war on regulation that produced the GFC. In a June 8,
2018 article , the Wall Street Journal mocked Trump's appointment of Joseph Otting
as Comptroller of the Currency (OCC). The illustration that introduces the article bears the
motto: "IN BANKS WE TRUST."
Otting, channeling his inner Pitt, declared his employees guilty of systematic misconduct
and embraced crony capitalism through Pitt's favorite phrase – "partnership."
I think it is more of a partnership with the banks as opposed to a dictatorial perspective
under the prior administration.
Otting, while he was in the industry, compared the OCC under President Obama to a fictional
interstellar terrorist. Obama appointed federal banking regulators that were pale imitation of
Ed Gray, Joe Selby, and Mike Patriarca – the leaders of the S&L reregulation. The
idea that Obama's banking regulators were akin to 'terrorists' is farcical.
The WSJ's December 12, 2018 article reported that Otting had also used Bob Stone's
favorite term to embrace crony capitalism.
Comptroller of the Currency Joseph Otting has also changed the tone from the top at his
agency, calling banks his "customers."
There are many terrible role models Trump could copy as his model of how to destroy banking
regulation and produce the next GFC, but Otting descended into unintentional self-parody when
he channeled word-for-word the most incompetent and dishonest members of Clinton and Bush's
wrecking crews.
The same article reported a trade association's statement that demonstrates the type of
outrageous reaction that crony capitalism inevitably breeds within industry.
Banks are suffering from "examiner criticisms that do not deal with any violation of law,"
said Greg Baer, CEO of the Bank Policy Institute ."
The article presented no response to this statement so I will explain why it is absurd.
First, "banks" do not "suffer" from "examiner criticism." Banks gain from examiner criticism.
Effective regulators (and whistleblowers) are the only people who routinely 'speak truth to
power.' Auditors, credit rating agencies, and attorneys routinely 'bless' the worst CEO abuses
that harm banks while enriching the CEO. The bank CEO cannot fire the examiner, so the
examiners' expert advice is the only truly "independent" advice the bank's board of directors
receives. That makes the examiners' criticisms invaluable to the bank. CEOs hate our advice
because we are the only 'control' (other than the episodic whistleblower) that is willing and
competent to criticize the CEO.
The idea that examiners should not criticize any bank misconduct, predation, or 'unsafe
and unsound practice' that does not constitute a felony is obviously insane. While
"violations of law" (felonies) are obviously of importance to us in almost all cases, our
greatest expertise is in identifying – and stopping – "unsafe and unsound
practices" because such practices, like fraud, are leading causes of bank losses and
failures.
Third, repeated "unsafe and unsound practices" are a leading indicator of likely elite
insider bank fraud and other "violations of law."
The trade association complaint that examiners dare to criticize non-felonious bank
conduct – and the WSJ reporters' failure to point out the absurdity of that
complaint – demonstrate that the banking industry's goal remains the destruction of
effective banking regulation. Trump's wrecking crew is using the Clinton and Bush playbook to
restore fully crony capitalism. He has greatly accelerated the onset of the next GFC.
Thank you for this, Bill Black. IMO the long-term de-regulatory policies under successive
administrations cited here, together with their neutering the rule of law by overturning the
Glass-Steagall Act; de-funding and failing to enforce antitrust, fraud and securities laws;
financial repression of the majority; hidden financial markets subsidies; and other policies
are just part of an organized, long-term systemic effort to enable, organize and subsidize
massive control and securities fraud; theft of and disinvestment in publicly owned resources
and services; environmental damage; and transfers of social costs that enable the organizers
to in turn gain a hugely disproportionate share of the nation's wealth and nearly absolute
political control under their "Citizens United" political framework.
Not to diminish, but among other things the current president provides nearly daily
entertainment, diversion and spectacle in our Brave New World that serves to obfuscate what
has occurred and is happening.
I'm with you Chauncey. I believe the rot really got started with creative accounting in
early 1970s. That's when accountants of every flavor lost themselves and were soon followed
by the lawyers. Sauce for the goose.
Banks and Insurers and many industrial concerns have become too big. We could avoid all
the regulatory problems by placing a maximum size on commercial endeavour.
A number of years ago I did both the primary capital program and environmental (NEPA) review
for major capital projects in a Federal Region. Hundreds of millions of dollars were at
stake. A local agency wanted us (the Feds) to approve pushing up many of their projects using
a so-called Public Private Partnership (PPP). This required the local agency to borrow many
millions from Wall Street while at the same time privatizing many of their here-to-fore
public operations. And of course there was an added benefit of instituting a non-union
shop.
To this end I was required to sit down with the local agency head (he actually wore white
shoes), his staff and several representatives of Goldman-Sachs. After the meeting ended, I
opined to the agency staff that Goldman-Sachs was "bullshit" and so were their projects.
Shortly thereafter I was removed to a less high-profile Region with projects that were not
all that griftable, and there was no danger of me having to review a PPP.
Oh, and I denied, denied, denied saying "bullshit."
Thank you, NC, for featuring these posts by Bill Black.
I have more than a passing acquaintance with banking, banking regulation, and banking's
rectitude (such an old fashioned word) in the importance for Main Street's survival, and for
the country's as a whole survival as a trusted pivot point in world finance , or for
the survival of the whole American project. I know this sounds like an over-the-top assertion
on my part, however I believe it true.
Main Street also knows the importance of sound banking. Sound banking is not a 'poker
chip' to be used for games. Sound banking is key to the American experiment in
self-determination, as it has been called.
Politicians who 'don't get this" have lost touch with the entire American enterprise,
imo. And, no, the neoliberal promise that nation-states no longer matter doesn't make this
point moot.
adding: US founding father Alexander Hambleton did understand the importance of sound
banking, and so Obama et al confusing "banking" with sound banking is too ironic, imo.
It was actually worse than this. The very deliberate strategy was to indoctrinate
employees of federal regulatory agencies to see the companies they regulated not as
"partners" but as "customers" to be served. This theme is repeated again and again in Bush
era agency reports. Elizabeth Warren was viciously attacked early in the Obama Administration
for calling for a new "watchdog" agency to protect consumers. The idea that a federal agency
would dedicate itself to protecting citizens first was portrayed as dangerously radical by
industry.
Models on Clinton and Bush.
What's not to like? Why isn't msm and dem elites showing him the love when he's following
their long term policies?
And we might assume these would be hills policies if she had been pushed over the line.
A little thought realizes that in spite of the pearl clutching they far prefer him to
Bernie.
CIA democrats are still determined to sink Tramp, and continues to beat the dead cat of
"Russian collision". What is interesting is that Jacob Schiff financed Bolsheviks revolution in
Russia.
Yahoo comments reflect the deep split in the opinions in the society, which is positioned
mainly by party lines. Few commenters understadn that the problem is with neoliberalism, not
Trump, or Hillary who represent just different factions of the same neoliberal elite.
Notable quotes:
"... Schiff said Deutsche Bank has paid hundreds of millions of dollars in fines to the state of New York for laundering Russian money, and that it was the one bank willing to do business with the Trump Organization. ..."
"... In an interview with the New Yorker that was posted on line on Dec. 14, Schiff said the Intelligence Committee is "going to be looking at the issue of possible money laundering by the Trump Organization, and Deutsche Bank is one obvious place to start." ..."
"... A Senate investigation, which Warren and Van Hollen want to see followed by a report and a hearing, could put further pressure on the lender. The written request from the senators, sent Dec. 13, cites Deutsche Bank's "numerous enforcement actions" and a recent raid by police officers and tax investigators in Germany. ..."
"... Schiff, a target of Trump's on Twitter, also referred to reported comments by the president's sons some years ago that they didn't need "to deal with U.S. banks because they got all of the cash they needed from Russia or disproportionate share of their assets coming from Russia." He said Sunday he expects to learn more about that claim through financial records. ..."
The incoming chairman of the House Intelligence Committee joined Democratic colleagues in
questioning ties between Deutsche Bank AG and President Donald Trump's real estate
business.
Representative Adam Schiff of California said on NBC's "Meet the Press" Sunday that any type
of compromise needs to be investigated. That could add his panel's scrutiny to that of
Representative Maxine Waters, who's in line to be chair of the House Financial Services
Committee and has also focused on the bank's connections to Trump.
Schiff's comments came three days after Wall Street critic Elizabeth Warren of Massachusetts
and fellow Senate Democrat Chris Van Hollen called for a Banking Committee investigation of
Deutsche Bank's compliance with U.S. money-laundering regulations.
Schiff said Deutsche Bank has paid hundreds of millions of dollars in fines to the state
of New York for laundering Russian money, and that it was the one bank willing to do business
with the Trump Organization.
"Now, is that a coincidence?" Schiff said. "If this is a form of compromise, it needs to be
exposed."
In an interview with the New Yorker that was posted on line on Dec. 14, Schiff said the
Intelligence Committee is "going to be looking at the issue of possible money laundering by the
Trump Organization, and Deutsche Bank is one obvious place to start."
More Pressure
A Senate investigation, which Warren and Van Hollen want to see followed by a report and
a hearing, could put further pressure on the lender. The written request from the senators,
sent Dec. 13, cites Deutsche Bank's "numerous enforcement actions" and a recent raid by police
officers and tax investigators in Germany.
It also notes the lender's U.S. operations being implicated in cross-border money-laundering
accusations such as in a recent case involving Danish lender Danske Bank A/S and the movement
of $230 billion in illicit funds.
"The compliance history of this institution raises serious questions about the national
security and criminal risks posed by its U.S. operations," the senators said in their letter.
"Its correspondent banking operations in the U.S. serve as a gateway to the U.S. financial
system for Deutsche Bank entities around the world."
Troy Gravitt, a Deutsche Bank spokesman, responded that the company "takes its legal
obligations seriously and remains committed to cooperating with authorized investigations."
Van Hollen, a Maryland Democrat, had questioned the Federal Reserve earlier this year about
how it would keep the White House from interfering with oversight of the lender, which had been
a major lender to Trump's real estate business.
Schiff, a target of Trump's on Twitter, also referred to reported comments by the
president's sons some years ago that they didn't need "to deal with U.S. banks because they got
all of the cash they needed from Russia or disproportionate share of their assets coming from
Russia." He said Sunday he expects to learn more about that claim through financial
records.
To contact the reporter on this story: Jesse Hamilton in Washington at
[email protected]
To contact the editors responsible for this story: Jesse Westbrook at
[email protected], Mark Niquette, Ros Krasny
55 seconds ago A
special Special Prosecutor must be appointed with a billion dollar budget. Where will the
money come from? Fines, penalties, and restitution by the Godfather.
U 46 seconds ago With
all these investigations, who should die hard Republicans vote for in 2020? Should it be
Donald Trump or Individual 1 or David Dennison? Gonna' be a hard choice next year.
F 1
minute ago Investigations of Trump are just getting started! hahaha
A 7 minutes ago Don
the Con is certainly getting a lot of probes of his illegal, criminal business deals. He
was a total idiot to become president and draw all this attention considering all the
crimes he has committed.
W 3 minutes ago
"Shifty" Schiff....doing everything to bring America together again!
D 17 minutes ago Lets investigate SLIMEY SHIFTLESS SCHIFF for leaking to
the News Media and running faster than a speedy bullet to a microphone and running his
loose lips !
B 3 minutes ago One of
the problem is that politicians, like schiffhead, have never had a real job and only have
scammed their donors and havent a clue how the real world works.
"... Bob Marley got it right.... the human race is becoming a rat race, and it's a disgrace. ..."
"... The biggest problem is the financialisation of the economy... what is the actual value of things? The market is so manipulated that real price discovery is not possible. ..."
"... We have an over-cooked service-sector economy unsustainably reliant on cheap debt, cheap energy, and cheap manufactured goods to fuel our 'high-end levels of consumption, and mobility or living standards, and an over-heated housing market that is unsustainably run according to the needs of investors and landlords rather than residents or tenants. ..."
"... What we need is a coordinated approach between our nations. Undercutting each other on corporate taxes, writing tax avoidance into law, and continuing to allow multinationals to influence our politicians and play our governments against each other is exactly the game we must end. ..."
"... Instead, it places the financially powerful beyond any state, in an international elite that makes its own rules, and holds governments to ransom. That's what the financial crisis was all about. The ransom was paid, and as a result, governments have been obliged to limit their activities yet further.... ..."
"... "Ransom". There is no better word to describe it. This (the ransom mentality) is exactly the reactionary, vindictive, doctrinaire psychology that must be extracted like a cancer from our institutional lives and the human species. A monolithic task. But identifying the cause is the first step to cure. ..."
"... these are the new medieval transnational barons ..."
@Crackerpot - The whole austerity crisis thing appears to have been engineered so that a few blinkered and unpatriotic, vulture
mafia privateers can make a killing, selling off vital state assets, such as infrastructure and ports, to the Chinese. This is
a very suspicious and widespread trend.
Bob Marley got it right.... the human race is becoming a rat race, and it's a disgrace.
I see it every day from the window of my flat, on a main road, in Bethnal Green. There's a 'mentally unstable' Rastafarian
who stands by the overground station, and shouts things out to people like "You're living in babylon".
The biggest problem is the financialisation of the economy... what is the actual value of things? The market is so manipulated
that real price discovery is not possible.
We have an over-cooked service-sector economy unsustainably reliant on cheap debt, cheap energy, and cheap manufactured
goods to fuel our 'high-end levels of consumption, and mobility or living standards, and an over-heated housing market that is
unsustainably run according to the needs of investors and landlords rather than residents or tenants.
The whole thing is going to blow apart. Our 'aspirations' are slowly killing us - they're destroying the social fabric.
What we need is a coordinated approach between our nations. Undercutting each other on corporate taxes, writing tax avoidance
into law, and continuing to allow multinationals to influence our politicians and play our governments against each other is exactly
the game we must end.
Deborah Orr:Instead, it places the financially powerful beyond any state, in an international elite that makes
its own rules, and holds governments to ransom. That's what the financial crisis was all about. The ransom was paid, and as
a result, governments have been obliged to limit their activities yet further....
I never thought I would live long enough to see this level of honesty ATL. It should have been published long ago, but at least
the discussion now begins.
"Ransom". There is no better word to describe it. This (the ransom mentality) is exactly the reactionary, vindictive, doctrinaire
psychology that must be extracted like a cancer from our institutional lives and the human species. A monolithic task. But identifying
the cause is the first step to cure.
"... Neoliberalism? This is not just a financial agenda. This a highly organized multi armed counterculture operation to force us, including Ms Orr [unless she has...connections] into what Terence McKenna [who was in on it] termed the `Archaic Revival'. That is - you and me [and Ms Orr] - our - return to the medieval dark ages, if we indeed survive that far. ..."
"... The conscious and intelligent manipulation of the organised habits and opinions of the masses is an important element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government which is the true ruling power of our country. We are governed, our minds are moulded, our tastes formed, our ideas suggested, largely by men we have never heard of. ..."
"... the UK government did intervene in the economy when it bailed out the banks to the tune of many billions of pounds underwritten by the taxpayer. The markets should always be regulated sufficiently (light touch is absolutely useless) to prevent the problems currently being experienced from ever happening again. ..."
"... Traditional liberalism had died decades before WWII and was replaced by finance capitalism. What happened after WW II was that capitalism had to make various concessions to avoid a socialist revolution: social and political freedoms indeed darted ahead. ..."
"... No chance mate, at least not all the time greasy spiv and shyster outfits like hedge funds are funding Puffin face and the Vermin Party. They are never going to bite the hand that feeds them ..."
"... And in case we get uppity and endeavour to challenge the economic paradigm and the rule of these neoliberal elites, there's the surveillance state panopticon to track our movements and keep us in check. ..."
"... There is not a shred of logical sense in neoliberalism. You're doing what the fundamentalists do... they talk about what neoliberalism is in theory whilst completely ignoring what it is in practice. In theory the banks should have been allowed to go bust, but the consequences where deemed too high (as they inevitable are). The result is socialism for the rich using the poor as the excuse, which is the reality of neoliberalism. ..."
"... She, knowingly, let neo-liberal economic philosophy come trumpeting through the door of No10 and it's been there ever since; it has guided our politicians for the past 30 odd years. Hence, it is Thatcher's fault. She did this and another bad thing: the woman who glorified household economics pissed away billions of pounds of North Sea Oil. ..."
"... Bailouts have been a constant feature of neoliberalism. In fact the role of the state is simply reduced to a merely commissioning agent to private parasitical corporations. History has shown the state playing this role since neoliberalism became embedded in policy since the 1970s - Long Term Capital Management, Savings and Loans, The Brady Plan, numerous PFI bailouts and those of the Western banking system during the 1982 South American, 1997 Asian and 2010 European debt crises. ..."
@EllisWyatt - Here's the funny thing about those who cheer the broken neoliberal model. They
promise we will get to those "sunny uplands" with exactly the same fervor as old Marxists.
Neoliberalism has spawned a financial elite who hold governments to ransom
Neoliberalism? This is not just a financial agenda. This a highly organized multi armed counterculture operation to
force us, including Ms Orr [unless she has...connections] into what Terence McKenna [who was in on it] termed the `Archaic
Revival'. That is - you and me [and Ms Orr] - our - return to the medieval dark ages, if we indeed survive that far.
The same names come up time and time again. One of them being, father of propaganda, Edward Bernays.
Bernays wrote what can be seen as a virtual Mission Statement for anyone wishing to bring about a "counterculture." In the
opening paragraph of his book Propaganda he wrote:
"..The conscious and intelligent manipulation of the organised habits and opinions of the masses is an important
element in democratic society. Those who manipulate this unseen mechanism of society constitute an invisible government
which is the true ruling power of our country. We are governed, our minds are moulded, our tastes formed, our ideas
suggested, largely by men we have never heard of.
This is a logical result of the way in which our democratic society is organised. Vast numbers of human beings must
cooperate in this manner if they are to live together as a smoothly functioning society. In almost every act of our daily
lives, whether in the sphere of politics or business, in our social conduct or our ethical thinking, we are dominated by
the relatively small number of persons who understand the mental processes and social patterns of the masses.
It is they who pull the wires which control the public mind..."[28]
Bernays' family background made him well suited to "control the public mind." He was the double nephew of psychoanalysis
pioneer Sigmund Freud. His mother was Freud's sister Anna, and his father was Ely Bernays, brother of Freud's wife Martha
Bernays.
@OneCommentator - the UK government did intervene in the economy when it bailed out the banks
to the tune of many billions of pounds underwritten by the taxpayer. The markets should
always be regulated sufficiently (light touch is absolutely useless) to prevent the problems
currently being experienced from ever happening again.
Those at the bottom of society and
those in the public sector are the ones paying the price for this intervention in the UK. If
you truly believe in the 'free' market then all of these failing organisations (banks, etc)
should have been allowed to fail. The problem is that the wealth created under the current
system is virtually all going to those at the top of the income scale and this needs to
change and is one of the main reasons that neo liberalism should be binned!
Traditional liberalism had died decades before WWII and was replaced by finance
capitalism. What happened after WW II was that capitalism had to make various concessions to
avoid a socialist revolution: social and political freedoms indeed darted ahead.
@brighton2 - No chance mate, at least not all the time greasy spiv and shyster outfits like hedge funds are funding Puffin
face and the Vermin Party. They are never going to bite the hand that feeds them.
And in case we get uppity and endeavour to challenge the economic paradigm and the rule of
these neoliberal elites, there's the surveillance state panopticon to track our movements and
keep us in check.
I know what you are saying it's just sooner or later as those at the bottom continue to be
squeezed the wealthy will sow their own seeds of destruction. I think we are witnessing the
end game which is reflected in the desperation of the coalition to flog everything regardless
of the efficacy of such behavior, they feel time is running out and they would be right.
Call it what you will - "neoliberalism", "neoconservatism", "socialism" or whatever it is...
This debate is not even really solely about money: this is about liberty , about
free choice, about being permitted to engage in voluntary exchange of goods and services with
others, unmolested. About the users of services becoming the ones paying for those
services.
Ultimately the real effect will be to remove power from governments and hand it back to
where it belongs - the free market.
voluntary transactions among free agents. That's called a free market and it is by far
the most efficient way to produce wealth humanity has ever known.
Could you explain how someone bound by a contract of employment, with the alternative,
destitution, is a 'free agent'?
@SpinningHugo - Nothing comes out of nothing and i well remember black Monday in the City.
That was the start of the spivs running the economy as if it were a casino. If you think its only on CiF that Thatcher gets the blame, think on this, Scotland, a
whole nation blames her too.
Unless you are completely confused by what neoliberalism is there is not a shred of
logical sense in this.
There is not a shred of logical sense in neoliberalism. You're doing what the
fundamentalists do... they talk about what neoliberalism is in theory whilst completely
ignoring what it is in practice. In theory the banks should have been allowed to go bust, but
the consequences where deemed too high (as they inevitable are). The result is socialism for
the rich using the poor as the excuse, which is the reality of neoliberalism.
Savers in a neoliberal society are lambs to the slaughter. Thatcher "revitalised" banking, while everything else withered and died.
Neoliberalism is based on the thought of personal freedom, communism is definitely not.
Neoliberalist policies have lifted millions of people out of poverty in Asia and South
America.
Neoliberalism is based on the thought that you get as much freedom as you can
pay for, otherwise you can just pay... like everyone else. In Asia and South America it has
been the economic preference of dictators that pushes profit upwards and responsibility down,
just like it does here.
I find it ironic that it now has 5 year plans that absolutely must not be deviated from,
massive state intervention in markets (QE, housing policy, tax credits... insert where
applicable), and advocates large scale central planning even as it denies reality, and makes
the announcement from a tractor factory.
Neoliberalism is a blight... a cancer on humanity... a massive lie told by rich people and
believed only by peasants happy to be thrown a turnip. In theory it's one thing, the reality
is entirely different. Until we're rid of it, we're all it's slaves. It's an abhorrent cult
that comes up with purest bilge like expansionary fiscal contraction to keep all the money in
the hands of the rich.
@MickGJ - You are wrong about the first 2 of course.
Banksters get others to do their shit.
But unfortunately the poor sods who went down on D Day were in their way fighting for Wall
Street as much as anything else. It's just that they weren't told about it by the Allies massive propaganda machine. So partly right
The response should be a wholesale reevaluation of the way in which wealth is created
and distributed around the globe
Which would be what? State planning? Communism? Totally free market capitalism? Oh wait, we already have the best of a bad bunch, a mixed capitalist economy with
democracy. That really is the crux of it, our system isn't perfect, never will be, but nobody has come
up with a better solution.
Barclays bank "only" paid out £660m in dividends to the bearers of risk capital,
while its bonus pot for a very select number of its staff was £1.5bn.
Fascinating! Now, one could infer that Barclays represent "beneficial capitalism",
rewarding its hard-working employees, but maybe we won't.
This is not the traditional capitalist style
The Traditional capitalist is not an extinct species but under threat. For the time
being the population is stagnant in some countries and even increasing in some others.
However, due to the foraging capacity of Neoliberal creature , competing in the same
economical niche, the size and life expectation of it are diminishing.
She, knowingly, let neo-liberal economic philosophy come trumpeting through the door of
No10 and it's been there ever since; it has guided our politicians for the past 30 odd years.
Hence, it is Thatcher's fault. She did this and another bad thing: the woman who
glorified household economics pissed away billions of pounds of North Sea Oil.
@MickGJ - No, you're right. Why let yesterdays experience feed into what you expect of the
future? Lets go forwards goldfish like, every minute a brand new one, with no baggage!
And by the way, who saved the hide of the very much private sector banks and financial
institutions? The hated STATE, us tax payers!
I think I agree with everything that you say here? The people at the top these days aren't
really of much use for anything, including capitalism. The only thing that they do excel at
is lining their own pockets and securing their privileged position in society.
They have become quite up front about it. There was a bit of a fuss last year when
Barclays bank "only" paid out £660m in dividends to the bearers of risk capital, while
its bonus pot for a very select number of its staff was £1.5bn. Barclays released a
statement before their AGM explaining:
"Barclays is fully committed to ensuring that a greater proportion of income and profits
flow to shareholders notwithstanding that it operates within the constraints of a
competitive market."
This is not the traditional capitalist style competition that they are talking about where
companies competed as to who can return the biggest profit for their shareholders this now
comes secondary to the real competition which is for which company can return the biggest
bonuses for a small group of employees.
Bailouts have been a constant feature of neoliberalism. In fact the role of the state is
simply reduced to a merely commissioning agent to private parasitical corporations. History
has shown the state playing this role since neoliberalism became embedded in policy since the
1970s - Long Term Capital Management, Savings and Loans, The Brady Plan, numerous PFI
bailouts and those of the Western banking system during the 1982 South American, 1997 Asian
and 2010 European debt crises.
No wonder you're so ignorant of the basics of economic policy if you won't flick through a
book - fear of accepting that you're simply wrong is a sure sign of either pig ignorance or
denial, and is as I said embarrassing so its not really much point in wasting anymore time
engaging with you.
The neoliberal idea is that the cultivation itself should be conducted privately as
well. They see "austerity" as a way of forcing that agenda.
..."neoliberal", concept behind the word, has nothing to do with liberal or liberty or
freedom...it is a PR spin concept that names slavery with a a word that sounds like the
opposite...if "they" called it neoslavery it just wouldn't sell in the market for political
concepts.
..."austerity" is the financial sectors' solution to its survival after it sucked most the
value out of the economy and broke it. To mend it was a case of preservation of the elite and
the devil take the hindmost, that's most of us.
...and even Labour, the party of trade unionism, has adopted austerity to drive its
policy.
...we need a Peoples' Party to stand for the revaluation of labour so we get paid for our
effort rather than the distortion, the rich xxx poor divide, of neoslavery austerity.
Of course it has. And it will continue to "fail", while provide us with all
sorts of goodies, for the foreseeable future. Capitalism's endless "failure" is of no more
concern than human mortality. Ever tried, ever failed, try again, fail better.
"... Now we see moneyed entities with vested interests, carpet bagging and flogging off the NHS and an unelected fossil fuel mandarin, at the heart of government decision making, appointing corporate yea-sayers, to the key government departments, with environmental responsibilities. Corporations capturing the state apparatus for their own ends, is 'corporatism.' ..."
"... "Neoliberalism in practice is every bit as bad as Communism in practice, with none of the benefits." ..."
"... The bailout is simply actual neoliberalism as opposed to the theory inside tiny right wing minds. The system depends on the wealthy not being allowed to suffer the consequences of their own greed, or it would represent revolution and still not work. ..."
"... Neoliberalism in practice is every bit as bad as Communism in practice, with none of the benefits. It always amusing to see neoliberal morons shout about the red menace when they're two sides of the same coin. ..."
"... Neoliberalism is nothing if not the opposite extreme of the communist planned economy. Like the communist planned economy, neoliberalism is doomed to failure. I think we've all been sold a lie. ..."
@NotAgainAgain - this is very true, it reminds me of an engineering company I worked for in
Nottingham (since gone under). The production manger was a corrupt thief. He gradually
sub-contracted the production work out to other companies in the area, taking backhanders for
his troubles.
Once all the production was farmed out, he somehow got himself promoted to
director level, where he and a sycophant subbed all the design work out. So all the
production and design was done out of house, standards dropped and the company closed,
leaving him with a nice payoff, just prior to retirement.
Some would say he played a blinder, my interpretation is he ruined a perfectly viable
company, making a very good product, and over the course of about 5 years put over 30 people
out of work.
In a just world he would be spending his retirement in prison.
Income distribution and a happy workforce is actually very good for business as well as
society!
Of course it is, but the capitalists do not know it. In many countries, including Finland,
the "condition of the working classes", ie. working conditions, have been in rapid decline
for the last 20 years.
Permanent salaried jobs have been replaced with temps from agencies, unpaid overtime is
becoming the norm, burnouts are commonplace and so on.
If in your country things are different, no mass lay-outs and outsourcing to China, count
yourself lucky!
But even though an illiterate market wouldn't be so great for them, they avoid their
taxes, because they can, because they are more powerful than governments
Noam Chomsky pointed this out aeons ago though-that the American model is to use tax money
to benefit private interests through technological infrastructure.
It was ever thus, if in slightly different forms. Still it is surprising that they have gone
so quickly from their stated position at the start of the republic of a rejection of kings
and emperors to their position now of corruption so ingrained it is impossible to make
distinctions. Proxy emperors are emperors all the same, no matter the rhetoric that promotes
them.
One senses that there is very little 'going back' possible. Besides, the great Neoliberal
scam is predicated upon the qualities of the 'governments' we have and the capacity of those
'rhetoricians' with the capacity to say anything or play any role, to lick any arse, to get
elected. Such apparent strength is weakness. In this world that now exists here, we have now
entered the same world as the USSR in the eighties, where the announcement of bumper harvests
of wheat, made everyone with a brain cell groan and think
'Oh fuck! no bread this winter-quick, run to the shops now, and buy up all the flour
there'.
But there is now no way to declare that without being seen as beyond the pale-a bug eyed
conspiracist.
Still, I am a believer in the connectedness of this world. The economic system and its
mythologies are just weird and distorted canaries in the coalmine of the wider environment.
It is indicating that there is a misalignment between the way we think and what is possible
in this world. Austerity promoters and 'Keynsian' Ballsites are one and the same thing-both
pretenders that the key to the problems is within their narrow gifts
Hubris is followed by nemesis. In a wider sense what we seen now is a complete failure of
the capacity to educate and to learn,and moderate behaviour, and find some way of caring for
our 'others', beyond the core of 'self'. nationalism is essentially an extension of 'self'.
We now shall see the failure of a retraction of thought into nationalism and
scapegoating.
I predict that the population of the world will decline over the next century-quite
markedly.
The only solace is that at the end of the process, the pain will be forgotten. It always
is.
@MickGJ - Cameron said 'We will cut the deficit, not the NHS,' and promised to be the
'greenest government ever,' saying that you could 'go green,' if you voted 'blue.'
Now we see
moneyed entities with vested interests, carpet bagging and flogging off the NHS and an
unelected fossil fuel mandarin, at the heart of government decision making, appointing
corporate yea-sayers, to the key government departments, with environmental responsibilities.
Corporations capturing the state apparatus for their own ends, is 'corporatism.'
Much of the healthy economic growth – as opposed to the smoke and mirrors of many
aspects of financial services – that Britain enjoyed during the second half of the
20th century was due to women swelling the educated workforce.
There was very little 'healthy economic growth' in Britain in the second half of the 20th
century.
Britain was bankrupt after WW2 with its people dependent on Marshall Aid and food
contributions from its former 'colonies'.
Whatever 'growth' occured after Marshall Aid arrived was scuppered by a class system where
company managers were more concerned with walking on the workers than with keeping their
businesses afloat while such discrimination provoked hard left trade union policies which
left british industry uncompetitive and ultimately non-existent.
If that wasn't enough, Thatcherism arrived to re-inforce class discrimination, sell off
national services and assets and replace social policy with neo-liberal consumerism.
Whether the workforce was swollen by women or anyone else is immaterial.
The anti-democratic incestuous class conflict latent in British society continues to ensure
that the UK will remain a mere vassal state of foot-soldiers and consumers for international
neo-liberal capitalism.
@DasInternaut - Completely agree. The performance has been poor to absymal. But this is a
failure of democratic governance because the collective interests of citizens as consumers
and service users are not being represented and enforced by the elected politicians since
they have been suborned by the capitalists elites and their fellow-travellers.
The people, indeed, have been sold a lie, but, unfortunately, it is only UKIP which is
making the political waves by revealing selected aspects of this lie. The three established
parties have been 'bought' to varying extents. But more and more citizens are beginning to
realise the extent to which they have been bought.
There is an upside to all of this, maybe I wont get modded so much from now on for being so
angry at the ideological criminals . Hopefully the middle classes will cotton on to the fact
that all this is not a mad hatters tinfoil hobby, we need more of them to be grumpy.
@MickGJ - We've already seen it. Not great so far. GS4, Winterbourne view, southern cross,
trains...............Welfare to work companies, delivering no better results than people left
to their own devices. Energy companies.
We'll see if the new wave of free schools, academy schools, and all the service outsourced by
the council perform any better.
Doubtful, as to make a profit, they have to employ poorer paid people, less well qualified,
and once they've got a contract, they've got very little competition, as when the second
round of bidding comes around, as the firms having got the first contract are the only one
with relevant experience, they are assured of renewal, the money machine will keep going!
Neoliberalism are policies that are
influenced by neo classical economics. If you are suggesting that the neoliberal school of
thought would advocate any kind of a bailout then you are mistaken. Where else have I
"apparently" embarrassed myself?
@TedSmithAndSon - This is just an inaccurate rant not a reply.
"The system depends on the wealthy not being allowed to suffer the consequences.."
Unless you are completely confused by what neolibralism is there is not a shred of logical
sense in this.
"The debt industry are the lenders who take advantage of a financial system..."
Which is what savers are. They come in the form of individuals businesses and governments.
This encompasses everyone.
"whilst paying the lowest possible rate. Wonga, for instance."
If you are a lender you do not pay anything, you receive.
"Thatchers revolution was to take our citizenship and give it a value, whilst making
everyone else a consumer, all for a handful of magic beans in the shape of British Gas
shares."
...not forgetting that she revitalised the economy and got everyone back to work
again.
"Neoliberalism in practice is every bit as bad as Communism in practice, with none of the
benefits."
Neoliberalism is based on the thought of personal freedom, communism is definitely not.
Neoliberalist policies have lifted millions of people out of poverty in Asia and South
America. Communism has no benefits for society open your eyes!
@ATrueFinn - After they are finished, what do Singaporeans eat?
Next year's harvest (possibly of GM food which makes better use of scarce
resources). I imagine the sun will eventually stop bombarding us with the energy that powers
photosynthesis but I'm not losing any sleep over it.
@MurchuantEacnamai - I think the point is this, Amazon make money by selling books, they
avoid paying taxes, yet expect an educated, literate population to be provided for them, on
the grounds that illiterate people don't buy books, and expect roads to move the books around
on.
@theguardianisrubbish - No! The bailout is simply actual neoliberalism as opposed to
the theory inside tiny right wing minds. The system depends on the wealthy not being
allowed to suffer the consequences of their own greed, or it would represent revolution and
still not work.
The debt industry are the lenders who take advantage of a financial system designed to
push profits upwards (neoliberalism in practice), whilst paying the lowest possible rate.
Wonga, for instance.
Thatchers revolution was to take our citizenship and give it a value, whilst making
everyone else a consumer, all for a handful of magic beans in the shape of British Gas
shares.
Neoliberalism in practice is every bit as bad as Communism in practice, with none of the
benefits. It always amusing to see neoliberal morons shout about the red menace when they're
two sides of the same coin.
.and provides them at a massively inflated cost accompanied by unforgivable waste and
inefficiency, appalling service and life-threatening incompetence.
as opposed to the private sector, who always does what it says it will do, at reasonable
cost, for the benefit of their customers, and with due regards to ethics?
Like the Banks, the financial sector, who will never sell you a product that isn't the best
for you, regardless of their interest? the private companies like Southern Cross, GS4?
The private insurance who refuse to take you on the minute you've got some illness or
disability? Get off it! The state isn't perfect, the services it provides are not perfect,
but replacing them with private provision isn't the answer!
@MurchuantEacnamai - How would you rate how well British government has done in ensuring
markets are genuinely competitive. How well has British government done in ensuring our
energy market is competitive, for example. Does the competitiveness we observe in the energy
market give customers better or worse value than they had before deregulation? How do you
rate the British government's performance in rail and public transport, with respect to
competitiveness?
Personally, and notwithstanding the notable exception of telecoms, I rate the British (and
US) government's performance in deregulating state entities, creating new markets and
ensuring competition, as poor.
Neoliberalism is nothing if not the opposite extreme of the communist planned economy.
Like the communist planned economy, neoliberalism is doomed to failure. I think we've all
been sold a lie.
"... Neoliberalism has spawned a financial elite who hold governments to ransom ..."
"... Neoliberal ideology acted as a smokescreen that enabled the financially powerful to rewrite the rules and place themselves beyond the law. ..."
"... So it seems that your suggestion is for a return to western capitalism post-war style - would that be right? (b.t.w. if I bring up the whole Soviet Union thing, it is partly because quite a few commentators in this debate come across as if they wish for something much more leftist than that). ..."
"... What you have missed, is that the lions share of the proceeds of that growth are not going to ordinary people but to a tiny minority of super rich. It is not working for the majority. ..."
"... The taxpayers are left to pick up the tab, nations are divided against immigrants and scroungers and then unfettered evangelists like you can spout as pompously as you like about how much big business would like to remove the state from corporate affairs. ..."
"... Without the state there wouldn't be neo-Liberalism, it took state regulated capitalism to build what unfettered purists insist on tearing apart for short term greed. ..."
"... The trouble is Neo-Liberals do not want to remove the state at all, they want to BE the state and in the process rendering democracy pretty much meaningless. And they've succeeded. ..."
"... The biggest swindle ever pulled was turning the most glaring and crushing failure of unfettered corporatism into the biggest and most crushing power grab implemented in order to suppress the will of the people ..."
"... Nobody hates a market more than a monopoly and capitalism must inevitably end in monopoly as it has. For the profiteering monopolies investment especially via taxation is insane as it can only undermine their monopoly. ..."
"... The bankers have always known that the austerity caused by having to pay off un-payable loans, that increase every year, will eventually produce countries very similar to the "Weimar Days" in pre-Hitler Germany. ..."
"... They also know that drastic conditions such as these often lead to a collapse of democracy and a resurgence of Fascism. ..."
"... Neoliberalism could not exist without massive state support. So the term is meaningless. There is nothing "liberal" about having a huge state funded military industrial complex that acts a Trojan horse for global corporations, invading other countries for resources. ..."
"... Neoliberalism is a branch of economic ideology which espouses the value of the free-market, and removing all protective legislation, so that large companies are free to do what they want, where-ever they want, with no impediments from social or environmental considerations, or a nation's democratic preferences. ..."
"... Business-friendly to who exactly: the nation or hostile overseas speculators? ..."
"... The golden age of 1945 - 1975 or so witnessed huge rises in standards of living so your point linking neo-liberalism to rising standards of living is literally meaningless. There was an explosive growth in economic activity during the three or four post war decades ..."
"... The assumption shared by many round here that the young are some untapped resource of revolutionary energy is deeply mistaken ..."
A wonderful article that names the central issue. Neoliberal ideology acted as a smokescreen
that enabled the financially powerful to rewrite the rules and place themselves beyond the
law. The resultant rise of financial capitalism, which now eclipses the productive
manufacturing-based capitalism that was the engine of world growth since the industrial
revolution, has propelled a dangerous self-serving elite to the centre of world power. It's
not just inequality that matters, but the character of the global elite.
The neo-liberal order commenced only in the late 1970s - there was a very different
order prior to this which was not "soviet socialism" as you term it.
So it seems that your suggestion is for a return to western capitalism post-war style -
would that be right? (b.t.w. if I bring up the whole Soviet Union thing, it is partly because
quite a few commentators in this debate come across as if they wish for something much more
leftist than that).
Anyway, my worry with this idea is that I am just not convinced that life in "The West
1945-80" was better on the whole than in "The West 1980-present". It's true that
unemployment is higher these days, but a lot of work in the post-war years was boring and
physically exhausting; in factories and mines where conditions were degrading and bad for
health; and where industrial relations were simply terrible. I think as well that the higher
unemployment is a localized phenomenon that many developing countries are not experiencing
(this is relevant because Deborah Orr proposes change for the whole world, not merely the
West).
There were also frequent recessions and booms - in fact, more frequent (albeit shorter)
than now. What seems to have changed in this respect is that, whereas we used to alternate
regularly between 2-3 years of boom and 1-2 years of bust, we now have 15 years of continuous
boom followed by a (maybe?) 10 year bust (this pattern began around 1980). If you asked me
which of these two patterns I preferred, then I think I'd go for the pre-1980 pattern, but
its not clear to me that the post-1980 pattern is so much worse as to underwrite a savage
indictment of the whole system.
As for Casino banking: they should reform that. Britain's Coalition Government has done
something in that respect, although its not very radical - I am hoping Labour can do more.
There is certainly a lot to be said for banks going back to a pre-"Big Bang" sense of
tradition and prudence.
Buts let's not also forget the plus sides in the ledger for post-1980 capitalism: hundreds
of millions in the former third world lifted out of poverty; unprecedented technological
innovation (e.g. the internet, which makes access to knowledge more equal even as income
inequality grows); and the accomodation (at least in the West) of progressive social change,
such as the empowerment of ethnic minorities, LGBT people and women.
Change, yes - but lets be careful not to throw the baby out with the bathwater.
OK, but both the claim and the link cited in support talk only about a problem in the US.
This can't really answer my point, which was that the rest of the world should not be
expected to support a change to the economic system of the whole world just because of
problems that are mostly localised to North America and Europe. People in developing
countries might like the fact that they are, at last, catching "the West" up, and might well
not care much about widening inequality of incomes in Western societies.
If you are going to propose changes that you want the whole world to adopt, as Deborah Orr
does, then you should be careful to avoid casually assuming that Africa, India, China, et al,
feel the same way about the world's recent history as we do. It seems to me that not enough
care has been demonstrated in this regard.
@MickGJ - Left to their own devices the most extreme neo-liberals would remove the state
almost completely from corporate life.
Except when the State has to step in to prop up an unsustainable ideology. Then it's all
meek murmurings and pleas for forgiveness and a timid "we'll be better from now" concessions
and the Government obliges the public with the farce that they actually intend to do anything
at all but make the public pay for the financial sector's state subsidized profligacy.
Once the begging bowl is re-filled of course then the pretense of "business as usual"
profligacy rises to the fore.
The taxpayers are left to pick up the tab, nations are divided against immigrants and
scroungers and then unfettered evangelists like you can spout as pompously as you like about
how much big business would like to remove the state from corporate affairs.
When you well know that is the last thing big business would like to do. More of the state
owned pie is always the most urgent of priorities. Poorer services at inflated costs equates
as 'efficiency' until the taxpayer is again left to step in and pick up the bill.
Without the state there wouldn't be neo-Liberalism, it took state regulated capitalism to
build what unfettered purists insist on tearing apart for short term greed.
The trouble is Neo-Liberals do not want to remove the state at all, they want to BE the
state and in the process rendering democracy pretty much meaningless. And they've
succeeded.
The biggest swindle ever pulled was turning the most glaring and crushing failure of
unfettered corporatism into the biggest and most crushing power grab implemented in order to
suppress the will of the people.
Just as IMF loans come with 'obligations' the principle of democracy itself was sold as
part of 'the solution'.
The unsustainable, sustained. By slavery to debt, removal of society's safety net and an
economy barely maintained by industries that serve the rich, vultures that prey on the weak
and rising living costs and the drudgery of a life compounded by a relentless bombardment of
everything in life that is unattainable.
Nobody hates a market more than a monopoly and capitalism must inevitably end in monopoly as
it has. For the profiteering monopolies investment especially via taxation is insane as it
can only undermine their monopoly. With the economy now globalised not even a world war could
sweep away the current ossified political economy and give capitalism a new lease on life.
It's socialism or monopoly capitalist barbarism. Make your choice.
Money that the governments don't actually need as they can print their own money and spend it
to use their countries own resources and then raise taxes to offset the extra spending and
thus maintaining monetary value. The reality is that a government should never, ever borrow
money.
The beginning period between the two world wars (1919-33) in Germany called the Weimar
Republic shows us exactly what severe austerity imposed by the Treaty of Versailles caused.
Because the German economy contracted severely due to reparations payments, steady inflation
and severe unemployment ensued. Of course the FED having started the Great Depression in
America had not helped matters much anywhere in the world. The bankers have always known that
the austerity caused by having to pay off un-payable loans, that increase every year, will
eventually produce countries very similar to the "Weimar Days" in pre-Hitler Germany.
They
also know that drastic conditions such as these often lead to a collapse of democracy and a
resurgence of Fascism.
What causes inflation is uncontrolled speculation of the kind we have seen fed by private
banking at various crucial points in history, such as the Weimar Republic. When speculation
is coupled with debt (owed to private banking cartels) such as we are seeing in America and
Europe now, the result is disaster. On the other hand, when a government issues its own "good
faith" commerce-related currency in carefully measured ways as we saw in Roman times or
Colonial America, it causes supply and demand to increase together, leaving prices
unaffected. Hence there is no inflation, no debt, no unemployment, and no need for income
taxes.
In reality, the Weimar financial crisis began with the impossible reparations payments
imposed at the Treaty of Versailles. It is very similar to the austerity being imposed on
European Nations and America as we speak – regardless of the fact that the IMF is
trying to pose as "the Good Cop" at the moment! The damage has been done to nations like
Greece, and others are soon to follow. The uncontrollable greed of banks and corporations is
leading to an implosion of severe magnitude! It's time to open their books and put a stop to
these private banks right now!
@MysticFish - So the US who has a greater spend on the military than communist China is
neoliberal?
Neoliberalism could not exist without massive state support. So the term is
meaningless. There is nothing "liberal" about having a huge state funded military industrial complex
that acts a Trojan horse for global corporations, invading other countries for resources.
The term neoliberal is not only meaningless but misleading as it implies a connection with
true liberalism, of which it has no meaningful connection.
Do away with deceptive terms like neoliberalism, capitalism, socialism, left wing and right
wing and things become clearer.
At root a lot of the people who get involved in all of the above have very similar
character traits - love of power, greed, deceitful, ruthlessness. Most start out with these
character traits, and others gain them as a result of power.
Anyone high up in politics or business is unhinged. You have to be. The organizational
structures in these things are so synthetic, the beliefs so artificial, rigid, dogmatic and
inhuman that only a unhinged person could prosper in this climate.
Most reasonable people admit doubt, are willing to accept compromise, are willing to make
the occasional sacrifice for the greater good. All these things are what make us human,
however all these things are seen as weaknesses in the inverted world of business and
politics.
Business and politics creates an environment where the must inhuman traits prosper.
"no but the highly placed banking and financial class are along with their venal
political mates"
For sure but are they capitalists? Although they may well own capital does their power
derive from the ownership of capital? You may, or may not be interested in this
lecture on the future of capitalism by John Kay.
@AssistantCook - Neoliberalism is a branch of economic ideology which espouses the value of
the free-market, and removing all protective legislation, so that large companies are free to
do what they want, where-ever they want, with no impediments from social or environmental
considerations, or a nation's democratic preferences. Von Hayek was a major influence and
Thatcher was a loyal disciple, as was the notorious dictator, Pinochet. It is economic
theory, designed for vulture capitalists, and unpopular industries like fossil fuel or
tobacco, and usually the 'freedom' is all one-sided.
@DavidPavett - If states are too big, then what about multinational banks and corporations? I
wonder why Neoliberal ideology does not try to limit the size of these. They are cumbersome
and destructive, predatory dinosaurs and yet our politicians seem mesmerised to the point of
allowing them special favours, tax incentives and the ability to determine our nation's
policies in matters such as energy and health. Why not 'Small is Beautiful,' when it comes to
companies? It doesn't make sense to shrink the state but then let non-transparent and
unaccountable, multinational companies become too powerful. One gets the feeling the country
is being invaded by the interests of hostile nations, using all-too-convenient Neoliberal
ideology and hidden behind a corporate mask.
Is the IMF ever stop evading its responsibility and blaming others for the worldwide
financial tragedy it has provoked? Is it ever stop hurting the working class?
"Neo-liberalism is based on the thought of personal freedom for the rich and powerful
elites is all."
No it is not that is what you want to believe. There is nothing in this statement other
than an opinion based on nothing.
"Many people across the globe were lifted out of poverty between 1945-1980 so what does
your statement about neo-liberalism prove"
Which countries during this period saw massive sustainable reductions in poverty without
some free market model in place?
"It is you who should open your eyes and stop expecting people on here to accept your
ideological beliefs and statements as facts."
I don't expect people to accept my beliefs I am just pointing out why I think their
beliefs are wrong. This is a comment section the whole idea of it is to comment on different
views and articles. How can you ever benefit or make an accurate decision or belief if you do
not try to understand what the opposite belief is? I think nearly everything I have said has
been somewhat backed up by logic or a fact, I have not said wishy washy statements like:
"Neo-liberalism is based on the thought of personal freedom for the rich and powerful
elites is all."
Unless you can expand on this and give evidence or some form of an example why you think
its true then it makes no sense. You are not the only commentor on this article to make a
similar statement and the way people have attempted to justify it is due to bailouts but as I
have said a bailout is not part of the neoliberal school of thought so if you have a problem
with bailouts you don't have a problem with neoliberalism.
@murielbelcher - I don't want to go to far into Thatcherism because it is slightly off topic.
The early 80s recession was a global recession and yes during the first few years
unemployment soared. Why was that because the trade unions were running amok the UK was
losing millions of days of work per month.
Inflation was getting out of control and the only
way to solve it was a self induced recession. You cannot seriously believe that without the
reforms that she implemented we would not have recovered as quick as we did nor can you argue
that it was possible for her or anyone else to turn around such an inefficient industry.
Don't forget the problems of the manufacturing industry go back way before Thatcher's time.
"Here's your problem. You believe that banks lend savings. They don't. Loans create
deposits create reserves."
I am not claiming to be an expert on this if you are then let me know and please do
correct me. I agree banks do not lend deposits but they do lend savings. There is a
difference putting money on deposit is different to say putting money into an ISA. I don't
agree though that deposits create reserves I believe that they come from the central bank
otherwise banks would be constrained by the amount of deposits in the system which is not
true and something you have said is not true.
Nevertheless, the majority of liquidity in the bond markets (like most other markets)
comes from institutional investors, i.e pension funds, unit trusts, insurance companies, etc.
They get their money from savings by consumers as well as sometimes companies. Ok we don't
always give our money to insurance companies when we save but via premiums is another way the
ordinary consumer contributes to this so called "debt industry". I also said that foreign and
local governments buy debt and companies invest directly into the debt market.
"In theory the banks should have been allowed to go bust, but the consequences where deemed
too high (as they inevitable are). "
Iceland would disagree.
"The result is socialism for the rich using the poor as the excuse, which is the reality
of neoliberalism."
Why have only the rich benefited from the bailout? You are not making any sense.
"The result is socialism for the rich using the poor as the excuse, which is the reality
of neoliberalism."
Why? You cannot just say a statement like that and not expand, it makes no sense.
"Thatcher "revitalised" banking, while everything else withered and died."
...but also revitalised the economy and got everyone back to work.
"Neoliberalism is based on the thought that you get as much freedom as you can pay for,
otherwise you can just pay... like everyone else."
Again you have to expand on this because it makes no sense.
"In Asia and South America it has been the economic preference of dictators that pushes
profit upwards and responsibility down, just like it does here."
Don't think that is true in most cases nor would it make sense. Why would a dictator who
wants as much power as possible operate a laissez-faire economy? You cannot have personal
freedom without having economic freedom, it is a necessary not sufficient condition. Tell me
a case where these is a large degree of political freedom but little to no economic freedom.
Moreover look at the countries in Asia and South America that have adopted a neoliberal
agenda and notice their how poverty as reduced significantly.
"I find it ironic that it now has 5 year plans that absolutely must not be deviated from,
massive state intervention in markets (QE, housing policy, tax credits... insert where
applicable), and advocates large scale central planning even as it denies reality, and makes
the announcement from a tractor factory."
Who has 5 year plans?
"In theory it's one thing, the reality is entirely different."
If the reality is different to the theory then it is not neoliberalism that is being
implemented therefore it makes no sense to dispute the theory. Look at where it has been
implemented, the best case in the world at the moment is Hong Kong look at how well that
country has performed.
"a massive lie told by rich people "
I can assure you I am not rich.
"Until we're rid of it, we're all it's slaves."
Neoliberalism is based on personal freedom. If you believe this about neoliberalism in your
opinion give me one economic school of thought where this does not apply.
"Bailouts have been a constant feature of neoliberalism."
What you are saying does not make sense. Whatever you say about that there was no where else
to turn the government had to bailout out the banks a neolibralist would disagree.
"In fact the role of the state is simply reduced to a merely commissioning agent to
private parasitical corporations. "
That's corporatism which so far you have described pretty well.
"History has shown the state playing this role since neoliberalism became embedded in
policy since the 1970s - Long Term Capital Management, Savings and Loans, The Brady Plan,
numerous PFI bailouts and those of the Western banking system during the 1982 South American,
1997 Asian and 2010 European debt crises."
What?! Bailouts have been occurring before the industrial revolution. Deregulation in the
UK occurred mainly during the 80s not 70's. Furthermore financial deregulation occurred in
the UK in 1986. In the USA the major piece of financial deregulation was the Gramm Leach
Bliley Act which was passed in 1999. So you have just undercut your own point with the
examples you gave above. You could argue Argentina and we could argue all day about the
causes of that, but I would say that any government that pursues an expansionary monetary
policy under a fixed ER is never going to end well.
"...policy if you won't flick through a book."
My point was that when people quote a source they tend to either quote the page that the
point comes from. To be honest if this book is telling you that neoliberalism and
neoclassical are significantly different (which you seemed to suggest in you earlier post)
then I would suggest put the book down.
"Google, Amazon and Apple... avoid their taxes, because they can, because they are more
powerful than governments."
Yes to the first, no to the second. Corporations with revenues exceeding the GDP of a small nation have quite a lot of power:
Exxon's revenue is between the GDP of Norway and Austria. In Finland Nokia generated 3 4 % of the GDP for a decade and the government bent backwards
to accommodate its polite requests, including a specific law reducing the privacy of
employees' emails.
We percieve a problem in (most of) Europe and North America because our economies are
growing more slowly than this, and in some cases not at all. The global growth figure comes
out healthy because of strong growth in the emerging countries, like China, Brazil and
India, who are narrowing the gap between their living standards and ours. So, the world as
a whole isn't broken, even if our bit of it is going through a rough patch.
@Fachan - Except that it isn't capitalism that was being criticized here, but neoliberalism:
a distinction that's often lost on neoliberals themselves, ironically.
I'm sure that Denis Healy and any number of African economists would confirm that the IMF is
quite simply a refuge of absolutely last resort, when investor confidence in your economy is
so shattered that the only way ahead is to open the shark gates and allow big money to
plunder whatever value remains there, without the benefit of any noticeable return for your
people. Greece is but one more victim of a syndrome that encompasses all the science and
forensic analysis of ritual sacrifice.
@OneCommentator - don't confuse economic deregulation which acted as handmaiden to global
finance and multinationals as economic freedoms for population
China's govt was doing what china's govt had decided to do from 1978 BEFORE the election
of Thatcher in 1979 or Reagan in 1980 (office from Jan 1981), so very little correlation
there I think
The GATT rounds whether you agree with their aims or not were the products of the post war
decades, again before Thatcher and Reagan came to power
The golden age of 1945 - 1975 or so witnessed huge rises in standards of living so your
point linking neo-liberalism to rising standards of living is literally meaningless. There
was an explosive growth in economic activity during the three or four post war decades
@theguardianisrubbish - you can't get away with this
She DID not get everyone back to work again. There were two recessions at either end of the 1980s. She TRIPLED unemployment during the first half of the 1980s and introduced the phenomenon
of high structural unemployment and placing people on invalidity benefits to massage the
headline unemployment count. Give us the figures to back up your assertion that she "got
everyone back to work again." I suspect that you cannot and your statement stands for the
utter nonsense that it is in any kind of reality.
A few months after she was forced out Tory Chancellor Norman Lamont in 1991 during yet
another recession declared that "unemployment was a price worth paying"!!!
Neo-liberalism is based on the thought of personal freedom for the rich and powerful
elites is all. Many people across the globe were lifted out of poverty between 1945-1980 so
what does your statement about neo-liberalism prove
It is you who should open your eyes and stop expecting people on here to accept your
ideological beliefs and statements as facts.
"The IMF exists to lend money to governments, so it's comic that it wags its finger at
governments that run up debt. And, of course, its loans famously come with strings attached:
adopt a free-market economy, or strengthen the one you have, kissing goodbye to the Big
State."
That's glib and inaccurate. A better read about the IMF from an insider:
http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/ Digest: the biggest problem the IMF have to deal with in bailouts is always the politics
of cronyism; free-market oligarchs and government in cahoots.
"Many IMF programs "go off track" (a euphemism) precisely because the government can't
stay tough on erstwhile cronies, and the consequences are massive inflation or other
disasters. A program "goes back on track" once the government prevails or powerful oligarchs
sort out among themselves who will govern -- and thus win or lose -- under the IMF-supported
plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families
would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led
to the fall of President Suharto and economic chaos."
Generally whoever happens to be in opposition at the time. This made the LibDems
the ideal (sorry) choice for a long time but then they broke a long-standing if unspoken
promise that they would never actually be in government.
Last weekś Economist has some very interesting stuff from the British Social
Attitudes survey which shows the increasing drift away from collectivist ideals towards
liberalism over each succeeding generation.
The assumption shared by many round here that the young are some untapped resource of
revolutionary energy is deeply mistaken
"... The crash was a write-off, not a repair job. The response should be a wholesale reevaluation of the way in which wealth is created and distributed around the globe ..."
"... The IMF also admits that it "underestimated" the effect austerity would have on Greece. Obviously, the rest of the Troika takes no issue with that. Even those who substitute "kick up the arse to all the lazy scroungers" whenever they encounter the word "austerity", have cottoned on to the fact that the word can only be intoned with facial features locked into a suitably tragic mask. ..."
"... Yet, mealy-mouthed and hotly contested as this minor mea culpa is, it's still a sign that financial institutions may slowly be coming round to the idea that they are the problem. ..."
"... Markets cannot be free. Markets have to be nurtured. They have to be invested in. Markets have to be grown. Google, Amazon and Apple haven't taught anyone in this country to read. But even though an illiterate market wouldn't be so great for them, they avoid their taxes, because they can, because they are more powerful than governments. ..."
"... The neoliberalism that the IMF still preaches pays no account to any of this. It insists that the provision of work alone is enough of an invisible hand to sustain a market. Yet even Adam Smith, the economist who came up with that theory , did not agree that economic activity alone was enough to keep humans decent and civilised. ..."
"... Governments are left with the bill when neoliberals demand access to markets that they refuse to invest in making. Their refusal allows them to rail against the Big State while producing the conditions that make it necessary. ..."
The crash was a write-off, not a repair job. The response should be a wholesale reevaluation of the way in which wealth is
created and distributed around the globe
Sat 8 Jun 2013 02.59 EDT First published on Sat 8 Jun 2013 02.59 EDT
The IMF's limited admission of guilt over the Greek bailout is a start, but they still can't see the global financial system's
fundamental flaws, writes Deborah Orr. Photograph: Boris Roessler/DPA FILE T he International Monetary Fund has admitted that some
of the decisions it made in the wake of the 2007-2008 financial crisis were wrong, and that the €130bn first bailout of Greece was
"bungled". Well, yes. If it hadn't been a mistake, then it would have been the only bailout and everyone in Greece would have lived
happily ever after.
Actually, the IMF hasn't quite admitted that it messed things up. It has said instead that it went along with its partners in
"the Troika" – the European Commission and the European Central Bank – when it shouldn't have. The EC and the ECB, says the IMF,
put the interests of the eurozone before the interests of Greece. The EC and the ECB, in turn, clutch their pearls and splutter with
horror that they could be accused of something so petty as self-preservation.
The IMF also admits that it "underestimated" the effect austerity would have on Greece. Obviously, the rest of the Troika takes
no issue with that. Even those who substitute "kick up the arse to all the lazy scroungers" whenever they encounter the word "austerity",
have cottoned on to the fact that the word can only be intoned with facial features locked into a suitably tragic mask.
Yet, mealy-mouthed and hotly contested as this minor mea culpa is, it's still a sign that financial institutions may slowly be
coming round to the idea that they are the problem. They know the crash was a debt-bubble that burst. What they don't seem to acknowledge
is that the merry days of reckless lending are never going to return; even if they do, the same thing will happen again, but more
quickly and more savagely. The thing is this: the crash was a write-off, not a repair job. The response from the start should have
been a wholesale reevaluation of the way in which wealth is created and distributed around the globe, a "structural adjustment",
as the philosopher
John Gray has said all along.
The IMF exists to lend money to governments, so it's comic that it wags its finger at governments that run up debt. And, of course,
its loans famously come with strings attached: adopt a free-market economy, or strengthen the one you have, kissing goodbye to the
Big State. Yet, the irony is painful. Neoliberal ideology insists that states are too big and cumbersome, too centralised and faceless,
to be efficient and responsive. I agree. The problem is that the ruthless sentimentalists of neoliberalism like to tell themselves
– and anyone else who will listen – that removing the dead hand of state control frees the individual citizen to be entrepreneurial
and productive. Instead, it places the financially powerful beyond any state, in an international elite that makes its own rules,
and holds governments to ransom. That's what the financial crisis was all about. The ransom was paid, and as a result, governments
have been obliged to limit their activities yet further – some setting about the task with greater relish than others. Now the task,
supposedly, is to get the free market up and running again.
But the basic problem is this: it costs a lot of money to cultivate a market – a group of consumers – and the more sophisticated
the market is, the more expensive it is to cultivate them. A developed market needs to be populated with educated, healthy, cultured,
law-abiding and financially secure people – people who expect to be well paid themselves, having been brought up believing in material
aspiration, as consumers need to be.
So why, exactly, given the huge amount of investment needed to create such a market, should access to it then be "free"? The neoliberal
idea is that the cultivation itself should be conducted privately as well. They see "austerity" as a way of forcing that agenda.
But how can the privatisation of societal welfare possibly happen when unemployment is already high, working people are turning to
food banks to survive and the debt industry, far from being sorry that it brought the global economy to its knees, is snapping up
bargains in the form of busted high-street businesses to establish shops with nothing to sell but high-interest debt? Why, you have
to ask yourself, is this vast implausibility, this sheer unsustainability, not blindingly obvious to all?
Markets cannot be free. Markets have to be nurtured. They have to be invested in. Markets have to be grown. Google, Amazon
and Apple haven't taught anyone in this country to read. But even though an illiterate market wouldn't be so great for them, they
avoid their taxes, because they can, because they are more powerful than governments.
And further, those who invest in these companies, and insist that taxes should be low to encourage private profit and shareholder
value, then lend governments the money they need to create these populations of sophisticated producers and consumers, berating them
for their profligacy as they do so. It's all utterly, completely, crazy.
The other day a health minister,
Anna Soubry
, suggested that female GPs who worked part-time so that they could bring up families were putting the NHS under strain. The
compartmentalised thinking is quite breathtaking. What on earth does she imagine? That it would be better for the economy if they
all left school at 16? On the contrary, the more people who are earning good money while working part-time – thus having the leisure
to consume – the better. No doubt these female GPs are sustaining both the pharmaceutical industry and the arts and media, both sectors
that Britain does well in.
As for their prioritising of family life over career – that's just another of the myriad ways in which Conservative neoliberalism
is entirely without logic. Its prophets and its disciples will happily – ecstatically – tell you that there's nothing more important
than family, unless you're a family doctor spending some of your time caring for your own. You couldn't make these characters up.
It is certainly true that women with children find it more easy to find part-time employment in the public sector. But that's a prima
facie example of how unresponsive the private sector is to human and societal need, not – as it is so often presented – evidence
that the public sector is congenitally disabled.
Much of the healthy economic growth – as opposed to the smoke and mirrors of many aspects of financial services – that Britain
enjoyed during the second half of the 20th century was due to women swelling the educated workforce. Soubry and her ilk, above all
else, forget that people have multiple roles, as consumers, as producers, as citizens and as family members. All of those things
have to be nurtured and invested in to make a market.
The neoliberalism that the IMF still preaches pays no account to any of this. It insists that the provision of work alone
is enough of an invisible hand to sustain a market. Yet even Adam Smith, the economist who
came up with that theory , did not agree
that economic activity alone was enough to keep humans decent and civilised.
Governments are left with the bill when neoliberals demand access to markets that they refuse to invest in making. Their refusal
allows them to rail against the Big State while producing the conditions that make it necessary. And even as the results of their
folly become ever more plain to see, they are grudging in their admittance of the slightest blame, bickering with their allies instead
of waking up, smelling the coffee and realizing that far too much of it is sold through Starbucks.
"... The era of neoliberalism has seen a massive increase in government, not a shrinkage. The biggest change is the role of governments - to protect markets rather than to protect the rights and dignities of its citizens. When viewed by outcome rather than ideological rhetoric, it becomes increasingly clear that neoliberalism has nothing to do with shrinking the state, freeing markets, or freeing the individual, and everything to do with a massive power grab by a global elite. ..."
"... What was the billions of pounds in bank bailout welfare and recession on costs all about? You tell me. All the result of the application of your extremist free market ideology? Let the banks run wild, they mess up and the taxpayer has to step in with bailout welfare and pay to clear up the recession debris ..."
"... Market participants and their venal political friends have during the past 30 years of extremist neo-liberal ideology rigged, abused, distorted and subverted their market and elite power to tilt the economic and social balance massively in their favour ..."
"... Neo liberalism = the favoured ideology of the very rich and powerful elite ..."
"... at last somebody is looking at globalisation and asking whose interests is it designed to serve? It certainly ain't for the people. ..."
"... the highly placed banking and financial class are along with their venal political mates ..."
"... We've had three decades of asset stripping in favor of the rich elites and look at the mess we're in now. ..."
"... I strongly believe that people are not being told the full story. Like the NSA surveillance revelation, the effects will not be pretty when the facts are known. No country needs the IMF. ..."
"... The mythology surrounding deficits and national debt is a religion that the world is in desperate need of debunking. Like religion, the mythology is used as a means of power and entrenchment of privilege for the Ruling Caste, not the plebs (lesser mortals). ..."
This article is a testament to our ignorance. Orr is no intellectual slouch, but somehow,
like many in the mainstream, she still fails to address some fundamental assumptions and thus
ends up with a muddled argument.
"What they don't seem to acknowledge is that the merry days of reckless lending are never
going to return;"
Lending has not stopped - it's just moved out of one market into another. Banks are making
profits, and banks profit are made by expanding credit.
Neoliberal ideology insists that states are too big and cumbersome, too centralised and
faceless, to be efficient and responsive.
Yes and no. There is a difference between what is preached and what happens in practice. The
era of neoliberalism has seen a massive increase in government, not a shrinkage. The biggest
change is the role of governments - to protect markets rather than to protect the rights and
dignities of its citizens. When viewed by outcome rather than ideological rhetoric, it
becomes increasingly clear that neoliberalism has nothing to do with shrinking the state,
freeing markets, or freeing the individual, and everything to do with a massive power grab by
a global elite.
@MurchuantEacnamai - well righty ideologues such as yourself and your venal political
acolytes have utterly failed to support the case or institute measures that: "apply effective
democratic governance to ensure market
What was the billions of pounds in bank bailout welfare and recession on costs all about?
You tell me. All the result of the application of your extremist free market ideology? Let
the banks run wild, they mess up and the taxpayer has to step in with bailout welfare and pay
to clear up the recession debris
Market participants and their venal political friends have during the past 30 years of
extremist neo-liberal ideology rigged, abused, distorted and subverted their market and elite
power to tilt the economic and social balance massively in their favour
You the taxpayer are good enough to bail us out when we mess up but then we demand that
your services are cut in return and that your employment is ever more precarious and wages
depressed (at the lower end of the scale - never ever the higher of course!! That's the
neo-liberal deal isn't it
Neo liberalism = the favoured ideology of the very rich and powerful elite and boy don't
they know how to work its levers
Very insightful commentary and at last somebody is looking at globalisation and asking whose
interests is it designed to serve? It certainly ain't for the people. Amazing it's been
approved on a UK liberal newspaper as well!
@Fachan - There was nothing in the article about envy. It was an exposition of the failure of
our present system which allows the rich to get ever richer. That would be fine if it weren't
for the fact that the increasing disparity in wealth is bringing down the economy and making
it less productive while leaving a large part of the population in, or on the verge of,
poverty.
@CaptainGrey - but we're not talking about that form of capitalism are we?
Surely you must realise that there are very very different forms of capitalism. The capitalism that reigns now would not have permitted the creation of the NHS had it not
been devised in the1940s when a very different type of capitalism reigned. Its political acolytes and its cheerleader press would have denounced the NHS as an
extremist commie idea!!
The Chicago boys swarmed into eastern Europe after 1989 to introduce a form of gangster
unbridled capitalism. The very Chicago boys led by Milton Friedman who used the dictator Pinochet's Chile as
test bed for their ideology from September 1973 after the coup that overthrew Allende
The neo-liberal order commenced only in the late 1970s - there was a very different order
prior to this which was not "Soviet Socialism" as you term it.
As such this extremist rich man's ideological experiment has had a long innings and has
failed as the events of 2008 laid bare for all to see - it has been tried out disastrously on
live human beings for 34 years and has now been thoroughly discredited with the huge bank
bailouts and financial crash and ensuing and enduring recession It was scarcely succeeding
prior to this with high entrenched rates of unemployment, frequent recessions/booms and busts
and unsustainable property bubbles and deregulated unstable speculative aka casino banking
activity
1. Neoliberalism cannot be pinned on one party alone. It was accepted by the Thatcher
government, but no Prime Minister since has seriously challenged it.
2. Neoliberalism is logically contrary to conservative values. Either there are certain
moral imperatives so important that it is worth wasting money over them, or there are not. No
wonder that Tories are torn in two, not to mention Labour politicians who also try to combine
neoliberalism and moral principle.
3. Saying "even Adam Smith" is understandable but unfair. His work was rather enlightened
in the context of mercantilism, and of course the Wealth of Nations was not his only book.
Others will know his work better than me, but I think he dwells rather strongly on problems
of persistent poverty.
4. The political and redistributive functions of nations are indeed damaged by neolib, but
I don't think there is any realistic way of getting that power back without applying capital
controls. If we apply capital controls, all hell breaks loose.
5. Ergo, we are stuck with a situation where neolib is killing democracy, distributive
justice and conservative moral values, but there is nothing we can do about it without
pulling the plug altogether and unleashing a sharp drop in wealth and 1930s nationalistic
havoc. A bit of a tragedy, indeed.
Deborah Orr: The IMF exists to lend money to governments, so it's comic that it
wags its finger at governments that run up debt.
I strongly believe that people are not being told the full story. Like the NSA
surveillance revelation, the effects will not be pretty when the facts are known. No country needs the IMF. Any national government with its own national currency
sovereignty can pay its own debts within its own country with its own currency. International
borrowing in foreign markets is the biggest myth since religion. But since neoliberalism and
its inherent myths have been swallowed whole for so long, we are still at the stage where the
child points and laughs at the nude emperor. The fallout from the revelation and remedy is to
follow.
The problem with the Eurozone is not that the Euro is the "national" currency. Control of
the Euro resides with the European Central Bank, not the Troika (European Commission,
European Central Bank, IMF). The European Central Bank, as sole controller of the Euro (the
"national" currency), can issue funds to constituent Eurozone states to the extent necessary.
I challenge anyone to demonstrate how any central bank does not have power over its own
currency!
The mythology surrounding deficits and national debt is a religion that the world is in
desperate need of debunking. Like religion, the mythology is used as a means of power and
entrenchment of privilege for the Ruling Caste, not the plebs (lesser mortals).
@DavidPavett - Does anyone have any idea what this is supposed to mean? There are
certainly no leads on this in the link given to "the philosopher" John Gray
Gray wrote this in the Guardian in 2007:
Whether in Africa, Asia, Latin America or post-communist Europe, policies of wholesale
privatisation and structural adjustment have led to declining economic activity and social
dislocation on a massive scale
This doesn't seem to support Orrś assertion that he is calling for a
structural adjustment, rather the opposite. I'ḿ not really familiar with Grayś work
but he seems to be rather against the universal imposition of any system, new or old.
@CaptainGrey - Capitalism is not an undifferentiated mass. Late-stage neoliberal
hypercapitalism as practiced in the US and increasingly in the UK is a very different beast
than the traditional European capitalist social democracy or the Nordic model, which have
been shown to work relatively well over time. In fact, neoliberal capitalism - the sort Orr
is talking about here - is marked by increasing decline both in the state and in the economy,
as inequality in wealth distribution creates a society of beggars and kings instead of
spenders and savers. The gains achieved through carefully regulated capitalism won't stick
around in the free-for-all conditions preferred by those whose ideology demands the sell-off
of the state.
@PeterWoking - For some parts of the world , yes they are more affluent now , but a huge part of the globe is still without
food and water .
I think de regulation of the financial sector has caused a huge amount of damage to the world all round and
to be honest, i expect more of the same as the Bankers are still in control.
Not that Wikipedia gets everything right but here is a snippet of what it says about the Goldman Sachs CEO:
'Blankfein testified before Congress in April 2010 at a hearing of the Senate Permanent Subcommittee on Investigations. He
said that Goldman Sachs had no moral or legal obligation to inform its clients it was betting against the products which they
were buying from Goldman Sachs because it was not acting in a fiduciary role. The company was sued on April 16, 2010, by the SEC
for the fraudulent selling of a synthetic CDO tied to subprime mortgages. With Blankfein at the helm, Goldman has also been criticized
"by lawmakers and pundits for issues from its pay practices to its role in helping Greece mask the size of its debts". In April
2011, a Permanent Subcommittee on Investigations report accused Goldman Sachs of misleading clients about complex mortgage-related
investments in 2007, and Senator Carl Levin alleged that Blankfein misled Congress, though no perjury charges have been brought
against Blankfein. In August of the same year, Goldman confirmed that Blankfein had hired high-profile defense lawyer Reid Weingarten'
Weingarten helped in the defense of the Worldcom thieves. Why would anyone do business with a company led by such an ethically
challenged CEO?
The problem here is probably deeper then personality of Blankfein.
There is such thing as system instability of economy caused by outsized financial sector and here GS fits the bill. Promotion
of psychopathic personalities with no brakes and outsize taste for risk is just an icing on the cake.
> Why would anyone do business with a company led by such an ethically challenged CEO?
Why you are assuming the other TBTF are somehow better then GS?
I believe that banking institutions are more dangerous to our liberties than standing armies.~Thomas Jefferson~
When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since
the hand that gives is above the hand that takes Money has no motherland; financiers are without patriotism and without decency;
their sole object is gain." – Napoleon Bonaparte, Emperor of France, 1815
This is about destruction of neoliberalism. Transnational financial elite under neoliberalism is above the law. the USA blatantly
breaches this convention now. And will pay the price.
This is Onion-style humor is no it : White House, Trudeau seek to distance themselves from Huawei move
Notable quotes:
"... The official, speaking on condition of anonymity, acknowledged that the arrest could complicate efforts to reach a broader U.S.-China trade deal but would not necessarily damage the process. ..."
"... Meng's detention also raised concerns about potential retaliation from Beijing in Canada, where Prime Minister Justin Trudeau sought to distance himself from the arrest. ..."
Huawei Technologies Co Ltd's chief financial officer, Meng Wanzhou, the 46-year-old daughter of the company's founder, was detained
in Canada on Dec. 1, the same day Trump and Chinese President Xi Jinping dined together at the G20 summit in Buenos Aires.
A White House official told Reuters Trump did not know about a U.S. request for her extradition from Canada before he met Xi and
agreed to a 90-day truce in the brewing trade war.
Meng's arrest during a stopover in Vancouver, announced by the Canadian authorities on Wednesday, pummeled stock markets already
nervous about tensions between the world's two largest economies on fears the move could derail the planned trade talks.
The arrest was made at Washington's request as part of a U.S. investigation of an alleged scheme to use the global banking system
to evade U.S. sanctions against Iran, according to people familiar with the probe.
Another U.S. official told Reuters that while it was a Justice Department matter and not orchestrated in advance by the White
House, the case could send a message that Washington is serious about what it sees as Beijing's violations of international trade
norms.
The official, speaking on condition of anonymity, acknowledged that the arrest could complicate efforts to reach a broader
U.S.-China trade deal but would not necessarily damage the process.
Meng's detention also raised concerns about potential retaliation from Beijing in Canada, where Prime Minister Justin Trudeau
sought to distance himself from the arrest.
"The appropriate authorities took the decisions in this case without any political involvement or interference ... we were advised
by them with a few days' notice that this was in the works," Trudeau told reporters in Montreal in televised remarks.
Originally from:
Truthdig
December 8, 2018, 4:38 AM GMT
Wall Street's corruption runs deeper than you can fathom | Alternet
Wall Street's corruption runs deeper than you can fathom
As an employee at the Federal Reserve in 2011, three years after
the dissolution of Lehman Brothers, Carmen Segarra witnessed the results of this deregulation firsthand
Of the myriad policy decisions that have brought us to our current precipice, from the signing of the
North Atlantic Free Trade Agreement (NAFTA)
to the invasion of Iraq and the
gerrymandering
of House districts across the country, few have proven as consequential as the demise of
Glass-Steagall
. Signed into law as the U.S.A.
Banking Act of 1933, the legislation had been crucial to safeguarding the financial industry in the wake of the Great Depression.
But with its repeal in 1999, the barriers separating commercial and investment banking collapsed, creating the preconditions for
an economic crisis from whose shadow we have yet to emerge.
Carmen Segarra might have predicted as much. As an employee at the Federal Reserve in 2011, three years after the dissolution
of Lehman Brothers, she witnessed the results of this deregulation firsthand. In her new book, "
Noncompliant: A Lone Whistleblower Exposes the Giants of Wall Street,
"
she chronicles the recklessness of institutions
like Goldman Sachs and the stunning lengths the United States government went to to accommodate them, even as they authored one of
the worst crashes in our nation's history.
"They didn't want to hear what I had to say," she tells Robert Scheer in the latest installment of "Scheer Intelligence." "And
so I think what we have in terms of this story is really not just a failure of the banks and the regulators, but also a failure of
our prosecutors. I mean, a lot of the statutes that could be used -- criminal statutes, even, that could be used to hold these executives
accountable are not being used, and they have not expired; we could have prosecutors holding these people accountable."
Segarra also explains why she decided to blow the whistle on the Fed, and what she ultimately hopes to accomplish by telling her
story. "I don't like to let the bad guys win," she says. "I'd rather go down swinging. So for me, I saw it as an opportunity to do
my civic duty and rebuild my life. I was very lucky to be blessed by so many people who I shared the story to, especially lawyers
who were so concerned about what I was reporting, who thought that the Federal Reserve was above this, who thought that the government
would not fail us after the financial crisis, and who were livid."
"Noncompliant" explores one of the darkest chapters in modern American history, but with a crook and unabashed narcissist occupying
the Oval Office, its lessons are proving remarkably timely. "We live in a culture where we reward bad behavior, we worship bad behavior,
and it's something that needs to stop," she cautions. "Changing the regulatory culture on [a] U.S. governmental level is something
that's going to take a decade, maybe two. And we need to start now, before things get worse."
Listen to Segarra's interview with Scheer or read a transcript of their conversation below:
Robert Scheer:
Hi, I'm Robert Scheer, and this is another edition of "Scheer Intelligence," where the intelligence comes from
my guests. Today, Carmen Segarra. She's written a book, just came out, called "Noncompliant: A Lone Whistleblower Exposes the Giants
of Wall Street." And boy, did she ever. Perhaps you remember this case; it was in 2011, two, three years into the Great Recession.
There was a lot of pressure from Congress that these banks be regulated in a more serious way. As a result, Carmen Segarra, someone
of considerable education, was brought in. And she was assigned to do a survey of Goldman Sachs, to go over to Goldman Sachs. And
I just want to preface this, people have to understand that not only is the Federal Reserve an incredibly -- the most important economic
institution in the United States, but the New York Federal Reserve plays a special role being in New York. And they are basically
entrusted with regulating the banks, and they are the institution that most definitely failed in that task, and helped bring about
the Great Recession. Would you agree with that assessment?
Carmen Segarra:
Yes, I would agree with that assessment. When I joined the Federal Reserve, as you pointed out, I was hired from
outside the regulatory world, but within the legal and compliance banking world, to help fix its problems. And I was well aware of
the problems that existed. And scoping the problems itself was relatively easy; I mean, within days of arriving, I had participated
in meetings where you had Goldman Sachs executives, you know, lying, doublespeaking, and misrepresenting to regulatory agencies without
fear of repercussions. And where I saw Federal Reserve regulators actively working to suppress and expunge from the record evidence
of wrongdoing that could be used by regulatory agencies, prosecutors, and even the Federal Reserve itself to hold Goldman Sachs accountable.
The question was, when I arrived, you know, are these problems fixable? And, spoiler alert: I don't think so.
RS:
Well, your book really is a compelling read on, really, what one could consider the dark culture of finance capital. Most
of us know very little about it; we think it's boring, it's detailed and so forth. And I was thinking of another woman observer of
great education and experience, who first tipped me off as a journalist when I was trying to cover the stuff about banking deregulation
and so forth, and when Clinton was president and they did the basic financial deregulation. A woman named Brooksley Born, who was
head of the Commodity Futures Trading Commission, and she had your kind of background, you know; a leading lawyer with the banks,
and so forth. Understood this a lot better than most of the men who were powerful, including Treasury Secretary Robert Rubin; Lawrence
Summers, who took over from him and went on to be the head of Harvard; Alan Greenspan–none of them really understood these collateralized
debt obligations, credit default swaps; she did. She blew the whistle on it, and they basically destroyed her. She was forced out
of the Clinton administration, and what have you. Did you know about Brooksley Born's work when you got into this? Do you have any
sense? I mean, this was really sort of the first major whistleblower, and she was, as you have been, basically pushed aside.
CS:
Yes. I definitely knew about her. And you know, I have to say that I was, you know, just taking that historical perspective,
which I think is an important point of view through which we should approach this topic. I mean, I remember when I was in law school,
I was one of the very first graduating classes to graduate into a post-Glass-Steagall world. From a 50,000-foot level, I think people
have a better understanding of what that means, in the sense, you know, you have all of a sudden the securities and the banking products
can get together.
But from a practical standpoint, from a ground-zero level, where I was at, that essentially meant two things. From
a professional standpoint, we studied and were aware of the fact that there were a bunch of people on one side of the aisle, the
investment products side–you know, the collateralized debt obligations that you mentioned.
And then there were people who were on
the banking side; we're talking, you know, for purposes of argument, credit cards and debit cards. And that these people, they may
have known about their products, but they were highly specialized; they only knew about the one or two things that they touched,
and they certainly didn't know about them and how they interacted together. And one of the things that I remember studying were not
just the cases of whistleblowers, but also discussing amongst our classmates, you know, what the impact would be of all of a sudden
having a class or a series of classes, graduating from law school, with people who are focusing on banking and compliance, like I
was, and who are having to understand both of these products and sort of how they interact together. And what, sort of visualizing
what our work life would be like, in terms of reporting to people that had an incomplete understanding of how the banking world worked.
So, yes, I was definitely aware; I understood perfectly where she was coming from. And she was very much a cautionary tale for the
rest of us who are lawyers. In terms of, if you find yourself in these difficult situations, you sort of game out what potentially
can happen. And I certainly took it into consideration when I was gaming out whether or not to whistleblow.
RS:
Well, before you get to the whistleblowing stage, I think you're being too kind to what I personally think are people who
should be considered as, or at least charged and examined often with what is criminal behavior. Because ignorance is really not a
good defense; when they were called before congressional committees, these knowledgeable people admitted they really didn't understand
collateralized debt obligations and credit default swaps. And for people who are not that familiar, you mentioned Glass-Steagall.
And what Glass-Steagall was, was one of the, really maybe the most important response of Franklin Delano Roosevelt's democratic administration
to the Great Depression. And how did this terrible depression happen, how were the banks so irresponsible. And they decided the key
thing was to separate investment banks from commercial bank; investment banks could be high-rollers, private money, you know what
you're doing, you have knowledge; and commercial banks where you're basically protecting the assets of ordinary people, they're not
knowledgeable, they're trusting your expertise. And eliminating Glass-Steagall eliminated this wall between the two kinds of banking.
And the company that you went to observe, Goldman Sachs, was an investment bank. And by the working of that law, they should have
been allowed to go belly-up when it turned out they had a lot of these dubious credit default swaps and collateralized debt obligations.
To people who don't know, a credit default swap was a phony insurance policy pretending to cover these things, but really there's
nothing backing it up. And somehow, in order to save them, they were allowed to announce they could do commercial banking. One could
argue, in some ways, the barrier was lifted to help–Citigroup was of course the other one–Citibank. And these are two banks that
the government stepped in to help and create this monster. Is it not the case?
CS:
Yeah, that's absolutely the case. But there's a couple of things that we need to keep in mind. I mean, I think that
we're all sort of educated enough to know that, you know, where there's a will, there's a way. And so if a system can be
corrupted, people that are allowed to grab hold of power will corrupt it–insofar and only for so long as we allow those people to
have the ability and the power to corrupt it. So ultimately, talking about more or less rules, or different rules, is productive
only to a point. Because ultimately what we're talking about here is the haphazard, slap on the wrist, failure to truly enforce
the rules and regulations equitably across the system. And that creates the imbalances that you see, for example, in Goldman
Sachs, and that you see in the system in general. One of the things that happened as a result of Glass-Steagall coming down was
that a lot of the investment bankers were allowed to take over the commercial banks. And those investment bankers knew nothing
about banking, and Goldman is a great example of that. I mean, when I arrived three years in after the financial crisis, what was
one of the things that was very shocking to me was going into meeting after meeting with Goldman senior management and hearing
them lie, doublespeak, and most shockingly of all, insist that they didn't have to comply with the law. And that is a problem.
Because a bank that doesn't believe, or management at a bank that doesn't believe they have to comply with the law–you bet they
are not supervising their employees correctly, and they're not incentivizing employees correctly in terms of how to do their job.
So their behavior is injecting enormous risk into the system
... ... ...
CS:
The case was assigned to a judge who was friends with the attorney, I had worked with the attorney that represented
the Fed. And then two days before dismissing the case, she revealed that she was married to someone who represented Goldman Sachs
for a living. So, yeah, there you go. [Laughs] I mean, it's almost impossible in terms of successfully blowing the whistle. But
going back to your question with respect to the recordings and having a say, I think the question that we need to be asking
ourselves is this: the Federal Reserve Bank of New York, and the Federal Reserve in general, is tasked with supervising the
banks. They have recorders. They have the law on their side. New York is a one person consent state. Banks, private banks,
habitually record everything that goes on inside the bank, and they do it for good reason. Because they do it to stop and prevent
fraud, among employees and by anybody that walks in the door. Why is the Federal Reserve not recording these executives? Why are
they not preserving evidence? I think that is the question that we need to be asking ourselves. You know, what I did was not
special. What I did is what the Fed should have been doing.
Wall Street's corruption runs deeper than you can fathom | Alternet
RS:
Well, it was special in that [Laughs]–come on! There have been a lot of witnesses to
these crimes, really, and you're the lone voice from within that system that dared to speak up. And as I
said, had you not been able to document it with these tapes, you would have been just dismissed as some
kind of kook. The book is called
Noncompliant: A Lone Whistleblower Exposes the Giants of Wall
Street.
You know, what is so important is nuance and language and attitude. And the people on Wall
Street can affect the protection of manners and complexity. I remember Lawrence Summers testifying in
Congress on why you had to get rid of Glass-Steagall, and he said "this is very complicated." And he said
the same thing Alan Greenspan said: "These people know what they're doing," and so forth. It wasn't
complicated. If the Mafia did it, you'd see right through it in five minutes. Right? You were bundling a
bunch of lousy deals together with some good deals, and you didn't even know what was in there, and you
sold them, and you got a phony insurance contract to back it up. And yet none of these people have been,
gone to jail; very few, one or two have been prosecuted as kind of a scapegoat. But the book is a great
story of an American heroine–but this is what everybody should do! [Laughs] I mean, the real issue about
whistleblowers like yourself is why did it take you? Where were the other folks? How many people–yeah, go
ahead.
CS:
Yeah, agreed. I think that's exactly right. You know, there's a number of
reasons why I wrote the book. First of all, because I think it's an important contribution to the
historical record. As to what is the systemic culture of corruption that exists in these regulatory
agencies that are taking our taxpayer dollars and paying themselves handsome salaries to work against the
American taxpayers. And then the second reason I wrote it is to incentivize people to come forward with
their stories. I wasn't the only person who wanted to blow the whistle in terms of what was going on
there. My circumstances were unique, and I sort of go through it in the book, in the sense that I was
very lucky, for example, that the Fed refused to even negotiate the mandated settlement that they were
supposed to negotiate with me. But they refused, and that allowed me to sue. There's a number of people
who have gone through the process and have been silenced by, you know, getting a monetary offer and
signing a settlement agreement. And we don't hear about them because they are forced not to talk. What I
sort of thought about was, you know, this is just a unique–you know, I didn't ask to be in this
situation, but I felt it was my civic duty. Because I do think that we need more people to really think
about how in their daily lives, they can stop rewarding bad behavior. We live in a culture where we
reward bad behavior, we worship bad behavior, and it's something that needs to stop, you know. Changing
the culture, the regulatory culture on the U.S. governmental level is something that's going to take a
decade, maybe two. And we need to start now, before things get worse. We are not in the best-off of
situations as a country; you know, we have what seems like an economic boom, but it's really just a
debt-fueled economic boom that is going to be temporary. And it's very tough to fix these types of
cultural issues, system issues, when the hurricane of the next financial crisis hits. We need to fix it
now, while we still have a semblance of peace, while we still have the sun shining. And we don't know how
much longer that's going to be. I hope it's long enough to fix it. I hope that people are inspired to
come forward and to think about how to make a difference in their daily lives. You know, because we need
to start thinking of raising children and raising adults that are incentivized in their daily lives to
reward good behavior. I think that until we create a critical mass of Americans that in their daily lives
refuse to reward bad behavior, we're not going to see real systemic change.
RS:
Well, we'll see change. It might not be good change. I mean, you have Donald
Trump–and I want to put some oomph behind this, that it's bipartisan. Because one of the–you know,
everybody, a lot of people I know are very upset about Donald Trump. He's speaking to what Hillary
Clinton calls the "deplorables"; but there's a lot of people hurting out there. And if you read a study
done by the Federal Reserve of St. Louis about the consequence of this economic meltdown that was
engineered from places like Goldman Sachs, the human cost was incredible. I mean, people lost everything.
They weren't bailed out. There was no mortgage relief. They were not helped. The banks were bailed out.
And yet no one has been held accountable, and the politicians, democrats and republicans, who supported
it, have gotten off scot-free.
Wall Street's corruption runs deeper than you can fathom | Alternet
CS:
Yeah, I think you're absolutely right. This is not a democratic problem, this is not
a republican problem. This is an American problem with worldwide impact. The U.S. dollar is a reserve
currency. The world depends in large part on the American banking system to work. And for it to work,
there are these rules, and these rules are there to create trust in the system and to create smooth
processes in the system, so that money can be moved and the economy can continue to grow. If the world
can no longer trust the American banking system because Americans cannot be trusted to regulate it, they
are going to move away from the American banking system. They are going to move away from the U.S. dollar
as a reserve currency. And then we are going to find ourselves in the situation that a lot of countries
that are not governed by reserve currencies find themselves occasionally, from time to time, whenever
they have a crisis. You know, we're talking about countries in Latin America; we're talking about
countries in Africa; we're talking about countries in Asia. I hope the book will inspire people to really
take a look around and realize, you know, the American consumer, the American worker, is incredibly
powerful. You know, these banks cannot survive without our money. We don't have to wait for the
government to keep failing us; we don't have to wait for the judiciary to keep failing us; we don't have
to wait for lawyers to keep failing us. We choose who we work for. We choose where we keep our money. We
can choose to protest. We can choose to call our pension funds and tell them, I want you to stop doing
business with Goldman Sachs. It's what we do on a daily basis. When we stand up and we say, I am not
going to be banking with these people–they will listen. It's like, they control all of these other checks
and balances that were put in place in terms of the government to stop them. So now it's up to us as a
people to actually do something about this.
RS:
Let me take a break. And I've been
talking to Carmen Segarra, who is actually the lone honest person from within the banking system that I
know of who really took the story of what these people were doing, and swindling the American people, and
fortunately documented it with tape recording–as they document everything; if you call the bank for
information, "your conversation will be recorded to make it more efficient"–well, she turned the table on
that, had the record. The book is called
Noncompliant: A Lone Whistleblower Exposes the Giants of
Wall Street.
[omission for station break] I'm not going to be able, in the time that I have here, to
do justice to this book, because the devil is in the details. I want to talk about some people who did
speak up. I mentioned Brooksley Born, who was this brilliant member of the Clinton administration who got
pushed out for speaking up. But when the pressure came down after the Great Recession, and the banks had
to be questioned, they at Goldman Sachs turned to a Columbia University finance professor, David Beim.
And he did a report. He had access to everything, he did this incredible report. We only know about it
because it showed up in some footnote somewhere. And by the way, I haven't given enough credit here to
the people who have helped break this story. ProPublica, who did a really terrific job on it, and the NPR
show This American Life, which really did a great job. So there has been really good reporting. As you
pointed out, it was absolutely shameful that Congress did not really take testimony from you; you were
there as an observer–I think in a red dress, to be noticed. [Laughs]
CS:
Yes. Well, you know, red is the color of martyrs.
RS:
And so I want to ask you about that. Before you even went there, this guy David
Beim had done a study. And William Dudley, the president of the bank, didn't even respond. He said thank
you, they looked at the–and they never responded to the criticisms in that study, which were devastating.
Of how the bank was operating.
CS:
Yeah, but that's how the Federal Reserve Bank of New York operates. And that's,
curiously enough, also how Goldman Sachs operates. They say one thing and do another. If you want to know
what they're doing, just flip it, right? I mean, if they're asking for a report, that means that they
plan to do nothing about it. And you know, the book sort of walks you through the story of how they
played at this game of pretending to clean up the regulatory issues. I mean, the joke really was on us,
the new regulators that were brought in from the industry to actually clean up the problems that were
there. None of us are there at the Fed anymore. Every single one of those people that I talk about that
validated my story, they're gone. And they are gone under different circumstances, some in good standing,
some in less good standing, but the point is they're all gone. Because the purpose of bringing us in was
not really to change things, it was to ensure that they had a smoke screen and a story to feed the press,
that they would print, saying that they had indeed fixed this. And there was nothing else there to see.
Wall Street's corruption runs deeper than you can fathom | Alternet
RS:
We're going to run out of time here, but I want to nail down
one–this chain of responsibility. And I had just mentioned New York Fed president
William Dudley, who I believe ran into some difficulty; he had ownership in
something that they were trading with. But leaving that aside, he replaced
Timothy Geithner. And when Goldman Sachs, when this whole banking thing happened,
there was no more important individual in this country, in a position to observe
it, than Timothy Geithner. He had been in the Clinton administration; he had
worked for Robert Rubin and Lawrence Summers in the Clinton administration when
they deregulated Wall Street. And he was rewarded for that deregulation, right,
by being named to the most important regulatory position, to be head of the New
York Fed. And Barack Obama in 2008, as the banking meltdown was happening, gave a
speech at Cooper Union, April of 2008, blasting Wall Street. And then, when
Hillary Clinton lost the primary, Barack Obama turned to Lawrence Summers and
Timothy Geithner, and these people for advice, and he named Timothy Geithner to
be his treasury secretary. The guy who at the New York Fed, where you went there
to work and to try to supervise Goldman Sachs–he knew everything about this, and
told us nothing, and he was rewarded by being made treasury secretary.
CS:
When I'm saying, you know, we have to stop rewarding bad behavior,
that's an example of what I'm talking about. It's like, we have a culture where
we reward people for their bad behavior. And in the Fed it is a systemic problem.
And it is a problem that comes from the top down. And when I was at the Fed, Ben
Bernanke was head of the Fed; Bill Dudley, as you pointed out, was the head of
the New York Fed; and Sarah Dahlgren was his head of supervision. This is a very
small world. We're not talking about a lot of people; the culture is top-down,
and everybody there just does what these people say, because if they don't
they're afraid they're going to lose their jobs. So from their perspective, they
have nothing to lose, because they have a bunch of workers that are going to do
as they say. And they will do what is in their best corporate interests. I mean,
you have Bill Dudley, who was allowed to hold on to a lot of his investments that
predated his arrival at the Fed and were held at Goldman Sachs. And you know,
when you have somebody who's not forced to really work for the government–as in
divesting themselves of their own conflicts and truly taking taxpayer money and
doing their job–then you can't expect a good result to come from that. Again, we
rewarded bad behavior. And that's why I think, you know, the key here is really
about taking a really good look at our daily lives and seeing, who are we
rewarding on a regular basis? And we need to stop rewarding that bad behavior.
Wall Street's corruption runs deeper than you can fathom | Alternet
RS:
But I want to challenge what I think is your optimism. And in
fact, you are living proof that doing the right thing can be a career-ender. I
haven't asked you, I mean, I assume you still have a good career; you're highly
talented and competent, and you were, you know, extremely well educated. But
you're not being considered to be treasury secretary or something, right? The
consequences for you were quite dire, weren't they?
CS:
They
were. And you know, my career in banking is over on a permanent basis. But I
think you sort of point out to, a little bit to my personality, and I hope it
comes through in the book; I sort of talk about that fact that I'm just a very
resilient person. And I just, I don't like to let the bad guys win. I'd rather go
down swinging. So for me, I saw it as an opportunity to do my civic duty and
rebuild my life. You know, and I was very lucky to be blessed by so many people
who I shared the story to, especially lawyers who were so concerned about what I
was reporting, who thought that the Federal Reserve was above this, who thought
that the government would not fail us after the financial crisis, and who were
livid. And I've been blessed with their support through the process of
whistleblowing, and I continue to be blessed by their support even after. I have
a husband who was, you know, a real hero of the story in my book, and I have been
able to remake my life as a lawyer in private practice. And my clients, you know,
God bless them, they trust me to help them. And I wouldn't change what I did for
anything. Because I think for me–and I talk about it in the book–I think living a
meaningful life is more important than making money. I think for me, making money
is important insofar as it pays the bills. But once my bills are paid, it's about
having a meaningful life. And I just feel very, very lucky that I have had the
life that I've had, that I got to go to a Catholic school that taught me the
morals that I believe in. I think that I am who I am, and I think that I would be
just as moral if I had grown up Jewish, or if I had grown up a Mormon, or if I
had grown up a Protestant. So I feel very blessed that I was exposed to what good
values and good behavior are. I decided since I was very little that that's just
the way I wanted to live my life, and that to live meaningfully was more
important than anything else. And that has driven all of my decisions, and I
found the experience to be rewarding. And when people talk to me about how bad
things are and how things sort of look like they're never going to turn around, I
tell them, no. They will turn around. We just need to believe in ourselves and be
our own saviors, and be our own heroes in our own daily lives.
RS:
But let me, let me challenge that. And yes, you're an
exemplary person. No question. And people should read this book,
Noncompliant: A Lone Whistleblower Exposes the Giants of Wall Street.
But I
want to focus on that word, "lone." Lone whistleblower. These people had the same
great education you had at the best schools, OK? They didn't blow the whistle.
No, they abetted the crime! They made it possible. They destroyed people like
Brooksley Born, who dared challenge it. And the fact of the matter is, you can't
expect ordinary people–even myself. You know, I did graduate work in economics,
I'm a professor, blah blah blah. But I can tell you, when I went into my bank
loans, I didn't know all the details and what they were talking about and
everything. I counted on regulation, I counted on government, I counted on
accountability, frankly, on the part of these institutions. So my view is, you
can't expect ordinary people–that's why we had a distinction between investment
banks and commercial banks. Commercial banks are supposed to deal with ordinary
people, OK? They're supposed to hold their money, give them a fair interest rate,
make loans on their houses, and help them out. And they have to be regulated,
because you know, the ordinary person can't be an expert. The failure here is of
the educated class. Of the superachievers. And you count on those people, yes, to
do the right thing. But money talks. And the fact of the matter is, the people
you went to school with, at the Ivy League schools, at the wherever–they sold us
all out.
CS:
I think you make a good point. But I also think that the
problems are systemic and run deeper. I mean, I would point out, for example,
just from a personal perspective, when I graduated both college and law school I
happened to be one of those that graduated into a recession, twice. There weren't
too many jobs. I didn't have too many options. I ended up working in where I
ended up working because it was either that or not feed myself. And I think one
of the problems that we have that is systemic is that we have allowed capitalism
to create such huge imbalances in how we reward people for their daily work. So
people are forced to do something that they may not even like, or may not even be
good at, because they have no choice. It's a shame, because we're a big enough
country, we have a lot of talent, there should be more invisible hand, central
planning. This whole system where we are now turning our attention to creating
computer programmers is more based on making sure that computer programming
becomes a cheap, minimum-wage job where the owners of the computer companies like
Apple don't have to overpay like they are doing now for those workers. So I think
that there are more systemic issues than we realize. And I agree with you, I
think that, you know, we were sold out by the intellectual class. But we still
need to figure out–and the intellectuals are the ones who are going to help us–we
need to figure out how to fix the system on a larger scale if we are going to
rebalance things. And I don't have the monopoly on the answer, on all the
answers, you know? I'm just a girl born in Indiana to two Puerto Rican parents,
you know? [Laughs] It's not like I have any terms, in any way access to the
higher echelons and how that works. But I think that we really do need to think
about, in our own ways and in our own lives, how we can sort of convince other
people to make the right choices on a daily basis. Because I think that if
everybody takes making the right choices seriously, and realizes that we're all
in the same boat–you know, we're all Americans, this is going to impact us all–I
think that we can, slowly but surely, right the boat and start heading in the
right direction.
RS:
People should read
Noncompliant
–it's an important
word; they weren't compliant–
A Lone Whistleblower Exposes the Giants of Wall
Street.
And recognize that the problem with modern governance is that the
decisions are made by people who don't have our common interest, who are bought
off. That money talks. And one reason we have such despair now, and we go for
demagogues, and we have such divisive, ugly language and ugly politics, is the
so-called civilized, well-educated leaders of our country went for the money and
betrayed ordinary people. I'll let you take the last word, and then we'll wrap it
up.
CS:
Ah, well, thank you. And again, you know, I know that you
are sort of [Laughs] thinking about it from the perspective of a hopeless sort of
case. But I do think that there is–and I hope people will look at it as the
beginning of change. You know, yes, the book is a very sad story; the bad guys do
win, for now. But just because they win the battle doesn't mean they're going to
win the war. And I refuse to give up hope in the American people, and I refuse to
give up hope in the American consumer. I think that we can make a difference if
we try. Because I think that when we get the American people–no matter whether
they're democrats, republicans, independent–when we get them educated on the
topic of finance, when we get them accessible stories, they will have their say.
And they matter–we matter. And it's important that they come to the table,
otherwise this problem isn't going to get solved.
Big finance does behave like an organized crime. And should be treated by society as
such...
Notable quotes:
"... By Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of economics and law at the University of Missouri-Kansas City, and co-founder of Bank Whistleblowers United. Jointly published with New Economic Perspectives ..."
By
Bill Black, the author of The Best Way to Rob a Bank is to Own One, an associate professor of
economics and law at the University of Missouri-Kansas City, and co-founder of Bank
Whistleblowers United. Jointly published with New Economic
Perspectives
I cannot write many blogs during the fall semesters because I teach four classes (I co-teach
one of them). The fall term of instruction at UMKC is now over so I am writing one piece before
turning to grading. I have recently done additional research on a topic I know is of great
interest -- the prosecution of elite white-collar criminals. I have organized it in the form of
a game in which the reader guesses who authored the quoted passage.
Which President
described the elite banksters of his era as "charlatans, chiselers and cheats?" Which Vice
President criticized prosecutions, enforcement actions, and even safety rules for the elite
white-collar criminals of his era in these terms?
But the number of complex regulations is only half the problem. As President [deleted] has
repeatedly emphasized, it is also the adversarial and seemingly mindless enforcement methods
that really get under people's skins. Business owners are sick of being treated like
criminals. They see a government that just doesn't make sense, that charges them with safety
violations when no one is in harm's way.
[Note that enforcement action is supposed to be 'adversarial' and that 'business owners'
need to be 'treated [as] [not 'like'] criminals' when they are criminals. A safety violation
that does not cause injury because no worker is in the unsafe trench when it collapsed should
be charged as a safety violation because it is. A well-run company with a strong safety record
takes that approach to safety. The government must too.]
Which U.S. Attorney General offered
the excuse for refusing to create a national task force to prioritize the prosecution of the
elite banksters of his era that the fraudsters were merely "white collar street criminals"?
Which U.S. Attorney General explained in these terms why he was working with the regulators
because prosecutions of elite banksters require enormous sophistication and prioritization?
[T]hese investigations most often involve complicated paper trails leading to highly
sophisticated schemes which disguise illegality under the veneer of legitimate business and
financial transactions.
[Note that this AG understood the essential danger that makes 'control frauds' uniquely
damaging -- the fact that the CEO finds it far easier to 'disguise illegality' 'under the
veneer' of seeming 'legitima[cy].']
Which U.S. President met with the Nation's U.S.
Attorneys to emphasize in these terms the criticality of prosecuting elite banksters?
It takes a snake, a cold-blooded snake, to betray the trust and innocence of hard-working
people," [deleted] said in a speech to his administration's U.S. attorneys in announcing his
effort. "And so, if we have to look under rocks to find these white-collar criminals, then we
will leave no stone unturned.
Which U.S. President proclaimed "I did not run for office to be helping out a
bunch of fat cat bankers on Wall Street"? Which FBI Director characterized the level of elite
fraud in failed insured institutions as 'pervasive' and explained that the fraud problem came
from the top in these terms?
The American public relied upon banking institutions and financial institutions being
soundly managed by people who were honest. Therefore, it is absolutely essential that this
program go forward to the end no matter how long that takes.
He discounted past arguments that Texas' economy was the root cause for the state's
financial crisis. "Although it was the general economic downturn in Texas that surfaced the
problem, it
appears to the FBI as if a pervasive pattern of fraudulent lending activity began much
earlier."
Which U.S. President told the Nation's leading bankers "My administration is the
only thing between you and the pitchforks"?
[Note that the President was characterizing the American people as a mob out to murder the
banksters that caused the financial crisis -- and stressing that his administration would
safeguard them from accountability for their crimes.]
Which U.S. Attorney General explained
in these terms how he began working with the new regulator the day after he was appointed to
ensure the prioritization of the most elite banksters in the ongoing financial crisis they were
both confronting?
I met with [deleted] Director of [deleted], the day after he assumed office to map out a
joint effort between the regulatory agencies and the Department of Justice to winnow through
the mass of referrals that had already been made to ensure that we were focusing upon the
most significant cases as our first priority.
Which regulatory agency made the 'mass of [criminal] referrals' the AG was
referring to? How many criminal referrals did the agency make in response to its financial
crisis? How many felony convictions of individuals did the Department of Justice (DOJ) obtain
in 'major' cases in response to these referrals? Which senior law enforcement agency warned in
September 2004 that an 'epidemic' of mortgage fraud was developing that would, he predicted,
cause a financial 'crisis' if it were not stopped? Which administration "debated for months the
advantages and perils of a criminal indictment against HSBC" given an FBI investigation
confirming the congressional finding that the bank, between 2001 and 2010, "exposed the U.S.
financial system to money laundering [by a leading drug cartel] and terrorist financing risks"
[by Saudis]"? The U.S. Attorney General, at the urging of the Fed and the Comptroller of the
Currency, refused to indict the bank or its senior officers who committed and profited from
tens of thousands of felonies. What U.S. Attorney General testified to Congress in the
following terms that the largest banks were too big to prosecute?
I am concerned that the size of some of these institutions becomes so large that it does
become difficult for us to prosecute them when we are hit with indications that if you do
prosecute, if you do bring a criminal charge, it will have a negative impact on the national
economy, perhaps even the world economy.
Under which administration did Scott G. Alvarez, general counsel at the Federal
Reserve successfully intervene with the SEC to weaken fraud penalties against some of the
world's largest banks? Under which administration did Timothy Geithner, then President of the
NY Fed, successfully intervene with then NY Attorney General Cuomo to caution against vigorous
prosecution of elite banksters? Did this harm Geithner and Cuomo's careers? Which President
unconstitutionally appointed the first Director of the Office of Thrift Supervision -- after
being warned that appointing him without the Senate's 'advice and consent' would be
unconstitutional? Why did the President do so -- and why did the Senate not protest the action?
Which administration ended the career prospects of a top regulator they appointed when he had
the audacity to bring an enforcement action against the President's son? Which U.S. Attorney
General wrote: "We are presently facing the largest financial disaster in American history
grounded in the betrayal of public trust by flagrant self-dealing in 'other people's money'"?
Which U.S. Attorney General described the causes of the financial crisis he was investigating
"the biggest white-collar swindle in history"?
For bonus points, these questions relate to a non-government party.
Who wrote the
following -- and made it public?
"Our savings and loan industry has created the largest mess in the history of U.S.
financial institutions," [deleted] said in a letter to the [industry trade association -- the
'league']. "The league responds to the savings and loan mess as Exxon would have responded to
the oil spill from the Valdez if it had insisted thereafter on liberal use of whisky by
tanker captains." [Deleted] blamed the league for 'constant and successful' lobbying over
many years that prevented government regulators from cracking down on S&Ls run by 'crooks
and fools' and persuaded regulators to use 'Mickey Mouse' accounting .
"It is not unfair to liken the situation now facing Congress to cancer and to liken the
league to a significant carcinogenic agent ."
"Because the League has clearly misled its government for a long time, to the taxpayers'
great detriment, a public apology is in order, not redoubled efforts to mislead further."
Answers : (plus the President that appointed the official):
George HW Bush Gore Mukasey
(Bush II) Thornburgh (Bush I) George HW Bush Obama William Sessions (Bush II) Obama Thornburgh
(Tim Ryan was the OTS Director he worked with) OTS, during the S&L debacle, made >
30,000 criminal referrals (all federal banking agencies combined made fewer than a dozen
criminal referrals in response to the Great Financial Crisis) and DOJ obtained > 1,000
felony convictions in cases DOJ defined as 'major.' The FBI (through Chris Swecker) Obama 13.
Holder (Obama) Bush II Bush II (No, Cuomo was elected Governor of NY and Obama appointed
Geithner as Treasury Secretary) George HW Bush (the unconstitutional appointment was Danny Wall
as OTS Director) George HW Bush (Tim Ryan was the OTS Director who brought the enforcement
action v. Neil Bush) Thornburg (Bush I) Thornburgh (Bush I) Warren Buffett and Charles Munger
(May 30, 1989).
The mess is caused by deregulation, money in politics, lobbying by the rich, wealth
inequality, fraud in the banking system, corruption of corporations, the wealthy hiding taxes
off-shore, greed, failure of democratic institutions, etc. In another way, you could say It's
the Love of Money. (It is a very long list epitomized by Black's quotations from the highest
offices in the land.)
Concise and enlightening summary. Thank you, Bill Black. Should be taught in every high
school US History and Civics class in America together with financial and monetary literacy.
Interesting how pervasive this behavior has been across so called "leaders" of both legacy
political parties and whose names repeatedly appear on the summary list. The damage to the
social and political fabric of the nation is incalculable.
"... In bull markets, everything works. In bear markets, the only thing that really works is short-term government and municipal bonds and cash. Ample opportunity is being given to cut exposure to risk, and it's clear that few people are taking advantage of it. They never do. ..."
(Bloomberg Opinion) -- As a longtime market observer, what I find most interesting about the latest correction in equities has
the feeling of inevitability that it will turn into something worse. It wasn't this way in late January, when everyone wanted to
buy that dip. It certainly wasn't this way in 2007, when the magnitude of the recession was grossly underestimated.
Even the Federal Reserve is getting into the pessimism. Chairman Jerome Powell signaled last week that a pause in interest-rate
hikes might be forthcoming. What's interesting about that is Powell surely knew that such a reference might be interpreted as
bowing to pressure from President Donald Trump and yet he did it anyway. In essence, he risked the perception of the Fed's
independence probably because he knows the economic data is worsening.
Just about everyone I talk to in the capital markets, including erstwhile bulls, acknowledges that things are slowing down. Yes,
the Institute for Supply Management's monthly manufacturing index released earlier this week was strong, but jobless claims are
ticking up and I am hearing anecdotal reports of a wide range of businesses slowing down. Even my own business is slowing.
Anecdotes aside, oil has crashed, home builder stocks have been crushed, and the largest tech stocks in the world have taken a
haircut. If we get a recession from this, it will be a very well-telegraphed recession. Everyone knows it is coming.
A
recession is nothing to fear. We have lost sight of the fact that a recession has cleansing properties, helping to right the
wrong of the billions of dollars allocated to bad businesses while getting people refocused on investing in profitable
enterprises. Stock market bears are so disliked because it seems as though they actually desire a recession and for people to
get hurt financially. In a way, they are rooting for a recession because they know that the down part of the cycle is necessary.
There are signs that capital has been incorrectly allocated. In just in the span of a year, there have been three separate
bubbles: one in bitcoin, one in cannabis and one in the FAANG group of stocks: Facebook, Apple, Amazon.com, Netflix and
Google-parent Alphabet. This is uncommon. I begged the Fed to take the punch bowl away, and it eventually did, and now yields of
around 2.5 percent on risk-free money are enough to get people rethinking their allocation to risk.
Yet, I wonder if it is possible to have a recession when so many people expect one. The worst recessions are the ones that
people don't see coming. In 2011, during the European debt crisis, most people were predicting financial markets Armageddon. It
ended up being a smallish bear market, with the S&P 500 Index down about 21 percent on an intraday basis between July and
October of that year. It actually sparked a huge bull market in the very asset class that people were worried about: European
sovereign debt. We may one day have a reprise of that crisis, but if you succumbed to the panic at the time, it was a missed
opportunity.
But just the other day, the front end of the U.S. Treasury yield curve inverted, with two- and three-year note yields rising
above five-year note yields. Everyone knows that inverted yield curves are the most reliable recession indicators. Of course,
the broader yield curve as measured by the difference between two- and 10-year yields or even the gap between the federal funds
rate and 10-year yields has yet to invert, but as I said before, there is an air of inevitability about it. Flattening yield
curves always precede economic weakness. They aren't much good at exactly timing the top of the stock market, but you can get in
the ballpark.
I suppose all recessions are a surprise to some extent. If you are a retail investor getting your news from popular websites
or TV channels, you might not be getting the whole picture. In the professional community, it is becoming harder to ignore the
very obvious warning signs that a downturn is coming. In bull markets, everything works. In bear markets, the only thing
that really works is short-term government and municipal bonds and cash. Ample opportunity is being given to cut exposure to
risk, and it's clear that few people are taking advantage of it. They never do.
S 25 minutes
ago If our country is going bankrupt, there is no better President, with greater experience
at going bankrupt, than this President.
M 24 minutes ago
Another Republican recession whoda thunk that would happen trump's "greatest economy ever".
D 9 minutes ago So
let's see the market is up over 20% since January 3 2017 which means it's above it's
historical average gain per year. Meanwhile everyone is screaming recession and bear
market. I want to know why anyone who has been invested in the market longer than the last
two years is so upset about. Do you think your entitled to a gain of more than 10% a year.
"... 'Neoliberalism' is just a sanitised-sounding expression, to cover-up the fact that what we are really seeing here is re-branded, far-right, corporatist ideology. ..."
"... There is a major dividing line. There are those who recognise the abuses of the system and lobby for changes and there are those who lobby for further exploitation. ..."
"... The West became over-indebted when it embraced globalisation which necessarily impoverishes the Middle and Working Classes of the developed nations. A chap called Jimmy Goldsmith warned of this and was widely condemned for it. There is another issue Guardianistas would rather not confront : you can a welfare state or you can have open borders. But you can't have both. ..."
"... Private enterprise is inefficient because at it's heart it rules out cooperation. Being happiest if it's a monopoly, there's nothing a business would like better than wipe out all competition. ..."
"... Right now, the neoliberals think that those in the Far East are the workers and those in the West are the consumers, until the Far East becomes the market and wages so low in the West that they become the workers, unless of course some kind souls decide to invest money in Education, Health and infrastructure in Africa on a huge scale, so we then have Africa as the workers and the far East as the market, and the West, apart from those who own large numbers of shares or business outright, presumably either starve to death or pull themselves up by their bootstraps, and start all over again, inventing and setting up completely new industries, providing the newly universally educated and healthy Chinese and Africans and South Americans haven't done it first. ..."
"... The economic model we have is bankrupt and in its death throes ..."
"... Except it's not. It is still very much alive and growing. ..."
"... deregulated capitalism has failed. That is the product of the last 20 years. The pure market is a fantasy just as communism is or any other ideology. In a pure capitalist economy all the banks of the western world would have bust and indeed the false value "earned" in the preceding 20 years would have been destroyed. ..."
"... "Multinationals need to recognise that paying tax is an investment. Without that tax, their markets will slowly evaporate." However, the gains for the transnational rich are immediate and enormous, while the failure of their markets is slow and, so far, almost entirely painless. ..."
"... Accountants now hold the whip hand in government and business. They know the price of everything but the value of nothing. They advocate selling off industries, outsourcing to low wage economies, zero hours contracts and deregulation (under the bogus campaign line of cutting red tape). ..."
"... Google, Amazon and Apple haven't taught anyone in this country to read. But even though an illiterate market wouldn't be so great for them, they avoid their taxes, because they can , because they are more powerful than governments. ..."
"... If you invent a set of rules that says a country that deficit spends above an arbitrary percentage of its GDP is horribly inefficient and far too high then it should not be a surprise that when that happens, it is described as such. ..."
"... But the basic problem is this: it costs a lot of money to cultivate a market – a group of consumers – and the more sophisticated the market is, the more expensive it is to cultivate them. A developed market needs to be populated with educated, healthy, cultured, law-abiding and financially secure people ..."
"... The economic model we have is bankrupt and in its death throes is gobbling up the last scintilla of surplus that can be extracted from the poor ( anyone not independently wealthy). ..."
'Neoliberalism' is just a sanitised-sounding expression, to cover-up the fact that what we are really seeing here is re-branded,
far-right, corporatist ideology.
"Fascism should more properly be called corporatism because it is the merger of state and corporate power."
- Benito Mussolini
There is a major dividing line. There are those who recognise the abuses of the system and lobby for changes and there
are those who lobby for further exploitation.
So on the one hand there are relatively rich philanthropists who are quietly supporting campaigns to redistribute wealth and
our abstaining, and on the other you have people arguing for repealing employment legislation.Worst of the lot are people who
pretend to care about the poor but then proceed to fill their own boots.
As consequence people like Warren Buffet should perhaps be among the good guys, whilst people like Tony Blair are the worst
of lot.
All very true. The failures of markets are well documented in economics: the tendency towards monopoly, the failure to value social
goods etc.
In addition, it is ironic that the arch advocates of the 'free market' came begging ( read lobbying) to their governments insisting
upon public financial bailouts for themselves or their counter parties. It was the 'free markets' failure to correctly price 'risk'
that was the route of the economic collapse.
As regards access to 'free markets' it seems patently obvious that if you extract the most money from that market (Amazon et
al), you should contribute a fair share towards the infrastructure of that market: roads, educations, health care etc.
@EllisWyatt - ... we have a real problem with corporations that have a default setting of minimize taxes through ever more
complex structures. It can't be beyond the wit of HMRC to reduce the complexity of the tax legislation and make it harder to
avoid? The prize is continued access to the UK market
We also have the problem that for half the households in the land the level of welfare and benfits rather than wages is the
major determinant of their disposable income and general prosperity.
The welfare code is now comparable in size to the tax code. The tax-benefit affairs of the working poor in the UK are now becoming
as complex as those of the companies that employ them.
The welfare rights industry, which is essentially tax-benefit-lawyering for claimants, is now as large and complex as the tax-lawyering
industry for companies.
It really is insane that we set the minimum wage so low that it attracts income tax, and then attempt to collect tax from the
employing company to fund a tax credit to top up the same low wages that the same company is paying.
The neoliberalism that the IMF still preaches pays no account to any of this. It insists that the provision of work alone is
enough of an invisible hand to sustain a market
Does it? where does it say that? An article which as usual blanket condemns "financial institutions" but actually means banks.
The West became over-indebted when it embraced globalisation which necessarily impoverishes the Middle and Working Classes of
the developed nations. A chap called Jimmy Goldsmith warned of this and was widely condemned for it. There is another issue Guardianistas
would rather not confront : you can a welfare state or you can have open borders. But you can't have both.
Though I'd say private enterprise is capable of building markets - but not of sustaining them. Take books: If few people
know how to read, someone will start a fee paying school to teach those who can pay for it. Then books will take off. And that
will generate money for some, who'll send their kids to school.
However it will always, inevitably, crash at some point: Business can build up, but will always do it in destructuve cycles
- exactly like the brush fires that destroy and regenerate the savannas. As somebright spark once said: Capitalism contains the
seeds of it's own destruction, or something along those lines.
And we don't want to live like that - so we have regulation, and the state.And the state fertilises, and safeguards, by cutting
the grass, making mulch, and spreading the rich gooey muck all over the nice, green, verdant, state controlled pampa.
The cowboys, now, they prefer no cutting of grass, and letting their cattle chomp away undistrurbed. And now my analogy is
starting to wear thin.
The bottom line: Private enterprise is inefficient because at it's heart it rules out cooperation. Being happiest if it's
a monopoly, there's nothing a business would like better than wipe out all competition.
Hence, the necessity for state spending, and state regulation, which the private sector is blind to, because it can't look
ahead.
People are members of families, and are employers and workers, who are customers or clients, and part of
their local communities and professions and trades and hobbyists/clubs who are large scale wholesale consumers who create the
markets that provides employment and income to individuals who are workers. And, and, one big circle.
Right now, the neoliberals think that those in the Far East are the workers and those in the West are the consumers, until
the Far East becomes the market and wages so low in the West that they become the workers, unless of course some kind souls decide
to invest money in Education, Health and infrastructure in Africa on a huge scale, so we then have Africa as the workers and the
far East as the market, and the West, apart from those who own large numbers of shares or business outright, presumably either
starve to death or pull themselves up by their bootstraps, and start all over again, inventing and setting up completely new industries,
providing the newly universally educated and healthy Chinese and Africans and South Americans haven't done it first.
OK. I was against it for a long time, but go ahead. There's no way of avoiding it. Eat the Rich. Apart from the fact that ultra
thin is fashionable, and with all that dieting and exercising, they are the only people who actually get the time for lots of
exercise these days, and they'll taste incredibly tough and stringy.
@CaptainGrey - Ssshhh not on CiF, we all know that capitalism has failed its just that we can't point to a successful alternative
model because such a thing has never existed, its just that this time its different and the model I advocate will lead us all
to the sunny uplands of utopia.
Obviously there will be a little bit of coercion and oppression to get us to those sunny uplands, but you can't make an omlette
etc. plus don't worry that stuff will only happen to "bad people"
The economic model we have is bankrupt and in its death throes
Except it's not. It is still very much alive and growing. The "alternatives" have crashed and burned save Cuba and North
Korea. Capitalism, especially the beneficial capitalism of the NHS, free education etc. has won and countless people have gained
as a result.
@CaptainGrey - deregulated capitalism has failed. That is the product of the last 20 years. The pure market is a fantasy just
as communism is or any other ideology. In a pure capitalist economy all the banks of the western world would have bust and indeed
the false value "earned" in the preceding 20 years would have been destroyed.
In the 19th century based on experience the public services became part of the public sector to avoid corruption and corporate
blackmail. The neoclassical revolution of the late 20th century has pushed us back to days when elites regarded the state as their
property. Democracy was a threat which won out either through the British model or violent revolution. A small elite cannot endure
if the majority feel exploited.
The Bilderberg Conference should look to the past and learn from the mistakes committed. Neoclassicism will eventually impoverish
them
@UnevenSurface - Multinationals need to recognise that paying tax is an investment. Without that tax, their markets will
slowly evaporate.
"Multinationals need to recognise that paying tax is an investment. Without that tax, their markets will slowly evaporate."
However, the gains for the transnational rich are immediate and enormous, while the failure of their markets is slow and, so far,
almost entirely painless.
@UnevenSurface - I think corporation tax is becoming obsolete given globalization and the increasing dominance of online / global
distribution.
Amazon, Starbucks (and to a lesser extent Google) need to have people on the ground in their market, for customer service,
distribution, warehouse staff, baristas etc. So they'll pay employer taxes etc.
The question is is that enough? I think we are missing a trick with the UK market due to outdated tax legislation that hasn't
really changed in 30 years.
After the US the UK is arguably the most attractive market in the world. Large, homogenous, wealthy with a low propensity to
save and a rapid rate of adoption of new technology / products. We need to think about how we can exploit this in relation to
corporate taxes because even though I am far from left wing, we have a real problem with corporations that have a default setting
of minimise taxes through ever more complex structures.
It can't be beyond the wit of HMRC to reduce the complexity of the tax legislation and make it harder to avoid? The prize is
continued access to the UK market
Accountants now hold the whip hand in government and business. They know the price of everything but the value of nothing.
They advocate selling off industries, outsourcing to low wage economies, zero hours contracts and deregulation (under the bogus
campaign line of cutting red tape).
All of these policies will ultimately end up with capitalism destroying itself. Low wage stagnation will result in penniless
consumers which results in no growth which results in cuttin wages to maintain shareholder returns which results in penniless
consumers etc etc etc. All our institutions are gradually eroded and life for the average citizen will become more and more unpleasant.
Profit share may be a way forward, it's not perfect, companies can effectively use it to freeze wages and benefit from unpaid
overtime, that creates unemployment as four people working a couple of hours extra ever day are denying someone else a job, but
used in the right way it could ensure people get a share in the wealth they help create.
At the sharp end it's tough, at the
company I worked at, all the managers were summoned to a meeting in September and told they had until Christmas to increase turnover
and profits, or they would be out of a job.
At the same company, one of my managers complained that a successful manager at another branch was a crook. The CEO replied
'Yes, but he's a crook that makes a million pounds in profit every year'. I wonder how Deborah's article would have gone down
with him?
Everything was easier when the U S and Europe ran the world's economies with Bank regulations, currency controls and only the
establishment could avoid income, capital gains and IHT taxes and grow wealthy generation after generation. Today there are simply
too many players in the global arena and the rules have been torn up. We are in a jungle where greed is rife and only the powerful
and corrupt survive, shipping and burying their loot in offshore havens.
We need a new global order with a change of mentality
and more morality among the world's politicians, banking and corporate leaders. Unless we end corruption and exploitation of natural
resources in the poor nations and a fairer distribution of the economic wealth the world faces economic and social collapse
Google, Amazon and Apple haven't taught anyone in this country to read. But even though an illiterate market wouldn't
be so great for them, they avoid their taxes, because they can , because they are more powerful than governments.
Is it beyond the wit of government to close these (perfectly legal) loopholes? Otherwise, what you are asking for is for these
companies to make charitible donations to government - nothing wrong with that per se, but let's not hide behind the misleading
term 'tax avoidance' - companies are obliged to minimise taxes within the law, face it.
It is perfectly clear that in much of the EU public expenditure has been horribly inefficient and far too high
If you invent a set of rules that says a country that deficit spends above an arbitrary percentage of its GDP is horribly
inefficient and far too high then it should not be a surprise that when that happens, it is described as such.
Whether that has any basis in reality or, as I suspect, is only relevant within its own ridiculous framework, is surely the
question.
Deborah Orr is established writer for the Guardian and Married to a Will Self whose is almost certainly a millionaire. She
is one of the rich. The idea that envy is driving her politics is just utterly absurd, and suggests a total lack of reflection.
But the basic problem is this: it costs a lot of money to cultivate a market – a group of consumers – and the more sophisticated
the market is, the more expensive it is to cultivate them. A developed market needs to be populated with educated, healthy,
cultured, law-abiding and financially secure people
Not really; Amazon is just as happy to sell us trashy films, multipacks of chocolate, obesity drugs and baseball bats to stove
our neighbour's head in. There's certainly an argument to be made that companies should have a duty to invest in the infrastructure
that enables their product to be transported, stored etc...but they shouldn't be expected to give a toss if their customers are
unhealthy ignoramuses. A market's a market.
But some countries manage to do this much more efficiently and effectively than others.
In Europe it would appear to be the Social Democratic Nordic countries and Germany which has very strong employment rights.
Korea's economic growth was based on government investment and a degree of protectionism. These are precisely the ideas that neoliberalism
opposes.
If they had adopted The Keynes Plan at the 1944 Bretton Woods conference then the IMF and the World Bank would never have been
set up. We most likely would not have had the euro crisis and the problem of trade imbalances between counties would most likely
have gone away.
Now that is what I call 'Keynesian'. Feel free to continue to make up your own definitions though.
Socialism for the 1% with the rest scraping around for the crumbs in an ever more divided world run by The Bilderbergers who play
the politicians like puppets.
@emkayoh - I am not sure its in its death throes, I think what we are seeing is capitalism attempting to transform itself again.
The success of that transformation will depend on how willing people across the western world to put up with reduced welfare,
poverty pay and almost no employment rights. If we say no and make things too hot for the ruling class we have a chance to take
control of the future direction of our world, if not then what's the point.
This is a strange rant. Everyone agrees that free markets need to be nurtured by appropriate state institutions. But some countries
manage to do this much more efficiently and effectively than others. It is perfectly clear that in much of the EU public expenditure
has been horribly inefficient and far too high.
There is no contradiction between being in favour of free markets and believing that markets and societies should be nurtured
appropriately. We think people should be free and all accept that they should be nurtured.
So why, exactly, given the huge amount of investment needed to create such a market, should access to it then be "free"?
Corporate taxation is best explained as the license that business pays to access the market -- which is in turn created through
the schools, hospitals, roads, etc. that the tax pays for. Unfortunately the new Corporate Social Irresponsibility being acted
out by multinationals today neatly avoids paying that license, and sooner or later will damage them. Multinationals need to recognize
that paying tax is an investment. Without that tax, their markets will slowly evaporate.
The economic model we have is bankrupt and in its death throes is gobbling up the last scintilla of surplus that can be extracted
from the poor ( anyone not independently wealthy).
"... What sticks in the neoliberalism craw is that the state provides these services instead of private businesses, and as such "rob" them of juicy profits! The state, the last easy cash cow! ..."
"... Who could look at the way markets function and conclude there's any freedom? Only a neoliberal cult member. They cannot be reasoned with. They cannot be dissuaded. They cannot be persuaded. Only the market knows best, and the fact that the market is a corrupt, self serving whore is completely ignored by the ideology of their Church. ..."
"... when Thatcher and Reagan deregulated the financial markets in the 80s, that's when the trouble began which in turn led to the immense crash in 2008. ..."
"... Neo-liberalism is just another symptom of liberal democracy which is government by oligarchs with a veneer of democracy ..."
"... The state has merged with the corporations so that what is good for the corporations is good for the state and visa versa. The larger and richer the state/corporations are, the more shyster lawyers they hire to disguise misdeeds and unethical behavior. ..."
"... If you support a big government, you are supporting big corporations as well. The government uses the taxpayer as an eternal fount of fresh money and calls it their own to spend as they please. Small businesses suffer unfairly because they cannot afford the shyster lawyers and accountants that protect the government and the corporations, but nobody cares about them. ..."
"... Deborah's point about the illogical demands of neoliberalism are indeed correct, which is somewhat ironic as neoliberalism puts objective rationality at the heart of its philosophy, but I digress... ..."
"... There would not be NHS, free education etc. without socialism; in fact they are socialism. It took the Soviet-style socialism ("statism") 70 years to collapse. The neoliberalistic capitalism has already started to collapse after 30 years. ..."
"... I'm always amused that neoliberal - indeed, capitalist - apologists cannot see the hypocrisy of their demands for market access. Communities create and sustain markets, fund and maintain infrastructure, produce and maintain new consumers. Yet the neolibs decry and destroy. Hypocrites or destructive numpties - never quite decided between Pickles and Gove ..."
"... 97% of all OUR money has been handed over to these scheming crooks. Stop bailing out the banks with QE. Take back what is ours -- state control over the creation of money. Then let the banks revert to their modest market-based function of financial intermediaries. ..."
"... The State can't be trusted to create our money? Well they could hardly do a worse job than the banks! Best solution would be to distribute state-created money as a Citizen's Income. ..."
"... To promote the indecent obsession for global growth Australia, burdened with debt of around 250 billion dollars, is to borrow and pay interest on a further 7 billion dollars to lend to the International Monetary Fund so as it can lend it to poorer nations to burden them with debt. ..."
This private good, public bad is a stupid idea, and a totally artificial divide. After all,
what are "public spends"? It is the money from private individuals, and companies,
clubbing together to get services they can't individually afford.
What sticks in the
neoliberalism craw is that the state provides these services instead of private businesses,
and as such "rob" them of juicy profits! The state, the last easy cash cow!
Neoliberalism is a modern curse. Everything about it is bad and until we're free of it, it
will only ever keep trying to turn us into indentured labourers. It's acolytes are required
to blind themselves to logic and reason to such a degree they resemble Scientologists or
Jehovah's Witnesses more than people with any sort of coherent political ideology, because
that's what neoliberalism actually is... a cult of the rich, for the rich, by the rich... and
it's followers in the general population are nothing but moron familiars hoping one day to be
made a fully fledged bastard.
Who could look at the way markets function and conclude there's any freedom? Only a
neoliberal cult member. They cannot be reasoned with. They cannot be dissuaded. They cannot
be persuaded. Only the market knows best, and the fact that the market is a corrupt, self
serving whore is completely ignored by the ideology of their Church.
It's subsumed the entire planet, and waiting for them to see sense is a hopeless cause. In
the end it'll probably take violence to rid us of the Neoliberal parasite... the turn of the
century plague.
"Capitalism, especially the beneficial capitalism of the NHS, free education etc. has
won and countless people have gained as a result."
I agree with you and it was this beneficial version of capitalism that brought down the
Iron Curtain. Working people in the former Communist countries were comparing themselves with
working people in the west and wanted a piece of that action. Cuba has hung on because people
there compare themselves with their nearest capitalist neighbor Haiti and they don't want a
piece of that action. North Korea well North Korea is North Korea.
Isn't it this beneficial capitalism that is being threatened now though? When the wall
came down it was assumed that Eastern European countries would become more like us. Some have
but who would have thought that British working people would now be told, by the likes of
Kwasi Kwarteng and his Britannia Unchained chums, that we have to learn to accept working
conditions that are more like those in the Eastern European countries that got left behind
and that we are now told that our version of Capitalism is inferior to the version adopted by
the Communist Party of China?
@bullwinkle - No , when Thatcher and Reagan deregulated the financial markets in the 80s,
that's when the trouble began which in turn led to the immense crash in 2008.
Neo-liberalism is just another symptom of liberal democracy which is government by oligarchs
with a veneer of democracy.
This type of government began in America about 150 years ago with the Rockefellers,
Carnegie, J.P. Morgan, Ford etc who took advantage of new inventions, cheap immigrant labour
and financial deregulation in finance and social mores to amass wealth for themselves and
chaos and austerity for workers.
All this looks familiar again today with new and old oligarchs hiding behind large
corporations taking advantage of the invention of the €uro, mass immigration into
western Europe and deregulation of the financial "markets" and social mores to amass wealth
for a super-wealthy elite and chaos and austerity for workers.
So if we want to see where things went wrong we need only go back 150 years to what happened
to America. There we can also see our future?
The beneficial capitalism of the NHS, free education etc. has won
Free education and the NHS are state institutions. As Debbie said, Amazon never taught
anyone to read. Beneficial capitalism is an oxymoron resulting from your lack of
understanding.
especially the beneficial capitalism of the NHS, free education etc. has won and
countless people have gained as a result.
At one and the same time being privatized and having their funding squeezed, a direct
result of the neoliberal dogma capitalism of austerity. Free access is being eroded by the
likes of ever larger student loans and prescription costs for a start.
they avoid their taxes, because they can, because they are more powerful than
governments
Let's not get carried away here. Let's consider some of the things governments can do,
subject only to a 5 yearly check and challenge:
force people upon pain of imprisonment to pay taxes to them
pay out that tax money to whomever they like
spend money they don't have by borrowing against obligations imposed on future taxpayers
without their agreement
kill people in wars, often from the comfort of a computer screen thousands of miles
away
print money and give it to whomever they like,
get rid of nation state currencies and replace them with a single, centrally controlled
currency
make laws and punish people who break them, including the ability to track them down in
most places in the world if they try and run away.
use laws to create monopolies and favour special interests
Let's now consider what power apple have...
- they can make iPhones and try to sell them for a profit by responding to the demands of
the mass consumer market. That's it. In fact, they are forced to do this by their owners who
only want them to do this, and nothing else. If they don't do this they will cease to
exist.
The state has merged with the corporations so that what is good for the corporations is good
for the state and visa versa. The larger and richer the state/corporations are, the more
shyster lawyers they hire to disguise misdeeds and unethical behavior.
If you support a big government, you are supporting big corporations as well. The
government uses the taxpayer as an eternal fount of fresh money and calls it their own to
spend as they please. Small businesses suffer unfairly because they cannot afford the shyster
lawyers and accountants that protect the government and the corporations, but nobody cares
about them. Remember, that Green Energy is big business, just like Big Pharma and Big Oil.
Most government shills have personally invested in Green Energy not because they care about
the environment, only because they know that it is a safe investment protected by government
for government. The same goes for large corporations who befriend government and visa
versa.
@NeilThompson - It's all very well for Deborah to recommend that the well paid share work.
Journalists, consultants and other assorted professionals can afford to do so. As a
self-employed tradesman, I'd be homeless within a month.
@SpinningHugo - Interesting that those who are apparently concerned with prosperity for all
and international solidarity are happy to ignore the rest of the world when it's going well,
preferring to prophesy apocalypse when faced with government spending being slightly reduced
at home.
@1nn1t - That is a point which just isn't made enough. This is the first group of politicians
for whom a global conflict seems like a distant event.
As a result we have people like Blair who see nothing wrong with invading countries at a
whim, or conservatives and UKIP who fail to understand the whole point of the European Court
of Human Rights.
They seem to act without thought of our true place in the world, without regard for the
truly terrible capacity humanity has for self destruction.
Deborah's point about the illogical demands of neoliberalism are indeed correct, which is
somewhat ironic as neoliberalism puts objective rationality at the heart of its philosophy,
but I digress...
The main problem with replacing neoliberalism with a more rational, and fairer system,
entails that people like Deborah accept that they will be less wealthy. And that my friends is the main problem. People like Deborah, while they are more than
happy to point the fingers at others, are less than happy to accept that they are also part
of the problem.
(Generalisation Caveat: I don't know in actuality if Deborah would be unhappy to be less
wealthy in exchange for a fairer system, she doesn't say)
Good critique of conservative-neoliberalism, unless you subscribe to it and subordinate any
morals or other values to it.
She mentions an internal tension and I think that's because conservatism and neoliberal
market ideology are different beasts.
There are different models of capitalism quite clearly the social democratic version in
Scandinavia or the "Bismarkian" German version have worked a lot better than the UKs.
Yet, mealy-mouthed and hotly contested as this minor mea culpa is, it's still a sign
that financial institutions may slowly be coming round to the idea that they are the
problem.
How is it a sign of that? We are offered no clues.
What they don't seem to acknowledge is that the merry days of reckless lending are never
going to return;
Try reading a history of financial crashes to dislodge this idea.
... even if they do, the same thing will happen again, but more quickly and more
savagely.
This may or may not be true but here it is mere assertion.
The IMF exists to lend money to governments, so it's comic that it wags its finger at
governments that run up debt.
At this point I start to have real doubts as to whether Deborah Orr has actually read even
the Executive Summary of the Report this article is ostensibly a response to.
All the comments that follow about the need for public infrastructure, education,
regulated markets and so on are made as if they were a criticism of the IMF and yet the IMF
says many of those same things itself. The IMF position may, of course, be contradictory -
but then that is something that would need to be demonstrated. It seems that Deborah has not
got beyond reading a couple of Guardian articles on the issues she discusses and therefore is
in no position to do this.
Efforts are being made to narrow the skills gap with other countries in the region, as
the authorities look to take full advantage of Bangladesh's favorable demographics and help
create conditions for more labor-intensive led growth. The government is also scaling up
spending on education, science and technology, and information and communication
technology.
Which seems to be the sort of thing Deborah Orr is calling for. She should spend a little
time on the IMF website before criticising the institution. It is certainly one that merits
much criticism - but it needs to be informed.
And the solution to the problems? For Deborah Orr the response
... from the start should have been a wholesale reevaluation of the way in which wealth
is created and distributed around the globe, a "structural adjustment", as the philosopher
John Gray has said all along.
Does anyone have any idea what this is supposed to mean? There are certainly no leads on
this in the link given to "the philosopher" John Gray. And what a strange reference that is.
John Gray, in his usual cynical mode, dismisses the idea of progress being achieved by the
EU. But then I suppose that is consistent from a man who dismisses the idea of progress
itself.
... Conservative neoliberalism is entirely without logic.
The first step in serious political analysis is to understand that the people one opposes
are not crazy and are not devoid of logic. If that is not clearly understood then all that is
left is the confrontation of assertion and contrary assertion. Of course Conservative
neoliberalism has a logic. It is one I do not agree with but it is a logic all the same.
The neoliberalism that the IMF still preaches pays no account to any of this [the need
for public investment and a recognition of the multiple roles that individuals have].
Wrong again.
It insists that the provision of work alone is enough of an invisible hand to sustain a
market.
And again.
This stuff can't be made up as you go along on the basis of reading a couple of newspaper
articles. You actually have to do some hard reading to get to grip with the issues. I can see
no signs of that in this piece.
@NotAgainAgain - We are going off topic and that is in no small part down to my own fault, so
apologies. Just to pick up the point, I guess my unease with the likes of Buffet, Cooper-Hohn
or even the wealthy Guardian columnists is that they are criticizing the system from a
position of power and wealth.
So its easy to advocate change if you feel that you are in the vanguard of defining that
change i.e. the reforms you advocate may leave you worse off, but at a level you feel
comfortable with (the prime example always being Polly's deeply relaxed attitude to swingeing
income tax increases when her own lifestyle will be protected through wealth).
I guess I am a little skeptical because I either see it as managed decline, a smokescreen
or at worst mean spiritedness of people prepared to accept a reasonable degree of personal
pain if it means other people whom dislike suffer much greater pain.
"There is a clear legal basis in Germany for the workplace representation of employees in
all but the very smallest companies. Under the Works Constitution Act, first passed in 1952
and subsequently amended, most recently in 2001, a works council can be set up in all private
sector workplaces with at least five employees."
The UK needs to wake up to the fact that managers are sometimes inept or corrupt and will
destroy the companies they work for, unless their are adequate mechanisms to hold poor
management to account.
Capitalism, especially the beneficial capitalism of the NHS, free education etc. has
won
There would not be NHS, free education etc. without socialism; in fact they are
socialism. It took the Soviet-style socialism ("statism") 70 years to collapse. The neoliberalistic
capitalism has already started to collapse after 30 years.
I'm always amused that neoliberal - indeed, capitalist - apologists cannot see the hypocrisy
of their demands for market access. Communities create and sustain markets, fund and maintain
infrastructure, produce and maintain new consumers. Yet the neolibs decry and destroy.
Hypocrites or destructive numpties - never quite decided between Pickles and Gove, y'see.
@JamesValencia - Actually on reflection you are correct and I was wrong in my attack on the
author above. Having re-read the article its a critique of institutions rather than people so
my points were wide of the mark.
I still think that well heeled Guardian writers aren't really in a position to attack the
wealthy and politically connected, but I'll save that for a thread when they explicitly do
so, rather than the catch all genie of neoliberalism.
@CaptainGrey - deregulated capitalism has failed. That is the product of the last 20
years. The pure market is a fantasy just as communism is or any other ideology. In a pure
capitalist economy all the banks of the western world would have bust and indeed the false
value "earned" in the preceding 20 years would have been destroyed.
If the pure market is a fantasy, how can deregulated capitalism have failed? Does one not
require the other? Surely it is regulated capitalism that has failed?
97% of all OUR money has been handed over to these scheming crooks. Stop bailing out the
banks with QE. Take back what is ours -- state control over the creation of money. Then let
the banks revert to their modest market-based function of financial intermediaries.
The State can't be trusted to create our money? Well they could hardly do a worse job than
the banks! Best solution would be to distribute state-created money as a Citizen's
Income.
@1nn1t - Some good points, there is a whole swathe of low earners that should not be in the
tax system at all, simply letting them keep the money in their pocket would be a start.
Second the minimum wage (especially in the SE) is too low and should be increased.
Obviously the devil is in the detail as to the precise rate, the other issue is non
compliance as there will be any number of businesses that try and get around this, through
employing people too ignorant or scared to know any better or for family businesses - do we
have the stomach to enforce this?
Thirdly there is a widespread reluctance to separate people from the largesse of the
state, even at absurd levels of income such as higher rate payers (witness child tax
credits). On the right they see themselves as having paid in and so are "entitled" to have
something back and on the left it ensures that everyone has a vested interest in a big state
dipping it hands into your pockets one day and giving you something back the next.
@Uncertainty - Which is why the people of the planet need to join hands.
The only group of people in he UK to see that need were the generation that faced WW2
together.
It's no accident that, joining up at 18 in 1939, they had almost all retired by 1984.
To promote the indecent obsession for global growth Australia, burdened with debt of around
250 billion dollars, is to borrow and pay interest on a further 7 billion dollars to lend to
the International Monetary Fund so as it can lend it to poorer nations to burden them with
debt.
It is entrapment which impoverishes nations into the surrender of sovereignty,
democracy and national pride. In no way should we contribute to such economic immorality and
the entire economic system based on perpetual growth fuelled by consumerism and debt needs
top be denounced and dismantled. The adverse social and environmental consequence of
perpetual growth defies all sensible logic and in time, in a more responsible and enlightened
era, growth will be condemned.
"... Socialism for the 1% with the rest scraping around for the crumbs ..."
"... Don't you think a global recession and massive banking collapse should be classified as 'crash and burn'? ..."
"... It's one of the major contradictions of modern conservatism that the raw, winner-takes-all version of capitalism it champions actually undermines the sort of law abiding, settled communities it sees as the societal ideal. ..."
"... Rich people have benefited from this more than most: they need workers trained by a state-funded education system and kept healthy by a state-funded healthcare system; they depend on lending from banks rescued by the taxpayer; they rely on state-funded infrastructure and research, and – like all of us – on a society that does not collapse. Whether they like it or not, they would not have made their fortunes without the state spending billions of pounds ..."
"... You have to be careful when you take on the banksters. Abe Lincoln John Kennedy and Hitler all tried or (in Kennedy's case planned) on the issuance of money via the state circumventing the banks. All came to a sticky end. No wonder politicians run scared of them. ..."
"... Now, that's a novel interpretation! The working people in "Communist" countries had free healthcare and education, guaranteed employment and heavily subsidized housing. The reason we have healtcare and free education is that working people in Capitalist countries would otherwise have revolted to have Socialism. In the absence of competition, there is no benefit for the Capitalist to be "beneficial". ..."
"... The banks could plainly see that they were stoking a bubble, but chose not to pass on the increased risk of lending to consumers by raising their interest rates and coolling the market. Why? Because they were making a handsome short-term profit. The banks put their own short-term interests above their long-term interests of financial stability. When the house of cards came tumbling down - we bailed them out. It was idiotic banks who failed to properly control their risk of lending that caused the crash, not interventionist politicians. ..."
Virtually everyone knows what went wrong, with the exception only of uncontrollable
ultra-right neoliberal buffs who try and put the blame on everyone else with various out and
out lies and deceptions, and they are thankfully petering and dying out by the day, including
deluded contributors to CiF, who seem to be positively and cruelly reveling in the suffering
their beloved thesis has and is causing.
So, now that we know the symptoms, what about the cure? The coalition want to make the poor
and vulnerable suffer even more than they have done over the last three decades or so while
still refusing to clamp down and wholly regulate the bankers, corporates and free markets, who
still hold too much power like the unions in the 70's,while Ed Miliband and 'One Nation
Labour' merely suggest in mild, diffident terms about financial regulation and a more balanced
economy, while still not wanting to upset those nice bankers too much.
It's time they were
upset though, and made to pay for their errors and recklessness; while they still award
themselves bonuses and take advantage of Gideon's recent tax cut, the poor and vulnerable who
were never responsible for the long recession now have money taken off them and struggle to
feed, pay bills and clothe themselves and their families, supported by the Daily Fail and co.
who look on them as scrounging, lazy, criminal, violent, drunken, drug addicted and promiscuous
sub-humans, who deserve their fate.
There's quite a few in the middle/professional classes
(many bankers) if they didn't know, but they don't bother with such, do they?
The economic model we have is bankrupt and in its death throes
I am not sure if this is true. We have the same economic system (broadly speaking,
capitalism) as nearly every country in the world, and the world economy is growing at a
reasonable rate, at around 3-4% for 2013-14 (see http://www.imf.org/external/pubs/ft/weo/2013/01/pdf/c1.pdf
for more details).
We perceive a problem in (most of) Europe and North America because our economies are
growing more slowly than this, and in some cases not at all. The global growth figure comes
out healthy because of strong growth in the emerging countries, like China, Brazil and India,
who are narrowing the gap between their living standards and ours. So, the world as a whole
isn't broken, even if our bit of it is going through a rough patch.
This is pertinant to a discussion of Deborah Orr's article, because in it she calls for
global changes:
The response from the start should have been a wholesale reevaluation of the way in
which wealth is created and distributed around the globe, a "structural adjustment", as the
philosopher John Gray has said all along.
My point is: I don't think this argument will work, because I don't see why the emerging
countries would want wholesale change to what, for them, is quite a successful recipe, just
because it going down badly in Europe. Instead, European countries need to do whatever it
takes to fix their banking systems; but also learn to live within their means, and show some
more of the discipline and enterprise that made them wealthy in the first place.
@Uncertainty - I`m not defending philanthropy, i am saying in answer to some personal attacks
on Miss Orr below the line, that her status as either rich or poor is irrelevant, it is her
politics that count .
Tony Benn and Polly Toynbee both receive much abuse in this manner on Cif.
@kingcreosote - Socialism for the 1% with the rest scraping around for the crumbs
And yet the rest have more crumbs than under any other conceivable system. Look
at the difference that even limited market liberalisation has made to poverty in China. No loaf, no crumbs. You can always throw the loaf out of the window if you don't like the
inequality and then no-one can have anything.
@jazzdrum - I don't have much time for those rich who feel guilty about their greed and do
'charity' to salve their souls. Oh and get a Knighthood as a result.
The more honest giver is the person who gives of what little they have in their purse and
go without as a result. Not a tax dodge re-branded as philanthropy.
Also, such giving from the rich often has strings and may be tailored to what they think
are the 'deserving poor'. I don't like that either.
@Herbolzheim - It's one of the major contradictions of modern conservatism that the raw,
winner-takes-all version of capitalism it champions actually undermines the sort of law
abiding, settled communities it sees as the societal ideal.
More and more people are beginning to understand this as a fundamentally political problem (
ref. @XerXes1369). The 'left' prefers to concentrate on the role of a financial elite (which
is supposed to be exerting some kind of malign supernatural force on the state), to divert
attention from what mainstream 'left' poltics in this society has turned out to be.
When the state is taking over 60% of the income of even those on minimum wages we se
how, from the very top to the very bottom, that the state is the problem.
It's become a monster that will destroy us all.
I would query where you get these figures from, but where it not for the state, do you really
think that somebody on the minimum wage, keeping 100% of their wages, would be able to
afford, out of these wages, health care, schooling for their children, infrastructure
maintenance, their own police force and army, their own legal system?
This from an article in the Independent:
Rich people have benefited from this more than most: they need workers trained by a
state-funded education system and kept healthy by a state-funded healthcare system; they
depend on lending from banks rescued by the taxpayer; they rely on state-funded
infrastructure and research, and – like all of us – on a society that does not
collapse. Whether they like it or not, they would not have made their fortunes without the
state spending billions of pounds.
So the state, although not perfect benefit all of us, get over it!
You have to be careful when you take on the banksters.
Abe Lincoln John Kennedy and Hitler all tried or (in Kennedy's case planned) on the
issuance of money via the state circumventing the banks. All came to a sticky end. No wonder politicians run scared of them.
Free education and the NHS are state institutions. As Debbie said, Amazon never taught
anyone to read. Beneficial capitalism is an oxymoron resulting from your lack of
understanding.
Yes they are state institutions and the tax system should be changed to prevent
Amazon et al from avoiding paying their fair share. But beneficial capitalism is not an
oxymoron, it is alive and present in virtually every corner of the world. Rather than accuse
me of not understanding, I think you would do well to take the beam out of your eye.
I agree with you and it was this beneficial version of capitalism that brought down the
Iron Curtain. Working people in the former Communist countries were comparing themselves
with working people in the west and wanted a piece of that action.
Now, that's a novel interpretation! The working people in "Communist" countries had free
healthcare and education, guaranteed employment and heavily subsidized housing. The reason we have healtcare and free education is that working people in Capitalist
countries would otherwise have revolted to have Socialism. In the absence of competition, there is no benefit for the Capitalist to be
"beneficial".
The banks couldn't stop property hyperinflation, at 20% a year for well over a
decade.
The banks could plainly see that they were stoking a bubble, but chose not to pass on the
increased risk of lending to consumers by raising their interest rates and coolling the
market. Why? Because they were making a handsome short-term profit. The banks put their own
short-term interests above their long-term interests of financial stability. When the house
of cards came tumbling down - we bailed them out. It was idiotic banks who failed to properly
control their risk of lending that caused the crash, not interventionist politicians.
Last week there was a story where HSBC have taken on a senior ex-MI5 person to shore up
their money laundering 'problems'. They're being fined over a billion dollars by the fed
for taking blood money from murderers, drug dealers and corrupt politicians.
Not the Security Services' Director General by any chance?
-- In a filing to the Bermuda Stock Exchange ("BSX"), HSBC Holdings plc (Ticker:
HSBC.BH), announced the appointment of Sir Jonathan Evans to the Board of Directors.
The filing stated:
Sir Jonathan Evans (55) has been appointed a Director of HSBC Holdings plc with effect
from 6 August 2013. He will be an independent non-executive Director and a member of the
Financial System Vulnerabilities Committee.
Sir Jonathan's career in the Security Service spanned 33 years, the last six of which as
Director General. During his career Sir Jonathan's experience included counter-espionage,
protection of classified information and the security of critical national infrastructure.
His main focus was, however, counter-terrorism, both international and domestic including,
increasingly, initiatives against cyber threats. As Director General he was a senior
advisor to the UK government on national security policy and attended the National Security
Council.
He was appointed Knight Commander of the Order of the Bath (KCB) in the 2013 New Year's
Honours List and retired from the Service in April 2013.
I think there's some really good points in the article.
Last week there was a story where HSBC have taken on a senior ex-MI5 person to shore up
their money laundering 'problems'. They're being fined over a billion dollars by the fed for
taking blood money from murderers, drug dealers and corrupt politicians.
Their annual fee for this guy with 20 years experience to tackle a billion dollar fine and
the disfunction in their organisation? A lousy 100 k. Fee to UK for training him? 0.
Ridiculous! It should have been 10 times that for him and a finders fee of perhaps 10
million to the state.
Realistically, the state has NO clue about it's real value, or the real value of the UK
population. And the example above, I think, demonstrates banks' attitude to the global demand
that they clean up their act. We neef to take this lot to the cleaners before the stench gets
any worse.
Ah, yes. Goldman Sachs is
famous for their "good work and integrity".
The US Department of Justice (DOJ) has said about $4.5 billion was misappropriated from 1MDB,
including some money that Goldman Sachs helped raise, by high-level officials of the fund and
their associates from 2009 through 2014.
US prosecutors filed criminal charges against 2 former Goldman Sachs bankers earlier this
month. One of them, Tim Leissner, pleaded guilty to conspiracy to launder money and
conspiracy to violate the Foreign Corrupt Practices Act.
I'm sure it was just a "few bad apples", like Goldman Sachs's Ex-CEO
Lloyd Blankfein , who was personally involved in the transaction.
You might remember Lloyd from his doing "God's
Work" .
"... Ship of Fools is no apology for Trumpism. Indeed, Carlson calls Trump "vulgar and ignorant." But he rightly points out that Trump "didn't invade Iraq or bail out Wall Street. He didn't lower interest rates to zero, or open the borders, or sit silently by as the manufacturing sector collapsed and the middle class died." Basically, Donald J. Trump is not your average American politician. Thank God. ..."
"... Well, Ship of Fools excoriates finance capitalism and the class that has constantly reaped economic benefits out of the labor of American workers without contributing anything of substance to the American body politic. The Democrats used to be the party of populist rabble rousers like Huey Long and Al Smith. ..."
"... Explicit in this critique of America's Ruling Class is the fact that democracies are unstable and prone to self-destruction. In modern America, the elite do not attend to the population, cynical race-mongering is used to win votes at the cost of internal peace, and chicken hawks like Max Boot and William Kristol still receive adulation in the Main Stream Media despite their disastrous record of cheering on military misadventures that kill thousands of Americans. (To say nothing of their fanatical opposition to Trump -- despite the fact that he won the presidency when their catspaws McCain and Romney ignominiously failed). Ship of Fools correctly notes that this is what an empire looks like in its final days. ..."
"... Jake Bowyer [ Email him ] is the pseudonym of an American college student. ..."
Since the late fall of 2016, Democrats and other Leftist types have been decrying President
Donald J. Trump as "not normal" and a "threat to democracy." Of course, this is hogwash of the
most rank sort. The same people lambasting Trump for his supposed " authoritarianism " are the
same people who have created the modern American oligarchy. Tucker Carlson , the popular Fox News who wrote
the single most brilliant and prescient Main Stream Media article on the Trump phenomenon:
Donald Trump Is Shocking, Vulgar and Right | And, my dear fellow Republicans,
he's all your fault, by Tucker Carlson, Politico, January 28, 2016.
For Carlson, moral and social rot in the United States starts at the very top -- the place
where Democrats and Republicans
https://vdare.com/posts/they-want-to-lose-gop-congress-sounds-retreat-on-border-wall-funds-democratic-priorities
to maintain unpopular elite rule. Carlson compares this American elite to blind drunk captains
steering a sinking ship. Making matters worse: the fact that, in keeping with Carlson's
nautical parallel, "Anyone who points out the consequences of what they're [the elite] doing
gets keelhauled." Gavin
McInnes (banned from Twitter ) and
Alex
Jones (banned from
everything ) would agree.
Ship of Fools is no apology for Trumpism. Indeed, Carlson calls Trump "vulgar and
ignorant." But he rightly points out that Trump "didn't invade Iraq or bail out Wall Street. He
didn't lower interest rates to zero, or open the borders, or sit silently by as the
manufacturing sector collapsed and the middle class died." Basically, Donald J. Trump is not
your average American politician. Thank God.
For much of Ship of Fools , Carlson comes off sounding like someone with his heart
in the center-left. Some cheeky Twitter users might even dub Carlson's latest book National
Bolshevism.
Why? Well, Ship of Fools excoriates finance capitalism and the class that has
constantly reaped economic benefits out of the labor of American workers without contributing
anything of substance to the American body politic. The Democrats used to be the party of
populist rabble rousers like Huey Long and Al Smith.
But Carlson points out that "the Democratic Party is now the party of the rich." Rather than
attacking mega-wealthy people
like Amazon's
Jeff Bezos or Apple's Tim Cook , the
modern American Left is completely in thrall to money and
corporate power. This hurts every American not in the upper income bracket.
Republicans are no better. They remain wedded to the idea of being the party of business,
and as such many Republican elected officials support Open Borders because that would provide
their donors with an endless supply of cheap labor. This support comes at the cost of angering
a majority of Republican voters.
In sum, both parties have given up on the native-born American workers. And, beginning in
2016, American workers began pushing back at the ballot box.
Ship of Fools is a bleak book. It is also much better than the usual fluff penned
(or signed) by Fox News pundits. Carlson tells uncomfortable truths and
engages with topics that until very recently were only considered fit for the fringe Right
(like VDARE.com ).
Take for instance the displacement of white Americans, especially white working-class
Americans. America is a nation of 200 million white people. Native-born whites pay more in
taxes, provide the majority of America's soldiers, sailors, Marines, and airmen, and are the
offspring of the people who built this country. For this hard work and loyalty,
foreign-born editors at the New York Times tweet
"#CancelWhitePeople." Hordes of
Antifa types cheer on the displacement of native-born whites, while the political elite do
nothing to combat rising drug overdose deaths and suicides in the Midwest, rural Northeast, and
South. As Carlson warns, " White
identity politics will be a response to a world in which identity politics is the only game
there is."
And, as anti-white vitriol increases and whites are demoted from majority status, Carlson
predicts that white interest groups will form and flex their muscles when they feel that their
backs are up against the wall.
At several points in Ship of Fools , Carlson sincerely grieves for the lost
Liberal-Left of his childhood. He misses the environmentalists who cared about littering, not
about some abstract thing called climate change. He misses those Leftists who cried about
injustice in the world rather than ranting and raving at the behest of the elite class. Without
an honest Left, America could further descend into corporate anarcho-tyranny
-- a place where businesses control free speech and only a small sliver of people enjoy the
benefits of the modern and high-tech economy.
Ship of Fools ends with a warning: either practice democracy or be prepared for
authoritarian rule.
"In order to survive, democracies must remain egalitarian," Carlson argues."When all the
spoils seem to flow upward, the majority will revolt in protest."
Explicit in this critique of America's Ruling Class is the fact that democracies are
unstable and prone to self-destruction. In modern America, the elite do not attend to the
population, cynical race-mongering is used to
win votes at the cost of internal peace, and chicken hawks like
Max Boot and William
Kristol still receive adulation in the Main Stream Media despite their disastrous record of
cheering on military misadventures that kill thousands of Americans. (To say nothing of their
fanatical opposition to Trump -- despite the fact that he won the presidency when their
catspaws McCain
and Romney ignominiously failed). Ship of Fools correctly notes that this is what an
empire looks like in its final days.
In this sense the elites may be right to characterize President Trump as a populist. After
all, Julius
Caesar gave the common man order, security, and bread in the face of a cold and sterile
system. By attempting to dismantle the elite consensus, Trump, Trumpism
, and America
First may just be the first entries in a new age of all-American Caesarism.
We should only be so lucky!
Jake Bowyer [ Email him ] is the pseudonym of an American college
student.
I enjoyed the book immensely even though I'm a socialist myself. Tucker's disdain for wars,
technology companies, and the ruling class are a breath of fresh air. I also enjoy his show
but I do wish he wouldn't talk over the guests he disagrees with.
There must be a reason why people like j g strijdom and curmudgeon, with their slimy
unsubstantiated charges, despise Tucker Carlson. I suspect it is this:
"... Fourth, privatization was supposed to reduce public sector monopolies, but there is often little evidence of significant erosion of the monopolies enjoyed by privatized SOEs. Arguably, technological change and innovation, e.g., in telecommunications, were far more significant in eroding privatized monopolies and reducing costs to consumers, than privatization per se. ..."
"... Also, natural monopolies (such as public utilities) are often deemed inefficient due to the monopolistic nature of the industry or market. The question which arises then is whether private monopoly is better, even with regulation intended to protect the public interest. ..."
Jerri-Lynn here. This short post usefully debunks arguments advanced to promote the privatization fairy. The author's reminds us
that state ownership, when done properly, as in Singapore, can offer its own benefits and " is recognized there as the reason for
public accountability, better governance and management."
By Jomo Kwame Sundaram, former UN Assistant Secretary General for Economic Development. Originally published at
Inter Press Service
KUALA LUMPUR, Malaysia, Sep 4 2018 (IPS) – Several arguments have been advanced to justify privatization since the 1980s. Privatization
has been advocated as an easy means to:
Reduce the government's financial and administrative burden, particularly by undertaking and maintaining services and infrastructure;
Promote competition, improve efficiency and increase productivity in providing public services;
Stimulate private entrepreneurship and investment to accelerate economic growth;
Help reduce the public sector's presence and size, with its monopolistic tendencies and bureaucratic support.
Moot case for privatization
First, privatization is supposed to reduce the government's financial and administrative burdens, particularly in providing services
and infrastructure. Earlier public sector expansion was increasingly seen as the problem, rather than part of the solution. Thus,
reducing the government's role and burden was expected to be popular.
Second, privatization was believed by some to be a means to promote competition, improve efficiency and increase productivity
in service delivery. This belief was naïve, confusing the question of ownership with that of promoting competition.
It was believed that privatization would somehow encourage competition, not recognizing that competition and property rights are
distinct, and not contingent issues. Associated with this was the presumption that competition would automatically result in greater
efficiency as well as improved productivity, not recognizing economies of scale and scope in many instances.
Third, privatization was expected to stimulate private entrepreneurship and investment. There is also a popular, but naïve belief
that privatization was going to stimulate private entrepreneurship when, in fact, the evidence is strong, in Malaysia and elsewhere,
that privatization often crowds out the likelihood of small and medium-sized enterprises actually emerging to fill the imagined void,
presumed to exist following privatization.
Admittedly, there is scope for new entrepreneurship with privatization as new ways and ideas offered by the private sector are
considered – or reconsidered – as the new privatized entity seeks to maximize the profits/rents to be secured with privatization.
However, the private purchase of previously public property, in itself, does not augment real economic assets. Private funds are
thus diverted, to take over SOEs, and consequently diminished, rather than augmented. Hence, private funds are less available for
investing in the real economy, in building new economic capacities and capabilities.
Fourth, privatization was supposed to reduce public sector monopolies, but there is often little evidence of significant erosion
of the monopolies enjoyed by privatized SOEs. Arguably, technological change and innovation, e.g., in telecommunications, were far
more significant in eroding privatized monopolies and reducing costs to consumers, than privatization per se.
From the 1980s, if not before, various studies have portrayed the public sector as a cesspool of abuse, inefficiency, incompetence
and corruption. Books and articles, often with clever titles such as 'vampire state', 'bureaucrats in business' and so on, provided
the justification for privatization.
Undoubtedly, there were some real horror stories, which have been conveniently and frequently cited as supposedly representative
of all SOEs. But other experiences can also be cited to show that SOEs can be run quite efficiently, even on commercial bases, confounding
the dire predictions of the prophets of public sector doom.
Has privatization improved efficiency?
Although some SOEs have been better run and are deemed more efficient after privatization, the overall record has hardly been
consistent. Thus, it is important to ascertain when and why there have been improvements, or otherwise. It is also important to remember
that better-run privatized SOEs, in and of themselves, do not necessarily serve the national or public interest better.
Undoubtedly, most SOEs can be better run and become more efficient. But this is not always the case as some SOEs are indeed already
well run. For instance, very few privatization advocates would insist that most SOEs in Singapore are poorly run.
As its SOEs are generally considered well-run, public ownership is not used there to explain poor governance, management or abuse;
instead, public ownership is recognized there as the reason for public accountability, better governance and management.
Principal-agent managerial delegation dilemma
Hence, in different contexts, with appropriately strict supervision, SOEs can be and have indeed been better run. Privatization,
in itself, does not solve managerial delegation problems, i.e., the principal-agent problem, as it is not a problem of public ownership
per se.
With SOEs, the principal is the state or the government while the agents are the managers and supervisors, who may -- or may not
-- pursue the objectives intended by the principal.
This is a problem faced by many organizations. It is also a problem for private enterprises or corporations, especially large
ones, especially where the principal (shareholders) may not be able to exercise effective supervision or control over the agent.
Also, natural monopolies (such as public utilities) are often deemed inefficient due to the monopolistic nature of the industry
or market. The question which arises then is whether private monopoly is better, even with regulation intended to protect the public
interest.
The answer needs to be ascertained analytically on the basis of evidence, and cannot be presumed a priori. If an industry is a
natural monopoly, what does privatization achieve? Often, it means a transfer to private hands, which can be problematic and possibly
dangerous for the public interest.
EDITOR'S NOTE: This article originally appeared at TomDispatch.com
.
Leaders are routinely confronted with philosophical dilemmas. Here's a classic one for our Trumptopian times: If you make enemies
out of your friends and friends out of your enemies, where does that leave you? What does winning (or losing) really look like? Is
a world in which walls of every sort encircle America's borders a goal worth seeking? And what would be left in a future fragmented
international economic system marked by tit-for-tat tariffs, travel restrictions, and hyper-nationalism? Ultimately, how will such
a world affect regular people? Let's cut through all of this for the moment and ask one crucial question about our present cult-of-personality
era in American politics: Other than accumulating more wealth and influence for himself,
his children
, and the
Trump family empire , what's Donald J. Trump's end game as president? If his goal is to keep this country from being, as he likes
to complain, " the world's
piggy bank ," then his words, threats, and actions are concerning. However bombastic and disdainful of a history he appears to
know little about, he is already making the world a less stable, less affordable, and more fear-driven place. In the end, it's even
possible that, despite the upbeat economic news of the moment, he could almost single-handedly smash that piggy bank himself, as
he has many of his own
business
ventures . Still, give him credit for one thing: Donald Trump has lent remarkable new meaning to the old phrase "the imperial
presidency." The members of his administration, largely a set of aging white men, either conform to his erratic wishes or get fired.
In other words, he's running domestic politics in much the same fashion as he oversaw the boardroom on his reality-TV show The
Apprentice . Now, he's begun running the country's foreign policy in the same personalized, take-no-prisoners, you're-fired
style. From the moment he hit the Oval Office, he's made it clear at home and abroad that it's his way or the highway. If only,
of course, it really was that simple. What he will learn, if "learning process" and "President Trump" can even occupy the same sentence,
is that "firing" Canada, the European Union (EU), or for that matter China has a cost. What the American working and the middle classes
will see (sooner than anyone imagines) is that actions of his sort have unexpected global consequences. They could cost the United
States and the rest of the world big-time. If he were indeed emperor and his subjects (that would be us) grasped where his policies
might be leading, they would be preparing a revolt. In the end, they -- again, that's us -- will be the ones paying the price in
this global chess match.
The Art of Trump's Deals
So far, President Trump has only taken America out of trade deals or threatened to do so if other countries don't behave
in a way that satisfies him. On his
third day in the White House, he honored his campaign promise to remove the United States from the Trans-Pacific Partnership,
a decision that opened space for our allies and competitors, China in particular, to negotiate deals without us. Since that grand
exit, there has, in fact, been a boom in side deals involving China and other Pacific Rim countries that has weakened, not strengthened,
Washington's global bargaining position. Meanwhile, closer to home, the Trump administration has engaged in a barrage of NAFTA-baiting
that is isolating us from our regional partners, Canada and Mexico.
Conversely, the art-of-the-deal aficionado has yet to sign a single new bilateral trade deal. Despite steadfast claims that he
would serve up the best deals ever, we have been left with little so far but various tariffs and an onslaught against American trading
partners. His one claim to bilateral-trade-deal fame was the
renegotiation of a six-year-old
deal with South Korea in March that doubled the number of cars each US manufacturer could export to South Korea (without having to
pass as many safety standards).
As White House Press Secretary Sarah Sanders
put
it , when speaking of Kim Jong-un's North Korea, "The President is, I think, the ultimate negotiator and dealmaker when it comes
to any type of conversation." She left out the obvious footnote, however: any type that doesn't involve international trade.
In the past four months, Trump has imposed tariffs, exempting certain countries, only to reimpose them at his whim. If trust were
a coveted commodity, when it came to the present White House, it would now be trading at zero. His supporters undoubtedly see this
approach as the fulfillment of his many campaign promises and part of his
classic method of keeping both friends and enemies guessing until he's ready to go in for the kill. At the heart of this approach,
however, lies a certain global madness, for he now is sparking a set of trade wars that could, in the end,
cost millions of American jobs.
The Allies
On May 31st, Commerce Secretary Wilbur Ross
confirmed that Canada, Mexico, and the EU would all be hit with 10 percent aluminum and 25 percent steel tariffs that had first
made headlines in March. When it came to those two products, at least, the new tariffs bore no relation to the previous average 3
percent tariff on US-EU traded goods.
In that way, Trump's tariffs, initially supposed to be
aimed at
China (a country whose president he's praised to the skies and whose trade policies he's lashed out at endlessly), went global.
And not surprisingly, America's closest allies weren't taking his maneuver lightly. As the verbal-abuse level rose and what looked
like a possible race to the bottom of international etiquette intensified, they threatened to strike back.
In June, President Trump ordered
that a promised 25 percent tariff on
$50 billion worth of imported
goods from China also be imposed. In response, the Chinese, like the Europeans, the Canadians, and the Mexicans, immediately
promised a massive response in kind. Trump countered by threatening another
$200 billion in tariffs against China. In the meantime, the White House is targeting its initial moves largely against products
related to that country's "
Made in China 2025 " initiative, the Chinese government's strategic plan aimed at making the country a major competitor in advanced
industries and manufacturing.
Meanwhile, Mexico began adopting retaliatory tariffs on American imports. Although it has a far smaller economy than the United
States, it's still the second-largest importer of US products, buying a whopping
$277 billion of them last year. Only Canada buys
more. In a mood of defiance stoked by the president's
hostility to its people, Mexico
executed its own trade gambit, imposing
$3 billion in 15
percent–25 percent tariffs against US exports, including pork, apples, potatoes, bourbon, and cheese.
While those Mexican revenge tariffs still remain limited, covering
just 1 percent
of all exports from north of the border, they do target particular industries hard, especially ones that seem connected to President
Trump's voting "base." Mexico, for instance, is by far the largest buyer of US pork exports, 25 percent of which were sold there
last year. What its 20 percent tariff on pork means, then, is that many US producers will now find themselves unable to compete in
the Mexican market. Other countries may follow suit. The result: a possible loss of up to 110,000 jobs in the pork industry.
Our second North American Free Trade Agreement (NAFTA) partner (for whose prime minister, Justin Trudeau, there is "
a special place in hell ," according to a key Trumpian trade negotiator) plans to invoke tariffs of up to 25 percent on about
$13 billion in US products beginning on July 1st. Items impacted
range "from ballpoint
pens and dishwasher detergent to toilet paper and playing cards sailboats, washing machines, dish washers, and lawn mowers." Across
the Atlantic, the EU has similarly announced retaliatory tariffs of 25 percent on 200 US products, including such American-made classics
as Harley-Davidson motorcycles, blue jeans, and bourbon.
Trump Disses the Former G7
As the explosive Group of Seven, or G7, summit in Quebec showed, the Trump administration is increasingly isolating itself from
its allies in palpable ways and, in the process, significantly impairing the country's negotiating power. If you combine the economies
of what might now be thought of as the G6 and add in the rest of the EU, its economic power is collectively larger than that of the
United States. Under the circumstances, even a small diversion of trade thanks to Trump-induced tariff wars could have costly consequences.
President Trump did try one "all-in" poker move at that summit. With his game face on, he first suggested the possibility of wiping
out all tariffs and trade restrictions between the United States and the rest of the G7, a bluff met with a healthy dose of skepticism.
Before he left for his meeting with North Korean leader Kim Jong-un in Singapore, he even suggested that the G7 leaders "consider
removing every single tariff or trade barrier on American goods." In return, he claimed he would do the same "for products from their
countries." As it turned out, however, that wasn't actually a venture into economic diplomacy, just the carrot before the stick,
and even it was tied to lingering
threats of severe penalties.
The current incipient trade war was actually launched by the Trump administration in March in the name of American "
national security
." What should have been highlighted, however, was the possible "national insecurity" in which it placed the country's (and the
world's) future. After all, a similar isolationist stance in the 1920s and the subsequent market crash of 1929 sparked the global
Great Depression,
opening the way for the utter devastation of World War II.
European Union countries were
incredulous when Trump insisted, as he had many times before, that the "U.S. is a victim of unfair trade practices," citing the
country's trade deficits, especially with
Germany and China. At the G7 summit, European leaders did their best to explain to him that his country isn't actually being
treated unfairly. As French President Emmanuel Macron
explained , "France runs trade
deficits with Germany and the United Kingdom on manufactured goods, even though all three countries are part of the EU single market
and have zero tariffs between them."
"... Cohn was there to offer his views about jobs and the economy. But, like the man he was there to meet, he was at heart a salesman. ..."
"... Cohn, brash and bold, wired to attack any moneymaking opportunity, pitched a fix that would put Wall Street firms at the center: Private-industry partners could help infrastructure get fixed, saving the federal government from going deeper into debt. The way the moment was captured by the New York Times , among other publications , Trump was dumbfounded. "Is this true?" he asked. Was a trillion-dollar infrastructure plan likely to increase the deficit by a trillion dollars? Confronted by nodding heads, an unhappy president-elect said, "Why did I have to wait to have this guy tell me?" ..."
"... Within two weeks, the transition team announced that Cohn would take over as director of the president's National Economic Council. ..."
"... The conflicts between the two men were striking. Cohn ran a giant investment bank with offices in financial capitals around the globe, one deeply committed to a world with few economic borders. Trump's nationalist campaign contradicted everything Goldman Sachs and its top executives represented on the global stage. ..."
"... Even before Scaramucci, Sen. Elizabeth Warren, D-Mass., had joked that enough Goldman alum were working for the Trump administration to open a branch office in the White House. ..."
"... "There was a devastating financial crisis just over eight years ago," Warren said. "Goldman Sachs was at the heart of that crisis. The idea that the president is now going to turn over the country's economic policy to a senior Goldman executive turns my stomach." Prior administrations often had one or two people from Goldman serving in top positions. George W. Bush at one point had three. At its peak, the Trump administration effectively had six. ..."
"... There are also striking similarities in their business histories. Both have a knack for weathering scandals and setbacks and coming out on top. Trump has filed for bankruptcy four times, started a long list of failed businesses (casinos, an airline, a football team, a steak company), but managed, through his best-selling books and highly rated reality TV show, to recast himself as the world's greatest businessman. During Cohn's tenure as president, Goldman Sachs faced lawsuits and federal investigations that resulted in $9 billion in fines for misconduct in the run-up to the subprime meltdown. Goldman not only survived but thrived, posting record profits -- and Cohn was rewarded with handsome bonuses and a position at the top of the new administration. ..."
"... Like any publicly traded company, there would now be pressure on Goldman Sachs to make its quarterly numbers and "maximize shareholder value." Discarding the partner model also meant the loss of a valuable restraint on risk-taking and bad behavior. Under the old system, any losses or fines came out of the partners' pockets ..."
"... Under Cohn, the firm aggressively moved into the subprime mortgage market, using Goldman's own money and that of its customers to help stoke the housing bubble. ..."
"... In just three years, Goldman Sachs had increased its trading volume by a factor of 50, which the Wall Street Journal attributed to "Cohn's successful push to rev up risk-taking and use of Goldman's own capital to make a profit" -- what the industry calls proprietary trading, or prop trading. ..."
"... "He reshaped the culture of the mortgage department into more of a trading environment." ..."
"... With Blankfein and Cohn at the top, the transformation of Goldman Sachs was complete. By 2009, investment banking had shrunk to barely 10 percent of the firm's revenues. Richard Marin, a former executive at Bear Stearns, a Goldman competitor that wouldn't survive the mortgage meltdown, saw Cohn as "the root of the problem." Explained Marin, "When you become arrogant in a trading sense, you begin to think that everybody's a counterparty, not a customer, not a client. And as a counterparty, you're allowed to rip their face off." ..."
"... Cohn was a member of Goldman's board of directors during this critical time and second in command of the bank. At that point, Cohn and Blankfein, along with the board and other top executives, had several options. They might have shared their concerns about the mortgage market in a filing with the SEC, which requires publicly traded companies to reveal "triggering events that accelerate or increase a direct financial obligation" or might cause "impairments" to the bottom line. They might have warned clients who had invested in mortgage-backed securities to consider extracting themselves before they suffered too much financial damage. At the very least, Goldman could have stopped peddling mortgage-backed securities that its own mortgage trading desk suspected might soon collapse in value. Instead, Cohn and his colleagues decided to take care of Goldman Sachs. ..."
"... At Goldman Sachs, Cohn was known as a hands-on boss who made it his business to walk the floors, talking directly with traders and risk managers scattered throughout the firm. "Blankfein's role has always been the salesperson and big-thinker conceptualizer," said Dick Bove, a veteran Wall Street analyst who has covered Goldman Sachs for decades. "Gary was the guy dealing with the day-to-day operations. Gary was running the company." While making his rounds, Cohn would sometimes hike a leg up on a trader's desk, his crotch practically in the person's face. ..."
"... At 6-foot- 2, bullet-headed and bald with a heavy jaw and a fighter's face, Cohn cut a large figure inside Goldman. Profiles over the years would describe him as aggressive, abrasive, gruff, domineering -- the firm's "attack dog." He was the missile Blankfein launched when he needed to deliver bad news or enforce discipline. Cohn embodied the new Goldman: the man who would run through a brick wall if it meant a big payoff for the bank. ..."
"... The biggest threat to Goldman was the economic health of the American International Group. ..."
"... Goldman and its clients were looking at multibillion-dollar hits to their bottom line -- a potentially fatal blow. ..."
"... But as Goldman learned a century ago, it pays to have friends in high places. The day after Lehman went bankrupt, the Bush administration announced an $85 billion bailout of AIG in return for a majority stake in the company. ..."
"... Once free of government interference, the Goldman board (which included Cohn himself) paid him a $9 million bonus in 2009 and an $18 million bonus in 2010. ..."
"... Yet the once venerated firm was now the subject of jokes on the late-night talk shows. David Letterman broadcast a "Goldman Sachs Top 10 Excuses" list (No. 9: "You're saying 'fraud' like it's a bad thing."). ..."
"... After news leaked that the firm might pay its people a record $16.7 billion in bonuses in 2009, even President Barack Obama, for whom the firm had been a top campaign donor, began to turn against Goldman, telling " 60 Minutes ," "I did not run for office to be helping out a bunch of fat-cat bankers on Wall Street." ..."
"... The firm finally acknowledged that it had failed to conduct basic due diligence on the loans its was selling customers and, once it became aware of the hazards, did not disclose them. ..."
"... "Gary was the tip of the spear for Goldman to beat back regulatory reform," said Kelleher, the financial reform lobbyist. "I used to pass him going into different agencies. They brought him in when they wanted the big gun to finish off, to kill the wounded." ..."
"... Yet defanging the Volcker Rule remained the firm's top priority. Promoted by former Fed Chair Paul Volcker, the rule would prohibit banks from committing more than 3 percent of their core assets to in-house private equity and hedge funds in the business of buying up properties and businesses with the goal of selling them at a profit. One harbinger of the financial crisis had been the collapse in the summer of 2007 of a pair of Bear Stearns hedge funds that had invested heavily in subprime loans. That 3 percent cap would have had a big impact on Goldman, which maintained a separate private equity group and operated its own internal hedge funds. But it was the restrictions Volcker placed on proprietary trading that most threatened Goldman. ..."
"... prop trading made up 48 percent of Goldman's. By one estimate , the Volcker Rule could cost Goldman Sachs $3.7 billion in revenue a year. ..."
"... Goldman had five years to prepare for some version of a Volcker Rule. Yet a loophole granted banks sufficient time to dispose of "illiquid assets" without causing undue harm -- a loophole that might even cover the assets Goldman had only recently purchased, despite the impending compliance deadline. The Fed nonetheless granted the firm additional time to sell illiquid investments worth billions of dollars. "Goldman is brilliant at exercising access and influence without fingerprints," Kelleher said. ..."
"... Just two years later, Goldman officials were again summoned by the Senate Permanent Subcommittee on Investigations to address charges that the bank under Cohn and Blankfein had boosted its profits by building a "virtual monopoly" in order to inflate aluminum prices by as much as $3 billion. ..."
"... Trump spoke of the great financial price Cohn paid to join him in the White House during his speech in Cedar Rapids. But something like the opposite was true. A huge amount of Cohn's wealth was tied up in Goldman stock. By entering government, he could sell his stake in the firm to comply with federal ethics laws. That way he could diversify his holdings and avoid roughly $50 million in capital gains taxes -- at least until he sold the replacement assets. ..."
"... As a presidential aide, Cohn did not need Senate approval. He was part of the skeletal crew that arrived at the White House on day one, giving him a critical head start on wielding his clout and cultivating his relationship with the new president. At that point, Trump was summoning Cohn to the Oval Office for impromptu meetings as many as five times a day . ..."
"... How exactly could Cohn recuse himself from matters involving Goldman when almost every aspect of his job has the potential to either grow Goldman's profits and inflate its stock price -- or tank them both? ..."
"... Yet rather than publicly recuse himself on attempts to undo Dodd-Frank, Cohn has led the charge from inside the White House. On that matter, Cohn is a walking, talking conflict of interest . ..."
"... Beyond deregulation, two other pillars of Trump's economic plan -- cutting taxes and investing in infrastructure -- would have dramatic impacts on Goldman's bottom line. ..."
Steve Bannon was in the room the day Donald Trump first fell for Gary Cohn. So were
Reince Priebus, Jared Kushner, and Trump's pick for secretary of Treasury, Steve Mnuchin. It
was the end of November, three weeks after Trump's improbable victory, and Cohn, then still the
president of Goldman Sachs, was at Trump Tower presumably at the invitation of Kushner, with
whom he was friendly. Cohn was there to offer his views about jobs and the economy. But, like
the man he was there to meet, he was at heart a salesman.
On the campaign trail, Trump had spoken often about the importance of investing in
infrastructure. Yet the president-elect had apparently failed to appreciate that the government
would need to come up with hundreds of billions of dollars to fund his plans. Cohn, brash and
bold, wired to attack any moneymaking opportunity, pitched a fix that would put Wall Street
firms at the center: Private-industry partners could help infrastructure get fixed, saving the
federal government from going deeper into debt. The way the moment was captured by the
New York Times , among other
publications , Trump was dumbfounded. "Is this true?" he asked. Was a trillion-dollar
infrastructure plan likely to increase the deficit by a trillion dollars? Confronted by nodding
heads, an unhappy president-elect said, "Why did I have to wait to have this guy tell me?"
Within two weeks, the transition team announced that Cohn would take over as director of the
president's National Economic Council.
1. GOLDMAN ALWAYS WINS
Goldman Sachs had been a favorite cudgel for candidate Trump -- the symbol of a
government that favors Wall Street over its citizenry. Trump proclaimed that Hillary Clinton
was in the firm's pockets, as was Ted Cruz. It was Goldman Sachs that Trump singled out when he
railed against a system rigged in favor of the global elite -- one that "robbed our working
class, stripped our country of wealth, and put money into the pockets of a handful of large
corporations and political entities." Cohn, as president and chief operating officer of Goldman
Sachs, had been at the heart of it all. Aggressive and relentless, a former aluminum siding
salesman and commodities broker with a nose for making money, Cohn had turned Goldman's sleepy
home loan unit into what a Senate staffer called "one of the largest mortgage trading desks in
the world." There, he aggressively pushed his sales team to sell mortgage-backed securities to
unaware investors even as he watched over "the big short," Goldman's decision to bet billions
of dollars that the market would collapse.
Now Cohn would be coordinating economic policy for the populist president.
The conflicts between the two men were striking. Cohn ran a giant investment bank with
offices in financial capitals around the globe, one deeply committed to a world with few
economic borders. Trump's nationalist campaign contradicted everything Goldman Sachs and its
top executives represented on the global stage.
Trump raged against "offshoring" by American companies during the 2016 campaign. He even
threatened "retribution," a 35 percent tariff on any goods imported into the United States
by a company that had moved jobs overseas. But Cohn laid out Goldman's very different view of
offshoring at an investor conference in Naples, Florida, in November. There, Cohn explained
unapologetically that Goldman had
offshored its back-office staff, including payroll and IT, to Bangalore, India, now home to
the firm's largest office outside New York City: "We hire people there because they work for
cents on the dollar versus what people work for in the United States."
Candidate Trump promised to create millions of new jobs, vowing to be "the greatest jobs president
that God ever created." Cohn, as Goldman Sachs's president and COO, oversaw the firm's mergers
and acquisitions business that had, over the previous three years, led to the loss of at least
22,000 U.S. jobs, according to a study by two advocacy
groups. Early in his candidacy, Trump described as "disgusting" Pfizer's decision to buy a
smaller Irish competitor in order to execute a "corporate inversion," a maneuver in which a
U.S. company moves its headquarters overseas to reduce its tax burden. The Pfizer deal
ultimately fell through. But in 2016, in the heat of the campaign, Goldman advised on a
megadeal that saw Johnson Controls, a Fortune 500 company based in Milwaukee, buy the
Ireland-based Tyco International with the same goal. A few months later, with Goldman's help,
Johnson Controls had executed its inversion.
With Cohn's appointment, Trump now had three Goldman Sachs alums in top positions inside his
administration: Steve Bannon, who was a vice president at Goldman when he left the firm in
1990, as chief strategist, and Steve Mnuchin, who had spent 17 years at Goldman, as Treasury
secretary. And there were more to come. A few weeks later, another Goldman partner, Dina
Powell, joined the White House as a senior counselor for economic initiatives. Goldman was a
longtime client of Jay Clayton, Trump's choice to chair the Securities and Exchange Commission;
Clayton had represented Goldman after the 2008 financial crisis, and his wife Gretchen worked
there as a wealth management adviser. And there was the brief, colorful tenure of Anthony
Scaramucci as White House communications director: Scaramucci had been a vice president at
Goldman Sachs before leaving to co-found his own investment company.
Even before Scaramucci, Sen. Elizabeth Warren, D-Mass., had joked that enough Goldman
alum were working for the Trump administration to open a branch office in the White
House.
"There was a devastating financial crisis just over eight years ago," Warren said.
"Goldman Sachs was at the heart of that crisis. The idea that the president is now going to
turn over the country's economic policy to a senior Goldman executive turns my stomach." Prior
administrations often had one or two people from Goldman serving in top positions. George W.
Bush at one point had three. At its peak, the Trump administration effectively had
six.
Earlier this summer, Trump boasted about his team of economic advisers at a rally in Cedar
Rapids, Iowa. "This is the president of Goldman Sachs. Smart," Trump
said . "Having him represent us! He went from massive paydays to peanuts."
Trump waved off anyone who might question his decision to rely on the very people he had
demonized. "Somebody said, 'Why did you appoint a rich person to be in charge of the economy?'
I said: 'Because that's the kind of thinking we want.'" He needed "great, brilliant business
minds so the world doesn't take advantage of us." How else could he get the job done? "I love
all people, rich or poor, but in those particular positions, I just don't want a poor
person."
"Does that make sense?" Trump asked. The crowd cheered.
Years of financial disclosure forms confirm that Cohn is indeed very rich. At the end of
2016, he owned some 900,000 shares of Goldman Sachs stock, a stake worth around $220 million on
the day Trump announced his appointment. Plus, he'd sold a million more Goldman shares over the
previous half-dozen years. In 2007 alone, the year of the big short, Goldman Sachs paid him
nearly $73 million -- more than the firm paid CEO Lloyd Blankfein. The disclosure forms Cohn
filled out to join the administration indicate he owned assets valued at $252 million to $611
million. That may or may not include the $65 million parting gift Goldman's board of directors
gave him for "outstanding leadership" just days before Trump was sworn in.
Like anyone taking a top job in the Trump administration, Cohn was
required to sign a pledge vowing not to participate for the next two years in any matter
"that is directly and substantially related to my former employer or former clients, including
regulations and contracts." But presidents have sometimes issued waivers to these requirements,
and it is unclear whether the Trump administration is making such waivers public.
Sens. Warren and Tammy Baldwin, a Democrat from Wisconsin, sent Cohn a letter a few days
later. They brought up the $65 million bonus and asked him to publicly recuse himself from any
issue that could have a direct or "significant indirect" impact on his old firm. Cohn never
responded to the letter, and if he has ever received a waiver, it has not been made available
to the public or the Office of Government Ethics.
"Consistent with the Trump administration's stringent ethics rules, Mr. Cohn will recuse
himself from participating in any matter directly involving his former employer, Goldman
Sachs," White House spokesperson Natalie Strom said. "The White House will not comment
further."
The White House declined requests to make Cohn available for an interview and declined to
answer a detailed set of questions.
Cohn shared the podium with fellow Goldman alum Mnuchin (the two made partner there the same
year) when the administration unveiled its new tax plan, one that, if the past is prelude, had
the potential to save Goldman more than $1 billion a year in corporate taxes. The president had
promised to "do a number" on financial reforms implemented after the 2008 subprime crisis,
including one that threatened to cost Goldman several billion dollars a year in revenues. Under
Cohn, the administration has introduced new rules easing initial public offerings -- a Goldman
Sachs specialty dating back to the start of the last century, when the firm handled the IPOs of
Sears, Roebuck; F. W. Woolworth; and Studebaker. As Trump's top economic policy adviser, Cohn
can exert influence over regulatory agencies that have shaken billions in penalties and
settlements out of Goldman Sachs in recent years. And his former colleagues inside Goldman's
Public Sector and Infrastructure group likely appreciate the Trump administration's
infrastructure plan, which is more or less exactly as Cohn first pitched it inside Trump Tower
in November.
"It's hard to see how Gary Cohn recusing himself would solve a lot of these conflicts
because nearly every major decision of his job would have a significant impact, likely billions
of dollars, on Goldman Sachs and its executives," said Tyler Gellasch, an attorney and former
Senate staffer who helped draft Dodd-Frank, the landmark financial reform law passed in the
wake of the financial meltdown. "Goldman touches nearly every aspect of the economy, from
selling U.S. treasuries to helping companies go public, and the National Economic Council
advises on all of that."
In the wake of last month's white supremacist rally in Charlottesville, Virginia, Cohn
confessed to the Financial Times that he
has "come under enormous pressure both to resign and to remain." But the man who the Washington
Post has dubbed Trump's "moderate voice" declared that neo-Nazis would not force "this Jew" to
leave his job. "As a patriotic American, I am reluctant to leave my post as director of the
National Economic Council," Cohn told FT. "I feel a duty to fulfill my commitment to work on
behalf of the American people."
Or at least a few of them. The Trump economic agenda, it turns out, is largely the Goldman
agenda, one with the potential to deliver any number of gifts to the firm that made Cohn
colossally rich. If Cohn stays, it will be to pursue an agenda of aggressive financial
deregulation and massive corporate tax cuts -- he seeks to slash rates by 57 percent -- that
would dramatically increase profits for large financial players like Goldman. It is an agenda
as radical in its scope and impact as Bannon's was.
2. ALPHA MALES
Donald Trump, the "blue-collar billionaire," has taken great pains to write grit and
toughness into his privileged biography. He talks of military schools and visits to
construction sites with his father and wrote in "The Art of the Deal" that in the second grade,
"I actually gave a teacher a black eye. I punched my music teacher because I didn't think he
knew anything about music and I almost got expelled." Yet when the authors of the book "Trump
Revealed: An American Journey of Ambition, Ego, Money, and Power" spoke to several of his
childhood friends, none of them recalled the incident. Trump himself crumpled when asked about
the incident during the 2016 campaign: "When I say 'punch,' when you're that age, nobody
punches very hard."
Gary Cohn, however, is the middle-class kid and self-made millionaire Trump imagines himself
to be. It appears that Cohn actually did slug a grade-school teacher in the face. "I was being
abused," Cohn told author Malcolm Gladwell, who interviewed him for his book, "David and
Goliath: Underdogs, Misfits, and the Art of Battling Giants," back when Cohn was still
president of Goldman Sachs. As a child, Cohn struggled with dyslexia, a reading disorder people
didn't understand much about when Cohn attended school in the 1970s in a suburb outside
Cleveland. "You're a 6- or 7- or 8-year-old-kid, and you're in a public-school setting, and
everyone thinks you're an idiot," Cohn confessed to Gladwell. "You'd try to get up every
morning and say, today is going to be better, but after you do that a couple of years, you
realize that today is going to be no different than yesterday." One time when he was in the
fourth grade, a teacher put him under her desk, rolled her chair close, and started kicking
him, Cohn said. "I pushed the chair back, hit her in the face, and walked out."
While Trump's father was a wealthy real estate developer, Cohn's father was an electrician.
When Trump sought to get into the casino business, his father loaned him $14 million. When Cohn
couldn't find a job after graduating from college, all his father could do was find him one
selling aluminum siding. While Trump has the instincts of a reality show producer and an eye
for spectacle, Cohn prefers to operate in the shadows.
But they likely recognize much of themselves in the other. Both Cohn and Trump are alpha
males -- men of action unlikely to be found holed up in an office reading through stacks of
policy reports. In fact, neither seems to be much of a reader. Cohn told Gladwell it would take
him roughly six hours to read just 22 pages; he ended his time with the author by wishing him
luck on "your book I'm not going to read." Both have a transactional view of politics. Trump
switched his voter registration between Democratic, Republican, and independent seven times
between 1999 and 2012. In the 2000s, his foundation gave $100,000 to the Clinton Foundation,
and he contributed $4,700 to Hillary Clinton's senatorial campaigns. He even bought and
refurbished a golf course in Westchester County a few miles from the Clinton home, in part,
Trump once admitted, to ingratiate himself with the Clintons. Cohn is a registered Democrat who
has given at least $275,000 to Democrats over the years, including to the campaigns of Hillary
Clinton and Barack Obama, but also around $250,000 to Republicans, including Senate Majority
Leader Mitch McConnell and Florida Sen. Marco Rubio.
There are also striking similarities in their business histories. Both have a knack for
weathering scandals and setbacks and coming out on top. Trump has filed for bankruptcy four
times, started a long list of failed businesses (casinos, an airline, a football team, a steak
company), but managed, through his best-selling books and highly rated reality TV show, to
recast himself as the world's greatest businessman. During Cohn's tenure as president, Goldman
Sachs faced lawsuits and federal investigations that resulted in $9 billion in fines for
misconduct in the run-up to the subprime meltdown. Goldman not only survived but thrived,
posting record profits -- and Cohn was rewarded with handsome bonuses and a position at the top
of the new administration.
Cohn's path to the White House started with a tale of brass and bluster that would make
Trump the salesman proud. Still in his 20s and stuck selling aluminum siding, Cohn made a play
that would change his life. In the fall of 1982, while visiting the company's home office on
Long Island, he stole a day from work and headed to the U.S. commodities exchange in Manhattan,
hoping to talk himself into a job. He overheard an important-looking man say he was heading to
LaGuardia Airport; Cohn blurted out that he was headed there, too. He jumped into a cab with
the man and, Cohn told Gladwell, who devoted six pages of "David and Goliath" to Cohn's
underdog rise, "I lied all the way to the airport." The man confided to Cohn that his firm had
just put him in charge of a market, options, that he knew little about. Cohn likely knew even
less, but he assured his backseat companion that he could get him up to speed. Cohn then spent
the weekend reading and re-reading a book called "Options as a Strategic Investment." Within
the week, he'd been hired as the man's assistant.
Cohn soon learned enough to venture off on his own and established himself as an independent
silver trader on the floor of the New York Commodities Exchange. In 1990, Goldman Sachs,
arguably the most elite firm on Wall Street, offered him a job.
Goldman Sachs was founded in the years just after the American Civil War. Marcus Goldman, a
Jewish immigrant from Germany, leased a cellar office next to a coal chute in 1869. There, in
an office one block from Wall Street, he bought the bad debt of local businesses that needed
quick cash. His son-in-law, Samuel Sachs, joined the firm in 1882. A generation later, in 1906,
the firm made its first mark, arranging for the public sale of shares in Sears, Roebuck.
Goldman Sachs's influence over politics dates back at least to 1914. That year, Henry Goldman,
the founder's son, was invited to advise Woodrow Wilson's administration about the creation of
a central bank, mandated by the Federal Reserve Act, which had passed the previous year.
Goldman Sachs men have played important roles in U.S. government ever since.
There was the occasional scandal, such as Goldman Sachs's role in the 1970 collapse of Penn
Central railroad, then the largest corporate bankruptcy in U.S. history. Still, the firm built
a reputation as a sober, elite partnership that served its clients ably. In 1979, when John
Whitehead, a senior partner and co-chairman, set to paper what he called Goldman's "Business
Principles," he began with the firm's most cherished belief: The client's interests come before
all else.
Two years later, Goldman took a step that signaled the beginning of the end of that culture.
In the fall of 1981, Goldman purchased J. Aron & Co., a commodities trading firm. Some
within the partnership were against the acquisition, worried over how profane, often crude,
trading culture would mix with Goldman's restrained, well-mannered way of doing business. "We
were street fighters," one former J. Aron partner told Fortune magazine in 2008.
The J. Aron team moved into the Goldman Sachs offices in lower Manhattan, but didn't adopt
its culture. Within a few years, it was producing well over $1 billion a year in profits. They
were 300 employees inside a firm of 6,000, but were posting one-third of Goldman's total
profits. The cultural shift, it turned out, was moving in the other direction. J. Aron,
according to a book by Charles D. Ellis, a former Goldman consultant, brought to Goldman "a
trading culture that would become dominant in the firm."
Lloyd Blankfein, who ascended to chairman and CEO in in 2006, started his Goldman career at
J. Aron, a year after Goldman acquired the firm. "We didn't have the word 'client' or
'customer' at the old J. Aron," Blankfein told Fortune magazine two years
after taking over as CEO. "We had counter-parties." Cohn joined J. Aron eight years after
Blankfein did, in 1990. Four years later, Blankfein was put in charge of the firm's Fixed
Income, Currency, and Commodities division, which included J. Aron. Cohn, loyal and
hard-working, with an instinct for connecting with people who can help him, became Blankfein's
" corporate problem
solver ."
The emergence of "Bad Goldman" -- and Cohn's central role in that drama -- is really the
story of the rise of the traders inside the firm. "As trading came to be a bigger part of Wall
Street, I noticed that the vision changed," said Robert Kaplan, a former Goldman Sachs vice
chairman, who left in 2006 after working at the firm for 23 years. "The leaders were saying the
same words, but they started to change incentives away from the value-added vision and tilt
more to making money first. If making money is your vision, what lengths will you not go?"
At the height of the dot-com years, a debate raged within the firm. The firm underwrote
dozens of technology IPOs, including Microsoft and Yahoo, in the 1980s and 1990s, minting an
untold number of multimillionaires and the occasional billionaire. Some of the companies they
were bringing public generated no profits at all, while Goldman was generating up to $3 billion
in profits a year. It seemed inevitable that some within Goldman Sachs began to dream of
jettisoning the Goldman's century-old partnership structure and taking their firm public, too.
Jon Corzine was running the firm then -- he would later go into politics in the Goldman
tradition, first as a U.S. senator and then as New Jersey governor -- and was four-square in
favor of going public. Corzine's second in command, Henry Paulson -- who would go on to serve
as Treasury secretary -- was against the idea. But Corzine ordered up a study that supported
his view that remaining private stifled Goldman's competitive opportunities and promoted
Paulson to co-senior partner. Paulson soon got on board. In May 1999, Goldman sold $3.7 billion
worth of shares in the company. At the end of the first day of trading, Corzine's and Paulson's
stakes in the firm were each worth $205 million. Cohn's and Mnuchin's shares were each worth
$112 million. And Blankfein ended up with $168 million in company stock.
Like any publicly traded company, there would now be pressure on Goldman Sachs to make its
quarterly numbers and "maximize shareholder value." Discarding the partner model also meant the
loss of a valuable restraint on risk-taking and bad behavior. Under the old system, any losses
or fines came out of the partners' pockets. In the early 1990s, for example, the firm was
involved in transactions with Robert Maxwell, a London-based media mogul who was accused of
stealing hundreds of millions of pounds from his companies' pension funds. The $253 million
that Goldman Sachs paid to settle lawsuits brought by pension funds over its involvement was
split among the firm's 84 limited partners. Now any losses are paid by a publicly traded entity
owned by shareholders, with no direct financial liability for the decision-makers themselves.
In theory, Goldman could claw back bonuses in response to executives' bad behavior. But in
2016, when Goldman paid over $5 billion to settle charges brought by the Justice Department
that the firm misled customers in the sale of a subprime mortgage product during Cohn's time
overseeing that unit, the Goldman board declined to dock Cohn's pay. Instead, the company
awarded
him a $5.5 million cash bonus and another $12.6 million in company stock.
As Blankfein moved up the corporate hierarchy, Cohn rose along with him. When Blankfein was
made vice chairman in charge of the firm's multibillion-dollar global commodities business and
its equities division, Cohn took over as co-head of FICC, Blankfein's previous position. That
meant Cohn was overseeing not just J. Aron and the firm's commodities business, but also its
currency trades and bond sales. By the start of 2004, Blankfein was promoted to president and
COO, and Cohn was named co-head of global securities. At that point, Cohn had authority over
the mortgage-trading desk. Under Cohn, the firm aggressively moved into the subprime mortgage
market, using Goldman's own money and that of its customers to help stoke the housing
bubble.
Goldman was already enabling subprime predators, such as Ameriquest and New Century
Financial, by providing them with the cash infusions they needed to scale up their lending to
individual home buyers. Cohn would steer the firm deeper into the subprime frenzy by setting up
Goldman as a patron of some of these same mortgage originators. During his tenure, Goldman
snapped up loans from New Century, Countrywide, and other notorious mortgage originators and
bundled them into deals with opaque names, such as ABACUS and GSAMP. Under Cohn's watchful eye,
Goldman's brokers then funneled slices to customers they sold on the wisdom of holding
mortgage-backed securities in their portfolios.
One such creation, GSAA Home Equity Trust 2006-2, illustrates Goldman's disregard for the
quality of loans it was buying and packaging into security deals. Created in early 2006, the
investment vehicle was made up of more than $1 billion in home loans Goldman had bought from
Ameriquest, one of the nation's largest and most aggressive subprime lenders. By that point,
the lender already had set aside
$325 million to settle a probe by attorneys general and banking regulators in 49 states,
who accused Ameriquest of misleading thousands of borrowers about the costs of their loans and
falsifying home appraisals and other key documents. Yet GSAA Home Equity Trust 2006-2 was
filled with Ameriquest loans made to more than 3,000 homeowners in Arizona, Illinois, Florida,
and elsewhere. By the end of 2008, 65 percent of the roughly 1,400 borrowers whose loans
remained in the deal were in default, had filed for bankruptcy, or had been targeted for
foreclosure.
In just three years, Goldman Sachs had increased its trading volume by a factor of 50, which
the Wall Street
Journal attributed to "Cohn's successful push to rev up risk-taking and use of Goldman's
own capital to make a profit" -- what the industry calls proprietary trading, or prop trading.
The 2010 Journal article quoted Justin Gmelich, then the firm's mortgage chief, who said of
Cohn, "He reshaped the culture of the mortgage department into more of a trading environment."
In 2005, with Cohn overseeing the firm's home loan desk, Goldman underwrote $103 billion in
mortgage-backed securities and other more esoteric products, such as collateralized debt
obligations, which often were priced based on giant pools of home loans. The following year,
the firm underwrote deals worth $131 billion.
In 2006, CEO Henry Paulson left the firm to join George W. Bush's cabinet as Treasury
secretary. Blankfein, Cohn's mentor and friend, took Paulson's place. By tradition, Blankfein,
a trader, should have elevated someone from the investment banking side to serve as his No. 2,
so both sides of the firm would be represented in the top leadership. Instead he named Cohn,
his long-time loyalist, and Jon Winkelried, who also had history on the trading side, as
co-presidents and co-COOs. Winkelried, who had started at Goldman eight years before Cohn, had
probably earned the right to hold those titles by himself. But Cohn had the advantage of his
relationship with the CEO. Blankfein and Cohn vacationed together in the Caribbean and Mexico,
owned homes near each other in the Hamptons, and their children attended the same school.
Winkelreid was out in two years. The bromance between his fellow No. 2 and the top boss may
have proved too much.
With Blankfein and Cohn at the top, the transformation of Goldman Sachs was complete. By
2009, investment banking had shrunk to barely
10 percent of the firm's revenues. Richard Marin, a former executive at Bear Stearns, a Goldman
competitor that wouldn't survive the mortgage meltdown, saw Cohn as "the root of the problem."
Explained Marin, "When you become arrogant in a trading sense, you begin to think that
everybody's a counterparty, not a customer, not a client. And as a counterparty, you're allowed
to rip their face off."
3. THE BIG SHORT
People inside Goldman Sachs were growing nervous. It was the fall of 2006 and, as
Daniel Sparks, the Goldman partner overseeing the firm's 400-person mortgage trading
department, wrote in an email to several colleagues, "Subprime market getting hit hard." The
firm had lent millions to New Century, a mortgage lender dealing in the higher-risk subprime
market. And now New Century was late on payments. Sparks could see that the wobbly housing
market was having an impact on his department. For 10 consecutive trading days, his people had
lost money. The dollar amounts were small to a behemoth like Goldman: between $5 million and
$30 million a day. But the trend made Sparks jittery enough to share his concerns with the
Goldman's top executives: President Gary Cohn; David Viniar, the firm's chief financial
officer; and CEO Lloyd Blankfein.
Sparks, a Cohn protégé, was running the mortgage desk that his mentor, only a
few years earlier, had built into a major profit center for the bank. In 2006 and 2007, a
report by the Senate Permanent Subcommittee on Investigations found, the two "maintained
frequent, direct contact" as Goldman worked to jettison the billions in subprime loans it had
on its book. "One of my jobs at the time was to make sure Gary and David and Lloyd knew what
was going on," Sparks told William Cohan, author of the 2011
book "Money and Power: How Goldman Sachs Came to Rule the World . " "They don't
like surprises." Viniar summoned around 20 traders and
managers to a 30th floor conference room inside Goldman headquarters in lower Manhattan. It was
there, on an unseasonably warm Thursday in December 2006, that the firm decided to initiate
what people inside Goldman would eventually dub "the big short."
One name tossed around during the three-hour meeting was that of John Paulson. Paulson (no
relation to Goldman's former CEO) would later attain infamy when it was revealed that his firm,
Paulson & Co., made roughly $15 billion betting against the mortgage market. (His
personal take
was nearly $4 billion.) At that point, though, Paulson was a little-known hedge fund manager
who crossed Goldman's radar when he asked the firm to create a product that would allow him to
take a "short position" on the real estate market -- laying down bets that a large number of
mortgage investments were going to plummet in value. Goldman sold Paulson what's called a
credit-default swap, essentially an insurance policy that would pay off if homeowners defaulted
on their mortgages in large enough numbers. The firm would create several more swaps on his
behalf in the intervening months. Eventually, as mortgage defaults began to mount, people
inside Goldman Sachs came to see Paulson as more of a prophet than a patsy. Some sitting around
the conference table that December day wanted to follow his lead.
"There will be big opportunities the next several months," one Goldman manager at the
meeting wrote enthusiastically in an email sent shortly after it ended. Sparks weighed in by
email later that night. He wanted to make sure Goldman had enough "dry powder" -- cash on hand
-- to be "ready for the good opportunities that are coming." That Sunday, Sparks copied Cohn on
an email reporting the firm's progress on laying down short positions against mortgage-backed
securities it had put together. The trading desk had already made $1.5 billion in short bets,
"but still more work to do."
Cohn was a member of Goldman's board of directors during this critical time and second in
command of the bank. At that point, Cohn and Blankfein, along with the board and other top
executives, had several options. They might have shared their concerns about the mortgage
market in a filing with the SEC, which requires publicly traded companies to reveal "triggering
events that accelerate or increase a direct financial obligation" or might cause "impairments"
to the bottom line. They might have warned clients who had invested in mortgage-backed
securities to consider extracting themselves before they suffered too much financial damage. At
the very least, Goldman could have stopped peddling mortgage-backed securities that its own
mortgage trading desk suspected might soon collapse in value. Instead, Cohn and his colleagues decided to take care of Goldman Sachs.
Goldman would not have suffered the reputational damage that it did -- or paid multiple
billions in federal fines -- if the firm, anticipating the impending crisis, had merely shorted
the housing market in the hopes of making billions. That is what investment banks do: spot ways
to make money that others don't see. The money managers and traders featured in the film "The
Big Short" did the same -- and they were cast as brave contrarians. Yet unlike the investors
featured in the film, Goldman had itself helped inflate the housing bubble -- buying tens of
billions of dollars in subprime mortgages over the previous several years for bundling into
bonds they sold to investors. And unlike these investors, Goldman's people were not warning
anyone who would listen about the disaster about to hit. As federal investigations found, the
firm, which still claims "our clients' interests always come first" as a core principle, failed
to disclose that its top people saw disaster in the very products its salespeople were
continuing to hawk.
Goldman still held billions of mortgages on its books in December 2006 -- mortgages that
Cohn and other Goldman executives suspected would soon be worth much less than the firm had
paid for them. So, while Cohn was overseeing one team inside Goldman Sachs preoccupied with
implementing the big short, he was in regular contact with others scrambling to offload its
subprime inventory. One Goldman trader described the mortgage-backed securities they were
selling as "shitty." Another complained in an email that they were being asked to "distribute
junk that nobody was dumb enough to take first time around." A December 28 email from Fabrice
"Fabulous Fab" Tourre, a Goldman vice president later convicted of fraud, instructed traders to
focus on less astute, "buy and hold" investors rather than "sophisticated hedge funds" that
"will be on the same side of the trade as we will."
At Goldman Sachs, Cohn was known as a hands-on boss who made it his business to walk the
floors, talking directly with traders and risk managers scattered throughout the firm.
"Blankfein's role has always been the salesperson and big-thinker conceptualizer," said Dick
Bove, a veteran Wall Street analyst who has covered Goldman Sachs for decades. "Gary was the
guy dealing with the day-to-day operations. Gary was running the company." While making his
rounds, Cohn would sometimes hike a leg up on a trader's desk, his crotch practically in the
person's face.
At 6-foot- 2, bullet-headed and bald with a heavy jaw and a fighter's face, Cohn cut a large
figure inside Goldman. Profiles over the years would describe him as aggressive, abrasive,
gruff, domineering -- the firm's "attack dog." He was the missile Blankfein launched when he
needed to deliver bad news or enforce discipline. Cohn embodied the new Goldman: the man who
would run through a brick wall if it meant a big payoff for the bank.
A Bloomberg profile described his typical day as 11 or 12 hours in the office, a
bank-related dinner, then phone calls and emails until midnight. "The old adage that hard work
will get you what you want is 100 percent true," Cohn said in a 2009 commencement address at
American University. "Work hard, ask questions, and take risk."
There's no record of how often Cohn visited his stomping grounds after hours in the early
months of 2007, but emails reveal an executive demanding -- and getting -- regular updates. On
February 7, one of the largest originators of subprime loans, HSBC, reported a greater than
anticipated rise in troubled loans in its portfolio, and another, New Century, restated its
earnings for the previous three quarters to "correct errors." Sparks wrote an email
to Cohn and others the next morning to reassure them that his team was closely monitoring the
pricing of the company's "scratch-and-dent book" and already had a handle on which loans were
defaults and which could still be securitized and offloaded onto customers. An impatient Cohn
sent a two-word email
at 5 o'clock that evening: "Any update?" The next day, an internal memo circulated that listed
dozens of mortgage-backed securities with the exhortation, "Let all of the respective desks
know how we can be helpful in moving these bonds." A week later, Sparks updated Cohn on the
billions in shorts his firm had bought but warned that it was hurting sales of its "pipeline of
CDOs," the collateralized debt obligations the firm had created in order to sell the mortgages
still on its books.
In early March, Cohn was among those who received an email spelling out the mortgage
products the firm still held. The stockpile included $1.7 billion in mortgage-related
securities, along with $1.3 billion in subprime home loans and $4.3 billion in "Alt-A" loans
that fall between prime and subprime on the risk scale. Goldman was "net short," according to
that same email, with $13 billion in short positions, but its exposure to the mortgage market
was still considerable. Sparks and others continued to update Cohn on their success offloading
securities backed by subprime mortgages through the third quarter of 2007. One product Goldman
priced at $94 a share on March 31, 2007 was worth just $15 five months later. Pension funds and
insurance companies were among those losing billions of dollars on securities Goldman put
together and endorsed as a safe, AAA-rated investments.
The third quarter of 2007 was ugly. A pair of Bear Stearns hedge funds failed. Merrill Lynch
reported $2.2 billion in losses -- its largest quarterly loss ever. Merrill's CEO warned that
the bank faced another $8 billion in potential losses due to the firm's exposure to subprime
mortgages and resigned several weeks later. The roiling credit crisis also took down the CEO of
Citigroup, which reported $6.5 billion in losses and then weeks later, warned of $8 billion to
$11 billion in additional subprime-related write-downs.
And then there was Goldman Sachs, which reported a $2.9 billion profit that quarter. For the
moment, the financial press seemed in awe of Blankfein, Cohn, and the rest of the team running
the firm. Fortune headlined an article "How Goldman Sachs Defies Gravity" that said Goldman's
"huge, shrewd bet" against the mortgage market "would seem to confirm the view Goldman is the
nimblest, and perhaps the smartest, brokerage on Wall Street." A Goldman press release drily
noted that "significant losses" in some areas -- the subprime mortgages it hadn't managed to
unload -- had been "more than offset by gains on short mortgage products." A Goldman trader who
played a central role in the big short was not so demure when making the case for a big bonus
that year. John Paulson was "definitely the man in this space," he conceded, but he'd helped
make Goldman "#1 on the street by a wide margin."
Disaster struck nine months into 2008 with the collapse of Lehman Brothers, in large part
the result of its exposure to subprime losses. Hank Paulson, the Treasury secretary and former
Goldman CEO, spent a weekend meeting with would-be suitors willing to take over a storied bank
that on paper was now worth virtually nothing. He couldn't find a buyer. Nor could officials
from the Federal Reserve, who were also working overtime to save the investment bank, founded
in 1850, that was even older than Goldman Sachs. Shortly after midnight on Monday, September
15, 2008, Lehman announced that it would file for bankruptcy protection when the courts in New
York opened that morning -- the largest bankruptcy in U.S. history.
Goldman Sachs wasn't immune from the crisis. The week before Lehman's fall, Goldman's stock
had topped $161 a share. By Wednesday, it dropped to below $100. It had avoided some big losses
by betting against the mortgage market, but the wider financial crisis was wreaking havoc on
its other investments. On paper, Cohn had personally lost tens of millions of dollars. He
hunkered down in an office with a view of Goldman's trading floor and worked the phone, trying
to change the minds of major investors who were pulling their money from Goldman, fearful of
anything riskier than stashing their cash in a mattress.
The next week, Goldman
converted from a free-standing investment bank to a bank holding company, which made it, in
the eyes of regulators, no different from Wells Fargo, JPMorgan Chase, or any other retail
bank. That gave the firm access to cheap capital through the Fed but would also bring increased
scrutiny from regulators. The bank took a $10 billion bailout from the Troubled Asset Relief
Program and another $5 billion from Warren Buffett, in return for an annual dividend of 10
percent and access to discounted company stock. The firm raised additional billions through a
public stock offering.
The biggest threat to Goldman was the economic health of the American International Group.
Among other products, AIG sold insurance to protect against defaults on mortgage assets, which
had been central to Goldman's big short. Of the $80 billion in U.S. mortgage assets that AIG
insured during the housing bubble, Goldman bought protection from AIG on roughly $33 billion,
according to the Wall Street Journal. When Lehman went into bankruptcy, its creditors received
11 cents on the dollar. Executives at AIG, in a frantic effort to avoid bankruptcy, had floated
the idea of pushing its creditors to accept 40 to 60 cents on the dollar; there was speculation
creditors like Goldman would receive as little as 25 percent. Goldman and its clients were
looking at multibillion-dollar hits to their bottom line -- a potentially fatal
blow.
But as Goldman learned a century ago, it pays to have friends in high places. The day after
Lehman went bankrupt, the Bush administration announced an $85 billion bailout of AIG in return
for a majority stake in the company. The next day, Paulson obtained a waiver regarding
interactions with his former firm because, the Treasury secretary said, "It became clear that
we had some very significant issues with Goldman Sachs." Paulson's calendar, the New York Times
reported, showed that the week of the AIG bailout, he and Blankfein spoke two dozen times.
While creditors around the globe were being forced to settle for much less than they were owed,
AIG paid its counterparties 100 cents on the dollar. AIG ended up being the single largest
private recipient of TARP funding. It received additional billions in rescue funds from the New
York Federal Reserve Bank, whose board chair Stephen Friedman was a former Goldman executive
who still sat on the firm's board. The U.S. Treasury ended up with greater than a 90 percent
share of AIG, and the U.S. government, using taxpayer dollars, paid in full on the insurance
policies financial institutions bought to protect themselves from steep declines in real estate
prices -- chief among them, Goldman Sachs. All told, Goldman received at least $22.9 billion in
public bailouts, including $10 billion in TARP funds and $12.9 billion in taxpayer-funded
payments from AIG.
Goldman, once again, had come out on top.
4. THE VAMPIRE SQUID
Goldman Sachs repaid repaid its $10 billion bailout partway through 2009, less than
12 months after the loan was made. Other banks in the U.S. and abroad were still struggling but
not Goldman, which reported a record $19.8 billion in pre-tax profits that year, and $12.9
billion the next. Gary Cohn went without a bonus in 2008, left to scrape by on his $600,000
salary. Once free of government interference, the Goldman board (which included Cohn himself)
paid him a $9 million bonus in 2009 and an $18 million bonus in 2010.
Yet the once venerated firm was now the subject of jokes on the late-night talk shows. David
Letterman broadcast a "Goldman Sachs Top 10 Excuses" list (No. 9: "You're saying 'fraud' like
it's a bad thing."). Rolling Stone's Matt Taibbi described the bank as "a great vampire squid
wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that
smells like money," a devastating moniker that followed Goldman into the business pages. After
news leaked that the firm might pay its people a record $16.7 billion in bonuses in 2009, even
President Barack Obama, for whom the firm had been a top campaign donor, began to turn against
Goldman, telling " 60 Minutes ," "I did not run for office
to be helping out a bunch of fat-cat bankers on Wall Street."
"They're still puzzled why is it that people are mad at the banks," Obama said. "Well, let's
see. You guys are drawing down $10, $20 million bonuses after America went through the worst
economic year that it's gone through in decades, and you guys caused the problem."
Goldman was also facing an onslaught of investigations and lawsuits over behavior that had
helped precipitate the financial crisis. Class actions and other lawsuits filed by pension
funds and other investors accused Goldman of abusing their trust, making "false and misleading
statements," and failing to conduct basic due diligence on the loans underlying the products it
peddled. At least 25 of these suits named Cohn as a defendant.
State and federal regulators joined the fray. The SEC accused Goldman of deception in its
marketing of opaque investments called "synthetic collateralized debt obligations," the values
of which were tied to bundles of actual mortgages. These were the deals Goldman had arranged in
2006 on behalf of John Paulson so he could short the U.S. housing market. Goldman, it turned
out, had allowed Paulson to cherry-pick poor-quality loans at the greatest risk of defaulting
-- a fact Goldman did not share with potential investors. "Goldman wrongly permitted a client
that was betting against the mortgage market to heavily influence which mortgage securities to
include in an investment portfolio," the SEC's enforcement director at the time said, "telling
other investors that the securities were selected by an independent, objective third
party."
Suddenly, Cohn and other Goldman officials were downplaying the big short. In June 2010,
Cohn testified before the Financial Crisis Inquiry Commission, created by Congress to
investigate the causes of the nation's worst economic collapse since the Great Depression. Cohn
asked the commissioners how anyone could claim the firm had bet against its clients when
"during the two years of the financial crisis, Goldman Sachs lost $1.2 billion in its
residential mortgage-related business"? His statement was technically true, but Cohn failed to
mention the billions of dollars the firm pocketed by betting the mortgage market would
collapse. Senate investigators later calculated that, at its peak, Goldman had $13.9 billion in
short positions that would only pay off in the event of a steep drop in the mortgage market,
positions that produced a record $3.7 billion in profits.
Two weeks after Cohn's testimony, Goldman agreed to pay the SEC $550 million to settle charges of
securities fraud -- then the largest penalty assessed against a financial services firm in the
agency's history. Goldman admitted no wrongdoing, acknowledging only that its marketing
materials "contained incomplete information." Goldman paid $60 million in fines and restitution
to settle an investigation by the
Massachusetts attorney general into the financial backing the firm had offered to predatory
mortgage lenders. The bank set aside another $330 million
to assist people who lost their homes thanks to questionable foreclosure practices at a Goldman
loan-servicing subsidiary. Goldman agreed to billions of dollars in additional settlements with
state and federal agencies relating to its sale of dicey mortgage-backed securities. The firm
finally
acknowledged that it had failed to conduct basic due diligence on the loans its was selling
customers and, once it became aware of the hazards, did not disclose them.
In the final report produced by the Senate's Permanent Subcommittee on Investigations,
Goldman Sachs was mentioned an extraordinary 2,495 times, and Gary Cohn 89 times. A Goldman
Sachs representative declined to respond to queries on the record.
The investigations and fines were a blow to Goldman's reputation and its bottom line, but
the regulatory reforms being debated had the potential to threaten Goldman's entire business
model. Even before the 2008 crash, the firm's lobbying spending had
grown under Lloyd Blankfein and Cohn. By 2010, the year financial reforms were being drafted,
Goldman spent $4.6
million for the services of 49 lobbyists. Their ranks included some of the most well-connected
figures in Washington, including Democrat Richard Gephardt, a former House majority leader, and
Republican Trent Lott, a former Senate majority leader, who had stepped down from the Senate
two years earlier.
Despite all those lobbyists on the payroll, Goldman made its case primarily through proxies
during the debate over financial reform. "The name Goldman Sachs was so radioactive it worked
to their disadvantage to be tied to an issue," said Marcus Stanley, then a staffer for
Democratic Sen. Barbara Boxer and now policy director of Americans for Financial Reform.
Instead, Goldman lobbied through industry groups.
Goldman's people likely knew that all of Wall Street's lobbying might could not stop the
passage of the sprawling 2010 legislative package dubbed the Dodd-Frank Wall Street Reform and
Consumer Protection Act. Obama was putting his muscle behind reform -- "We simply cannot accept
a system in which hedge funds or private equity firms inside banks can place huge, risky bets
that are subsidized by taxpayers," he said in one
speech -- and the Democrats enjoyed majorities in both houses of Congress. "For Goldman
Sachs, the battle was over the final language," said Dennis Kelleher of Better Markets, a
Washington, D.C., lobby group that pushes for tighter financial reforms. "That way they at
least had a fighting chance in the next round, when everyone turned their attention to the
regulators."
There was a lot for Goldman Sachs to dislike about Dodd-Frank. There were small annoyances,
such as "say on pay," which ordered companies to give shareholders input on executive
compensation, a source of potential embarrassment to a company that gave out $73 million in
compensation for a single year's work -- as Goldman paid Cohn in 2007. There were large
annoyances, such as the requirement
that financial institutions deemed too big to fail, like Goldman, create a wind-down plan in
case of disaster. There were the measures that would interfere with Goldman's core businesses,
such as a provision instructing the Commodity Futures Trading Commission to regulate the
trading of derivatives. And yet nothing mattered to Goldman quite like the Volcker Rule, which
would protect banks' solvency by limiting their freedom to make speculative trades with their
own money. Unless Goldman could initiate what Stanley called the "complexity two-step" -- win a
carve-out so a new rule wouldn't interfere with legitimate business and then use that carve-out
to render a rule toothless -- Volcker would slam the door shut on the entire direction in which
Blankfein and Cohn had taken Goldman.
It was 5:30 a.m. on Friday, June 25, 2010, when a joint House-Senate conference committee
approved
the final language of Dodd-Frank. By Sunday, an industry attorney named Annette Nazareth -- a
former top SEC official whose firm counts Goldman Sachs among its clients -- had already sent
off a heavily annotated copy of the 848-page bill to colleagues at her old agency. It was just
the first salvo in a lobbying juggernaut.
Within a few months, Cohn himself was in Washington to meet
with a governor of the Federal Reserve, one of the key agencies charged with implementing
Volcker. The visitors log at the CFTC, the agency Dodd-Frank put in charge of derivatives
reform, shows that Cohn traveled to D.C. to personally meet with CFTC staffers at least six
times between 2010 and 2016. Cohn also came to the capital for meetings at the SEC, another
agency responsible for the Volcker Rule. There, he met with SEC chair Mary Jo White and other
commissioners. "I seem to be in Washington every week trying to explain to them the unintended
consequences of overregulation," Cohn said in a talk he gave to business students at Sacred
Heart University in 2015.
"Gary was the tip of the spear for Goldman to beat back regulatory reform," said Kelleher,
the financial reform lobbyist. "I used to pass him going into different agencies. They brought
him in when they wanted the big gun to finish off, to kill the wounded."
Democrats lost their majority in the House that November, and Goldman threw its weight
behind the spate of Republican bills that followed, aimed at taking apart Dodd-Frank piece by
piece. Goldman spent more than $4 million for the services of 45 lobbyists in 2011 and $3.5
million a year in 2012 and 2013. Its lobbying spending was nearly as high in the years after
passage of Dodd-Frank as it was the year the bill was introduced.
Goldman lobbyists dug in on a range of issues that would become top priorities for
Republicans in the wake of Donald Trump's electoral victory. Records from the Center for
Responsive Politics show that Goldman lobbyists worked to promote corporate tax cuts, such as
on the Tax Increase Prevention Act of 2014 and Senate legislation aimed at extending some $200
billion in tax cuts for individuals and businesses. Goldman lobbied for a bill to fund
economically critical infrastructure projects, presumably on behalf of its Public Sector and
Infrastructure group. Goldman had seven lobbyists working on the JOBS Act, which would make it
easier for companies to go public, another bottom-line issue to a company that underwrote $27
billion in IPOs last year. In 2016, Goldman had eight lobbyists dedicated to the Financial
CHOICE Act, which would have undone most of Dodd-Frank in one fell swoop -- a bill the House
revived in April.
Yet defanging the Volcker Rule remained the firm's top priority. Promoted by former Fed
Chair Paul Volcker, the rule would prohibit banks from committing more than 3 percent of their
core assets to in-house private equity and hedge funds in the business of buying up properties
and businesses with the goal of selling them at a profit. One harbinger of the financial crisis
had been the collapse in the summer of 2007 of a pair of Bear Stearns hedge funds that had
invested heavily in subprime loans. That 3 percent cap would have had a big impact on Goldman,
which maintained a separate private equity group and operated its own internal hedge funds. But
it was the restrictions Volcker placed on proprietary trading that most threatened Goldman.
Prop trading was a profit center inside many large banks, but nowhere was it as critical as
at Goldman. A 2011 report by one Wall Street analyst revealed that prop trading accounted for
an 8 percent share of JPMorgan Chase's annual revenues, 9 percent of Bank of America's, and 27
percent of Morgan Stanley's. But prop trading made up 48 percent of Goldman's. By one
estimate , the
Volcker Rule could cost Goldman Sachs $3.7 billion in revenue a year.
When regulators finalized a new Volcker Rule in 2013, Better Markets declared it a "major
defeat for Wall Street." Yet the victory for reformers was precarious. "Just changing a few
words could dramatically change the scope of the rule -- to the tune of billions of dollars for
some firms," said former Senate staffer Tyler Gellasch, who helped write the rule. Volcker gave
banks until July 2015 -- the five-year anniversary of Dodd-Frank -- to bring themselves into
compliance. Yet apparently the Volcker Rule had been written for other financial institutions,
not elite firms like Goldman Sachs. "Goldman Sachs has been on a shopping spree with its own
money," began a New York Times article in January 2015. The bank used its own funds to buy a
mall in Utah, apartments in Spain, and a European ink company. Paul Volcker expressed
disappointment that banks were still making big proprietary bets, as did the two senators most
responsible for writing the rule into law. That June, Cohn appeared to reassure investors that
Goldman would find a workaround. Speaking at an investor conference, he said Goldman was
"transforming our equity investing activities to continue to meet client needs while complying
with Volcker."
Goldman had five years to prepare for some version of a Volcker Rule. Yet a loophole granted
banks sufficient time to dispose of "illiquid assets" without causing undue harm -- a loophole
that might even cover the assets Goldman had only recently purchased, despite the impending
compliance deadline. The Fed nonetheless granted the firm additional time to sell illiquid
investments worth billions of dollars. "Goldman is brilliant at exercising access and influence
without fingerprints," Kelleher said.
By mid-2016, Goldman, along with Morgan Stanley and JPMorgan Chase, was petitioning the Fed
for an additional five years to comply with Volcker -- which would take the banks well into a
new administration. All Blankfein and Cohn had to do was wait for a new Congress and a new
president who might back their efforts to flush all of Dodd-Frank. Then Goldman could continue
the risky and lucrative habits it had adopted since traders like Cohn had taken over the firm
-- the financial crisis be damned -- and continue raking in billions in profits each year.
Goldman's political giving changed in the wake of Dodd-Frank. Dating back to at least 1990,
according to the Center for Responsive Politics, people associated with the firm and its
political action committees contributed more
to Democrats than Republicans. Yet in the years since financial reform, Goldman, once Obama's
second-largest political donor, shifted its campaign contributions to Republicans. During the
2008 election cycle, for instance, Goldman's people and PACs contributed $4.8 million to
Democrats and $1.7 million to Republicans. By the 2012 cycle, the opposite happened, with
Goldman giving $5.6 million to Republicans and $1.8 million to Democrats. Cohn's personal
giving followed the same path. Cohn gave $26,700 to the Democratic Senatorial Campaign
Committee in 2006 and $55,500 during the 2008 election cycle, and none to its GOP equivalent.
But Cohn donated $30,800 to the National Republican Senatorial Committee in 2012 and another
$33,400 to the National Republican Congressional Committee in 2015, without contributing a dime
to the DSCC. Cohn gave $5,000 to Massachusetts Republican Scott Brown weeks after news broke
that Elizabeth Warren -- an outspoken critic of Goldman and other Wall Street players -- might
try to capture his U.S. Senate seat, which she did in 2012.
Goldman Sachs, under Cohn and Blankfein, was hardly chastened, continuing to play fast and
loose with existing rules even as it plunged millions of dollars into fending off new ones. In
2010, the SEC ran a sting operation looking for banks willing to trade favorable assessments by
its stock analysts for a piece of a Toys R Us IPO if the company went public. Goldman took the
bait, for which they would pay a $5 million fine. An employee working out of Goldman's Boston
office drafted speeches, vetted a running mate, and negotiated campaign contracts for the state
treasurer during his run for Massachusetts governor in 2010, despite a rule forbidding
municipal bond dealers from making significant political contributions to officials who can
award them business. According to the SEC, Goldman had underwritten $9 billion in bonds for
Massachusetts in the previous two years, generating $7.5 million in fees. Goldman paid $12
million to settle the matter in 2012.
Just two years later, Goldman officials were again summoned by the Senate Permanent
Subcommittee on Investigations to address charges that the bank under Cohn and Blankfein had
boosted its profits by building a "virtual monopoly" in order to inflate aluminum prices by as
much as $3 billion.
The last few years have brought more unwanted attention. In 2015, the U.S. Justice
Department launched an investigation into Goldman's role in the alleged theft of billions of
dollars from a development fund the firm had helped create for the government of Malaysia.
Federal regulators in New York state fined Goldman $50 million because its leaders failed to
effectively supervise a banker who leaked stolen confidential government information from the
Fed, which hit the
firm with another $36.3 million in penalties. In December, the CFTC fined Goldman $120 million for
trying to rig interest rates to profit the firm.
Politically, 2016 would prove a strange year for Goldman. Bernie Sanders clobbered Hillary
Clinton for pocketing hundreds of thousands of dollars in speaking fees from Goldman, while
Trump attacked Ted Cruz for being "in bed with" Goldman Sachs. (Cruz's wife Heidi was a
managing director in Goldman's Houston office until she took leave to work on her husband's
presidential campaign.) Goldman would have "total control" over Clinton, Trump said at a
February 2016 rally, a point his campaign reinforced in a two-minute ad that ran the weekend
before Election Day. An image of Blankfein flashed across the screen as Trump warned about the
global forces that "robbed our working class."
Goldman's giving in the presidential race appears to reflect polls predicting a Clinton win
and the firm's desire for a political restart on deregulation. People who identified themselves
as Goldman Sachs employees gave less than
$5,000 to the Trump campaign compared to the $341,000 that the firm's people and PACs
contributed
to Clinton. Goldman Sachs is relatively small compared to retail banking giants.
Yet, according to the Center for Responsive
Politics , no bank outspent Goldman Sachs during the 2016 political cycle. Its PACs and
people associated with the firm made $5.6 million in political contributions in 2015 and 2016.
Even including all donations to Clinton, 62 percent of Goldman's giving ended up in the coffers
of Republican candidates, parties, or conservative outside groups.
5. TROJAN HORSE
There's ultimately no great mystery why Donald Trump selected Gary Cohn for a top
post in his administration, despite his angry rhetoric about Goldman Sachs. There's the high
regard the president holds for anyone who is rich -- and the instant legitimacy Cohn conferred
upon the administration within business circles. Cohn's appointment reassured bond markets
about the unpredictable new president and lent his administration credibility it lacked among
Fortune 100 CEOs, none of whom had donated to his campaign. Ego may also have played a role.
Goldman Sachs would never do business with Trump, the developer who resorted to foreign banks
and second-tier lenders to bankroll his projects. Now Goldman's president would be among those
serving in his royal court.
Who can say precisely why Cohn, a Democrat, said yes when Trump asked him to be his top
economic aide? No doubt Cohn has been asking himself that question in recent weeks. But he'd
hit a ceiling at Goldman Sachs. In September 2015, Goldman announced that Blankfein had
lymphoma, ramping up speculation that Cohn would take over the firm. Yet four months later,
after undergoing chemotherapy, Blankfein was back in his office and plainly not going anywhere.
Cohn was 56 years old when he was invited to Trump Tower. An influential job inside the White
House meant a face-saving exit -- and one offering a huge financial advantage.
Trump spoke of the great financial price Cohn paid to join him in the White House during his
speech in Cedar Rapids. But something like the opposite was true. A huge amount of Cohn's
wealth was tied up in Goldman stock. By entering government, he could sell his stake in the
firm to comply with federal ethics laws. That way he could diversify his holdings and avoid
roughly $50 million in capital gains taxes -- at least until he sold the replacement
assets.
A job in the White House might also prove an outlet for his frustrations with politicians
and regulators intent on reining in the worst impulses of Wall Street. Trump was Trump, but he
had also vowed to dismantle financial reform. "Dodd-Frank has made it impossible for bankers to
function," Trump said during the campaign. The new president had the potential to serve as a
vessel for Goldman's corporate interests.
"Maybe the one thing that holds this administration together is a belief that markets know
best, and the least regulation is the best regulation," said Dennis Kelleher of Better Markets.
"Goldman's interests fit with that very nicely."
Trump had given Steve Mnuchin, his campaign finance chair, the grander title. But taking
over as Treasury secretary meant being confirmed by the Senate. Mnuchin's confirmation vote was
delayed after it was revealed that he'd neglected to list $95 million in assets (including
homes in New York, Los Angeles, and the Hamptons) on his Senate Finance Committee disclosure
forms and failed to disclose his ties to an offshore hedge fund registered in the Cayman
Islands. Mnuchin was not confirmed until mid-February. The president's pick for commerce
secretary, Wilbur Ross, a financier who had bailed out several of Trump's casinos a few decades
earlier, was not confirmed until the end of February.
As a presidential aide, Cohn did not need Senate approval. He was part of the skeletal crew
that arrived at the White House on day one, giving him a critical head start on wielding his
clout and cultivating his relationship with the new president. At that point, Trump was
summoning Cohn to the Oval Office for impromptu meetings as many as
five times a day .
In early February, Trump signed an executive order giving his Treasury secretary 120 days to
give him a hit list of regulations the administration could eliminate. But with Mnuchin yet to
be confirmed, the task appeared to land in Cohn's eager hands. He was standing at the
president's shoulder when Trump said, "We expect to be cutting a lot out of Dodd-Frank." Shares
in Goldman Sachs, which had jumped by 28 percent after the election, rose another $6 a share
that day. Soon Cohn was coordinating Trump's plans not only for rolling back regulations, but
also for creating jobs and slashing taxes. He met with a health care specialist, along with
House Speaker Paul Ryan and other Republican leaders, to discuss alternatives to the Affordable
Care Act.
Proximity is power inside any White House, especially in this one, where policy often seems
shaped by Trump's last conversation. Treasury is several blocks away, while Cohn's office was
in the West Wing, directly across the hall from Bannon's. Operating within a chaotic
administration, Cohn was
reportedly energized and focused, working around the clock. Cohn is a tenacious
practitioner who, after ascending to the heights of Goldman Sachs, could teach a master class
on the art of seizing a leadership vacuum and building alliances. On day 39 of the new
administration, the White House sent out a press release introducing the "best-in-class team"
Cohn had assembled "to drive President Trump's bold plan for job creation and economic growth."
The 13 advisers included familiar figures who had worked for George W. Bush or his father, but
they also included at least three former lobbyists so conflicted they would need an ethics
waiver to work in the White House. For instance,
Michael Catanzaro , the man Cohn chose to oversee energy policy, was until last year a
lobbyist for such oil, gas, and coal companies as Devon Energy and Talen Energy. Shahira Knight
had been a lobbyist for Fidelity, the mutual fund giant, before joining Cohn's team.
Cohn's strategy in those early months was to make himself indispensable to the new
president. Cohn emerged as one of the few people around Trump comfortable interrupting him
during a meeting or openly disagreeing on points of policy. The New York Times reported that
Trump often turned to Cohn during a meeting and asked him directly, "What do you want to do?"
Early on, Trump referred to Cohn as "one of my geniuses" -- a quote Reuters attributed to a
"source close to Cohn."
Soon, major media were painting Cohn as a leading centrist inside the Trump White House
because he had staked out positions on immigration, international alliances, and global warming
at odds with Bannon's hard-right nationalism. Bannon and his allies only bolstered this
narrative by characterizing "Carbon Tax Cohn" and his allies, Jared Kushner and Ivanka Trump,
as interlopers -- "the Democrats," as some inside the White House called them. "Within Trump's
Inner Circle, a Moderate Voice Captures the President's Ear," read the headline of a Cohn
profile in the Washington Post.
"Led by Gary Cohn and Dina Powell -- two former Goldman Sachs executives often aligned with
Trump's elder daughter and his son-in-law -- the group and its broad network of allies are the
targets of suspicion, loathing and jealousy from their more ideological West Wing colleagues,"
the Washington Post reported. Fueling the rage of the ideologues, Cohn and his allies were
largely winning. Trump dropped Bannon from the National Security Council and elevated Powell to
deputy national security adviser. When, after Charlottesville, false reports leaked that Cohn
was so disgusted with the president he was resigning, blue-chip stocks slid down. Instead,
Bannon was out. Cohn, despite reports that he invoked Trump's wrath for critical remarks to the
Financial Times, was still in and expected to deliver the president a win on corporate
taxes.
On the day it was announced that he was joining the Trump administration, Cohn said on a
goodbye podcast for Goldman Sachs, "You look at the size of our capital. You look at the size
of our balance sheet. You look at the size of our people -- it's just enormous." More than $40
billion had flowed into the bank in 2016, bringing the bank's assets under management to a
record $1.38 trillion. That meant pressure to find ways to put that money to work -- an
enormous challenge if regulators finally shut down Goldman's prop trading arm.
How exactly could Cohn recuse himself from matters involving Goldman when almost every
aspect of his job has the potential to either grow Goldman's profits and inflate its stock
price -- or tank them both?
"To the extent Goldman Sachs is a direct party in a matter, Gary will recuse himself," a
source familiar with the situation said. But, the source added, "As NEC director, Gary is going
to touch on matters on the day-to-day economy as a whole and Goldman Sachs is a participant in
the economy, thus Gary will indirectly touch on things that affect Goldman Sachs along with
other banks and institutions."
Yet rather than publicly recuse himself on attempts to undo Dodd-Frank, Cohn has led the
charge from inside the White House. On that matter, Cohn is a walking, talking conflict of
interest .
While at Goldman, Cohn had personally met with officials at the Commodity Futures Trading
Commission to discuss the derivatives reform plank of Dodd-Frank, an arena in which Goldman is
a dominant player. He had taken issue with rules imposed by Dodd-Frank that require banks to
keep more capital on hand. Requiring banks to hold more money in reserve made them
"unequivocally" safer than before 2008, he said in a 2015 interview while still Goldman's
president, but he complained that Goldman was now able to lend less money, hurting profits. And
then there's the Volcker Rule. Cohn, while still president of the firm, had traveled to D.C. at
least twice to personally lobby regulators about its implementation.
These days, it can be hard to tell whether Cohn is speaking as a high-ranking White House
official or a former Goldman Sachs executive.
In the wake of Trump's February call for a rollback in financial regulations, Cohn vowed in
an interview with Bloomberg TV, "We're going to attack all aspects of Dodd-Frank." The
first example he gave: the Volcker Rule, which he cast as harmful to the country's competitive
advantage. In an
interview that same day with Fox Business, he homed in on another Goldman obsession:
Dodd-Frank's capital requirements. "Banks are forced to hoard money because they are forced to
hoard capital, and they can't take any risks," he said. Mortgage, auto, credit card lending,
and commercial lending are all up since 2010. Yet Cohn told Fox viewers, "We need to get banks
back in the lending business, that's our No. 1 objective."
Roy Smith, a former Goldman partner now teaching at the NYU Stern School of Business, argues
that Cohn should avoid the administration's effort to unwind Dodd-Frank altogether, but "at a
very minimum he has to excuse himself whenever the discussion turns to Volcker." But Smith said
he has trouble imagining Cohn leaving the room when Volcker comes up. "The hard part for
someone like Cohn is that he knows where all the pain points are with Volcker and other parts
of Dodd-Frank," Smith said. "His every instinct would be to get involved."
Beyond deregulation, two other pillars of Trump's economic plan -- cutting taxes and
investing in infrastructure -- would have dramatic impacts on Goldman's bottom line.
Thanks to loopholes, many Fortune 500 corporations pay
little or no corporate income tax at all. By contrast, Goldman Sachs typically pays taxes
near the official 35 percent federal tax rate. In 2014, for instance, Goldman paid $3.9 billion
in taxes on profits of $12.4 billion, or 31 percent. Last year, the firm's tax bill was $2.7
billion on profits of $10.3 billion, or 28 percent. In that same Fox Business interview, Cohn
said that "lower corporate taxes" was the White House's "starting point" on tax reform; cuts to
personal income taxes were a secondary concern.
Under the plan Cohn and Mnuchin announced last spring, what Cohn called "one of the biggest
tax cuts in the American history," corporate taxes would be capped at 15 percent. If Cohn
succeeds, Goldman will save massive sums: At that rate, Goldman would have paid $2 billion less
in taxes in 2014, $1.4 billion less in 2015, and $1.4 billion less in 2016. The Koch brothers'
network of political groups has already spent millions of dollars to promote the proposal. Even
Blankfein, who the Trump campaign singled out in the commercial it ran in the final days of the
campaign, acknowledged in a
voicemail to employees that Trump's commitment to tax cuts, deregulation, and infrastructure
"will be good for our clients and our firm."
The details of the president's "$1 trillion" infrastructure plan are similarly favorable to
Goldman. As laid out in the administration's 2018 budget, the government would spend only $200
billion on infrastructure over the coming decade. By structuring "that funding to incentivize
additional non-Federal funding" -- tax breaks and deals that privatize roads, bridges, and
airports -- the government could take credit for "at least $1 trillion in total infrastructure
spending," the budget reads.
It was as if Cohn were still channeling his role as a leader of Goldman Sachs when, at the
White House in May, he offered this advice to executives: "We say, 'Hey, take a project you
have right now, sell it off, privatize it, we know it will get maintained, and we'll reward you
for privatizing it.'" "The bigger the thing you privatize, the more money we'll give you,"
continued Cohn. By "we," he clearly meant the federal government; by "you," he appeared to
be speaking, at least in part, about Goldman Sachs, whose Public Sector and Infrastructure
group
arranges the financing on large-scale public sector deals. "Goldman Sachs is one of the
largest infrastructure fund managers globally," according to infrastructure advisory firm
InfraPPP
Partners , "having raised more than $10 billion of capital since the inception of the
business in 2006." Lost in the infamous press conference the president gave in the lobby of
Trump Tower a few days after Charlottesville, with Cohn and Mnuchin visibly uncomfortable at
his right flank, were Trump's remarks on infrastructure, the ostensible purpose of the event.
The thrust was that the president would grease the wheels for project approvals by signing an
executive order rolling back environmental impact requirements and other elements of an
"overregulated permitting process."
In countless other ways, Cohn is positioned to help the firm that has been so good to him
over the years. The country's National Economic Council adviser might caution a president
against running too large a deficit, especially amid a healthy economy. But Goldman Sachs is in
the business of finding investors to underwrite government debt. An economic adviser might
caution a populist president that corporate inversions often cost jobs and tax revenue.
Instead, Trump has ordered a review of policies Obama put in place to discourage them -- good
news for Cohn's former colleagues. Transparency has been a watchword of initial public
offerings dating back at least to the Securities and Exchange Act of 1934, but easing those
rules, a step Goldman has sought, could potentially generate hundreds of millions of dollars in
fees for investment banks such as Goldman. The SEC announced in June that it would allow any
company going public to withhold details of its finances and strategies, an exemption
previously available only to firms with under $1 billion in revenue -- more good tidings for
Goldman. Just loosening the rules for IPOs, said Tyler Gellasch, the former Senate staffer,
"could mean hundreds of millions of dollars more to Goldman."
In June, the Treasury Department released a statement of principles about the
administration's approach to financial regulation focused on promoting "liquid and vibrant
markets." Not surprisingly, the report included a call to ease capital requirements and
substantially amend the Volcker Rule.
It's Cohn's influence over the country's regulators that worries Dennis Kelleher, the
financial reform lobbyist. "To him, what's good for Wall Street is good for the economy,"
Kelleher said of Cohn. "Maybe that makes sense when a guy has spent 26 years at Goldman, a
company who has repaid his loyalties and sweat with a net worth in the hundreds of millions."
Kelleher recalls those who lost a home or a chunk of their retirement savings during a
financial crisis that Cohn helped precipitate. "They're still suffering," he said. "Yet now
Cohn's in charge of the economy and talking about eliminating financial reform and basically
putting the country back to where it was in 2005, as if 2008 didn't happen. I've started the
countdown clock to the next financial crash, which will make the last one look mild."
This article was reported in partnership with The Investigative Fund at The Nation
Institute.
The author introduces an important notion of 'financial expropriation' which is at the core of
"casino capitalism". Role of finance as a mediator between people and privatized services led to
extraction of new type of rent.
Notable quotes:
"... Financial capital permeates economic activity, and interacts with financial markets in ways capable of generating enormous profits but also precipitating global crises. ..."
"... The economic processes - and the social relations - characteristic of financialization represent a milestone in the development of capitalism. ..."
"... A long boom occurred, lasting until 1973-74, during which production became increasingly dominated by transnational monopolistic enterprises, while finance operated under a system of controls domestically and internationally. For nearly three decades, the US was the dominant economic force in global production and trade. ..."
"... . Since the 1970s, there have been profound changes in production methods deriving from information and telecommunications technologies. Transnational enterprises have become dominant over global production and international trade. The centre of gravity of global productive capacity has partly shifted from mature economies in the West toward rising economies in the East, primarily China. ..."
"... The most striking feature of the period, however, has been the rise of finance, the start of which can be usefully placed in the late 1970s. The financial sector had become progressively larger in the 1950s and 1960s, while still operating within the regulatory framework characteristic of the long post-war boom ..."
"... The three decades that followed have witnessed unprecedented expansion of financial activities, rapid growth of financial profits, permeation of economy and society by financial relations, and domination of economic policy by the concerns of the financial sector. At the same time, the productive sector in mature countries has exhibited mediocre growth performance, profit rates have remained below the levels of the 1950s and 1960s, unemployment has generally risen and become persistent, and real wages have shown no tendency to rise in a sustained manner. ..."
"... Bretton Woods had enforced the convertibility of the US dollar into gold at S35 to the ounce, thus fixing exchange rates during the long boom. Its collapse led to the gradual emergence of alternative international monetary arrangements based on the US dollar functioning as inconvertible quasi-world-money. The new arrangements have generated considerable instability of exchange and interest rates, thereby spurring the growth of international financial markets. ..."
"... Growth of international capital flows during the same period, partly in response to exchange and interest rate instability, has led to financialization in developing countries. ..."
"... The ascendancy of central banks is hardly surprising, since financialization in general would have been impossible without active and continuous intervention by the state. Financialization has depended on the state to deregulate the financial system with regard to prices, quantities, functions and cross-border flows of capital. Equally, financialization has depended on the state to regulate the adequacy of own capital, the management of risk, and the rules of competition among financial institutions. ..."
"... Ultimately, however, the rise of finance has resulted from changes deep within capitalist accumulation. Three characteristic tendencies of accumulation in mature countries have shaped financialization as a structural transformation of contemporary capitalism. First, non-financial enterprises have become increasingly involved in financial processes on an independent basis, often undertaking financial market trans-actions on own account. The financialization of industrial and commercial enterprises has affected their profitability, internal organization, and investment outlook. Non-financial enterprises have become relatively more remote from banks and other financial institutions. Second, banks have focused on transacting in open financial markets with the aim of making profits through financial trading rather than through outright borrowing and lending. At the same time banks have turned toward individual and household income as a source of profit, often combining trading in open markets with lending to households, or collecting household savings. Third, individuals and households have come increasingly to rely on the formal financial system to facilitate access to vital goods and services, including housing, education, health, and transport. The savings of households and individuals have also been increasingly mobilized by the formal financial system. ..."
"... Financialization reflects a growing asymmetry between production and circulation - particularly the financial component of the latter - during the last three decades. The asymmetry has arisen as the financial conduct of non-financial enterprises, banks and households has gradually changed, thus fostering a range of aggregate phenomena of financialization. A telling aspect of the transformation has been the rise of profits accruing through financial transactions, including new forms of profit that could even be unrelated to surplus value. This process is summed up as 'financial expropriation' in subsequent chapters. ..."
"... The most important development in the evolution of derivatives trading in recent years has been the move to cash settlement of the contract, thus freeing the counter- parties from the need to deliver the underlying asset. On this basis, derivatives have become essentially a punt on the future direction of the price of the underlying asset that is subsequently settled in cash. ..."
"... In effect, the derivative has become what could be called a contract-for-differences - an agreement between buyer and seller to exchange the difference between the current value of a share, currency, commodity, or index and its value at maturity of the contract. ..."
"... the core of the enormously expanded derivatives markets lie a few international banks, which have also been one of the driving forces of financialization. Banks are the pillar of contemporary of the 1980s to the end of the 2000s the notional outstanding appears to have doubled every two or three years for most of the period. ..."
"... These dealers werelarge global banks that were also fundamental to financialization. The same banks were among the largest participants in the exchange-traded markets, though data is hard to obtain for the latter. There is no doubt, however, that the large dealer banks were heavily involved in the management of the 'exchanges', including determination of risk management procedures and 'margin' levels. ..."
"... In short, the banks that dominate derivatives trading are also the banks that set the interest rate at which derivatives are traded and valued, although the banks are not obliged to trade at the declared rate. No wonder, then, that one of the most egregious scandals of financialization appears to be the manipulation of the LIBOR by large dealer banks, a matter which has been under police investigation since 2010. ..."
"... The problem is not a few 'rotten apples' amidst the LIBOR committee, criminally colluding with each other and with brokers to influence the LIBOR. Rather, a deeply flawed structure has allowed dealer banks to dominate derivatives markets while effectively manipulating the terms of derivatives trading. ..."
The crisis of the 2000s will prove fertile ground for economic historians for decades to come
with regard to both its causes and consequences. However, the crisis has already had one definite
outcome: it has finally lifted the curtain on the transformation of mature and developing capitalist
economies during the last three decades, confirming the pivotal role of finance, both domestically
and internationally. Financial capital permeates economic activity, and interacts with financial
markets in ways capable of generating enormous profits but also precipitating global crises. In terms
that will be used throughout this book, contemporary capitalism is 'financialized' and the turmoil
commencing in 2007 is a crisis of 'financialization'.
The economic processes - and the social relations - characteristic of financialization represent
a milestone in the development of capitalism. The catalyst of crisis in 2007 was speculative mortgage
lending to the poorest workers in the US during the 2000s, the loans being subsequently traded in
'securitized' form in global financial markets. It is hard to exaggerate what an extraordinary fact
this is. Under conditions of classical, nineteenth-century capitalism it would have been unthinkable
for a global disruption of accumulation to materialize because of debts incurred by workers, including
the poorest. But this is precisely what has happened under conditions of financialized capitalism,
an economic and social system that is much more sophisticated than its nineteenth-century predecessor.
Financialization has emerged gradually during recent decades, and its content and implications
are the focus of this book. To be sure, capitalist economies are continually restructured due to
pressures of competition and to the underlying drive to maintain profitability. However, some transformations
have a distinctive historical significance, and financialization is one of those. The change that
has taken place in mature capitalist economies and societies since the late 1970s requires appropriate
attention to be paid to finance. Consider the following features of financialization to substantiate
this claim. Context and structural aspects of financialization
Mature capitalism has been historically marked by deep transformations of economy and society.
Toward the end of the nineteenth century, for instance, there emerged new methods of production in
heavy industry, accompanied by the rise of monopolistic, joint-stock enterprises. The change coincided
with a long depression, 1873-96, and led to a rebalancing of global productive power away from Britain
and toward the US and Germany. Similarly, at the end of the Second World War, mass consumption emerged
across several developed countries based on methods of mass production. A long boom occurred, lasting
until 1973-74, during which production became increasingly dominated by transnational monopolistic
enterprises, while finance operated under a system of controls domestically and internationally.
For nearly three decades, the US was the dominant economic force in global production and trade.
The transformation represented by financialization is of a similar order of importance.
Since the 1970s, there have been profound changes in production methods deriving from information
and telecommunications technologies. Transnational enterprises have become dominant over global
production and international trade. The centre of gravity of global productive capacity has
partly shifted from mature economies in the West toward rising economies in the East, primarily
China. Meanwhile, the institutional framework
of capitalist activity has been altered as deregulation has prevailed in important markets, above
all, for labour and finance. Throughout this period, accumulation has lacked dynamism in mature countries,
inequality was exacerbated, and crises have become sharper and more frequent.
The most striking feature of the period, however, has been the rise of finance, the start of which
can be usefully placed in the late 1970s. The financial sector had become progressively larger in
the 1950s and 1960s, while still operating within the regulatory framework characteristic of the
long post-war boom. However, even by the late 1970s, the domestic and international importance of
finance remained modest.
The three decades that followed have witnessed unprecedented expansion of
financial activities, rapid growth of financial profits, permeation of economy and society by financial
relations, and domination of economic policy by the concerns of the financial sector. At the same
time, the productive sector in mature countries has exhibited mediocre growth performance, profit
rates have remained below the levels of the 1950s and 1960s, unemployment has generally risen and
become persistent, and real wages have shown no tendency to rise in a sustained manner.
An asymmetry
has emerged between the sphere of production and the ballooning sphere of circulation. The rise of
finance has been predicated 011 a radical alteration of the monetary framework of capitalist accumulation,
both internationally and domestically. International monetary conditions have been stamped by the
collapse of the Bretton Woods Agreement in 1971-73. Bretton Woods had enforced the convertibility
of the US dollar into gold at S35 to the ounce, thus fixing exchange rates during the long boom.
Its collapse led to the gradual emergence of alternative international monetary arrangements based
on the US dollar functioning as inconvertible quasi-world-money. The new arrangements have generated
considerable instability of exchange and interest rates, thereby spurring the growth of international
financial markets.
Growth of international capital flows during the same period, partly in response
to exchange and interest rate instability, has led to financialization in developing countries. Domestic
monetary conditions, in contrast, have been marked by the steady accumulation of power by central
banks as controllers of credit money backed by the state. Central banks have emerged as the dominant
public institution of financialization, the defender of the interests of the financial sector.
The ascendancy of central banks is hardly surprising, since financialization in general would
have been impossible without active and continuous intervention by the state. Financialization has
depended on the state to deregulate the financial system with regard to prices, quantities, functions
and cross-border flows of capital. Equally, financialization has depended on the state to regulate
the adequacy of own capital, the management of risk, and the rules of competition among financial
institutions. Even more decisively, financialization has depended on the state to intervene periodically
to underwrite the solvency of banks, to provide extraordinary liquidity and to guarantee the deposits
of the public with banks.
Ultimately, however, the rise of finance has resulted from changes deep
within capitalist accumulation. Three characteristic tendencies of accumulation in mature countries
have shaped financialization as a structural transformation of contemporary capitalism. First, non-financial
enterprises have become increasingly involved in financial processes on an independent basis, often
undertaking financial market trans-actions on own account. The financialization of industrial and
commercial enterprises has affected their profitability, internal organization, and investment outlook.
Non-financial enterprises have become relatively more remote from banks and other financial institutions.
Second, banks have focused on transacting in open financial markets with the aim of making profits
through financial trading rather than through outright borrowing and lending. At the same time banks
have turned toward individual and household income as a source of profit, often combining trading
in open markets with lending to households, or collecting household savings. Third, individuals and
households have come increasingly to rely on the formal financial system to facilitate access to
vital goods and services, including housing, education, health, and transport. The savings of households
and individuals have also been increasingly mobilized by the formal financial system.
The transformation of the conduct of non-financial enterprises, banks and households constitutes
the basis of financialization. Examining these relations theoretically and empirically, and thus
establishing the deeper content of financialized capitalism, is the main task of this book. Hie concepts
and methods deployed for the purpose derive from Marxist political economy. To summarize, the capitalist
economy is treated as a structured whole that comprises different spheres of activity - namely production,
circulation, and distribution - among which production is dominant. Both production and circulation
possess their own internal logic, even though the two spheres are inextricably linked. Production
creates value; its motive is profit (surplus value) deriving from the exploitation of labour; its
aim is the accumulation of capital. Circulation does not create value; it results in profits, but
these derive mostly - though not exclusively - from redistributing surplus value. Finance is a part
of circulation, but also possesses mechanisms standing aside commodity trading and its corresponding
flows of money. The traded object of finance is loanable money capital, the cornerstone of capitalist
credit. Production, circulation and distribution give rise to class relations, pivoting on the ownership
of the means of production, but also determined by the appropriation of profits.
Financialization reflects a growing asymmetry between production and circulation - particularly
the financial component of the latter - during the last three decades. The asymmetry has arisen as
the financial conduct of non-financial enterprises, banks and households has gradually changed, thus
fostering a range of aggregate phenomena of financialization. A telling aspect of the transformation
has been the rise of profits accruing through financial transactions, including new forms of profit
that could even be unrelated to surplus value. This process is summed up as 'financial expropriation'
in subsequent chapters. New social layers have emerged as financial profit has burgeoned.
Financial markets and banks
It might seem paradoxical at first sight to associate financialization with the conduct of banks,
given that the rise of finance has had far more extravagant aspects. Financializa- tion, for instance,
appears to relate more to the global spread of financial markets, the proliferation of traded financial
instruments, and the emergence of novel, market-re- lated financial transactions, rather than to
the behaviour of banks. Compared to the expanding and rapidly changing world of financial markets,
banks seem old-fashioned and even staid. And yet, as is shown in the rest of the book, banks have
been a decisive factor in the financialization of capitalism. Banks remain the cornerstone of contempo-
rary finance and several of the most visible market-related features of financialization emanate
from banks. It is not accidental that the crisis of financialization in the late 2000s has revolved
around banks rather than other financial institutions.
To establish the importance of banks in the course ot financialization consider some general features
of the derivatives markets, arguably the most prominent finan- cial markets of recent years.1 Simply
put, a derivative is a contract that establishes a claim on an underlying asset - or on the cash
value of that asset - which must be executed at some definite point in the future. The underlying
asset could be a com- modity, such as wheat; or another financial asset, such as a bond; or a financial
price, for example the value of a currency; or even an entirely non-economic entity like the weather.
The units of the underlying asset stated on the contract and multiplied by the spot price define
the notional value of the derivative. Historically, derivatives have been associated with agricultural
production: a forward or a futures contract would specify the quantity and price of an agricultural
commodity that would be delivered at a definite point in the future. A forward contract would be
a private agreement between two parties agreeing to trade some specific output at a certain price
and time (e.g., the wheat produced by one of the contracting parties); a futures contract would also
be a private agreement between two parties but the commodity traded would be generic (e.g., any wheat
of a certain type and quality).
Capitalist farmers could use derivatives to hedge against unforeseen fluctuations in the price
of output. In addition to hedging, derivatives could also be used to speculate on the future movement
of prices, or to arbitrage among different markets exhibiting unwarranted price divergences in the
underlying asset. Thus, the standard way of intro- ducing derivatives in textbooks is as instruments
that make for hedging, speculation or arbitrage among market traders.* Derivatives markets are typically
perceived as spontaneously emerging entities which supplement the services offered by the markets
in underlying assets, and hence improve the efficiency of the capitalist economy. Even with this
simple definition of derivatives, a key distinction is apparent - one between a contract that meets
the specific conditions of two counterparties (a for- ward) and a contract that is more generic and
could be traded freely in open mar- kets (a future). The former is similar to an over-the-counter
derivative, the latter to an exchange-traded derivative. They represent two different ways of undertaking
the trading process - the forward depends on the specific decisions of the trading parties, the future
depends on the impersonal and 'third' institution of the 'exchange' which organizes the trading.
The exchange' standardizes futures contracts, steps between buyers and sellers to clear purchases
and sales by the counterparties and, critically, demands a daily 'margin' in cash as protection from
failure to meet contracted obli- gations at maturity.
The most important development in the evolution of derivatives trading in recent years has been
the move to cash settlement of the contract, thus freeing the counter- parties from the need to deliver
the underlying asset. On this basis, derivatives have become essentially a punt on the future direction
of the price of the underlying asset that is subsequently settled in cash. Consequently, the trading
of derivatives has come to include underlying assets that could never be delivered, such as a stock
market index.
In effect, the derivative has become what could be called a contract-for-differences
- an agreement between buyer and seller to exchange the difference between the current value of a
share, currency, commodity, or index and its value at maturity of the contract. If the difference
is positive, the seller pays the buyer; if it is negative, the buyer is the one who loses money.
Profit, in this context, depends on the difference between a fixed financial parameter and its uncertain
value in the future.4
Spurred by cash settlement, the growth ol derivatives markets in the years of financialization
has been breathtaking: from practical irrelevance in the 1980s, their notion- al sum in 2011 was
in the vicinity of 700 trillion US dollars for over-the-counter and probably a similar sum for exchange-traded
derivatives.' Yet, at the core of the enormously expanded derivatives markets lie a few international
banks, which have also been one of the driving forces of financialization. Banks are the pillar of
contemporary of the 1980s to the end of the 2000s the notional outstanding appears to have doubled
every two or three years for most of the period.
Consider now the role of banks in these enormous markets. The importance of banks is most apparent
in the over-the-counter market, which naturally lacks the organizing role played by the exchange'
in the exchange-traded market. Banks func- tion as market-makers, that is, as agents that stand ready
to buy and sell in the over- the-counter market; they are the dealers that are integral to market
functioning. Banks also provide the necessary market infrastructure through vital market institutions
such as the International Swaps and Derivatives Association (ISDA). Table 2 classifies over-the-counter
transactions in terms of the counterparties, which are split into dealer banks, other financial institutions,
and non-financial customers.8
... ... ...
Approximately US sjotn is not allocated either because it refers to commodity derivatives, or
because it represents adjustments in BIS statistics. In practice, over-the-counter derivatives function
as banking instruments. Almost a third of the trading in over-the-counter derivatives in 2011 took
place in dealer-to-deal- er transactions, while all transactions had at least one dealer bank as
a counterparty. There were, perhaps, seventy sizeable dealer banks in about twenty countries transact-
ing with many thousands of end users of derivatives; indeed, concentration appears to have been even
greater than that, and perhaps fifteen to twenty dealers controlled the overwhelming bulk of over-the-counter
trading across the world."
These dealers werelarge global banks that were also fundamental to financialization. The same banks were among the
largest participants in the exchange-traded markets, though data is hard to obtain for the latter.
There is no doubt, however, that the large dealer banks were heavily involved in the management of
the 'exchanges', including determination of risk management procedures and 'margin' levels.
Given the dominant presence of banks in the derivatives markets, it is hardly surprising that
banks have encouraged the broadening of derivatives trading to include underlying assets with which
they are most familiar - financial securities. Table 2 shows that less that ю percent of over-the-counter
transactions actually involved non-financial enterprises: the great bulk comprised transactions that
took place among financial institutions, and thus referred mostly to financial derivatives. In fact,
growth in the derivatives markets has generally been dominated by inter- est-rate and foreign-exchange
derivatives; since the early 2000s the strongest growth has been in credit default swaps (CDS), which
are briefly discussed in Part III of this book.10
The price of financial derivatives depends, among other factors, on the rate of interest, and
the rate that is typically used to value most financial derivatives is the London Interbank
Offered Rate (LIBOR). The LIBOR is determined by a committee comprising several of the banks that dominate
the derivatives markets; its determination involves the simple averaging of interest rates (excluding
outliers) submitted by LIBOR committee banks daily. These are rates at which the LIBOR banks think
that they can borrow from each other, although no LIBOR bank is obliged to undertake borrowing at
the submitted rate. The LIBOR acts as a rate of interest that determines the value of derivatives,
but it is not a rate of interest in the normal sense since no actual transactions need to take place
at the rates declared by the committee banks.
In short, the banks that dominate derivatives trading are also the banks that set the
interest rate at which derivatives are traded and valued, although the banks are not obliged to
trade at the declared rate. No wonder, then, that one of the most egregious scandals of
financialization appears to be the manipulation of the LIBOR by large dealer banks, a matter which has been under police
investigation since 2010.
The problem is not a few 'rotten apples' amidst the LIBOR committee, criminally colluding
with each other and with brokers to influence the LIBOR. Rather, a deeply flawed structure has
allowed dealer banks to dominate derivatives markets while effectively manipulating the terms of
derivatives trading.
Banks are at the heart of the derivatives markets which have been such a prominent feature of
financialization. Derivatives markets rely on banks, in particular on the price-making skills and
general organizational capabilities of banks. Indeed, banks are so dominant in derivatives markets
that they are even capable of manipulating the key rate on the basis of which derivatives prices
are formed. The vast growth of derivatives markets reflects in part the turn of banks toward trading
in open financial markets, which is one of the fundamental tendencies of financialization. In sum,
at the root of financialization lie the vast banks of mature and other economies. The theoretical
and empirical analysis of financialization in the rest of this book, therefore, focuses on banks
as well as non-financial enterprises and households.
I wondered how a bank could sell toxic assets to another financial institution, and even
more, that other institutions would buy them.
Or flogging designed to fail financial products to one's own customers?
Goldman Sachs' Abacus Program had its banksters create designed-to-fail financial products
for customers (they were called 'muppets'), so that GS could then bet against them!
"... Financialisation represents a historic and deep-seated transformation of mature capitalism. Big businesses have become "financialised" as they have ample profits to finance investment, rely less on banks for loans and play financial games with available funds. Big banks, in turn, have become more distant from big businesses, turning to profits from trading in open financial markets and from lending to households. Households have become "financialised" too, as public provision in housing, education, health, pensions and other vital areas has been partly replaced by private provision, access to which is mediated by the financial system. Not surprisingly, households have accumulated a tremendous volume of financial assets and liabilities over the past four decades. ..."
"... Financialisation has also created new forms of profit associated with financial markets and transactions. Financial profit can be made out of any income, or any sum of money that comes into contact with the financial sphere. Households, for example, generate profits for finance as debtors (mostly by paying interest on mortgages) but also as creditors (mostly by paying fees and charges on pension funds and insurance). Finance is not particular about how and where it makes its profits, and certainly does not limit itself to the sphere of production. It ranges far and wide, transforming every aspect of social life into a profit-making opportunity. ..."
"... Financialised capitalism is, thus, a deeply unequal system, prone to bubbles and crises – none greater than that of 2007-09. What can be done about it? The most important point in this respect is that financialisation does not represent an advance for humanity, and very little of it ought to be preserved. Financial markets are, for instance, able to mobilise advanced technology employing some of the best-trained physicists in the world to rebalance prices across the globe in milliseconds. This "progress" allows financiers to earn vast profits; but where is the commensurate benefit to society from committing such expensive resources to these tasks? ..."
"... The debate should focus on why neoliberalism was seen as the panacea to the relatively socialist post-War consensus. Neoliberalism is an ideology which has not even begun to be deconstructed. Like religion, the myths (concerning deficits and debt, for example) have been exposed here in CiF but not the global public -- and must be eventually. ..."
"... Big Brother=Neoliberalism=The Market=The Party=Enforcement ..."
"... Don't delude yourself. A capitalist "society" must have control over its citizens as intensive as a socialist one - just look at GCHQ/NSA. That it is exercised through markets and advertising instead of propaganda is neither here nor there. ..."
"... Thatcher's and Reagan's vicious, vile strikebreaking and the support they got from the supposedly free press and supposedly impartial judiciary in that is a good example. ..."
"... "The right way to think about it is that the financial industry must be doing something incredibly useful or it would not exist." What a ridiculous thing to say. By the same reasoning both bubonic plague and child abusers are both doing something incredibly useful, otherwise they would not exist. ..."
"... Classical economics generally sees things the way you do, and attempts to match up economics with reality. Neoclassical economics on the other hand, which is the system we're currently using, has little concern with reality. So the specific problem involves our economic system diverging from reality. ..."
"... Compounding factors involve the sociopathic nature of the individuals involved. For example, we think nothing about starting a war (generating profit for our military machine), then rebuilding the ravaged country (generating profit for our construction companies). In neoclassical economics that's just damned good business (the banks and corporations taking profits, the taxpayer footing the bill). ..."
"... There have always been alpha males and alpha females even, people who are very competitive, workaholics, who are leaders, who must be in charge. ..."
"... I think the difference in the last 30 years was Thatcherism and in very short order Reaganism. Adam Curtis says that Thatcher and her campaign manager were ardent anti-communists, they saw Britain in the grip of the unions as a kind of moral decay rotting the nation from the inside out (the enemy within) and they were both obsessed with Churchill, so they embarked on a Methodist 'the devil makes work for idle hands' market philosophy aimed at encouraging people to be self-sufficient, independent, have Victorian values, be as successful as possible and all that stuff. ..."
"... I think another thing is that capitalism then was still in its infancy of the turbo-on-steroids stage. For that cancer to truly metastasize we needed the personal computer network revolution that enabled globalisation, ..."
"... I agree that financialisation is a parasitic activity that will bring the body politic to its knees - and in the not too near future. This is capitalism that really doesn't give f**k about the environment or anyone who is not earning these obscene bucks shuffling electronic wizardry around to nobody's benefit but their own. ..."
"... Whose value system is overly competitive with the desire to win.. How can it be otherwise when we, ourselves, have brainwashed the children since the 1980s. We have given them Gameboys, Xboxes and the WoW where the emphasis is on winning. Play this for hours every day and the message becomes ingrained -- WIN ..."
"... The USSR had to be heavily militarized because its very existence depended on being able to defend itself against the aggressive USA and its little helpers, Nato-countries. It was surrounded by US military bases. That is the same US that went and murdered millions in SE Asia to "fight Communism". ..."
"... The article is about a global issue, not only your backyard. The people of UK can consider themselves lucky compared with billions of others. But what would you care. ..."
"... The financial sector, CEOs, oligarchs etc run on good old fashioned greed - a commodity not about to run out anytime soon. Is it even 'reversible' ? ..."
Finance's hold on our everyday life must be broken The rampant
capitalism that has brought the market into every corner of society needs to be reined in 'Financial
calculation evaluates everything in pennies and pounds, transforming the most basic goods – above
all, housing – into "investments".'
The rampant capitalism that has brought the market into every corner of society needs to be reined
in
The mature economies of the modern world, particularly the United States and Britain, are often
described as "financialised". The term reflects the ascendancy of the financial sector. Even more
important, it conveys the penetration of the financial system into every nook and cranny of society,
including housing, education, health and other areas of life that were previously relatively immune.
Evidence that financialisation represents a deep transformation of mature economies is offered
by the
global crisis of 2007-09 . The crisis originated in the elephantine US financial system, and
was associated with speculation in housing. For a brief period it led to serious questioning of mainstream
economic theory and policy: how to confront the turmoil, and what to do about the diseased financial
system; are new economic theories needed? However, after six years it is clear that very little has
changed. Financialisation is here to stay.
Consider, for instance, the policies to confront the crisis. First, public funds were injected
into banks to boost capital. Second, public liquidity was made available to banks to sustain their
operations. Third, public interest rates were driven to zero to enable banks to make secure profits
by lending to their own customers at higher rates.
This extraordinary public largesse towards private banks was matched by austerity and wage reductions
for workers and households. As for restructuring finance, nothing fundamental has taken place. The
behemoths that continue to dominate the global financial system operate in the knowledge that they
enjoy an unspoken public guarantee. The unpalatable reality is that financialisation will persist,
despite its costs for society.
Financialisation represents a historic and deep-seated transformation of mature capitalism.
Big businesses have become "financialised" as they have ample profits to finance investment, rely
less on banks for loans and play financial games with available funds. Big banks, in turn, have become
more distant from big businesses, turning to profits from trading in open financial markets and from
lending to households. Households have become "financialised" too, as public provision in housing,
education, health, pensions and other vital areas has been partly replaced by private provision,
access to which is mediated by the financial system. Not surprisingly, households have accumulated
a tremendous volume of financial assets and liabilities over the past four decades.
The penetration of finance into the everyday life of households has not only created a range of
dependencies on financial services, but also changed the outlook, mentality and even morality of
daily life. Financial calculation evaluates everything in pennies and pounds, transforming the most
basic goods – above all, housing – into "investments". Its logic has affected even the young, who
have traditionally been idealistic and scornful of pecuniary calculation. Fertile ground has been
created for neoliberal ideology to preach the putative merits of the market.
Financialisation has also created new forms of profit associated with financial markets and
transactions. Financial profit can be made out of any income, or any sum of money that comes into
contact with the financial sphere. Households, for example, generate profits for finance as debtors
(mostly by paying interest on mortgages) but also as creditors (mostly by paying fees and charges
on pension funds and insurance). Finance is not particular about how and where it makes its profits,
and certainly does not limit itself to the sphere of production. It ranges far and wide, transforming
every aspect of social life into a profit-making opportunity.
The traditional image of the person earning financial profits is the "rentier", the individual
who invests funds in secure financial assets. In the contemporary financialised universe, however,
those who earn vast returns are very different. They are often located within a financial institution,
presumably work to provide financial services, and receive vast sums in the form of wages, or more
often bonuses. Modern financial elites are prominent at the top of the income distribution, set trends
in conspicuous consumption, shape the expensive end of the housing market, and transform the core
of urban centres according to their own tastes.
Financialised capitalism is, thus, a deeply unequal system, prone to bubbles and crises –
none greater than that of 2007-09. What can be done about it? The most important point in this respect
is that financialisation does not represent an advance for humanity, and very little of it ought
to be preserved. Financial markets are, for instance, able to mobilise advanced technology employing
some of the best-trained physicists in the world to rebalance prices across the globe in milliseconds.
This "progress" allows financiers to earn vast profits; but where is the commensurate benefit to
society from committing such expensive resources to these tasks?
Financialisation ought to be reversed. Yet such an entrenched system will never be reversed by
regulation alone. Its reversal also requires the creation of public banking that would operate with
a new spirit of public service. It also needs effective controls to be applied to private banking
as well as to international flows of capital. Not least, it requires new methods of meeting the financial
requirements of households, as well as of small and medium enterprises. There is an urgent need for
communal and associational ways to provide housing, education, health and other basic goods and services
for working people, breaking the hold of finance on everyday life.
Ultimately, financialisation will not be reversed without an ambitious programme to re-establish
the superiority of the social over the private, and the collective over the individual in contemporary
society. Reversing financialisation is about reining in the rampant capitalism of our day.
Costas Lapavitsas's latest book is Profiting Without Producing: How Finance Exploits Us All
The Berlin Wall kept people in - that was its primary purpose.
Few people know what the Berlin Wall was. It was a wall around West Berlin, which was not a
part of West Germany but an occupied territory within the GDR. An American president called himself
a Berliner, which means a Berliner Pfannkuchen, i.e. a doughnut (technically, not by shape and
content.)
But whatever. The good people of the UK nowadays seem to wish there was a Rumanian Wall and
a Bulgarian Wall to keep people in. I gather quite a few in the former West Germany would like
a wall to keep the Ossies in.
Why Reagan and Thatcher were allowed to gut functioning...societies so that a handful could
prosper remains the great mystery.
On the contrary. Reagan and Thatcher were convenient advocates of a growing conservative consensus.
The convergence of institutions must have begun before their tenure because neoliberalism became
the dominant consensus by the time of their leadership.
The debate should focus on why neoliberalism
was seen as the panacea to the relatively socialist post-War consensus. Neoliberalism is an ideology
which has not even begun to be deconstructed. Like religion, the myths (concerning deficits and
debt, for example) have been exposed here in CiF but not the global public -- and must be eventually.
Big Brother=Neoliberalism=The Market=The Party=Enforcement
Don't delude yourself. A capitalist "society" must have control over its citizens as intensive
as a socialist one - just look at GCHQ/NSA. That it is exercised through markets and advertising
instead of propaganda is neither here nor there.
Thatcher's and Reagan's vicious, vile strikebreaking and the support they got from the supposedly
free press and supposedly impartial judiciary in that is a good example.
"The right way to think about it is that the financial industry must be doing something incredibly
useful or it would not exist."
What a ridiculous thing to say. By the same reasoning both bubonic plague and child abusers are
both doing something incredibly useful, otherwise they would not exist.
Perhaps you could explain to me what exactly it is that these socialists are doing that is
so useful?
It is the essential difference between wealth and money that is constantly missed by Politicians
and Economists.
Classical economics generally sees things the way you do, and attempts to match up economics with
reality. Neoclassical economics on the other hand, which is the system we're currently using,
has little concern with reality. So the specific problem involves our economic system diverging
from reality.
Compounding factors involve the sociopathic nature of the individuals involved. For example,
we think nothing about starting a war (generating profit for our military machine), then rebuilding
the ravaged country (generating profit for our construction companies). In neoclassical economics
that's just damned good business (the banks and corporations taking profits, the taxpayer footing
the bill).
isnt it amazing that Marx predicted over 150 years ago that the greedy capitalists would
be their own gravediggers
I never read Marx, although it sounds like he knew a bit about human nature and simply took the
system to its logical conclusion.
I'm not anti-capitalism. I believe it was a useful development in human history, similar to
religion and feudalism. But now it's time to say goodbye and find a new way of doing things. There's
no point in flogging a dead horse, unless you're part of the 1%.
I haven't really given that aspect of it much thought. When I was growing up, we played Monopoly
or Risk or Cluedo, we went outside, we raced, played cowboys and indians and the rest.
There have always been alpha males and alpha females even, people who are very competitive,
workaholics, who are leaders, who must be in charge.
I think the difference in the last 30 years was Thatcherism and in very short order Reaganism.
Adam Curtis says that Thatcher and her campaign manager were ardent anti-communists, they saw
Britain in the grip of the unions as a kind of moral decay rotting the nation from the inside
out (the enemy within) and they were both obsessed with Churchill, so they embarked on a Methodist
'the devil makes work for idle hands' market philosophy aimed at encouraging people to be self-sufficient,
independent, have Victorian values, be as successful as possible and all that stuff.
I can well believe that, it's just that they stirred up the whole thing without ever thinking
through the terrible potential downsides. That's a major problem with politics, fanatical zealots
who claim to have the solution for all the problems a nation faces.
I think another thing is that capitalism then was still in its infancy of the turbo-on-steroids
stage. For that cancer to truly metastasize we needed the personal computer network revolution
that enabled globalisation, partly because then, it was possible for people to source more and
more and more income streams without the commensurate ability to truly monitor the quality of
the investments or to manage the human relations that actually motivate people to feel appreciated
and to do good work.
Fighting talk. I agree that financialisation is a parasitic activity that will bring the body
politic to its knees - and in the not too near future. This is capitalism that really doesn't
give f**k about the environment or anyone who is not earning these obscene bucks shuffling electronic
wizardry around to nobody's benefit but their own.
Maybe regulation per se is not the main answer,
but it sure as hell needs a politician to stand up and say what is said in this article.
Whose value system is overly competitive with the desire to win.. How can it be otherwise when
we, ourselves, have brainwashed the children since the 1980s. We have given them Gameboys, Xboxes
and the WoW where the emphasis is on winning. Play this for hours every day and the message becomes
ingrained -- WIN
The failure of the USSR owed much to its militarism but don't you see that a society like
that HAS to be heavily militarized because its very existence depends on having total control
over its citizens.
The USSR had to be heavily militarized because its very existence depended on being able to
defend itself against the aggressive USA and its little helpers, Nato-countries. It was surrounded
by US military bases. That is the same US that went and murdered millions in SE Asia to "fight
Communism".
Consider, for instance, the policies to confront the crisis. First, public funds were injected
into banks to boost capital. Second, public liquidity was made available to banks to sustain
their operations. Third, public interest rates were driven to zero to enable banks to make
secure profits by lending to their own customers at higher rates.
Yet it seems you still blame the private sector for accepting the favorable situation rather
than the state for causing it:
Ultimately, financialization will not be reversed without an ambitious program to re-establish
the superiority of the social over the private, and the collective over the individual in contemporary
society.
A shift towards the rights of the individual would see the state have less power to bail out
the banks. Your solution is to give the source of the problem yet more power. The banks couldn't bail
themselves out - they needed the state to take the funds from the citizens. Why do you find the
state so blameless as to suggest they need more influence?
Remind me, because maybe I missed something, but which bit of the post-war German economic
miracle had them seeking a bailout from the IMF?
I'll tell you. West Germany was allowed to default twice on massive post-war loans in 1946
and 1948 thereby requiring IMF loans to finance it's day-to-day running.
My current company needs debt to pay for the machinery and running costs to create products. These
are sold for profit and the debt repaid. Without the initial debt the products, the salaries,
the taxable income would not exist. Debt is banned in Islamic countries – it is not a coincidence
that from being streets behind 1000 years ago, the Western world is now considerably more developed
I think what sticks in the craw of socialists is that these financial corporations and people
working in finance would be out of work if it hadn't been for Government intervention and taxpayer
money. There is a real irony in having had to listen how great Thatcher was for breaking the unions,
smashing nationalized industries on the basis of free market principles only to have to bail out
the biggest advocates of the free market. Especially when the cause of the longest and deepest
recession in memory was caused by those financial corporations and people working in finance.
Do I envy these people? Not really, they are on the whole treated like sh1t and they are so
attached to their money that they are like mewling, whimpering children when faced with the threat
of losing their jobs.
Isn't it amazing that marx predicted over 150 years ago that the greedy capitalists would be their
own gravediggers as they continue to pauperize the workers to extract more profit , drive down
wages and replace jobs with machinery. Forgetting it is the workers who buy the commodities and
if they cannot buy , the system will collapse in on itself
Your problem is that that you may desire a non-aspirational society, but that's just not how people
are. The human spirit is aspirational and competitive - whether you think that's desirable or
not doesn't matter. Consequently, the type of society you want is only possible if that human
spirit can be quashed and contained.
The failure of the USSR owed much to its militarism but don't you see that a society like that
HAS to be heavily militarised because its very existence depends on having total control over
its citizens. Without guns and walls, people would have just refused to be cowed and would have
left.
In simple terms, human beings are imperfect individuals driven by passions, ambitions and desires
which result in bad things happening but more often good things. Whether we like the fact that
we are imperfect is immaterial - we are what we are and no enforced system which seeks to contain
our individuality will ever succeed in the long run.
As bullydoggy says - its land (and I would add debt too).
This
Nationwide graph shows price rising 2.7 times adjusted for inflation from q3 1983 – q3 2007.
This is 6.5 times in nominal terms.
Residential Land Prices - Looking at figures for South East England from the same period aug
1983-july 07, it increases further, 13 times nominally - and this was an area with the 3rd lowest
increase in nominal terms! (At the bottom of the page - 'download the full residential land value
data')
There is no reason that interest can't be paid from the existing stock of money. Play a game of
monopoly and you will see that it is possible. Your argument has a false composition within it.
The central bank is an arm of the government to all intents and purposes. To consider it as a
case of the private sector holding the government over a barrel is silly. The state is the one
with a monopoly over money.
It's fairly simple. Split Banking into ' High Street ' stuff [ as in the good old days ] and the
newer riskier stuff . You could even have a State Bank. If an investment company goes bust - let
them - no bail outs - no public money. is lost. Have people who know what they are doing in the
Treasury and FSA - This hasn't happened so far.
Have a sensible rate of higher tax , get them to spend it here and /or tax luxury goods at
higher rates. Rich people like to spend money - encourage it. Encourage philanthropy, endowments
to Universities etc.
Communism has not been tried anywhere, so you don't know whether it works or not. Neoliberalism
has now been tried quite enough for us to know that it does not
No what you call neoliberalism might have been tried but not true neoliberalism, that will
work brilliantly, all you need to do is give me the reigns of power and let me get on with it,
trust me...
Not convinced? about as convincing as your claim that communism has not been properly tried
so maybe we should give it a go?
' Tobin tax on financial transactions can be of help. '
Unless universally applied [ AND done properly ] this would be an extremely STUPID idea. Do
you think for one moment that Wall Street [ or even, say, Moscow ] would ever do this ? The following
points should be noted :-
1. Tried in Sweden - didn't work and abandoned
2. 70 % would come from the City - to disappear into the EU coffers never to be seen again
apart from extra lunch portions for Van Rumpy Pumpy and his unelected catamites
3. A perfectly respectable international business may need to transfer collateral [ security
] from one subsidiary to another every day [ to cope with different trading zones ]. This sort
of transaction happens hundreds of thousands of time a day in the City - twice a day at 0.1 %
over 250 trading days for a £ 1 million, say, is a huge amount of money.
So what will happen ? - the tax will either get handed on to the customer [ which may well
be a pensioner's or worker's Pension Fund ]
OR gets done in a more expensive way [ again , cost handed on to customer ]
OR Firm decamps elsewhere
IE - NO-ONE BENEFITS
The armchair anarchists and toy-town Trots may jump and down with glee but the City provides
a significant chunk of GDP - If you want to be Greece but without the sunshine or being bailed
out by the the Germans then so be it.
If I understand you correctly, I think you are suggesting that to pay interest more money
must be created as debt. I've seen this suggested quite often but I think it is a fallacy of
composition.
If you were to think about money as a fixed quantity of gold you could pose the same question,
how could interest be paid out on the gold in more gold? Quite easily, some of the gold just
gets called interest payments as it changes hands, and that's it. No new gold is required.
Under a gold standard interest is paid by the "natural" growth in the money supply resulting
from gold mining.
Under a fiat system the only way the intest could be paid would be if non-debt based money were
issued which would require monetary reform. Yes, that's right, under our system the govt cannot
issue money - it must borrow it from the central bank, which, in the case of the USA, is a group
of private banks.
The article is about a global issue, not only your backyard. The people of UK can consider
themselves lucky compared with billions of others. But what would you care.
Quite. But do you think any one of the "socialists" raging on about nasty neo-liberals and
capitalists have twigged that if a fairer system was applied that few in the UK would see any
increase in their standard of living?
Sure thing mate, it'd be my pleasure! Are you REALLY sure you want to take the risk though?
It would mean you suddenly accumulate a rather large debt...
Nope the debts yours. I just want the cash, and money is bad. Apparently.
Of course we could... financialise the debt. You could roll the debt up and and sell it to
people based on whether or not they think you'll pay it. Oh hang on... we've just killed the article
because that's bad too.
No. Its an exchange. Each side gets something. Lets take a simple example. I buy a cake at
a bakery. I get a cake, in exchange for money. The baker gets money for the cake. The baker (not
being a moron) knows how much the ingredients, energy, time and so on the cake has cost. Some
of that money goes to pay for these bits of the cake. The remainder is profit. The baker, in turn
pays the suppliers. They also know what it cost to get their supplies ready for the baker, and
add a little bit more for profit. So... show me the transfer, rather than the exchange.
Profit is income less spending. Somebody else's spending is your income.
Neither communism or crony capitalism work, so why not a free market system
Communism has not been tried anywhere, so you don't know whether it works or not. Neoliberalism
has now been tried quite enough for us to know that it does not. Free market inevitably leads
to neoliberalism, otherwise it is not free.
It is always amusing to watch the rantings of someone living in the safest, most prosperous,
more socially equal, society in the history of man ranting and raving for Communism or a Benevolent
Dictator, or something; anything but this.
Were it in my power I would cheerfully transport you to the 12th Century where you could
enjoy the benefits of living (shortly) free of Financialism.
Why not make it the 4th century and the collapse of the Western Roman Empire through excessive
debt servitude? Or indeed fast forward into the 21st century with the decline of Western capitalist
economies for the same reason and the undesirable triumph of Chinese Communist market capitalism
through its use of Abba Lerner's Functional Finance?
"I think Christ's attack on the money lenders (which may have been a big part of what cost him
his life) and the Islamic prohibition of usury falls into this category. Look what lending money
at interest has done to our society."
I agree, and it surely lies at the root of the whole financial mess. if we hadn't allowed interest,
the whole confection of finance divorced from enabling trade would not have arisen in the first
place.
Diverting from the topic a bit, I'm not so sure about your first paragraph. I'm always struck
by a thing the great traveller Freya Stark said:
"I think, with the possible exception of the act of love, water rights have caused more
trouble than anything else in human history"
But I am not qualified to discuss the role of Sin - though I'm very grateful for your introduction
of it to this threadlet, where it has born much fruit of useful points - so I'll have to leave
the ethics there, I think!
Tobin tax on financial transactions can be of help.
We tax the food for children but not speculators play with money. France and Germany can take
the lead to let the computers send a small sum on every transaction back to the people. That would
be one of the few good things from EU. Otherwise let poor people starve and let the speculators
play to death of our countries.
So how many people rely on food banks? Is it half of us? One in ten, one in a hundred, one
in a thousand?
The article is about a global issue, not only your backyard. The people of UK can consider
themselves lucky compared with billions of others. But what would you care.
1. Public banking - it has no ties to corporate/international banking. N. or S. Dakota's
"public bank" - begun about 90 years ago by a bunch of conservative farmers who despised the
rise of bankster power.
How is this a model? The Bank of North Dakota operates more like the Bank of England than a
retail bank, it doesn't offer retail services except for student loans.
2. Community-based markets - see the most famous one in Spain.
There are several one in all places, Ohio.
You may as well offer up the edinburgh bicycle cooperative as a model. Co-op exist all over
the work, but they are a rounding error in the global economy. There is a place for them, but
they are not going to take over from companies.
the capitalism which lets people pile up enough money to fund billion-dollar research programmes.
Such programmes are mostly funded by governments using tax money. Even in pharmaceutics the
fundamental innovations and inventions are largely done in universities.
Little to do with your capitalism. Well, except that the profits of your benevolent pharmaceutical
companies are exceptionally high.
To summarize, you imply that capitalism and 'the market' are exemplified by government bailouts
of massively overinflated banks, to allow them to continue benefiting from government created
arbitrages of securitized debt and artificial regulatory economies of scale.
You go on to suggest that people's choices of dependence on large financial corporations is
bad, but then imply that they would be better off if they were instead dependent on a single monopoly
corporation to which they have no choice in belonging.
This is the problem with almost all attacks on capitalism and free markets. They incorrectly
ascribe our present system to the same and fail to recognise the similarities between dysfunctional
private and public corporate entities.
Making up a term - financialisation - and using to describe all use of money and also certain
aspects of finance itself actual makes analysing problems harder. You are actually over generalising
which makes you prone to creating narrative fallacies.
Porky, the term 'financialisation' has wide currency in economics, and refers to a specific
set of transformations in the structure of accumulation. It is not used 'to describe all banking',
etc. The Oxford-trained economist Thomas Palley provides this succinct definition of it:
Financialization is a process whereby financial markets, financial institutions, and financial
elites gain greater influence over economic policy and economic outcomes.
Financialization transforms the functioning of economic systems at both the macro and micro
levels.
Its principal impacts are to (1) elevate the significance of the financial sector relative
to the real sector, (2) transfer income from the real sector to the financial sector, and (3)
increase income inequality and contribute to wage stagnation. Additionally, there are reasons
to believe that financialization may put the economy at risk of debt deflation and prolonged recession.
Financialization operates through three different conduits: changes in the structure and
operation of financial markets, changes in the behavior of nonfinancial corporations, and changes
in economic policy.
Countering financialization calls for a multifaceted agenda that (1) restores policy control
over financial markets, (2) challenges the neoliberal economic policy paradigm encouraged by financialization,
(3) makes corporations responsive to interests of stakeholders other than just financial markets,
and (4) reforms the political process so as to diminish the influence of corporations and wealthy
elites.
They used interest rates to control inflation, come what may, which is precisely what Maggie
instigated after any ideas of cooperation had been rejected by the unions, during Callaghan's
time in office.
Thatcher used interest rates to create unemployment, not control inflation.
Sir Alan Budd (a top Treasury civil servant and Thatcher adviser, a strong supporter of monetarism,
who became Provost of The Queen's College, Oxford) let this cat out of the bag:
"The Thatcher government never believed for a moment that [monetarism] was the correct way
to bring down inflation. They did however see that this would be a very good way to raise unemployment.
And raising unemployment was an extremely desirable way of reducing the strength of the working classes.
[...] What was engineered – in Marxist terms – was a crisis of capitalism which re- created the reserve
army of labour, and has allowed the capitalists to make high profits ever since."
Quoted in Nick Cohen, "Gambling with our future", New Statesman, 13 January 2003, page 13.
The way I see it is you have the elite class, made of leaders, executives, industrialists, experts,
then you have the common hordes.
Common people are like a horse, the elite are like the rider, the horse doesn't mind the rider,
the rider is firm with the reigns and keeps the horse controlled, but then if the rider starts
to pull too firmly on the reins, the bridle causes discomfort, even pain, to the horse, with the
crop whipping and the spurs digging in, you push the horse too far and it will throw you.
The rider will inevitably, albeit gingerly, get back in the saddle, a little wiser. I have
no problem with this setup, but I know the rider has a short memory, and it is a case of taking
care of all your horses, not just the one you ride, because nags are always trouble and they are
worth a lot more when well taken care of.
This is a bad analogy, I know, but it is basically true; a phenomenal amount of problems in
communities and the world are due to inadequacies, unfortunately the symptoms of these inadequacies
are also big business and the economy would be disturbed by solving them, so we see "austerity"
preserving what we should be curing.
Make Bank executives personally responsible for the liabilities of the banks they are directors
of. Just like entrepreneurs are often personally responsible for their companies debts.
I am not sure I would use the description of 'Financialisation'. I would describe it more as the
difference between wealth and money. Money is a means of exchange. It is not wealth. In London
it is possible to buy a one bedroomed flat for over one million pounds. In some parts of the country
a similar flat could be bought for forty thousand pounds or less. The wealth is the property and
the money is the means of exchange. Just because my house goes up in value does not mean I have
more wealth. My house is unchanged. It is true that if I sold my house and realised the money
I might then be able buy a similar house for less money else where. Then with the surplus money
I could exchange that for more wealth in the form of goods elsewhere. However as a society no
wealth has been generated.
Only if money is used to create wealth in the form of goods and some services does wealth of society
increase.
It is the essential difference between wealth and money that is constantly missed by Politicians
and Economists.
Ideally it would be about drawing lines of decency between rights and responsibility; of course
everyone wants more rights than responsibility and will fight for that, wether they are just an
ordinary person or someone who actually has a high impact sphere of influence, and most people
will allow that person that right because they view thing in terms relative to their own context
and basically want the same thing.
It isn't about doing anything at gun point, it is about drawing clear lines of decency between
rights and responsibility, at which point it becomes a case of people knowing what they and others
can and cannot, should and should not, get away with. It isn't about punishment or forcing people
to do this or that, it is about natural repercussion that comes from inconsiderate behaviour,
it is about logically creating an environment that doesn't want to see you lynched.
"... A small number of the financial swindlers, including executives from Wall Street's leading banks (Goldman Sachs, J. P. Morgan etc), paid fines – but no one went to prison for the gargantuan fraud that drove millions of Americans into misery. ..."
Through favorable legal rulings and illegal foreclosures, the bankers evicted 9.3 million
families. Over 20 million individuals lost their properties, often due to illegal or fraudulent
debts.
A small number of the financial swindlers, including executives from Wall Street's leading
banks (Goldman Sachs, J. P. Morgan etc), paid fines – but no one went to prison for the
gargantuan fraud that drove millions of Americans into misery.
There are other swindler bankers, like the current Secretary of Treasury Steve Mnuchin, who
enriched themselves by illegally foreclosing on thousands of homeowners in California. Some
were tried; all were exonerated, thanks to the influence of Democratic political leaders during
the Obama years.
"... The Trump Plan is actually the product of the former Goldman-Sachs investment bankers who have been in charge of Trump's economic policy since he came into office. Steve Mnuchin, the Treasury Secretary, and Gary Cohn, director of Trump's economic council, are the two authors of the Trump tax cuts. They put it together. They are also both former top executives of the global shadow bank called Goldman Sachs. ..."
"... Given that economic policy under Trump is being driven by bankers, it's not surprising that the CEO of the biggest US banks, Morgan Stanley, admitted just a few months ago that a reduction of the corporate nominal income tax rate from the current 35% nominal rate to a new nominal rate of 20% will provide the bank an immediate windfall gain of 15%-20% in earnings. ..."
"... Big multinational companies like Apple, i.e. virtually all the big tech companies, big Pharma corporations, banks and oil companies, pay no more than 12-13% effective tax rates today -- not the 35% nominal rate. ..."
"... Tech, big Pharma, banks and oil companies are the big violators of offshore cash hoarding/tax avoidance schemes. Microsoft's effective global tax rate last year was only 12%. IBM's even less, at 10%. The giant drug company, Pfizer paid 18% and the oil company, Chevron 14%. One of the largest US companies in the world, General Electric, paid only 1%. When their nominal rate is reduced to 20% under the Trump plan, they'll pay even less, likely in the single digits, if that. ..."
"... Tax cutting for business classes and the 1% has always been a fundamental element of Neoliberal economic policy ever since the Reagan years (and actually late Jimmy Carter period). Major tax cut legislation occurred in 1981, 1986, and 1997-98 under Clinton. George W. Bush then cut taxes by $3.4 trillion in 2001-04, 80% of which went to the wealthiest households and businesses. He cut taxes another $180 billion in 2008. Obama cut another $300 billion in his 2009 so-called recovery program. When that faltered, it was another $800 billion at year end 2010. He then extended the Bush tax cuts that were scheduled to expire in 2011 two more years. That costs $450 billion each year. And in 2013, cutting a deal with Republicans called the 'fiscal cliff' settlement, he extended the Bush tax cuts of the prior decade for another ten years. That cost a further $5 trillion. Now Trump wants even more. He promised $5 trillion in tax cuts during his election campaign. So the current proposal is only half of what he has in mind perhaps. ..."
"... Neoliberal tax cutting in the US has also been characterized by the 'tax cut shell game'. The shell game is played several ways. ..."
"... To cover the shell game, an overlay of ideology covers up what's going on. There's the false argument that 'tax cuts create jobs', for which there's no empirical evidence. There's the claim US multinational corporations pay a double tax compared to their competitors, when in fact they effectively pay less. There's the lie that if corporate taxes are cut they will automatically invest the savings, when in fact what they do is invest offshore, divert the savings to stock and bond and other financial markets, boost their dividend and stock buybacks, or stuff the savings in their offshore subsidiaries to avoid paying taxes. ..."
"... All these neoliberal false claims, arguments, and outright lies continue today to justify the Trump-Goldman Sachs tax plan -- which is just the latest iteration of neoliberal tax policy and tax offensive in the US. The consequences of the Trump plan, if it is passed, will be the same as the previous tax giveaways to the 1% and their companies: it will redistribute income massively from the middle and working classes to the rich. Income inequality will continue to worsen dramatically. ..."
"... Nothing will change so long as the Corporate Party of America is allowed to continue its neoliberal tax giveaways, its tax cutting 'shell games', and is allowed to continue to foment its ideological cover up. ..."
Contradicting Trump, the independent Tax Policy Center has estimated in just the first year half
of the $2 trillion plus Trump cuts will go to the wealthiest 1% households that annually earn more
than $730,000. That's an immediate income windfall to the wealthiest 1% households of 8.5%, according
to the Tax Policy Center. But that's only in the first of ten years the cuts will be in effect. It
gets worse over time.
According to the Tax Policy Center, "Taxpayers in the top one percent (incomes above $730,000),
would receive about 50 percent of the total tax benefit [in 2018]". However, "By 2027, the top one
percent would get 80 percent of the plan's tax cuts while the share for middle-income households
would drop to about five percent." By the last year of the cuts, 2027, on average the wealthiest
1% household would realize $207,000, and the even wealthier 0.1% would realize an income gain of
$1,022,000.
When confronted with these facts on national TV this past Sunday, Trump's Treasury Secretary,
Steve Mnuchin, quickly backtracked and admitted he could not guarantee every middle class family
would see a tax cut. Right. That's because 15-17 million (12%) of US taxpaying households in the
US will face a tax hike in the first year of the cuts. In the tenth and last year, "one in four middle
class families would end up with higher taxes".
The US Economic 'Troika'
The Trump Plan is actually the product of the former Goldman-Sachs investment bankers who
have been in charge of Trump's economic policy since he came into office. Steve Mnuchin, the Treasury
Secretary, and Gary Cohn, director of Trump's economic council, are the two authors of the Trump
tax cuts. They put it together. They are also both former top executives of the global shadow bank
called Goldman Sachs. Together with the other key office determining US economic policy, the
US central bank, held by yet another ex-Goldman Sachs senior exec, Bill Dudley, president of the
New York Federal Reserve bank, the Goldman-Sachs trio of Mnuchin-Cohn-Dudley constitute what might
be called the 'US Troika' for domestic economic policy.
The Trump tax proposal is therefore really a big bankers tax plan -- authored by bankers, in the
interest of bankers and financial investors (like Trump himself), and overwhelmingly favoring the
wealthiest 1%.
Given that economic policy under Trump is being driven by bankers, it's not surprising that
the CEO of the biggest US banks, Morgan Stanley, admitted just a few months ago that a reduction
of the corporate nominal income tax rate from the current 35% nominal rate to a new nominal rate
of 20% will provide the bank an immediate windfall gain of 15%-20% in earnings. And that's just
the nominal corporate rate cut proposed by Trump. With loopholes, it's no doubt more.
The Trump-Troika's Triple Tax-Cut Trifecta for the 1%
The Trump Troika has indicated it hopes to package up and deliver the trillions of $ to their
1% friends by Christmas 2017. Their gift will consist of three major tax cuts for the rich and their
businesses. A Trump-Troika Tax Cut 'Trifecta' of $ trillions.
1.The Corporate Tax Cuts
The first of the three main elements is a big cut in the corporate income tax nominal rate, from
current 35% to 20%. In addition, there's the elimination of what is called the 'territorial tax'
system, which is just a fancy phrase for ending the fiction of the foreign profits tax. Currently,
US multinational corporations hoard a minimum of $2.6 trillion of profits offshore and refuse to
pay US taxes on those profits. In other words, Congress and presidents for decades have refused to
enforce the foreign profits tax. Now that fiction will be ended by officially eliminating taxes on
their profits. They'll only pay taxes on US profits, which will create an even greater incentive
for them to shift operations and profits to their offshore subsidiaries. But there's more for the
big corporations.
The Trump plan also simultaneously proposes what it calls a 'repatriation tax cut'. If the big
tech, pharma, banks, and energy companies bring back some of their reported $2.6 trillion (an official
number which is actually more than that), Congress will require they pay only a 10% tax rate -- not
the current 35% rate or even Trump's proposed 20%–on that repatriated profits. No doubt the repatriation
will be tied to some kind of agreement to invest the money in the US economy. That's how they'll
sell it to the American public. But that shell game was played before, in 2004-05, under George W.
Bush. The same 'repatriation' deal was then legislated, to return the $700 billion then stuffed away
in corporate offshore subsidiaries. About half the $700 billion was brought back, but US corporations
did not invest it in jobs in the US as they were supposed to. They used the repatriated profits to
buy up their competitors (mergers and acquisitions), to pay out dividends to stockholders, and to
buy back their stock to drive equity prices and the stock market to new heights in 2005-07. The current
Trump 'territorial tax repeal/repatriation' boondoggle will turn out just the same as it did in 2005.
2. Non-Incorporate Business Tax Cuts
The second big business class tax windfall in the Trump-Goldman Sachs tax giveaway for the rich
is the proposal to reduce the top nominal tax rate for non-corporate businesses, like proprietorships
and partnerships, whose business income (aka profits) is treated like personal income. This is called
the 'pass through business income' provision.
That's a Trump tax cut for unincorporated businesses -- like doctors, law firms, real estate investment
partnerships, etc. 40% of non-corporate income is currently taxed at 39.6% (the top personal income
tax rate). Trump proposes to reduce that nominal rate to 25%. So non-incorporate businesses too will
get an immediately 14.6% cut, nearly matching the 15% rate cut for corporate businesses.
In the case of both corporate and non-corporate companies we're talking about 'nominal' tax rate
cuts of 14.6% and 15%. The 'effective' tax rate is what they actually pay in taxes -- i.e. after
loopholes, after their high paid tax lawyers take a whack at their tax bill, after they cleverly
divert their income to their offshore subsidiaries and refuse to pay the foreign profits tax, and
after they stuff away whatever they can in offshore tax havens in the Cayman Islands, Switzerland,
and a dozen other island nations worldwide.
For example, Apple Corporation alone is hoarding $260 billion in cash at present -- 95% of which
it keeps offshore to avoid paying Uncle Sam taxes. Big multinational companies like Apple, i.e.
virtually all the big tech companies, big Pharma corporations, banks and oil companies, pay no more
than 12-13% effective tax rates today -- not the 35% nominal rate.
Tech, big Pharma, banks and oil companies are the big violators of offshore cash hoarding/tax
avoidance schemes. Microsoft's effective global tax rate last year was only 12%. IBM's even less,
at 10%. The giant drug company, Pfizer paid 18% and the oil company, Chevron 14%. One of the largest
US companies in the world, General Electric, paid only 1%. When their nominal rate is reduced to
20% under the Trump plan, they'll pay even less, likely in the single digits, if that.
Corporations and non-corporate businesses are the institutional conduit for passing income to
their capitalist owners and managers. The Trump corporate and business taxes means companies immediately
get to keep at least 15% more of their income for themselves -- and more in 'effective' rate terms.
That means they get to distribute to their executives and big stockholders and partners even more
than they have in recent years. And in recent years that has been no small sum. For example, just
corporate dividend payouts and stock buybacks have totaled more than $1 trillion on average for six
years since 2010! A total of more than $6 trillion.
But all that's only the business tax cut side of the Trump plan. There's a third major tax cut
component of the Trump plan -- i.e. major cuts in the Personal Income Tax that accrue overwhelmingly
to the richest 1% households.
3. Personal Income Tax Cuts for the 1%
There are multiple measures in the Trump-Troika proposal that benefits the 1% in the form of personal
income tax reductions. Corporations and businesses get to keep more income from the business tax
cuts, to pass on to their shareholders, investors, and senior managers. The latter then get to keep
more of what's passed through and distributed to them as a result of the personal income tax cuts.
The first personal tax cut boondoggle for the 1% wealthiest households is the Trump proposal to
reduce the 'tax income brackets' from seven to three. The new brackets would be 35%, 25%, and 12%.
Whenever brackets are reduced, the wealthiest always benefit. The current top bracket, affecting
households with a minimum of $418,000 annual income, would be reduced from the current 39.6% to 35%.
In the next bracket, those with incomes of 191,000 to 418,000 would see their tax rate (nominal again)
cut from 28% to 25%. However, the 25% third bracket would apply to annual incomes as low as $38,000.
That's the middle and working class. So households with $38,000 annual incomes would pay the same
rate as those with more than $400,000. Tax cuts for the middle class, did Trump say? Only tax rate
reductions beginning with those with $191,000 incomes and the real cuts for those over $418,000!
But the cuts in the nominal tax rate for the top 1% to 5% households are only part of the personal
income tax windfall for the rich under the Trump plan. The really big tax cuts for the 1% come in
the form of the repeal of the Inheritance Tax and the Alternative Minimum Tax, as well as Trump's
allowing the 'carried interest' tax loophole for financial speculators like hedge fund managers and
private equity CEOs to continue.
The current Inheritance Tax applies only to those with estates of $11 million or more, about 0.2
of all the taxpaying households. So its repeal is clearly a windfall for the super rich. The Alternative
Minimum Tax is designed to ensure the super rich pay something, after they manipulate the tax loopholes,
shelter their income offshore in tax havens, or simply engage in tax fraud by various other means.
Now that's gone as well under the Trump plan. 'Carried interest', a loophole, allows big finance
speculators, like hedge fund managers, to avoid paying the corporate tax rate altogether, and pay
a maximum of 20% on their hundreds of millions and sometimes billions of dollars of income every
year.
Who Pays?
As previously noted, folks with $91,000 a year annual income get no tax rate cuts. They still
will pay the 25%. And since that is what's called 'earned' (wage and salary) income, they don't get
the loopholes to manipulate, like those with 'capital incomes' (dividends, capital gains, rents,
interest, etc.). What they get is called deductions. But under the Trump plan, the deductions for
state and local taxes, for state sales taxes, and apparently for excess medical costs will all disappear.
The cost of that to middle and working class households is estimated at $1 trillion over the decade.
Trump claims the standard deduction will be doubled, and that will benefit the middle class. But
estimates reveal that a middle class family with two kids will see their standard deduction reduced
from $28,900 to $24,000. But I guess that's just 'Trump math'.
The general US taxpayer will also pay for the trillions of dollars that will be redistributed
to the 1% and their companies. It's estimated the federal government deficit will increase by $2.4
trillion over the decade as a result of the Trump plan. Republicans in Congress have railed over
the deficits and federal debt, now at $20 trillion, for years. But they are conspicuously quiet now
about adding $2.4 trillion more -- so long as it the result of tax giveaways to themselves, their
1% friends, and their rich corporate election campaign contributors.
And both wings of the Corporate Party of America -- aka Republicans and Democrats -- never mention
the economic fact that since 2001, 60% of US federal government deficits, and therefore the US debt
of $20 trillion, are attributable to tax cuts by George W. Bush and Barack Obama: more than $3.5
trillion under Bush and more than $7 trillion under Obama. (The remaining $10 trillion of the US
debt due to war and defense spending, price gouging by the medical industry and big pharma driving
up government costs for Medicare, Medicaid, and other government insurance, bailouts of the big banks
in 2008-09, and interest payments on the debt).
The 35-Year Neoliberal Tax Offensive
Tax cutting for business classes and the 1% has always been a fundamental element of Neoliberal
economic policy ever since the Reagan years (and actually late Jimmy Carter period). Major tax cut
legislation occurred in 1981, 1986, and 1997-98 under Clinton. George W. Bush then cut taxes by $3.4
trillion in 2001-04, 80% of which went to the wealthiest households and businesses. He cut taxes
another $180 billion in 2008. Obama cut another $300 billion in his 2009 so-called recovery program.
When that faltered, it was another $800 billion at year end 2010. He then extended the Bush tax cuts
that were scheduled to expire in 2011 two more years. That costs $450 billion each year. And in 2013,
cutting a deal with Republicans called the 'fiscal cliff' settlement, he extended the Bush tax cuts
of the prior decade for another ten years. That cost a further $5 trillion. Now Trump wants even
more. He promised $5 trillion in tax cuts during his election campaign. So the current proposal is
only half of what he has in mind perhaps.
Neoliberal tax cutting in the US has also been characterized by the 'tax cut shell game'.
The shell game is played several ways.
In the course of major tax cut legislation, the elites and their lobbyists alternate their focus
on cutting rates and on correcting tax loopholes. They raise rates but expand loopholes. When the
public becomes aware of the outrageous loopholes, they then eliminate some loopholes but simultaneously
reduce the tax rates on the rich. When the public complains of too low tax rates for the rich, they
raise the rates but quietly expand the loopholes. They play this shell game so the outcome is always
a net gain for corporations and the rich.
Since Reagan and the advent of neoliberal tax policy, the corporate income tax share of total
US government revenues has fallen from more than 20% to single digits well below 10%. Conversely,
the payroll tax has doubled from 22% to more than 40%. A similar shift within the personal income
tax, steadily around 40% of government revenues, has also occurred. The wealthy pay less a share
of the total and the middle class pays more. Along the way, token concessions to the very low end
of working poor are introduced, to give the appearance of fairness. But the middle class, the $38
to $91,000 nearly 100 million taxpaying households foot the bill for both the 1% and the bottom.
This pattern was set in motion under Reagan. His proposed $752 billion in tax cuts in 1981-82 were
adjusted in 1986, but the net outcome was more for the rich and their corporations. That pattern
has continued under Clinton, Bush, Obama and now proposed under Trump.
To cover the shell game, an overlay of ideology covers up what's going on. There's the false
argument that 'tax cuts create jobs', for which there's no empirical evidence. There's the claim
US multinational corporations pay a double tax compared to their competitors, when in fact they effectively
pay less. There's the lie that if corporate taxes are cut they will automatically invest the savings,
when in fact what they do is invest offshore, divert the savings to stock and bond and other financial
markets, boost their dividend and stock buybacks, or stuff the savings in their offshore subsidiaries
to avoid paying taxes.
All these neoliberal false claims, arguments, and outright lies continue today to justify
the Trump-Goldman Sachs tax plan -- which is just the latest iteration of neoliberal tax policy and
tax offensive in the US. The consequences of the Trump plan, if it is passed, will be the same as
the previous tax giveaways to the 1% and their companies: it will redistribute income massively from
the middle and working classes to the rich. Income inequality will continue to worsen dramatically.
US multinational corporations will begin again to divert profits, and investment, offshore;
profits brought back untaxed will result in mergers and acquisitions, dividend payouts, and financial
markets investment. No real jobs will be created in the US. The wealthy will continue to pump their
savings into financial asset markets, causing further bubbles in stocks, exchange traded funds, bonds,
derivatives and the like. The US economy will continue to slow and become more unstable financially.
And there will be another financial crash and great recession -- or worse. Only this time, the vast
majority of US households -- i.e. the middle and working classes -- will be even worse off and more
unable to weather the next economic storm.
Nothing will change so long as the Corporate Party of America is allowed to continue its neoliberal
tax giveaways, its tax cutting 'shell games', and is allowed to continue to foment its ideological
cover up. More articles by:
Jack Rasmus
"... Within the next 18 months, US Steel announced that the nation's largest steel producer was also shutting down 16 plants across the nation including their Ohio Works in Youngstown, a move that eliminated an additional 4,000 workers here. That announcement came one day before Jones and Laughlin Steel Corp. said they were cutting thousands of jobs at their facilities in the Mahoning Valley, too. ..."
"... Within a decade 40,000 jobs were gone. Within that same decade, 50,000 people had left the region, and by the next decade that number was up to 100,000. Today the 22 miles of booming steel mills and the support industries that once lined the Mahoning River have mostly disappeared -- either blown up, dismantled or reclaimed by nature. ..."
"... Candidate Trump promised to create millions of new jobs, vowing to be "the greatest jobs president that God ever created." Cohn, as Goldman Sachs's president and COO, oversaw the firm's mergers and acquisitions business that had, over the previous three years, led to the loss of at least 22,000 U.S. jobs, according to a study by two advocacy groups. Early in his candidacy, Trump described as "disgusting" Pfizer's decision to buy a smaller Irish competitor in order to execute a "corporate inversion," a maneuver in which a U.S. company moves its headquarters overseas to reduce its tax burden. The Pfizer deal ultimately fell through. But in 2016, in the heat of the campaign, Goldman advised on a megadeal that saw Johnson Controls, a Fortune 500 company based in Milwaukee, buy the Ireland-based Tyco International with the same goal. A few months later, with Goldman's help, Johnson Controls had executed its inversion. ..."
"... "There was a devastating financial crisis just over eight years ago," Warren said. "Goldman Sachs was at the heart of that crisis. The idea that the president is now going to turn over the country's economic policy to a senior Goldman executive turns my stomach." Prior administrations often had one or two people from Goldman serving in top positions. George W. Bush at one point had three. At its peak, the Trump administration effectively had six. ..."
"... The Trump economic agenda, it turns out, is largely the Goldman agenda, one with the potential to deliver any number of gifts to the firm that made Cohn colossally rich. ..."
"... If Cohn stays, it will be to pursue an agenda of aggressive financial deregulation and massive corporate tax cuts -- he seeks to slash rates by 57 percent -- that would dramatically increase profits for large financial players like Goldman. It is an agenda as radical in its scope and impact as Bannon's was. ..."
"... The story tracks Gary Cohn's impressive rise from an aluminum siding salesman to a Goldman Sachs top leader. In the mid-2000s, Goldman saw that the housing market was a bubble waiting to pop, and arranged its position to take advantage of the coming collapse ..."
"... Politically, 2016 would prove a strange year for Goldman. Bernie Sanders clobbered Hillary Clinton for pocketing hundreds of thousands of dollars in speaking fees from Goldman, while Trump attacked Ted Cruz for being "in bed with" Goldman Sachs. (Cruz's wife Heidi was a managing director in Goldman's Houston office until she took leave to work on her husband's presidential campaign.) Goldman would have "total control" over Clinton, Trump said at a February 2016 rally, a point his campaign reinforced in a two-minute ad that ran the weekend before Election Day. An image of Blankfein flashed across the screen as Trump warned about the global forces that "robbed our working class." ..."
"... It's Cohn's influence over the country's regulators that worries Dennis Kelleher, the financial reform lobbyist. "To him, what's good for Wall Street is good for the economy," Kelleher said of Cohn. "Maybe that makes sense when a guy has spent 26 years at Goldman, a company who has repaid his loyalties and sweat with a net worth in the hundreds of millions." Kelleher recalls those who lost a home or a chunk of their retirement savings during a financial crisis that Cohn helped precipitate. "They're still suffering," he said. "Yet now Cohn's in charge of the economy and talking about eliminating financial reform and basically putting the country back to where it was in 2005, as if 2008 didn't happen. I've started the countdown clock to the next financial crash, which will make the last one look mild." ..."
"... Trump ( and the GOP generally) are running the William Henry Harrison routine. Talk about the plain common working people, mix in some log cabins and hard cider, describe anyone who wants to raise wages as an effete elitist, and the downsize, merge, consolidate, offshore, the better to profit from the misery of others. ..."
"... I don't think the Establishment has any idea of the level of dissatisfaction and discontent there is in the electorate, as their plan is short to mid-term doom. ..."
From then on, this date in 1977 would be known as Black Monday in the Steel Valley, which stretches
from Mahoning and Trumbull counties in Ohio eastward toward Pittsburgh. It is the date when Youngstown
Sheet and Tube abruptly furloughed 5,000 workers all in one day.
The bleeding never stopped.
Within the next 18 months, US Steel announced that the nation's largest steel producer
was also shutting down 16 plants across the nation including their Ohio Works in Youngstown, a
move that eliminated an additional 4,000 workers here. That announcement came one day before Jones
and Laughlin Steel Corp. said they were cutting thousands of jobs at their facilities in the Mahoning
Valley, too.
Within a decade 40,000 jobs were gone. Within that same decade, 50,000 people had left
the region, and by the next decade that number was up to 100,000. Today the 22 miles of booming
steel mills and the support industries that once lined the Mahoning River have mostly disappeared -- either blown up, dismantled or reclaimed by nature.
If a bomb had hit this region, the scar would be no less severe on its landscape.
More:
The events of Black Monday forever changed not only the Steel Valley, but her people and eventually
American culture and politics. Just last year the reverberations were felt in the presidential
election when many hard-core Democrats from this area broke from their party to vote for Donald
Trump, a Republican who promised to bring jobs back to the Heartland.
Even today, after the election, the Washington establishment still hasn't processed or properly
dissected its effects. Economic experts predicted that the service industry would be the employment
of the future. Steel workers were retrained to fill jobs in that sector, which was expected to
sustain the middle class in the same way that manufacturing did.
It did not. According to a study done by the Midwest Center for Research the average salary
of a steel worker in the late 1970s was $24,772.80. Today, according to the most recent Bureau
of Labor statistics, the medium household income in the Mahoning Valley is $24,133.
Trump raged against "offshoring" by American companies during the 2016 campaign. He even threatened
"retribution," a 35 percent tariff on any goods imported into the United States by a company
that had moved jobs overseas. But [Gary] Cohn laid out Goldman's very different view of offshoring
at an investor conference in Naples, Florida, in November. There, Cohn explained unapologetically
that Goldman had offshored its back-office staff, including payroll and IT, to Bangalore, India,
now home to the firm's largest office outside New York City: "We hire people there because they
work for cents on the dollar versus what people work for in the United States."
Candidate Trump promised to create millions of new jobs, vowing to be "the greatest jobs
president that God ever created." Cohn, as Goldman Sachs's president and COO, oversaw the firm's
mergers and acquisitions business that had, over the previous three years, led to the loss of
at least 22,000 U.S. jobs, according to a study by two advocacy groups. Early in his candidacy,
Trump described as "disgusting" Pfizer's decision to buy a smaller Irish competitor in order to
execute a "corporate inversion," a maneuver in which a U.S. company moves its headquarters overseas
to reduce its tax burden. The Pfizer deal ultimately fell through. But in 2016, in the heat of
the campaign, Goldman advised on a megadeal that saw Johnson Controls, a Fortune 500 company based
in Milwaukee, buy the Ireland-based Tyco International with the same goal. A few months later,
with Goldman's help, Johnson Controls had executed its inversion.
With Cohn's appointment [as his economic adviser], Trump now had three Goldman Sachs alums
in top positions inside his administration: Steve Bannon, who was a vice president at Goldman
when he left the firm in 1990, as chief strategist, and Steve Mnuchin, who had spent 17 years
at Goldman, as Treasury secretary. And there were more to come. A few weeks later, another Goldman
partner, Dina Powell, joined the White House as a senior counselor for economic initiatives. Goldman
was a longtime client of Jay Clayton, Trump's choice to chair the Securities and Exchange Commission;
Clayton had represented Goldman after the 2008 financial crisis, and his wife Gretchen worked
there as a wealth management adviser. And there was the brief, colorful tenure of Anthony Scaramucci
as White House communications director: Scaramucci had been a vice president at Goldman Sachs
before leaving to co-found his own investment company.
Even before Scaramucci, Sen. Elizabeth Warren, D-Mass., had joked that enough Goldman alum
were working for the Trump administration to open a branch office in the White House.
"There was a devastating financial crisis just over eight years ago," Warren said. "Goldman
Sachs was at the heart of that crisis. The idea that the president is now going to turn over the
country's economic policy to a senior Goldman executive turns my stomach." Prior administrations
often had one or two people from Goldman serving in top positions. George W. Bush at one point
had three. At its peak, the Trump administration effectively had six.
Ex-Goldmanista Steve Bannon's White House agenda was not in Goldman's interest, though. But now
he's gone. More:
The Trump economic agenda, it turns out, is largely the Goldman agenda, one with the potential
to deliver any number of gifts to the firm that made Cohn colossally rich.
If Cohn stays, it will
be to pursue an agenda of aggressive financial deregulation and massive corporate tax cuts -- he
seeks to slash rates by 57 percent -- that would dramatically increase profits for large financial
players like Goldman. It is an agenda as radical in its scope and impact as Bannon's was.
The story tracks Gary Cohn's impressive rise from an aluminum siding salesman to a Goldman Sachs
top leader. In the mid-2000s, Goldman saw that the housing market was a bubble waiting to pop, and
arranged its position to take advantage of the coming collapse. The Intercept continues:
Cohn was a member of Goldman's board of directors during this critical time and second in command
of the bank. At that point, Cohn and Blankfein, along with the board and other top executives,
had several options. They might have shared their concerns about the mortgage market in a filing
with the SEC, which requires publicly traded companies to reveal "triggering events that accelerate
or increase a direct financial obligation" or might cause "impairments" to the bottom line. They
might have warned clients who had invested in mortgage-backed securities to consider extracting
themselves before they suffered too much financial damage. At the very least, Goldman could have
stopped peddling mortgage-backed securities that its own mortgage trading desk suspected might
soon collapse in value.
Instead, Cohn and his colleagues decided to take care of Goldman Sachs.
Goldman would not have suffered the reputational damage that it did -- or paid multiple billions
in federal fines -- if the firm, anticipating the impending crisis, had merely shorted the housing
market in the hopes of making billions. That is what investment banks do: spot ways to make money
that others don't see. The money managers and traders featured in the film "The Big Short" did
the same -- and they were cast as brave contrarians. Yet unlike the investors featured in the film,
Goldman had itself helped inflate the housing bubble -- buying tens of billions of dollars in subprime
mortgages over the previous several years for bundling into bonds they sold to investors. And
unlike these investors, Goldman's people were not warning anyone who would listen about the disaster
about to hit. As federal investigations found, the firm, which still claims "our clients' interests
always come first" as a core principle, failed to disclose that its top people saw disaster in
the very products its salespeople were continuing to hawk.
What follows is an amazing, very detailed story about how Goldman maneuvered successfully through
the rubble of the economic collapse, and came out on top. And then, get this:
Politically, 2016 would prove a strange year for Goldman. Bernie Sanders clobbered Hillary
Clinton for pocketing hundreds of thousands of dollars in speaking fees from Goldman, while Trump
attacked Ted Cruz for being "in bed with" Goldman Sachs. (Cruz's wife Heidi was a managing director
in Goldman's Houston office until she took leave to work on her husband's presidential campaign.)
Goldman would have "total control" over Clinton, Trump said at a February 2016 rally, a point
his campaign reinforced in a two-minute ad that ran the weekend before Election Day. An image
of Blankfein flashed across the screen as Trump warned about the global forces that "robbed our
working class."
So Trump won -- and staffed up with Goldman machers -- Gary Cohn most important of all:
There's ultimately no great mystery why Donald Trump selected Gary Cohn for a top post in his
administration, despite his angry rhetoric about Goldman Sachs. There's the high regard the president
holds for anyone who is rich -- and the instant legitimacy Cohn conferred upon the administration
within business circles. Cohn's appointment reassured bond markets about the unpredictable new
president and lent his administration credibility it lacked among Fortune 100 CEOs, none of whom
had donated to his campaign. Ego may also have played a role. Goldman Sachs would never do business
with Trump, the developer who resorted to foreign banks and second-tier lenders to bankroll his
projects. Now Goldman's president would be among those serving in his royal court.
Finally:
It's Cohn's influence over the country's regulators that worries Dennis Kelleher, the financial
reform lobbyist. "To him, what's good for Wall Street is good for the economy," Kelleher said
of Cohn. "Maybe that makes sense when a guy has spent 26 years at Goldman, a company who has repaid
his loyalties and sweat with a net worth in the hundreds of millions." Kelleher recalls those
who lost a home or a chunk of their retirement savings during a financial crisis that Cohn helped
precipitate. "They're still suffering," he said. "Yet now Cohn's in charge of the economy and
talking about eliminating financial reform and basically putting the country back to where it
was in 2005, as if 2008 didn't happen. I've started the countdown clock to the next financial
crash, which will make the last one look mild."
Read the whole thing. Please, do. It is staggering to think that here we are, a decade after
the crash, and here we are.
Tonight (Sunday), PBS begins airing Ken Burns' and Lynn Novick's long Vietnam War documentary.
I'll write more about it this week. I've watched it, and to call it landmark television is to vastly
undersell it. It comes to mind reading the Goldman-Trump piece because it revealed, however inadvertently,
how little we Americans learned from the Vietnam experience when it came time to invade Iraq.
Twenty, thirty years from now, don't be surprised if some American president proposes a "this
time, it's different" invasion of another foreign country. And don't be surprised if we the people
cheer for him. We're suckers for this kind of thing.
Here's Kevin Williamson, on Trump's epic flip-flop on immigration and DACA:
What did they expect? Trump is a serial bankrupt who has betrayed at least two-thirds of the
wives he's had and who lies compulsively -- who invented an imaginary friend to lie to the press
on his behalf. He has screwed over practically everyone who has ever trusted him or done business
with him, and his voters were just another in a long series of marks. They gave him that 280ZX
with no down payment -- and no prospect of repossessing it until 2020 at the earliest. Poor Ann
Coulter is somewhere weeping into her gin: "I bet on a loser," she explains.
It was a dumb bet.
With no market-oriented health-care reform and no hawkish immigration reform and the prospects
of far-reaching tax reform looking shaky -- even though Republicans exist for no obvious purpose
other than cutting taxes -- Trump is still looking for his big win. Even those who were willing
to suspend the fully formed adult parts of their brains and give him the benefit of the doubt
are coming around to the realization that he has no beliefs and no principles, and that he will
sell out any ally, cause, or national interest if doing so suits his one and only true master
in this life: his vanity. He didn't get rolled by Pelosi and Schumer: His voters got rolled by
him. That's the real deal.
Cheers to you, Youngstown!
When Youngstown (so to speak) figures out what's been done to it, politics in this country is
going to get very, very interesting. In the meantime:
Some of Trump's base is happy to let him cut deals with Pelosi and Schumer so long as he tweets
gifs of Hillary and CNN logos. WWE BS.
Given Trump's history of betraying everyone he's been involved with (wives, businesses, family
members) why are people surprised?
And no, I don't suspect Trump supporters to ever turn on him. Whatever he does, they'll find
a way to excuse it and cast the blame of "the media", "those liberals", "those people", and "them"
instead. It's easier for them to allow themselves to be ripped off, over and over again, than
to admit to themselves that they were fools who fell victim to a con man.
(And no, I don't place much credence in Ann Coulter's hissy fit. She's just trying to keep
the TV cameras on her as long as possible. Like usual.)
The world has changed. It used to be ."what is good for General Motors is good for America."
Multinational corporations tend to have most of their revenue growth outside of the USA today.
Some companies like Apple manufacture their phones overseas, and most sales are overseas. This
complicates all historical comparisons. The world is much more interconnected these days and we
are all "God's children" living in all parts of the globe. Nationalism that is practiced by Trump
eventually ends with a 1930s in Europe. BLAME creates hatred which then becomes to great uniter.
"Be charitable. It's VERY hard for someone to admit that they were fooled. It will be interesting
to see all the mechanisms of denial."
Will it be interesting? Or entirely predictable? We have a model: All the ostensibly progressive
people who for years voted Democrat and essentially ended up with a huge bait and switch. Which
is not the divide in the Democratic Party, with the social justice left now ascendant and angry,
because they got an awful lot of Dont Ask, Don't Tell and Clinton-era mass incarceration for their
loyalty. While the union-wing got Goldman Sachs stuff.
All those people got rolled the same way Trump is rolling people now. So now we have BLM and
Bernie Sanders and basically nothing in between.
Trump has always been an ethically-challenged con man. I would still like to hear someone identify
an actual policy that would help Youngstown. The truth is that steel industry jobs are gone, and
they aren't coming back. Illegal immigration had nothing (or next to nothing) to do with that
and has next to nothing to do with the fact that Youngstown has not developed other jobs for its
citizens. Trump never proposed any concrete solutions, but quite frankly neither has JD Vance.
Democrats have -- Obamacare, training programs, increased minimum wage, financial aid, more support
for unions -- but by and large the white working class has rejected those policies. So maybe Youngstown
should figure out what it wants from Trump or anyone else.
"The faithful man has perished from the earth, and there is no one upright among men. They all
lie in wait for blood; every man hunts his brother with a net. That they may successfully do evil
with both hands-the prince asks for gifts, the judge seeks a bribe, and the great man utters his
evil desire; so they scheme together." Micah 7:2-3 (NKJV)
The more things change, the more they stay the same.
Trump raged against "offshoring" by American companies during the 2016 campaign. He even threatened
"retribution," a 35 percent tariff on any goods imported into the United States by a company
that had moved jobs overseas.
Again, can somebody explain to me how in the hell this is going to be done as free trade is
50%+ popular and any changes in a deal, such as NAFTA, will have serious negative economic consequences
in certain parts of the nation. Rip up NAFTA, Iowas LOSES BIG!
Also, in terms of employment the steel industry is not that large anymore. It has about 80K
workers today which is significantly about 90% less in the 1980s. And we produce almost (about
~95%) as much steel today as in the 1980s. So steel tariffs will increase steel jobs by 10% which
is 8K workers and construction will lose 1% of 730K which is almost 8K workers. So somebody has
to show me the benefit of steel tariffs as I don't see it.
[NFR: But that's not really the point. The point is that Trump *specifically* ran against Goldman
Sachs and what it represents. And now look. It simply won't do to say, "But Hillary would have
been worse." Maybe so, but at this point, that strikes me as a way of rationalizing Trump's failure
to keep his promises. -- RD]
Actually, I see it as rationalizing on the part of the NeverTrumpers for why they were justified
in offering the voters a sh*t sandwich and why the voters were wrong to go with Trump in the hope
of not being forced to eat a sh*t sandwich. Now that Trump has gone back on his promises, the
NeverTrumpers are rationalizing that it proves they were right all along because the voters didn't
escape the promised sh*t sandwich.
I would dearly love to help them out, and rebuild their cities. It would be the right thing
to do. But as long as they keep voting for republicans (and yes, republicans are more corporate
and Wall Street friendly then the democrats, Hillary Clinton notwithstanding), they are going
to continue to decline.
As a Baltimore resident, I find this statement hilarious.
"As members of the reviled Never Trump movement, it's not just an end-zone celebration play
to say we warned you. We warned you over and over that Trump's brand isn't success; it's betrayal.
We warned you that he believes in nothing, and so he will break any promise, shaft any ally, and
abandon any position. Hate us all you want, but if you think this is the last time he'll shank
his faithful, you might want to review the last 40 years of his personal and business behavior."
"There is a subset of voters who look upon their politician in an unhealthy God-like/3rd world
fashion; much more tangible on the Left, but there on the Right as well."
This is correct, except for that ludicrous claim that it is worse on the Left. It's obvious
on both sides and it's been that way forever.
I despise Trump. I am glad he is making deals with Democrats, but the Goldman Sachs thing is
horrible. There was always a faint chance he could have governed as a populist, pushing massive
infrastructure projects to create jobs, for instance. I thought that would appeal to his vanity
as someone who builds things. No such luck.
It isn't just the steel industry. You underestimate the level of rage out there in flyover country
– and the towns where the service workers live next to the towns where the 1% live because the
workers cannot afford the uptown costs – they really will be fine if the whole system burns to
ash.
VikingLS (at 10:19pm) hits the mark, IMO. I'd be interested to hear more. Playing the "con man"
card gets stale & tiresome fast. Thanks also to Rob G for recommended reading (at 7:08am). So,
Rod, won't a good shot of Ben Op faith and virtue also help make America industrious again? It
is hard work, but is it impossible to imagine or too complex to do? If you think so, I think you
underestimate us–and our Lord.
So long as the Clintonistas don't find a new figurehead, bet on Sanders winning in 2020. If anyone's
a true opponent of neoliberal economic policies, he is.
Trump ( and the GOP generally) are running the William Henry Harrison routine. Talk about
the plain common working people, mix in some log cabins and hard cider, describe anyone who wants
to raise wages as an effete elitist, and the downsize, merge, consolidate, offshore, the better
to profit from the misery of others.
Now, what could have been done in 1977? That was the beginning of Jimmy Carter's term, his
first year in office. At the time, he was a conservative southern Democrat, America's first born-again
Christian president, despised by liberals, who tried to run Ted Kennedy against him in the 1980
Democratic primary, producing plenty of material for Ronald Reagan campaign commercials in the
general election.
It would have taken a VERY comprehensive plan and some long-term investments. The steel plants
were aging and uncompetitive. The companies laid off thousands because they didn't think it worth
investing billions in new plants, new technology, etc. A few plants that employees pooled their
hard-earned savings to buy turned out to be unsustainable too. A good stop TOWARD a more sensible
socialist economy would have been a law providing that IF a company employing more than 1000 workers
wanted to shut a plant, a government agency has first option to buy, at a price no greater than
original investment minus all depreciation taken on corporate tax returns (that is, next to nothing).
Then it would have taken billions in federal financing to do the upgrade. Why do this? Well,
considering the economic and social costs of all the crime, drug networks, drug treatment, alcoholism,
etc. in the forty years since, it might have been a net cost savings. This is how socialism becomes
a paying proposition, rather than "running out of other people's money."
But a sustainable program has to be geared to production people will actually need and use
and want and buy. Production of stuff that piles up because there is no market for it is not sustainable.
Something could have been done, but there was no will. Democrats were, then as now, afraid of
their own shadow, and addicted to putting band-aids on long-term problems. Republicans, then as
now, were addicted to "market forces," which, of course, are what triggered the catastrophe. What
passed for a "left" at that time was too busy debating whether Deng or the Gang of Four were the
true heroes of proletarian revolution and holding May Day picnics where 90 percent of participants
were college graduates. They weren't reading the business pages.
It is also the case that Hillary Clinton was in bed with Goldman.
True, and relevant, but hardly in contradiction with what Dux Bellorum said.
[NFR: This is simplistic trolling and you know it. It is also the case that Hillary Clinton
was in bed with Goldman. Remember the private Wall Street speech she gave, released by Wikileaks,
in which she talked about how one needed to have "a public and a private position"? We would
have been equally screwed by a Clinton.2 presidency, and a conventional Republican one. My
anger at Trump over this is that he promised to be something different -- and, being fabulously
wealthy, he didn't depend on the largesse of financial titans to make his living. He was in
a position to change things -- yet on economic issues, he's turned out to be as bad or worse
than those he ran against in both parties. -- RD]
It would be trolling if we were describing a single election, sure, but the comment refers
to the very, very long alliance between social conservatives and business conservatives, which,
in the south, goes back to the nineteenth century. Institutional Christian powers have been taking
money and power from business interests to enforce their particular visions of what everyone should
live like, and it's had the effect of giving them more and more power over an ever-shrinking and
ever more miserable kingdom.
There's that lovely idea that by their fruits shall one know ideas, I think that Youngstown,
in synecdoche, is a great example of the fruits of that particular idea.
The problem with this line of thought is that it would lead you to expect that Trump won Rust
Belt voters whose chief concern was jobs and the economy. But he didn't; Clinton (narrowly) did.
Trump won Rust Belt voters whose chief concern was "cultural decline".
Somehow the economic narrative got way off from what the data actually show: on election day,
Trump underperformed recent Republican candidates in every economic cohort *except* households
making $70K-$100K. This is the group you need to look at to explain his appeal.
1. I am unhappy with certain (even "many") Trump decisions.
2. I remain happy I voted for Trump over Clinton.
What would it take for me to instead have wished I voted Clinton over Trump?..some combination
of the following:
1. An increase in taxes on the working and professional class.
2. An offensive ground invasion of foreign country.
3. The nomination and Senate approval of a doctrinaire Liberal to the Supreme Court.
4. Policies that would lead to increased working class and poor immigrants to our country.
I imagine there are more, but these are some of the important points. I can muddle through
a temporary ill mannered President and don't have a problem getting dirty to avoid the above.
Judging from the reaction of Trumpers in this comment thread it's pretty clear that there is literally
nothing he could do that would cause them to abandon him. They will rationalize anything he does.
During the campaign, some of them said "well if he betrayed us on immigration then we'd leave
him" and the biggest crimes committed by the Rubios of the world was that they cut deals far better
(from restrictionist points of view) than this. So it's clear how they react to a betrayal–simply
pretend it's not a betrayal, or that any non-Trump alternative would have been worse.
I'm always amazed at how loyal Trump supporters are. At times he was voted in to totally disrupt
Washington, at other times he was supposed to make deals to keep the peace.
Look, Trump was always part of Wall Street. This was always going to happen. I don't think it's
a bad thing but I do feel bad for the people who voted for him expecting anything different.
"It's easy to criticize but a lot more difficult to say what they should have done. So tell me,
who should they have supported? And don't say "Anybody but Trump" – that's not an answer."
This is a fair question, but they easily could have organized around another candidate who
represented what they believed in (surely Trump is not the only person in the world who favored
cutting back immigration–it's a very popular position in the GOP grass roots). Pat Buchanan ran
on it in the '90s.
But to say "let's get behind the guy whose track record practically screams at you that you're
going to get backstabbed" seems worse than even staying home. What are the chances now that next
time a candidate runs on those issues anyone is going to believe him?
A side note: John_M's correction of the steel plant closures makes sense. At the time they happened,
it was not unusual to point out that American steel was uncompetitive even in a fair market (which
didn't exist). Failure to modernize was a big factor.
And even if evil capitalism and elitist government may have been behind the closings, one should
point out that a lot of less bright capitalists lost their shirts.
Any legislation. Congress doesn't need to pass some thing. They could pass any
thing. Except they can't pass any thing. Not a single thing. They're incapable of governing. It's
thoroughly depressing. As Williamson has noted previously, the wily McConnell is just the wrong
man for the job. Trump's broken promises are nearly 100% McConnell's leadership failures. Could
any other GOP president overcome McConnell's incompetence? Maybe. But that's a lot of incompetence
to overcome. The Democrats are terrible human beings. But they know how to pass legislation. So
if you want to pass some legislation and your choices are the Democrats or McConnell do you really
have a choice as to the party you're going to approach?
Have to agree with all the Trump voters and supporters on this thread. None of them voted on principles;
as they have stated, more on emotion, affinity and bread and butter issues. Your points about
Trump's betrayals ring hollow. Everybody understood that Trump's positions are malleable and that
was part of the package. Even when his policies begin to hurt his supporters, that will be a necessary
evil to shore up the cultural and social solidarity that Trump represents. Plain and simple.
Everyone who voted for Trump based on ANYTHING he said during the campaign is a sucker. We warned
you, but you wouldn't listen and just wanted to watch the 'libtards' cry.
To be honest, I never understood how Trump was going to bring these jobs back as automation
was the primary cause and the connection of Illegal Immigrants was not significant. Please show
the direct lines of DACA Immigrants to manufacturing jobs in the Rust Belt?
They increase the labor pool that will compete with those people whose jobs have been eliminated
by automation. Moreover, they require the same public spending (actually more), so now those people
affected by automation are left with less government succour, as resource now have to be diverted
to people who entered the country illegally.
I, for one, understand that some sort of compromise solution will need to be reached to deal
with the Dacaritos, but let's not wave our hands and pretend this is all the fault of Skynet and
that inflating the number of no- to low-skilled people in the pool will have no effect.
Be aware, too, that we're NOT discussing just a few hundred thousand people here, as the deals
being thrown around will go up into the millions, once you factor in chain migration, as well
as the knock on effect of encouraging yet more illegal immigration with the promise of future
amnesties.
Mr. Dreher routinely gets into the pitfall of context denial when it comes to Trump.
Given the state of the country, and especially what the Republican and Democratic parties have
given us for the last 40 years, no one (including Mr. Dreher) will ever be able to make the case
that supporting Trump was not the rational way to go despite the risks. It was the right way to
go under the circumstances and given the horrid alternatives that the GOP gave us in the primaries
and the Democratic Party gave us for the general.
More importantly, just because Trump may be fake doesn't mean he did not tap into real issues.
The reason Trump won is that, again, he tapped into very real issues.
Since I discovered your blog, Rod, I have wondered, why would you have your blog on such a lame
website. Now I know – its your way or the highway. No choosing between imperfect choices.
Just as the Clinton campaign disintegrated into a vacuous, visionless, vapor which the ultimately
voters did not care to inhale, so too the Trump administration is in the premature process of
decay into an amorphous, gelatinously unrecognizable politico-administrative life-form ("neither
fish nor foul," "because you are lukewarm!neither hot nor cold "), perhaps to better camouflage
and disguise the creedless (nihilistic) plutocratic pillaging of what remains of the non-oligarchically
captured corpse (or, at least, despoiled and desecrated body) of a once proud and productively
positive Middle Class government and state.
A deal with Pelosi/Schumer would make sense on infrastructure but not DACA. Trump will not survive
this betrayal on DACA. People aren't stupid.
There is a debate in the informed pro-Trump community -- is Trump a con artist, sell out, traitor,
or man who means well but whose hands are tied. On one side, you have people bending over backwards
to defend pretty transparently treacherous moves by Trump's on the grounds that he has little
real choice. The argument is that because Trump's Jacksonian agenda is being monolithically and
implacably opposed by the top leadership of both parties, the courts, the military, the IC, the
banks and big corps, etc. (our true rulers), Trump has to bide his time, cut deals, and
play Nth dimensional chess until he can move forward with his real populist agenda.
The other side of the argument is that Trump is just a con artist. When pro-Trump people try
to argue to me that Trump's hands are tied, I also counter by pointing out the factors that are
under Trump's control. Trump can't control Ryan, McConnell, etc. but what can he control. Trump
can certainly control who works for him! Which means the strongest evidence that Trump never meant
it can be found just by looking at who he has working for him. He gave top jobs to establishment
figures like McMaster, Kelly and Cohn.
I can understand the claim that CIA and other deep state figures, McConnell, etc. won't go
along with Trump and have been working overtime to sabotage Trump -- those things are true -- but
what then is Trump's excuse for giving jobs to people like McMaster and Cohn?
Kushner and Cohn (and really most likely Lloyd Blankfein himself) have mostly neutralized Trump's
economic, immigration and trade agenda in areas where the president has a lot to autonomy to act
independent of the courts and Congress, while McMaster has done the same on the foreign policy
front. And John Kelly, by all accounts, now has Trump under de facto house arrest, having reportedly
cut off Trump from all of his remaining advisors that support the original MAGA agenda.
These are dark days for anyone who recognizes that the issues that propelled Trump to victory
are real. Nothing ever changes because our true rulers are not the people we elect.
Finally, the idea that Trump pulled off the con of the century does not hold up. That honor
belongs to the post-1980 Republican party for pulling off the longest and greatest con over the
largest number of people ever. Trump can't come close.
Who did Kevin Williamson favor in the 2016 primaries? Jeb? Rubio? Cruz?
Here is the reality that Williamson and his ilk refuse to acknowledge. If any of Trump's Republican
rivals were in his position now:
The federal government would not be appreciably smaller.
Obamacare would not be fully repealed/replaced.
A bigger amnesty would be at least under consideration, if not already enacted.
The personal income tax would not be abolished or turned into a flat tax.
We'd be in a regime change war with Assad (and thus Putin).
Paul Ryan-ish "entitlement reform" would not be enacted.
Latinos and millenials would not love the Republican Party.
Homosexual marriage would not be rolled back.
These other Republicans (most to all of whom would have lost to HRC) would not have been so
successful enacting the movement con agenda, which is unpopular and internally contradictory.
Voucherize Medicare + open borders + neocon wars + free trade + PC pandering = balanced budgets,
prosperity for all, and a "permanent Republican majority"?
"Just shocking that a politician went back on a campaign promise. Throw the bum out. Shocking."
This is in fact shocking. It's shocking at least on the order of Bush the Elder's reversal
of "read my lips: no new taxes", which cost him a second term.
I see that Trump has opened a US military base in Israel, the first ever, which is one of the
stupidest acts in recent American history.
all of which suggests that Trump will soon be history himself
Given the comment section, there is no indication that his voters are judging his progress based
on any criteria that is usually applied to normal politicians. Real benefits are not actually
a criterion used by his voters. If trump can find enough scapegoats to blame for things, I believe
that qualifies as progress for his voters because that makes them feel better. Since he is adapt
at generating controversy and thereby creating appropriate new groups to blame I do not really
see reason why this virtuous cycle could not continue for two terms.
I mean seriously, bush junior sent off their sons and daughters to vacation in the desert and
thousands of them did not come back and he got two terms. Trumps voters are not going to be upset
just because he lies to them.
"Or cancelling Obama regulations such as the one that required any buildings re-built with federal
money needs to take rising sea levels into account?"
I didn't even know that was a thing. (The regs themselves.)
As I followed the Houston and then FL news, once I would get past all the human suffering my
mind always seemed to end up in the same place: "We're not really so stupid that we're actually
gonna rebuild in these same low-lying places?"
I know this only applies to certain areas, and that the storm over Houston was pretty freakish
and perhaps a one-of-a-kind. But some of these areas are destined to flood so much over the coming
decades that they will eventually have to be abandoned, at least as building sites. So in the
meantime how many billions are we going to put on Uncle Sam's credit card, to be paid by coming
generations, for rebuilding doomed structures?
I hope there are controls in place that at least force the people who in the worst places to
move elsewhere.
Kronstein1963 writes:
It's easy to criticize but a lot more difficult to say what they should have done. So tell me,
who should they have supported?
They should have voted for Sanders in the primaries and then the GOP nominee in the general.
By doing this they would have helped further the economic nationalist message by demonstrating
significant support for a serious anti-Wall street message. By putting Trump in there they established
empirically that
populist economic nationalism = Goldman Sachs.
Populist economic nationalism is now a dead letter
I'm in holding mode on Trump right now. I'm wait-and-see on where DACA negotiations go, and I'll
call my Representative and Senators to voice my opposition to amnesty (and support for some of
the restrictionist bills pending). Here's the possibilities of what the past week's DACA drama
means to me:
Looks, quacks like a duck: Trump sincerely wanted to agree to amnesty, with little in return,
with the Democrats, got blowback from his troops, and backtracked by seeming to insist on tougher
demands.
Total sellout: Trump will go for amnesty, with no meaningful concessions, base voters (and
small donors) be damned.
4D chess: Trump was using talk of amnesty and delaying a fight over the wall to lure the Democrats
into negotiation so he could then drop tougher demands on them (end to chain migration), which
he knows they will reject, setting them up to look like extremists and have a government shutdown
fight (which, e.g., Congressman Luis Gutierrez openly wants) right before Christmas.
In the first possibility, I'm upset and undecided for 2020, but at least Trump listened to
his troops after only a few days of Breitbart and Twitter screaming at him. That's more than you
can say for GWB, John McCain, or Paul Ryan.
In the second possibility, I'm through with Trump, for good.
In the third, I'm OK with political chess-playing in principle, but you gotta do it right.
It's dangerous, especially for Trump, hated as he is by all TPTB, even in his own party, to demoralize
and confuse your core fan base (and small donation base, I repeat) in attempt to lure the opposition
into a political trap.
I can't tell if possibility 1 or 3 is the truth (2 is unlikely but frighteningly possible).
In any case, I don't see a DACA amnesty happening because too few Republicans will risk it, Trump
seems to be offering a trade which the Democrats will never ever accept (only DACA applicants
for RAISE Act and maybe wall or some interior enforcement), and some Democrats (Gutierrez and
company) are so stupid and greedy and fanatical that they think they are entitled to a massive
amnesty with literally nothing in return, not even fake border enforcement (Schumer and Pelosi
are trying to talk sense into their backbenchers, we'll see to what avail).
It's almost as though the last 40 years of Youngstown citizens felt *entitled* to having those
good jobs replaced, in their town, w/o having to move or re-invent themselves.
I am not buying the we were fooled thing in the least. Like, the don is putting health care and
DACA in the hands of republican legislators and all they have to do is legislate. They have not
and cannot. Now we are reading about the don's betrayal of labor on TAC? This is not any sort
of news whatsoever. Someday, maybe after some environmental disaster in appalachia, we will read
about how the don betrayed the amerian people by crippleing regulations designed to protect their
air and water. As if that was something new too. No, what we are seeing here is what I have been
seeing since the rise of the don. If he is successful, it is because we supported and voted for
him. If he does what anyone paying attention saw him doing already, then we can say, well, he
never was a true conservative anyway. All this, is just more of the same ole lies of omission
and lies to deny responsibility and place blame on anyone but ourselves. How many columns have
I read here about how the don was the fault, not of the people that actually voted for him, but
the fault of those gay transgender mexican muslim blacks and their secularist enablers. And the
beat goes on.
Oh, and I was mortified when trump was elected but not at all surprised. He followed every standard
GOP strategy including the tried and true decisive pander to the NRA. If he did do anything different,
it was to claim in a much more outright manner that we were being victimized by immigrants and
all those other non-deserving people. He even set the bait for people like me, by saying he would
go after wall street and the hedge funds that shorted the whole world in the financial collapse.
But in this pile on, we should give the don credit where it is due. He has successfully exposed
the republican party for what it has always been about. And putting healthcare and DACA into republican
legislator's hands is going to be much more revealing about who has been fooling the fools than
anything the don himself has done.
"Steel workers were retrained to fill jobs in that sector, which was expected to sustain the middle
class in the same way that manufacturing did.
It did not. According to a study done by the Midwest Center for Research the average salary
of a steel worker in the late 1970s was $24,772.80. Today, according to the most recent Bureau
of Labor statistics, the medium household income in the Mahoning Valley is $24,133."
There seems to be some misperceptions regarding the wages that were paid in old-line manufacturing
industries vs modern service jobs. The most important thing to understand is that the once strong
wages and benefits in the steel and auto and other similar industries had nothing to do with the
sort of work the people were doing. The pay and benefits were a direct result of the employees
having strong unions and the unions having favorable federal legislation in place.
The truth is that the jobs themselves were often awful, especially in steel. And dangerous.
But the jobs didn't require any more experience or ability from a new hire than the fast food
industry requires today.
It is just a quirk of the way the industrialization of the country played out that the industrial
sector ended up, at least for awhile, with employee-friendly compensation packages. In fact had
it all gone the other way, and the service sector grown first, before manufacturing, many of the
problems the non-college educated crowd face today wouldn't even exist. Manufacturing has become
especially sensitive to labor costs because companies can choose to build factories in other countries
where salaries are low. Most of the country's service industry isn't like that.
"When Youngstown (so to speak) figures out what's been done to it, politics in this country is
going to get very, very interesting."
Rod what are you going to do to change this? The Ben Op doesn't help.
[NFR: I dunno, Viking, I guess I'm waiting on you to tell me what to do. You know perfectly
well that the Benedict Option is not about changing American politics, but about the life of the
church. Besides, it is not the case that I or anybody else has to have a "solution" to offer before
we can criticize what we see. I doubt very much you apply that standard to your own judgments
of the world. -- RD]
Since I voted for Trump and you did not, doesn't that put me in a better position to judge whether
Trump's willingness to make deals with Dems on DACA, taxes and infrastructure amounts to betrayal?
Answer: It doesn't. It's what I want him to do. He campaigned on making deals, including with
Russia, which I also want to see to keep the peace. Just hold the line on social issues, and we're
good.
But I thought we were a bunch of hicks that did not understand the constitutional checks and balances
and the need for compromise and when we found out Trump was not able to be a dictator we would
turn on him.
The problem is Youngstown won't figure it out. They, and so many other small and industrial towns
across the country, are looking for a solution on their terms. They have had the last 30 plus
years to update, and some have, like Pittsburgh. Meanwhile, the people who have figured this out
left for greener pastures a long time ago.
I would dearly love to help them out, and rebuild their cities. It would be the right thing
to do. But as long as they keep voting for republicans (and yes, republicans are more corporate
and Wall Street friendly then the democrats, Hillary Clinton notwithstanding), they are going
to continue to decline.
I was in Youngstown just the other week. You could no more thoroughly destroy a city than if you
had the Air Force flyover and reduce it to rubble via saturation bombing. You could say the exact
same thing about 1000 other towns here in the Rust Belt. The main source of economic activity
is methamphetamine production and heroin trafficking, and the ruination of generations yet unborn
is baked in.
"So Trump won -- and staffed up with Goldman machers -- Gary Cohn most important of all"
As did Obama, and Bush, and Clinton, and on and on unti the heat death of the universe. Wall.
Street. Always. Wins. Like the Military Industrial Complex always wins.
And they will continue to win until we can decide as a people to put our cultural distinctions
and differences aside and defeat them. Because they are going to exsanguinate your tribe of traditionalist
Christian conservatives as surely as they will my tribe. Say what you want about the political
praxis of Occupy Wall Street, at least they were yelling at the right buildings.
I'd like to bring an old word back into our political currency: solidarity.
Still a happy Trump supporter here; unphased by the presence of Goldman Sachs employees (the horror!)
or of deals with Democrats. Could be better, could be much worse.
[NFR: I dunno, Viking, I guess I'm waiting on you to tell me what to do. You know perfectly well
that the Benedict Option is not about changing American politics, but about the life of the church.
Besides, it is not the case that I or anybody else has to have a "solution" to offer before we
can criticize what we see. I doubt very much you apply that standard to your own judgments
of the world. -- RD]
Actually I do try and hold myself to a standard along those lines. People don't always like
my suggestions, but I do have them. I wouldn't have asked you that question if I didn't have an
idea what I think you, or at least somebody at TAC, needs to do.
Someone needs to talk about what Trump getting elected as a Republican with his platform says
about the voters, even if he himself seems to have pulled a bait and switch. Not what liberals
say it means ("Clinton was a bad candidate" at best "America is racist" at worst.) This is conference
worthy.
Nothing against you and Larrison, you're both fine writers, but is it possible to get the other
writers here to write more? What's the difference between yourself and say, Bill Kaufman in TAC's
structure?
Someone, it doesn't have to be you, but someone, needs to spend serious time looking at the
Conservative movement in new media. That's looking like where the future is, not the New York
Times op-ed page. There really are people who supported Trump who are both aware that Trump isn't
keeping his campaign promises, and are discussing what their next move is going to be.
Try and resist the temptation to write variations of "Trump voters must feel stupid now". As
opposed to what? Having Clinton as president? Do you honestly think if Clinton was president you
wouldn't be writing some version of "Wow, I knew Clinton was going to be bad, but I didn't realize
she'd be THIS bad." In a little over 3 years, it will be a different story, but for a lot of people
a Clinton presidency where she kept her promises would be worse.
I am going to write you a personal email. I actually have taken a pretty serious personal professional
hit because of this election, and I STILL don't regret my vote. This is not all academic for me.
It's hilarious how selective people are about economics. Nothing to be done about the steel industry.
Just how markets work. Too bad so sad Youngsville.
Unless you are cool. Like Amazon. And cities will slobber all over themselves to say to hell
with the market, we need to subsidize development. And give the richest guy in the world free
stuff:
I am sorry but this happened almost 40 years ago and I remember when conservatives like Reagan
were dancing on the death of union graves in the 1980s. Conservative loved when Reagan fired union
air traffic controllers. And one reason why I voted for Bill Clinton because in 1992 he campaigned
on the jobs of tomorrow as was honest to the American people that many of these jobs were not
coming. (And the second fall in manufacturing was occurring in 1992 as well.) To be honest, I
never understood how Trump was going to bring these jobs back as automation was the primary cause
and the connection of Illegal Immigrants was not significant. Please show the direct lines of
DACA Immigrants to manufacturing jobs in the Rust Belt?
Agreed, as long as he rub in his Grand Victory over HRC, conservatives will take anything from
Trump.
I didn't vote for or against Trump -- the election winner was foreordained in my state -- but I
am surprised to hear these "I told you sos". Despite Trump's betrayals, I am not at all convinced
that the situation would be any better now had Hillary Clinton or an establishment Republican
been elected. In fact, being cozy with Wall Street and immigration amnesty is exactly what Hillary
Clinton or an establishment Republican would have done. So I can see how Trump is now and always
has been a worse alternative from the viewpoint of the Republican establishment, but I can't see
how Trump even now is a worse alternative than the Republican establishment or Hillary Clinton
from the viewpoint of the typical Trump voter.
[NFR: But that's not really the point. The point is that Trump *specifically* ran against
Goldman Sachs and what it represents. And now look. It simply won't do to say, "But Hillary would
have been worse." Maybe so, but at this point, that strikes me as a way of rationalizing Trump's
failure to keep his promises. -- RD]
@Planet Albany – "Since I voted for Trump [ ] Trump's willingness to make deals with Dems on
DACA, taxes and infrastructure amounts to betrayal? Answer: It doesn't. It's what I want him to
do. He campaigned on making deals, including with Russia, which I also want to see to keep the
peace. Just hold the line on social issues, and we're good."
I voted for him too. Making deals witn Dems on DACA isn't "holding the line on social issues",
obviously.
Trump's a total prisoner of DC, Wall Street, and Silicon Valley now. We need a new president.
Thanks for Neil Gorsuch, Donnie. 'Bye.
So, who were the people of Youngstown supposed to support? Hillary Clinton and a Democratic party
that is visciously hostile to their social values? Jeb Bush and a Republican Party that's indifferent
to their plight, and considers them to be lazy losers? Both parties support immigration and trade
policies that are killing these people because it benefits their corporate and Chamber of Commerce
contributors. Only one guy spoke to their situation: Donald Trump.
I don't like Trump – never have. And I didn't vote for him. I lived in Maryland – Clinton was
going to win that state easily. My vote didn't matter so I voted 3rd party as a protest vote.
But, I understand why people voted for Trump. They were desperate and he was THE ONLY CANDIDATE
in either party that talked to their struggles. This is not a failure of the voters. It's the
criminally negligent failure of both political parties to address the problems facing ordinary
America.
It's easy to criticize but a lot more difficult to say what they should have done. So tell
me, who should they have supported? And don't say "Anybody but Trump" – that's not an answer.
Shapiro is right. Planet Albany is one of the Trumpeters who love the personality, and who would
not care if Trump shot somebody in the middle of Fifth Avenue. Their problem is that Trump can
flip the Bird at the Media and the Cultural elite all he wants, but he will not affect system
in the slightest, because he has no understanding of its structure and no plane to affect it in
any way.
Since I voted for Trump and you did not, doesn't that put me in a better position to judge
whether Trump's willingness to make deals with Dems on DACA, taxes and infrastructure amounts
to betrayal? Answer: It doesn't. It's what I want him to do.
It's not whether he makes deals. It's on whether they are good deals. The DACA deal would not
be a good one if it follows what has been outlined.
When I got out of graduate school I was offered a job by a steel company research lab – so
yes, I was somewhat of a steel metallurgist. I went into micro-electronics instead. When I turned
down their job offer, I told them that they would survive the Japanese competition, but that I
thought that the mini-mills would decimate them.
The research lab closed down 3 years later as the steel company restructured.
Even without import competition, the steel industry we knew in the 1970's was doomed. The facilities
were antique and the development of the basic oxygen furnace and the sophisticated electric arc
remelt furnaces obsoleted much of the existing infrastructure. If you look at a Nucor mill now,
you won't see many employees.
Even without any import issues, there would not have been many employees left.
Imports were – and are – a problem. But the carnage was done by technology and automation.
The politicians do not seem to be very willing to discuss this – automation doesn't give the simple
villain of the Chinese, Indians, Ukrainians, .
If you look at the present day, we are still fighting over theVietnam war, as the pro and con
sides are roughly the same as 40 years ago, middle class hippies vs "working class whites".
Hillary Clinton would have easily defeated Ted Cruz, Marco Rubio, or Jeb Bush. Cruz is still stuck
in his Reagan impersonation; Rubio wants to go to war with Russia over Ukraine, Crimea, Georgia,
Syria, etc; and Jeb couldn't even bring himself to criticize the war in Iraq because of family
loyalty.
Ben Shapiro charges $10,000 to give the same speech over and over again to college students.
It's always the same: SJWs are whiny children, Millennials need to grow up, socialism sucks, the
Alt-Right are losers, blah! blah! blah! A nice living if you can get it and he's got it.
Trump was and is still the lesser of two evils. I think of Trump the same way Christians in
Syria think of Assad. Or Christians in Iraq thought about Saddam Hussein. There's always someone
worse waiting to take over.
Some fellow Christians are facing bankruptcy because they refuse to provide services for a
gay wedding. This isn't some whiny college campus SJW showdown. That's where my concern is. I
really couldn't care less about Goldman Sachs. I don't earn enough to care. Don't care about DACA
or The Wall either. Sorry.
Christian liberty is the only issue I'm voting on. And Trump will always be the lesser of two
evils. Always. Always. Always.
So Trump is a crook, and Hillary too. I suspect much of 'Youngstown' knew that. When other choice
did the system offered, from 150 millions eligible potential candidates?
Yes, things may get even more interesting. Haven't tried Sanderistas yet, have we?
Just hold the line on social issues, and we're good.
@Planet Albany -- how do you feel about tax "reform" that blows the budget even more, and gives
the bulk of the benefit to the top 1%-ers? Or cancelling Obama regulations such as the one that
required any buildings re-built with federal money needs to take rising sea levels into account?
Or p!ssing off Mexico so much that that they are turning to Argentina and Brazal to purchase their
wheat and corn (NAFTA uncertainties).
What would Trump have to do that would make you feel he has betrayed you? Don't worry he will
do it, but somehow I suspect you and the rest of the Trump faithful will stick by him anyway.
This is a cult, not a political following. He is one of 'you' and so anything he does is ok.
Those people who are dying in Youngstown because of a government working in cooperation with corporate
interests to enrich shareholders no matter the cost of American lives may take great solace in
the knowledge that the people making those decisions and benefitting from them said some words
sometimes about how gay relationships are objectively disordered, and those outside of the zones
of suffering may feel sad for those deaths, but must understand that they are martyrs who gave
their lives in the war to prevent gay people from getting health insurance for their families.
$0.02,
DBA
[NFR: This is simplistic trolling and you know it. It is also the case that Hillary Clinton
was in bed with Goldman. Remember
the private Wall Street speech she gave , released by Wikileaks, in which she talked about
how one needed to have "a public and a private position"? We would have been equally screwed by
a Clinton.2 presidency, and a conventional Republican one. My anger at Trump over this is that
he promised to be something different -- and, being fabulously wealthy, he didn't depend on the
largesse of financial titans to make his living. He was in a position to change things -- yet on
economic issues, he's turned out to be as bad or worse than those he ran against in both parties. -- RD]
Con? We are always being conned by politicians. There is a subset of voters who look upon their
politician in an unhealthy God-like/3rd world fashion; much more tangible on the Left, but there
on the Right as well.
I voted Trump fully expecting to be conned, hopeful that one or two promises would become reality.
So far I am pleased with the level of duplicity.
Twenty, thirty years from now, don't be surprised if some American president proposes a
"this time, it's different" invasion of another foreign country. And don't be surprised if
we the people cheer for him.
20 or 30 years?? Try three. We're barreling towards war with North Korea and half the country
will be cheering the President (whoever it is) on.
So because Trump has failed to deliver on promises to the working class, said working class should
abandon Trump for whom? The Liberals, who hate them? The GOP types, like Williamson, who also
hate them?
re: Youngstown, etc., The New Minority by Justin Gest is worth a read. It's a sociological
study of the white working class in two comparable areas, Youngstown and East London, and what
happened when industry failed. The book was written before DT won the GOP nomination, but it does
take Trump's primary run into consideration. The work that Gest did is based on survey results
and interviews he conducted with residents during time spent as an "embedded" researcher.
For many years we have heard U.S. politicians sanctimoniously intoning that Chinese politicians
legitimacy depended on their creating jobs. This last election Jeb Bush and others found out this
applies to them also, to their astonishment. Trump has the wind at his back on this front with
the economy going forward, but can't count on this continuing thru the next election.
For those of us who always thought Trump was a huckster with no principles other than self-aggrandizement,
his behavior as president comes as no surprise. He's never made a promise he couldn't break. But,
like all successful hucksters, he knows his mark and knows, on an instinctive level, how to appeal
to their hopes and fears to close the sale. I'm not sure what it would take to break through the
rationalizations of his base, but it would have to be something pretty spectacular.
Be charitable. It's VERY hard for someone to admit that they were fooled.
It will be interesting to see all the mechanisms of denial. I suspect that the reality of Trump
will be dismissed in the same way as the reality of Climate Change.
1. God would never allow such a terrible event to happen to His beloved USA
2. It's all the fault of (NON-WHITE) foreigners
3. FAKE NEWS!
4. It's actually a good thing
' When Youngstown (so to speak) figures out what's been done to it, politics in this country
is going to get very, very interesting .'
Republicans know what they are doing, and as long as there are more scapegoats available and
more vote suppression techniques to be tried, they aren't worried about losing elections. Consider
this example:
Mr. Dreher's own senior US senator is pushing a last-ditch ACA repeal and replace bill, called
GCHJ, that would strip federal $$ from states like Louisiana that expanded Medicaid on the federal
dime. How much money is involved?
In 2026 alone, La. would lose $3.2 billion while Texas, Mississippi and Alabama would collectively
gain 11.3 billion in new federal $$. Put another way, La. with its 1.4% of the US population would
shoulder 4% of the total cuts mandated by GCHJ in 2026. Then a tidal wave of more federal cuts
arrives in 2027.
Why would Dr. Bill Cassidy, who formerly worked in Louisiana's notorious charity hospital system
before entering politics and reaching the US Senate, seek to hurt his own constituents this way?
In brief, many in Louisiana oppose Medicaid and food stamps because they see the federal benefits
going mostly to 'those people.' If voters in La. are conned, it is because they have conned themselves.
He didn't get rolled by Pelosi and Schumer: His voters got rolled by him. That's the real deal.
This is the part where the Never-Trumpers are overplaying their hand. They act as if they were
offering a better alternative. They were not. On trade, immigration and foreign policy, all other
16 candidates were worse–significantly worse. Each promised to re-run the Bush Administration,
except they'd make Putin the new Saddam Hussein.
It's as if they were the team that lost conference championship, and then gloated when the
the team that won it went on to lose the Super Bowl. How about they spend a little more time looking
at their own positions and trying to figure out why a significant plurality (often a large majority
in a number of states) outright rejected them?
None of them have done this. They dare not anger their Boomer donors, I guess. Got to keep
those cruises going!
Again, even if everything they say about Trump is true, he is still better than them.
The money power of Wall Street infiltrated and changed the Democratic Party sometime after the
LBJ years. As a result, we have a one-party-system with a lib and a con wing. The wings differ
on social issues, and they sweep the crumbs off the table to different constituencies.
However, after 40 years of this BS, can we really expect the children and grandchildren of
displaced steelworkers (who symbolize all the outsourced, discarded workers in the U.S.) to rise
in anger with torches and pitchforks? Sad to say, but the victims of this betrayal so far are
passively standing by. I am not calling for violent revolution, but instead for a party that puts
the needs and aspirations of the average person at the head of the table. If the Democratic Party
won't do it, and yet won't go away, then a serious effort needs to made to foster a new party.
It's worth noting, too, that the Trump base has been melting down phone lines in Washington protesting
Amnesty.
Obviously, it's your blog, Rod, so you can do what you like with it, but why not take a look
at this issue itself instead of post after post taking victory laps about that Horrible Mr. Trump?
What do you think would be a good deal? Should there be some limited amnesty (which I favor)?
Goldman Sachs is the fourth branch of government. They are indeed "too big to fail." Perhaps we
should stop fighting them and try to somehow get them working for the common good. I don't know
how this could be done, but it is worth a try.
[NFR: But that's not really the point. The point is that Trump *specifically* ran against Goldman
Sachs and what it represents. And now look. It simply won't do to say, "But Hillary would have
been worse." Maybe so, but at this point, that strikes me as a way of rationalizing Trump's failure
to keep his promises. -- RD]
Putting things into context is precisely the point.
I'm not remotely surprised to read in these precincts that the Democrats, particularly Clinton,
are just as much in the bag for Wall Street as Trump and the Republicans. Too bad it's completely
untrue. Even if Clinton were so inclined, which she certainly wouldn't be to nearly the same extent,
major elements in the Democratic party and Congress would be pushing for policies far removed
from the plutocratic – as they have for years, for increased financial and antitrust regulation,
higher taxes on the 1%, limits on CEO pay, environmental controls, minimum wage, and on and on
and on. There is no such significant political element among Republican officeholders, either
at the state or federal level. The argument that "Democrats (especially evil Hillary) are just
as bad" – all evidence to the contrary – is really just an after-the-fact rationalization to justify
one's prior support for what is clearly one of the most financially and morally corrupt administrations
in our history.
It is amazing how much research and
socio-political commentary is necessary in order to prove that an amoral, egomaniac MTV-era pseudo-celebrity
apparently intends to govern the country like an amoral, egomaniac MTV-era pseudo-celebrity. In
other words, he is a narcissistic goofball who will tell anyone anything in order to get press
or money.
Who knew? Apparently not enough of us to prevent the cartoon presidency.
And when the people of Youngstown realize Trump has betrayed them, they will turn left, and turn
hard. The next Bernie Sanders cannot be stopped, for the same reason Trump couldn't be stopped:
because he will simply take the party away from the establishment. As I said last year, when you
elect Marius, Sulla follows.
I'm not surprised that Trump can't see this coming. I am a bit surprised that Goldman Sachs
apparently doesn't either.
The politics of immigration restriction is interesting. The restrictionists have clear and strong
preferences.
"Popular opinion" may be against restrictionism (or not given the media lens), but at the end
of the day, most of public against restrictionism has a soft level of support mostly for virtue
signalling purposes. They don't actually care.
The business lobby cares a lot, and the ethnonationalist/racialist wing of the Democrats, and
that is about all.
Playing games with DACA is going to open the GOP to nasty primary battles, which judging from
2016, the Establishment candidates will be vulnerable. Also, supporting these schlock sentimental
policies aren't going to win them any votes, anymore than giving money to refugee assistance or
homeless shelters.
I don't think the Establishment has any idea of the level of dissatisfaction and discontent
there is in the electorate, as their plan is short to mid-term doom. (Polling has 9% of Americans
identifying as "Alt-Right" post-Charlottesville, and about another 30% you can describe as "Alt-Lite".
These are mostly the people who will vote in GOP Primaries in 2018.)
Not that Wikipedia gets everything right but here is a snippet of what it says about the Goldman
Sachs CEO:
'Blankfein testified before Congress in April 2010 at a hearing of the Senate Permanent Subcommittee
on Investigations. He said that Goldman Sachs had no moral or legal obligation to inform its clients
it was betting against the products which they were buying from Goldman Sachs because it was not
acting in a fiduciary role. The company was sued on April 16, 2010, by the SEC for the fraudulent
selling of a synthetic CDO tied to subprime mortgages. With Blankfein at the helm, Goldman has
also been criticized "by lawmakers and pundits for issues from its pay practices to its role in
helping Greece mask the size of its debts". In April 2011, a Permanent Subcommittee on Investigations
report accused Goldman Sachs of misleading clients about complex mortgage-related investments
in 2007, and Senator Carl Levin alleged that Blankfein misled Congress, though no perjury charges
have been brought against Blankfein. In August of the same year, Goldman confirmed that Blankfein
had hired high-profile defense lawyer Reid Weingarten'
Weingarten helped in the defense of the Worldcom thieves. Why would anyone do business with
a company led by such an ethically challenged CEO?
libezkova -> pgl... February 04, 2017 at 07:12 PM
The problem here is probably deeper then personality of Blankfein.
There is such thing as system instability of economy caused by outsized financial sector and
here GS fits the bill. Promotion of psychopathic personalities with no brakes and outsize taste
for risk is just an icing on the cake.
> Why would anyone do business with a company led by such an ethically challenged CEO?
Why you are assuming the other TBTF are somehow better then GS?
"... First, the brain. Two generations ago, almost every economist knew what a catastrophe a deficiency of effective demand could create. And in a real crunch, they knew what to do about that. They realized you couldn't push on a string, so somebody - the government - had to borrow and spend when private markets would not. From the 1980s on, though, the fundamental Keynesian point - the Principle of effective Demand -disappeared in a cloud of statistical double-talk that, when you deconstruct it, turns out to imply estimating potential output as a lagged function of whatever foolish policy is being pursued. ..."
"... Central bankers didn't take this giant step backwards to pre-Keynesian economics by themselves. In that sense, it's unfair to say they have only themselves to blame. But they swallowed it whole, helped subsidize it, and cheered it on. Now that they have rediscovered that monetary policy can't levitate a broken economy, except by beggaring the neighbors, it's time they admitted their errors and stopped acting like they could control everything... ..."
"... Next, courage. In the good old days, central bankers were given to heady talk about "taking away the punch bowl" before the party really got going. That may have been mostly rhetoric, but it at least paid lip service to some value bigger than banking... ..."
JohnH -> Peter K....
January 13, 2017 at 08:31 AM
Thomas Ferguson: "Central bankers today irresistibly bring to mind the Wizard of Oz. It's the characters'
missing virtues that grab me: a heart, a brain, and courage. Central bankers today lack all three.
First, the brain. Two generations ago, almost every economist knew what a catastrophe a deficiency
of effective demand could create. And in a real crunch, they knew what to do about that. They realized
you couldn't push on a string, so somebody - the government - had to borrow and spend when private
markets would not. From the 1980s on, though, the fundamental Keynesian point - the Principle of
effective Demand -disappeared in a cloud of statistical double-talk that, when you deconstruct it,
turns out to imply estimating potential output as a lagged function of whatever foolish policy is
being pursued.
Central bankers didn't take this giant step backwards to pre-Keynesian economics by themselves.
In that sense, it's unfair to say they have only themselves to blame. But they swallowed it whole,
helped subsidize it, and cheered it on. Now that they have rediscovered that monetary policy can't
levitate a broken economy, except by beggaring the neighbors, it's time they admitted their errors
and stopped acting like they could control everything...
Next, courage. In the good old days, central bankers were given to heady talk about "taking
away the punch bowl" before the party really got going. That may have been mostly rhetoric, but it
at least paid lip service to some value bigger than banking...
The Fed took risks to save the banking system, but is already telling us we are close to full
employment and professing to be alarmed about "inflation," when anyone can see that banks, insurers,
and pension funds are clamoring for rate rises, just as in the 1930s. Both institutions need to start
thinking about someone besides the financial community. If they don't, I do not doubt that we will
not have seen the last of the anger that Donald Trump and Senator Bernie Sanders mobilized in such
disparate ways in the United States..."
Meanwhile 'liberal' worshippers of unsubstantiated 'crowding out' theories are eager to stifle
fiscal stimulus by having the Fed take away the punch bowl before the party starts.
Why Trade Deficits Matter, The Atlantic
: However one feels about
Donald Trump, it's fair to say he has usefully elevated a
long-simmering issue in American political economy: the hardship faced
by the families and communities who have lost out as jobs have shifted
overseas. For decades, many politicians from both parties ignored the
plight of these workers, offering them bromides about the benefits of
free trade and yet another trade deal, this time with some "adjustment
assistance."
One of Trump's economic goals is to lower the U.S.'s trade
deficit-which is to say, shrink the discrepancy between the value of
the country's imports and the value of its exports. Right now, the
U.S. currently imports $460 billion more than it exports, meaning it
has a trade deficit that works out to about 2.5 percent of GDP. Given
that the job market is still not back to full strength and the U.S.
has been losing manufacturing jobs-there are 60,000 fewer now than at
the beginning of this year,
according to the Bureau
of Labor Statistics
-economists would be wise to question their
assumption that such a deficit is harmless. ...
Is the U.S. trade deficit a problem whose solution would help American
workers? ...
Looks to me like "global power" comes from a lot more than
military spending, and if its jobs we want, then military
spending is a decent short run stimulus but long run waste in
terms of productive expenditure.
The
Great Illusion is a book by Norman Angell, first published in
the United Kingdom in 1909 under the title Europe's Optical
Illusion and republished in 1910 and subsequently in various
enlarged and revised editions under the title The Great
Illusion.
Angell argued that war between industrial countries was
futile because conquest did not pay. J.D.B. Miller writes:
"The 'Great Illusion' was that nations gained by armed
confrontation, militarism, war, or conquest." The economic
interdependence between industrial countries meant that war
would be economically harmful to all the countries involved.
Moreover, if a conquering power confiscated property in the
territory it seized, "the incentive to produce [of the local
population] would be sapped and the conquered area be
rendered worthless. Thus, the conquering power had to leave
property in the hands of the local population while incurring
the costs of conquest and occupation."
Angell said that arms build-up, for example the naval race
that was happening as he wrote the book in the early 1910s,
was not going to secure peace. Instead, it would lead to
increased insecurity and thus increase the likelihood of war.
Only respect for international law, a world court, in which
issues would be dealt with logically and peaceably would be
the route for peace.
A new edition of The Great Illusion was published in 1933;
it added "the theme of collective defence." Angell was
awarded the Nobel Peace Prize in 1933. He added his belief
that if France, Britain, Poland, Czechoslovakia, etc. had
bound themselves together to oppose all military aggression,
including that of Hitler's, and to appeal to world justice
for solution to countries' grievances, then the great mass of
reasonable Germans would have stepped up and stopped Hitler
from leading their country into an unwinnable war, and World
War II would have been avoided.
In 1909 a book was published
saying that free trade would make the world prosperous
forever. In the U.S. It was called "the Grand Illusion."
Unfortunately Kaiser Wilhelm appeared not to get the message.
If China didn't have those $$$$trillions, they wouldn't
feel empowered to change boundary lines by force. We wouldn't
be worried about a new arms race.
As for solutions, a trade weighted tariff that kicked in
after a certain period/percentage would work just fine,
probably similar to the wage equalization tariff I suggested
the other day. A VAT might accomplish a similar result.
But seriously, you and everyone who thinks like you can go
screw yourselves. Your myopic elitism has gotten us here. I
wish you nothing but pain.
"then military spending is a decent short run stimulus"
No
it is not. It is very ineffective and wasteful. You would get
much better return on your investment by spending on
repairing and upgrading civic infrastructure.
Bull. What we need is enforceable labor and environmental
standards and protections so that the corporate greed heads
will have less incentive to outsource their production to
places lacking any of those things. This is all about
maximizing rents by ruthlessly exploiting vulnerable labor in
the developing world and by being able to poison and
devastate their countries at will.
U.S. currently imports $460 billion more than it exports,
meaning
"
~J B & D B~~
... meaning that We the People print up
t-bonds valued at $460 then trade these bonds for Federal
Reserve Notes printed up by FG-s worth $460 then use same
notes to buy same amount of running shoes, shot glasses, etc.
We print up genuine t-bonds for their counterfeit products
that look like the real thing. Huh! The question is :
How can we do more of this without those foreigner suckers
catching on, getting wise to the scam?
For one, we can make sure that we don't print up more of
our genuine paper than their demand for it. Get it? So long
as their demand continues to be great enough to raise the
price of our tiny slips of paper, we are cool.
When we are printing too much, the price of our paper
falls, buys less, has less buying power. Less buying power is
what we call inflation. More buying power is what we call
deflation. Got it?
Print less thus keep popularity of our printed numbers up.
Tell me something!
What happens when our workers lose jobs to foreigner
suckers who dig our printed numbers?
Job loss to foreigners slows down the domestic development
of robotics, artificial intelligence, and the singularity
that will inevitably detonate all jobs globally. What will
that detonation do to our life style of excessive
overpopulation.
Don't ask, but don't
tell --
Donald A. Coffin :
, -1
The usual response to a trade deficit is that the country
running the deficit sees its currency decline in value. This
lowers the effective price of its exports and raises the
effective price of its imports. Assuming nothing peculiar
about the price elasticities of demand for exports and
import, this should lead to a shrinking trade deficit. From
1973 to 1998, the dollar appreciated steadily, and the
(nominal) trade deficit expanded only slightly. From 1998 to
2005, the dollar continued to appreciate--but the (nominal)
trade deficit exploded, increasing by a factor of (roughly)
10 by 2006. Then, as the dollar began depreciating (in 2002),
the trade deficit began to shrink. Since about 2008, the
dollar has been appreciating again.
What needs most to be
explained is the explosion of the trade deficit between 1998
and 2006; about half of the increase in the trade deficit was
between 1998 and 2002; the other half between 2002 and 2006.
"... The incomes of the financial sector are mostly pure rents so there are fewer gains from trade possible here than there are for more productive sectors. Trade negotiations on this are therefore more 'win-lose' rather than potentially 'win-win'. ..."
T's right – the economic impact of Brexit on the UK will overwhelmingly depend on how the EU "passport"
entitlements for the banks are negotiated. And of course the Germans (with Frankfurt) and the
French (with Paris) have a strong incentive to make sure that a good slab of the City's business
goes to them.
The incomes of the financial sector are mostly pure rents so there are fewer gains from trade
possible here than there are for more productive sectors. Trade negotiations on this are therefore
more 'win-lose' rather than potentially 'win-win'.
I think the result will certainly be lower aggregate GDP for the UK but it might well be better
distributed (eg London property prices may be less absurd). The City has long made the rest of
the UK economy suffer from a form of Dutch disease through an overvalued pound sterling. So those
Sunderland Brexit voters might prove ultimately correct in their assessment of their economic
interests – just not in the way they think.
Future Economists Will Probably Call
This Decade the 'Longest Depression'
:
... Back before 2008, I used to teach my
students that during a disturbance in
the business cycle, we'd be 40 percent
of the way back to normal in a year. The
long-run trend of economic growth, I
would say, was barely affected by
short-run business cycle disturbances.
There would always be short-run bubbles
and panics and inflations and
recessions. They would press production
and employment away from its long-run
trend -- perhaps by as much as 5
percent. But they would be transitory.
After the shock hit, the economy would
rapidly head back to normal. The
equilibrium-restoring logic and magic of
supply and demand would push the economy
to close two-fifths of the gap to normal
each year. After four years, only a
seventh of the peak disturbance would
remain.
In the aftermath of 2008, Stiglitz was
indeed one of those warning that I and
economists like me were wrong. Without
extraordinary, sustained and aggressive
policies to rebalance the economy, he
said, we would never get back to what
before 2008 we had thought was normal.
I found it amusing that Goldman raised their price target (causing a rally in the
stock) hours before underwriting a capital raise that cause a decline in Tesla's stock.
Although, to be fair there are SEC rules that are very explicit, with severe consequences,
if Goldman Sachs' underwriting dept talked or leaked anything to their analysts.
Goldman Sachs does plenty of shady things to make a profit – like selling Mortgage Backed Securities
as AAA investments, and simultaneously, knowing they're crap, betting on them going bad (covered
in the critically acclaimed documentary "Inside Job"), or helping Greece hide their budget deficit
with accounting magic… so they can sell them debt… that they know will go bad.
However, as odd as it is, none of those actions were illegal. THIS would actually be illegal,
and Goldman Sachs is smarter than that. I'd guess it is a genuine coincidence.
On a separate note, I find it important to note that Tesla FIRST scouted out battery suppliers
to supplement their battery supply 1 DAY before announcing the amount of their capital raise.
My hypothesis, Tesla's accelerated Model 3 ramp-up meant that they will need a large supply
of additional batteries as the Gigafactory will not be able to accelerate it's schedule enough
to match the accelerated vehicle production ramp.
This also tells me that Tesla is confident enough in their accelerated Model 3 production schedule
that they needed to arrange a multi-million dollar contract with battery suppliers to supplement
their capacity until the Gigafactory can meet demand.
Although, to be fair there are SEC rules that are very explicit, with severe consequences,
if Goldman Sachs' underwriting dept talked or leaked anything to their analysts.
This is all about corruption of regulators and impunity of TBTF financial institutions under
neoliberalism - which is an immanent feature of neoliberalism aka "casino capitalism"…
Goldman's role in the growth of casino capitalism in the USA is similar to that of other players,
except for one thing: Goldman didn't believe its own hype. The now famous Rolling Stone magazine
article in 2009 by Matt Taibbi unforgettably referred to Goldman Sachs, the world's most powerful
investment bank, as a "great vampire squid wrapped around the face of humanity, relentlessly jamming
its blood funnel into anything that smells like money." (
http://www.forbes.com/sites/jakezamansky/2013/08/08/the-great-vampire-squid-keeps-on-sucking/
)
Impunity is epidemic in America. The rich and powerful get away with their heists in broad
daylight. When a politician like Bernie Sanders calls out the corruption, the New York Times
and Wall Street Journal double down with their mockery over such a foolish "dreamer." The Journal
recently opposed the corruption sentence of former Virginia governor Bob McDonnell for taking
large gifts and bestowing official favors - because everybody does it. And one of its columnists
praised Panama for facilitating the ability of wealthy individuals to hide their income from
"predatory governments" trying to collect taxes. No kidding.
Our major institutions, the ones that should know better, are often gross enablers of impunity.
Consider my alma mater, Harvard University, and its recent nuptial with hedge-fund manager
John Paulson. Paulson was the co-conspirator with Goldman Sachs of one of the most notorious
scams of the recent financial bubble.
Professional financial hackers have a lot of common with the organized crime. And not only
in respect to common addictions to cocaine and prostitutes. But there is a subtle difference:
financial hackers make it daily (and very lucrative) business to figure out ways to abide by
the letter of the law while violating its spirit. Although the claim that they do not break
the law has very little credibility. They do break the law, but at the same time their political
influence is big enough to keep them out of jail. In 2012 Lanny Breuer, then the head of the
Justice Department's criminal division openly admitted that. In a speech at the New York City
Bar Association he said that he felt that it was his duty to consider the health of the company,
the industry, and the markets in deciding whether or not to file charges. Which in case of
Goldman represents insurmountable obstacle to criminal prosecution.
In any case GS converted itself into a special type of TBTF company, the company that specialized
in hacking financial system. And in a large company internal politic can turn really destructive
both to the firm and society at large. In fact, in large companies there are people with very
high IQ at the top with personal traits that makes them more dangerous in comparison with bosses
of Mexican gangs. It also makes internal political battles more vicious. BTW, a lot of psychopaths
have above average IQ.
In a way the USA never had a subprime crisis. What we had was systemic, neoliberalism-induced
crisis that involves FED, government, congress, banking, ratings, insurance, investment and
financial industries (the banks were at the center of this crime syndicate and they were the
largest beneficiaries of the crimes committed), one manifestation of which was 2008 subprime
crisis. Large banks became huge, dominant political force and based on their political weight,
they hacked the financial system in the same way computer hackers hack computers systems to
suit their short term needs and first of all for enrichment of the brass (appetite for "make
money fast" schemes was greatly raised during dot-com crisis).
As Simon Johnson wrote in May 2009 the USA had a The Quiet Coup with banks becoming the most
favored and the most protected industry of the Congress. Financial system is essentially a
system of rules. If a rich and powerful organization is directed toward hacking the rules:
finding weaknesses and exploiting them it is undistinguishable from mafia in a very precise
meaning of the term (organize crime syndicate with strong ethnic component), only more sophisticated.
Again they are not gangsters in traditional meaning of this word, they are of a hackers, and
as such they are much more difficult to prosecute. As a comment to blog post at EconomistView
by "Eric" (Paul Krugman The Unwisdom of Elites) aptly stated:
Villains….who exactly? The principle reason that there have been few prosecutions of high level
bankers is that not so much that got done was illegal. Reckless, maybe. But even here is it
really reckless behavior if you have a belief - which turns out to be true - that public finances
will bear the downside risks on your behalf?
In hindsight it feels like these things should have been illegal, but the available serious
punishments, such as not bailing out AIG, not allowing various investment firms to become bank
holding entites, not backstopping the GSEs (read their debt issues and you'll see that nowhere
is a claim made for public backing), not taking first loss positions on Bear Stearn assets,
etc., etc., were foregone by voluntary actions by public officials.
Make peace with the truth that there will be no sweeping prosecutions, least of all by the
federal government of the USA.
"... 'There's an interesting theory – called the 'green paradox' – that low oil prices are in part the reaction of an industry fearful of the impacts of climate change policy on its future revenues. ..."
"... The German economist Hans-Werner Sinn has argued that "if suppliers feel threatened by a gradual greening of economic policies.. they will extract their stocks more rapidly" thus pushing their prices down' ..."
There's a new parliamentary group in UK on Limits to Growth that had it's
first meeting this week.
'A 2015 analysis of the remaining fossil fuel resources in China, USA,
Canada and Australia, which includes unconventional resources, suggests
that overall oil production is in fact peaking already'
I hadn't heard this before:
'There's an interesting theory – called the 'green paradox' – that
low oil prices are in part the reaction of an industry fearful of the impacts
of climate change policy on its future revenues.
The German economist Hans-Werner
Sinn has argued that "if suppliers feel threatened by a gradual greening
of economic policies.. they will extract their stocks more rapidly" thus
pushing their prices down'
Barriers to productivity growth
: "The limits to productivity growth
are set only by the limits to human inventiveness"
says
John Kay. This understates the problem. There are other limits.
I'd mention two which I think are under-rated.
One is competition. Of course, this tends to increase productivity in many
ways. But it has a downside. The fear of competition from future new technologies
can
inhibit
investment today: no firm will spend £10m on robots if they
fear a rival will buy better ones for £5m soon afterwards. ...
The second is that, as Brynjolfsson and MacAfee
say
, "significant organizational innovation is required to capture
the full benefit of…technologies."
For example, Paul David has
described (pdf)
how the introduction of electricity into American factories
did not immediately raise productivity much, simply because it merely replaced
steam engines. It was only when bosses realized that electric motors allowed
factories to be reorganized – dispensing with the need for machines to be
close to a central power source – that productivity soared, as workflow
improved and new cheaper buildings could be used. This took many years.
It's not just organizational change that's needed, though..., I suspect
that if IT is to have (further?) productivity-enhancing effects, they require
socio-organizational change. ...
However, there are always obstacles to the social and organizational change
necessary for technical change to lead to productivity gains. These might
be cognitive – such as the Frankenstein
syndrome
or "not invented
here
" mentality. Or they can be material. Socio-technical change is
a process of creative destruction, the losers from which kick up a stink;
think of taxi-drivers protesting against Uber.
Worse still, these losers aren't always politically weak Ludditites. They
can be well-connected bosses of incumbent firms, or managers seeking to
maintain their power base. ...
The big question facing us is, therefore: do we have the right set of institutions
to foster the socio-organizational change that beget productivity growth?
These require a mix of healthy markets, to maximize ecological diversity;
a financial system which backs risky new-comers;
property
rights which incentivise innovation; and state intervention
that facilitates all these whilst not being captured by Luddites. If our
politics weren't so imbecilic, this question would be getting a lot more
attention than it is.
The
seventh edition of
Manias, Panics, and Crashes has recently been published by Palgrave Macmillan.
Charles Kindleberger of MIT wrote the first edition, which appeared in 1978, and followed
it with three more editions. Robert Aliber of the Booth School of Business at the University
of Chicago took over the editing and rewriting of the fifth edition, which came out in
2005. (Aliber is also the author of another well-known book on international finance,
The New International Money Game.) The continuing popularity of Manias,
Panics and Crashes shows that financial crises continue to be a matter of widespread
concern.
Kindleberger built upon the work of
Hyman Minsky, a faculty member at Washington University in St. Louis. Minsky was
a proponent of what he called the "financial instability hypothesis," which posited that
financial markets are inherently unstable. Periods of financial booms are followed by
busts, and governmental intervention can delay but not eliminate crises. Minsky's work
received a great deal of attention during the global financial crisis (see
here and
here; for a summary of Minksy's work, see
Why Minsky Mattersby L. Randall Wray of the University of Missouri-Kansas City
and the Levy Economics Institute).
Kindleberger provided a more detailed description of the stages of a financial crisis.
The period preceding a crisis begins with a "displacement," a shock to the system. When
a displacement improves the profitability of at least one sector of an economy, firms
and individuals will seek to take advantage of this opportunity. The resulting demand
for financial assets leads to an increase in their prices. Positive feedback in asset
markets lead to more investments and financial speculation, and a period of "euphoria,"
or mania develops.
At some point, however, insiders begin to take profits and withdraw from the markets.
Once market participants realize that prices have peaked, flight from the markets becomes
widespread. As prices plummet, a period of "revulsion" or panic ensues. Those who had
financed their positions in the market by borrowing on the promise of profits on the
purchased assets become insolvent. The panic ends when prices fall so far that some traders
are tempted to come back into the market, or
trading is limited by the authorities, or a lender of last resort intervenes to halt
the decline.
In addition to elaborating on the stages of a financial crisis, Kindleberger also
placed them in an international context. He wrote about the propagation of crises through
the arbitrage of divergences in the prices of assets across markets or their substitutes.
Capital flows and the spread of euphoria also contribute to the simultaneous rises in
asset prices in different countries. (Piero
Pasotti and Alessandro Vercelli of the University of Siena provide an analysis of
Kindleberger's contributions.)
Aliber has continued to update the book, and the new edition has a chapter on the
European sovereign debt crisis. (The prior edition covered the events of 2008-09.) But
he has also made his own contributions to the Minsky-Kindleberger (and now –Aliber) framework.
Aliber characterizes the decades since the early 1980s as "…the most tumultuous in monetary
history in terms of the number, scope and severity of banking crises." To date, there
have been four waves of such crises, which are almost always accompanied by currency
crises. The first wave was the debt crisis of developing nations during the 1980s, and
it was followed by a second wave of crises in Japan and the Nordic countries in the early
1990s. The third wave was the Asian financial crisis of 1997-98, and the fourth is the
global financial crisis.
Aliber emphasizes the role of cross-border investment flows in precipitating the crises.
Their volatility has risen under flexible exchange rates, which allow central banks more
freedom in formulating monetary policies that influence capital allocation. He also draws
attention to the increases in household wealth due to rising asset prices and currency
appreciation that contribute to consumption expenditures and amplify the boom periods.
The reversal in wealth once investors revise their expectations and capital begins to
flow out makes the resulting downturn more acute.
These views are consistent in many ways with those of
Claudio Borio of the Bank for International Settlements (see also
here). He has written that the international monetary and financial system amplifies
the "excess financial elasticity," i.e., the buildup of financial imbalances that characterizes
domestic financial markets. He identifies two channels of transmission. First, capital
inflows contribute to the rise in domestic credit during a financial boom. The impact
of global conditions on domestic financial markets exacerbates this development (see
here). Second, monetary regimes may facilitate the expansion of monetary conditions
from one country to others. Central bankers concerned about currency appreciation and
a loss of competitiveness keep interest rates lower than they would otherwise, which
furthers a domestic boom. In addition, the actions of central banks with international
currencies such as the dollar has international ramifications, as the current widespread
concern about the impending rise in the Federal Funds rate shows.
Aliber ends the current edition of Manias, Panics and Crashes with an appendix
on China's financial situation. He compares the surge in China's housing markets with
the Japanese boom of the 1980s and subsequent bust that initiated decades of slow economic
growth. An oversupply of new housing in China has resulted in a
decline in prices that threatens the solvency of property developers and the banks
and shadow banks that financed them. Aliber is dubious of the claim that the Chinese
government will support the banks, pointing out that such support will only worsen
China's indebtedness. The need for an eighth edition of Manias, Panics and Crashes
may soon be apparent.
It's that time of year.... when the bank-that-does-God's-work chooses who to bless with mass
affluence. This year 425 Goldman Sachs' employees were annointed "Managing Directors" which
according to Emolumnet.com means an average annual comp of approximately $1 million.
Two days ago
we reported
that the saga of Rohit Bansal, Goldman's "leaker" at the Fed is coming to a close
with the announcement of a criminal case filed against Goldman's deep throat who had previously spent
7 years at the NY Fed, and was about to spend some time in prison, and who had been providing Goldman
with confidential information sourced from his contact at the NY Fed for months, as a result of which
Goldman would be charged a penalty.
Moments ago the NY DFS announced that the best connected hedge fund in the world would pay $50
million to the New York State Department of Financial Services and "accept a three-year voluntary
abstention from accepting new consulting engagements that require the Department to authorize the
disclosure of confidential information under New York Banking Law"
Goldman Sachs would also admit that a Goldman employee engaged in the criminal theft of Department
confidential supervisory information; Goldman Sachs management failed to effectively supervise its
employee to prevent this theft from occurring; and Goldman failed to implement and maintain adequate
policies and procedures relating to post-employment restrictions for former government employees.
Below are the unbelievable, details of just how Goldman was getting material information from
the NY Fed, from the FDS:
Violation of Post-employment Restrictions
On July 21, 2014, an individual began work at Goldman, Sachs & Co. as an Associate in the Financial
Institutions Group ("FIG") of the Investment Banking Division ("IBD"). The Associate reported to
a Managing Director and a Partner at Goldman.
Prior to his employment at Goldman, from approximately August 2007 to March 2014, the Associate
was a bank examiner at the U.S. Federal Reserve Bank of New York ("the New York Fed").
His
most recent position at the New York Fed was as the Central Point of Contact ("CPC") – the primary
supervisory contact for a particular financial institution – for an entity regulated by the Department
(the "Regulated Entity").
In March 2014, the Associate was required to resign from his position at the New York Fed for,
among other reasons, taking his work blackberry overseas without obtaining prior authorization to
do so and for attempting to falsify records to make it look like he had obtained such authorization,
and for engaging in unauthorized communications with the Federal Reserve Board.
The Associate was hired in large part for the regulatory experience and knowledge he had gained
while working at the New York Fed. Prior to hiring him, the Partner and other senior personnel interviewed
and called the Associate several times, and the Partner took him out to lunch and dinner.
Prior to starting at Goldman, in May 2014, the Associate informed the Partner of potential restrictions
on his work, due to his previous employment at the New York Fed, and specifically as the CPC for
the Regulated Entity. The Partner advised the Associate to consult the New York Fed to obtain clarification
regarding any applicable restrictions.
Accordingly, the Associate inquired with the New York Fed Ethics Office and was given a "Notice
of Post-Employment Restriction," which he completed and signed with respect to his supervisory work
for the Regulated Entity. The Associate provided this form to Goldman. This Notice of Post-Employment
Restriction read that the Associate was prohibited "from knowingly accepting compensation as an employee,
officer, director, or consultant from [the Regulated Entity]" until February 1, 2015.
On May 14, 2014, the Associate forwarded this notice of restriction to the Partner, the Managing
Director, and an attorney in Goldman's Legal Department. In his email, the Associate also included
guidance from the New York Fed, stating, in short, that a person falls under the post-employment
restriction if that person "directly works on matters for, or on behalf of," the relevant financial
institution.
Despite receiving this notice and guidance,
Goldman placed the Associate on Regulated Entity matters from the outset of his employment.
As further detailed below, the Associate also schemed to steal confidential regulatory and government
documents related to that same Regulated Entity in advising that client.
Unauthorized Possession and Dissemination of Confidential Information
During his employment at Goldman, the Associate
wrongfully obtained confidential information, including approximately 35 documents, on approximately
20 occasions, from a former co-worker at the New York Fed (the "New York Fed Employee").
These documents constituted confidential regulatory or supervisory information – many marked as "internal,"
"restricted," or "confidential" – belonging to the Department, the New York Fed or the Federal Deposit
Insurance Corporation (the "FDIC"). The Associate's main conduit for receiving information
from the New York Fed was his former coworker, the New York Fed Employee, who has since been terminated
for this conduct. While still employed at the New York Fed, the New York Fed Employee would
email documents to the Associate's personal email address, and the Associate would subsequently forward
those emails to his own Goldman work email address.
On numerous occasions, the Associate provided this confidential information to various
senior personnel at Goldman, including the Partner and the Managing Director, as well as a Vice President
and another associate who perform quantitative analysis for Goldman. In several instances
where the Associate forwarded confidential information to other Goldman personnel, the Associate
wrote in the body of the email that the documents were highly confidential or directed the recipients,
"Please don't distribute." At least nine documents that the Associate provided to Goldman constituted
confidential supervisory information under New York Banking Law § 36(10). Pursuant to the statute,
such confidential supervisory information shall not be disclosed unless authorized by the Department.
The documents included draft and final versions of memoranda regarding and examinations of the Regulated
Entity, as well as correspondence related to those examinations.
At least 17 confidential documents that the Associate had improperly received from the
New York Fed – seven of which constituted confidential supervisory information under New York Banking
Law § 36(10) – were found in hard copy on the desk of the Managing Director. Additional
hard copy documents were found on the desks of the Vice President and the other associate, including
at least one document constituting confidential supervisory information under New York Banking Law
§ 36(10).
On August 18, 2014, the Associate shared three documents pertaining to enterprise risk management
with the Managing Director, writing, "Below is the ERM request list, work program and assessment
framework we used for ERM targets. Again this is highly confidential as its not public and has not
been issued a[s] guidance yet. Not sure where it is at anymore due to internal politics. I worked
on this framework and guidance within the context of a system working group with the Fed system.
We ran several pilots to test it was well. Please don't distribute." The Managing Director replied,
"I won't. Will review on plane tomorrow to DC." The documents were marked as "Internal-FR" or "Restricted-FR."
Part of Goldman's work for the Regulated Entity included advisory services with respect to a potential
transaction. A certain component of the Regulated Entity's examination rating was relevant to the
transaction. The Regulated Entity's examinations were conducted jointly by the FDIC, DFS and the
New York Fed. As described below, the Associate used confidential information regarding the Regulated
Entity's examination rating – obtained both from his prior employment at the New York Fed and from
his contacts there – and conveyed this information to the Managing Director, who then conveyed the
information to the Regulated Entity on September 23, 2014, in advance of it being conveyed by the
regulators.
On August 16, 2014, the Associate emailed the Managing Director regarding the regulators' perspective
on the Regulated Entity's forthcoming examination rating, writing "You need to speak to [the CEO
of the Regulated Entity] about scheduling a meeting with all 3 agencies ASAP. He needs to meet with
them and display and discuss all the improvements and corrections they have made during the last
examination cycle."
On September 23, 2014, the Associate attended the birthday dinner of the New York Fed
Employee at Peter Luger Steakhouse, along with several other New York Fed employees. Immediately
after the dinner, the Associate emailed the Managing Director, divulging confidential information
concerning the Regulated Entity, specifically, the relevant component of the upcoming examination
rating. The Associate wrote, "…the exit meeting is tomorrow and looks like no [change]
to the [relevant] rating. I heard there won't be any split rating… [The Regulated Entity] should
have listened to you with the advice…hopefully [the CEO] will now know you didn't have phony info."
In this email, the Associate also provided advice to relay to the Regulated Entity's management,
stating that they should "keep their cool, not get defensive and not say too much unless the regulators
have a blatant fact wrong" as it "will go off better for them in the long run. Believe it or not
the regulator's [sic] look for reaction and level of mgmt respectiveness [sic] during these exit
meetings." The Managing Director replied "Let's discuss . . . I'm seeing [the CEO of the
Regulated Entity] tmw afternoon alone."
Later that night, the Associate followed up with another email to the Managing Director, writing,
"I feel awful not being there to wrap up 2013. I would have been able to pull all this through. I
was a real advocate for all the work they have done." He also offered to join a meeting with the
CEO of the Regulated Entity if the Managing Director wanted.
On September 26, 2014, Goldman had an internal call regarding the calculation of certain asset
ratios, during which there was disagreement over the appropriate method. During the call,
the Associate circulated an internal New York Fed document – which the Associate had recently obtained
from the New York Fed Employee – relating to the calculation, to the call participants, writing,
"Pls keep confidential?" Following the group call, the Partner called the Associate to discuss
the document, including where he had obtained it, and the Associate told him that he had obtained
it from the New York Fed. The Partner then called the Global Head of IBD Compliance to report the
matter and forwarded the document.
Compliance Failures, Failure to Supervise and Violation of Internal Policies
After receiving notice of the Associate's prohibition on working on matters for the Regulated
Entity, Goldman, including the Partner and the Legal Department, failed to take any steps to screen
the Associate from such prohibited work. Instead, Goldman affirmatively placed the Associate
on matters for the Regulated Entity beginning on his first day, and added the Associate to the official
Goldman database as a member of the Regulated Entity "Team" – a team led by the Partner.
Goldman failed to provide training to personnel regarding what constituted confidential supervisory
information and how it should be safeguarded. While Goldman policies provided that confidential information
received from clients should only be shared on a "need to know" basis, Goldman did not distinguish
between this broader category of confidential information and the type of confidential supervisory
information belonging to a regulator or other government agency, which is protected by law, such
as confidential supervisory information under New York Banking Law § 36(10). Indeed, Goldman policies
failed to adequately address Department confidential supervisory information.
As noted above, the Associate also violated Goldman's internal policy on "Use of Materials from
Previous Employers," which states that work that personnel have done for previous employers, and
confidential information gained while working there, should not be brought into Goldman or used or
disclosed to others at Goldman without the express permission of the previous employer.
* * *
The Managing Director is safe, as are all other Goldman employees: nobody aside for Bansal who
was merely trying to impress his superiors, has anything to worry about.
Anyone else found to have obtained at least "35 confidential documents" from the Fed on at least
"20 occassions" would be sent straight to jail with a prison sentence anywhere between several decades
and life.
Goldman's punishment? 0.6% of its 2014 Net Income.
Duc888
How could this happen? Seriously. Aren't the FED and GS separate entities?
Oh, wait.....
LetThemEatRand
The fact that these documents were sent via email only tells me how widespread this is.
Most of these guys are probably smart enough to put a paper copy in their briefcase and
deliver it to Goldman the old fashioned way bankers do things (over drinks and coke at a strip
bar).
But when "everyone is doing it," a guy may get careless and start using email, figuring
what the fuck.
Urban Redneck
Did Goldman's Marketing Department write that release for their FRBNY subsidiary??? They
deserve the $50 million fine for being an embarrassment to scheming bankers everywhere. This
is a company that has destroyed companies, entire economies, and countless (not so little)
investors by placing their own financial interests above their clients and regularly using
inside information and access to do so. Then Goldman is "caught" when they turn themselves in
(not that they had a lot of choice given the amateur hour performance) for actually "helping"
one of their clients (for once)... This whole thing stinks, in more ways than one.
Sudden Debt
What a joke!!!
GS and JPM ARE THE FED!!!
and that "fine"... THAT'S THEIR DONUT BUDGET!!
J J Pettigrew
Bagels....please!
Elliott Eldrich
"Feel sorry for the poor schmuck, cuffed and heading to a sallyport, to be booked,
and serve 6 months in jail, for stealing a carton of ciggs..."
Little crimes are punished with great fervor, while the biggest criminals get their wrists
slapped. This is outrageous, and I just have to ask how much more we are supposed to bear
before breaking?
Lord Ariok
I Love my Country and Hate Our Government. But If our government isn't "Gangster" well
believe it there will be another "Government" that is even more "Gangster" then ours to take
the number 1 spot in the Syndicate. The way I see it if we have to do this in order to compete
with China's Level of Corruption. Damn Chinese Efficiency. ~ Lord Ariok
venturen
they have Bill Dudley...they were worried that this underling would do something. Heck
Goldman gives the orders not the other way around
Bay of Pigs
The William Dudley is the main man at the FED (and the BIS), not Yellin or Fischer.
"Prior to joining the Bank in 2007, Mr. Dudley was a partner and managing director at Goldman,
Sachs & Company and was the firm's chief U.S. economist for a decade. Prior to joining Goldman
Sachs in 1986, he was a vice president at the former Morgan Guaranty Trust Company. Mr. Dudley
was an economist at the Federal Reserve Board from 1981 to 1983.
In 2012, Mr. Dudley was appointed chairman of the Committee on the Global Financial System of
the Bank for International Settlements (BIS). Previously, Mr. Dudley served as chairman of the
former Committee on Payment and Settlement Systems of the BIS from 2009 to 2012. He is a
member of the board of directors of the BIS and chairman of the Economic Club of New York."
Jesus College, Cambridge hosted, once more, the world's leading Symposium on Economic Crime,
and over 500 distinguished speakers and panelists drawn from the widest possible international fora,
gathered to make presentations to the many hundreds of delegates and attendees.
What became very quickly clear this year was the general sense of deep disgust and repugnance
that was demonstrated towards the global banking industry.
I can say with some degree of certainty now that a very large number of academics, law
enforcement agencies, and financial compliance consultants are now joined, as one, in their total
condemnation of significant elements of the global banking sector for their organised criminal activities.
Many banks are widely identified now as nothing more than enterprise criminal organisations,
who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate
commercial policy.
My prediction is that bankers will be jailed in the next economic/financial crisis. Lots and lots
of bankers.
It may seem to many that those working within this profession will remain above the law indefinitely
in light of the lack of any accountability whatsoever since the collapse of 2008. It may seem that way,
but extrapolating this trend into the future is to ignore a monumentally changed political environment
around the world. From the ascendancy of Donald Trump and Bernie Sanders here in the U.S., to Jeremy
Corbyn becoming Labour leader in the UK, big changes are certainly afoot.
I have become convinced of this change for a little while now, but we won't really see evidence of
it until the next collapse. However, something I read earlier today really brought the point home for
me. Rowan Bosworth-Davies recently attended the 33rd Cambridge International Symposium on Economic Crime
and provided us with some notes in an excellent piece titled,
The Banking Criminals Exposed. Here are a few excerpts:
Jesus College, Cambridge hosted, once more, the world's leading Symposium on Economic Crime,
and over 500 distinguished speakers and panelists drawn from the widest possible international fora,
gathered to make presentations to the many hundreds of delegates and attendees.
This Symposium has indeed become an icon among other international gatherings of its knd and
over the years, it has proved to be highly influential in the driving and development of international
policy aimed at combating international financial and economic crime.
What became very quickly clear this year was the general sense of deep disgust and repugnance
that was demonstrated towards the global banking industry.
I can say with some degree of certainty now that a very large number of academics, law enforcement
agencies, and financial compliance consultants are now joined, as one, in their total condemnation
of significant elements of the global banking sector for their organised criminal activities.
Many banks are widely identified now as nothing more than enterprise criminal organisations,
who engage in widespread criminal practice and dishonest conduct as a matter of course and deliberate
commercial policy.
Speaker after speaker addressed the implications of the scandalous level of PPI fraud, whose
repayment and compensation schedules now run into billions of pounds.
Some speakers struggled with the definition of such activity as 'Mis-selling' and needed to
be advised that what they were describing was an institutionalized level of organised financial crimes
involving fraud, false accounting, forgery and other offenses involving acts of misrepresentation
and deceit.
One of the side issues which came out of this and other debates, was the general and
genuine sense of bewilderment that management in these institutions concerned, (and very few banks
and financial houses have escaped censure for this dishonest practice) have walked away from this
orgy of criminal antics, completely unscathed. The protestations from management that these
dishonest acts were carried out by a few rogue elements, holds no water and cannot be justified.
In the end, I sat there, open-mouthed while evidence against the same old usual scum-bag financial
institutions, was unrolled, and a lengthy list of agencies, all apparently dedicated to dealing with
fraud and financial crime, lamely sought to explain why they were powerless to help these victims.
This was followed by a lengthy list of names of major law firms, and Big 5 accounting firms
who were willing to join with these pariah banks to bring complex and expensive legal actions against
these victims, bankrupting them, forcing them from their homes, repossessing properties they had
worked for years to create, while all the time, the regulators and the other agencies, including
to my shame and regret, certain spineless police forces, stood by and sought to justify their inaction.
At one stage, we were shown how banks ritually and deliberately take transcripts of telephone
calls made between complainants and the bank, and deliberately and systematically go through these
conversations, re-editing them and reproducing them in a format which is much more favourable to
the bank.
For the first time, I found routine agreement among delegates that the banking industry had
become synonymous with organised crime. Many otherwise more conservative attendees expressed their
grave concern and their repugnance at the way in which so many of our most famous banking names were
now behaving. It is becoming very much harder to believe that the banks will be able to rely on the
routine support they have traditionally enjoyed from most ordinary members of the public.
The election of Jeremy Corbyn to the leadership of the labour Party means that banking
crime and financial fraud will now become an electoral issue.
But now, the new Labour leadership will focus the attention of the electorate on the relationship
between the Tory party and their very crooked friends in the City, and the degree of protection that
the Square Mile gangsters and their Consiglieri, their Capos, and their Godfathers will become much
more identifiable. Bank crime will now become much more identifiable as a City practice and their friends
in the Tories will be seen as being primary beneficiaries.
Things are moving in the direction of justice. At a glacial place for sure, but moving
they are.
pot_and_kettle
When they're swinging from lamp posts lining Broadway and Water St, *then * I'd call it progress.
Til then, same old same old...
11b40
There were over 1,000 felony prosecutions that came out of the Savings & Loan fiasco in the 80's,
with a 90% conviction rate.
But, to your point, these were not the big Wall Street Bankers. Mostly just your local common banker
thief and his cronies, with a few politicians thrown in for good measure. No big fish were prosecuted
during the Depression era, either.
vincent
A reminder of how JPM saved its own ass in 2008. Worth bookmarking....
Dream on, Mike. Just who will jail the banksters? They own the governments of USA, Canada, and
Western Europe. Not a chance in my lifetime.
GCT
Politicians and the judicial branch are in the banks pockets. I will believe it when I see it
to be honest. I have yet to see real bankers or for that matter politicians go to jail. As long as
the big fines are paid nothing will change. Must be nice to create money from nothing to pay these
fines and fucking your customers over at the same time.
Fahque Imuhnutjahb
Wishful thinking. If any justice is to be meted out then the "little people" will have to take
it upon themselves.
And by little people I mean the plebes, not dwarves; but the dwarves are welcome to help, unless
of course
some of them are little bankers, then they're not welcome, but the rest are. Glad we got that cleared
up.
If we told you that thousands of protesters donning bright yellow shirts had taken to the streets
to call for the ouster of a leader in an important emerging market, you'd be forgiven for
thinking we were talking about Brazil, where President Dilma Rousseff is facing calls for
impeachment amid allegations of fiscal book cooking and government corruption.
But on this particular weekend, you'd be wrong.
We're actually talking about Malaysia, where tens of thousands of demonstrators poured into the
streets of Kuala Lumpur on Saturday to call for the resignation of Prime Minister Najib Razak
whose government has been accused of obstructing an investigation into how some $700 million from
1Malaysia Development Berhad mysteriously ended up in Najib's personal bank account.
1MDB was set up by Najib six years ago and has been the subject of intense scrutiny for borrowing
$11 billion to fund questionable acquisitions. $6.5 billion of that debt came from three bond
deals underwritten by Goldman, whose Southeast Asia chairman Tim Leissner is married to hip hop
mogul Russell Simmons' ex-wife Kimora Lee who, in turn, is good friends with Najib's
controversial wife Rosmah Manso.
You really cannot make this stuff up.
What Goldman did, apparently, is arrange for three private placements, one for $3 billion and two
for $1.75 billion each back in 2013 and 2012, respectively. Goldman bought the bonds for its own
book at 90 cents on the dollar with plans to sell them later at a profit (more here from FT).
Somewhere in all of this, $700 million allegedly landed in Najib's bank account and the going
theory is that 1MDB is simply a slush fund.
So you can see why some folks are upset, especially considering Rosmah has a habit of having, how
shall we say, rich people problems, like being gouged $400 for a home visit by a personal
hairstylist. Here's The New York Times with more on the protests:
Tens of thousands of demonstrators in Malaysia defied police orders on Saturday, massing in the
capital in a display of anger at the government of Prime Minister Najib Razak, who has been
accused of corruption involving hundreds of millions of dollars.
The demonstration in central Kuala Lumpur, which has been planned for weeks, has been declared
illegal by the Malaysian police, and the government on Friday went as far as to pass a decree
banning the yellow clothing worn by the antigovernment protesters.
But the demonstrators, who represent a broad coalition of civic organizations in Malaysia,
including prominent lawyers, asserted their right to protest on Saturday.
The government has acknowledged that Mr. Najib received the money in 2013 and said it was a
donation from undisclosed Arab royalty.
One group of protesters on Saturday carried the image of a giant check in the amount of 2.6
billion ringgit, with a sign that read, "You really think we are stupid?"
The group organizing the protest goes by the name Bersih, which means clean in Malay
Calls for Mr. Najib to resign have come both from within his party, which is divided, and from
the opposition. One junior member of Mr. Najib's party, the United Malays National Organization,
filed a lawsuit against Mr. Najib on Friday asking for details of how the money was spent.
Of course the most prominent voice calling for Najib's ouster is that of the former Prime
Minister Mahathir Mohamad. "I don't believe it is a donation. I don't believe anybody would give
[that much], whether an Arab, or anybody," he says.
Meanwhile, Malaysia is facing a re-run of the 1997/98 financial crisis as the ringgit plunges
amid broad-based pressure on emerging markets. With FX reserves now sitting under $100 billion
some fear a return to capital controls (let's just call it the "1998 option") is just around the
corner despite the protestations of central bank chief Zeti Akhtar Aziz. Here's BofAML:
Capital controls are not likely, but the possibility cannot be dismissed, despite <assurances
from Zeti. Introducing controls will be a regressive move and a huge setback, hurting the economy
and financial sector, and derailing any ambitions of becoming an international Islamic financial
center. Malaysia's reputation and credibility remain tainted by the capital controls of 1998,
even after almost two decades.
The ringgit has depreciated almost 13% year-to-date, the worst performing EM Asian currency.
FX reserves fell to $94.5bn at mid-August, falling below the $100bn threshold and down by about
$9bn in July alone. At the peak, FX reserves were $141bn in May 2013. Cover to short-term
external debt is only 1x, while cover to imports stands at 5.9 months. Downside risks remain
given looming Fed rate hikes, China's RMB devaluation and the political crisis over 1MDB.
Malaysia's vulnerability is also heightened by high leverage (household, quasi-public and
external) and a fragile fiscal position (heavy oil dependence, off balance sheet liabilities)
The current crisis has not reached the extreme stress seen during the Asian financial crisis,
when draconian capital controls were eventually introduced in September 1998. During that
episode, the ringgit collapsed by about 89% from peak to trough at its worst (to 4.71 from 2.49
against the USD). The ringgit has depreciated some 26% in the current crisis. During that
episode, the KLCI fell by about 79% from peak to trough (from 1,271 to 263) at its worst. The
KLCI today has fallen by only about 12% from its recent peak. Nevertheless, downside risks remain
given looming Fed rate hikes, China's RMB devaluation and the political crisis.
So in short, Malaysia is on the brink of political and financial crisis, and it looks as though
the nuclear route (capital controls) may be just around the corner, which would of course only
serve to alienate the country's financial system at a time when the government looks to be on the
brink of collapse. What's particularly interesting here is the timing. Mahathir Mohamad famously
clashed with George Soros during the '98 crisis, going so far as to brand the billionaire a
"moron". Now that the country's "founding father" is looking to oust Najib, it will be
interesting to see what role he plays in shaping Malaysia's response to the current financial
crisis and on that note, we'll leave you with a quote from Dr. Mahathir ca. 1997:
"I know I am taking a big risk to suggest it, but I am saying that currency trading is
unnecessary, unproductive and immoral. It should be stopped. It should be made illegal. We
don't need currency trading. We need to buy money only when we want to finance real trade."
Back in January 2014, we reported that Goldman's merchant banking unit rushed to buy an 18% in Denmark's
DONG Energy (that would be Danish Oil & Natural Gas) company for $1.5 billion. The result was an
immediate grassroots resistance campaign, as hundreds of thousands of Danes refused to hand over
their DONG to the vampire squid for various reasons, not the least of which was granting Goldman
veto rights over changes to DONG's leadership and strategy, a right usually reserved for buyers of
33% of an entity. A bigger reason for the Danish anger at the Goldman DONG deal, was that as
The Local reported a few months later, the sale "did not include a massive deal that both parties
knew was imminent, shortchanging the company's value by as much as 20 billion kroner."
Which was to be expected: as we
further said in January 2014, "if Goldman is involved, it guarantees future benefits for
the Vampire Squid". Sure enough:
Denmark lost out on billions of kroner when it sold partial ownership of Dong Energy to American
investment firm Goldman Sachs in January 2014, Politiken reported Wednesday.
When the Danish government sold an 18 percent stake of Dong to Goldman Sachs, the Finance Ministry
calculated the company's value at 31.5 billion kroner ($4.6 billion).
But just three months later, Dong was granted the rights to instal a massive offshore
wind park supported by the United Kingdom. According to Politiken, that deal
shot Dong's value up to over 50 billion kroner but was not calculated into the Goldman Sachs sale
despite both Dong and the investment firm being fully aware of it.
Politiken also reports that the looming deal was common knowledge throughout the wind industry.
As a result, the locals were less than delighted to learn the details of yet another Goldman pillaging
of taxpayers, one which allowed Goldman to make a substantial return on its investment in just months
courtesy of what was information which the government either did not have access to, or simply refused
to notice.
Bloomberg
further reports that "the Goldman deal left an indelible mark on Danish politics. Disagreement
over the Wall Street bank's investment in state assets prompted a junior party in the former Social
Democrat-led administration to quit the coalition in protest. Danes gathered in their thousands in
front of the parliament to protest against the sale."
Indeed, the deal caused a rift in the former Social Democrat-led coalition, culminating in
the departure of a junior member, the Socialist People's Party. The government of Helle Thorning-Schmidt
that oversaw the Goldman deal was ousted
in the June 2014 elections, paving the way for a Liberal government led by Lars Loekke Rasmussen.
He served as finance minister under Fogh Rasmussen and was also prime minister from 2009 until 2011.
Fast forward over a year, and a shaken Denmark still refuses to let Goldman fully off the hook
when recently the government decided to let lawmakers see secret documents on Goldman Sachs
Group Inc.'s purchase of the 18% stake in DONG. However, as Goldman reports, this glimpse
into the fine details of the Goldman decision making process will probably be a one-off. To wit:
"The government says it's making an exception in the case of Goldman's 2014 investment in Dong
Energy A/S after lawmakers on a committee overseeing the sale complained they weren't given full
access to the relevant files. Bjarne Corydon, who was finance minister at the time, said
the information contained in the transaction papers was too sensitive even for the parliament
committee."
Almost as "sensitive" as when Goldman's former employee and then Treasury Secretary Hank Paulson
tried to pass an open-ended "three-page termsheet" bailout of, well, Goldman Sachs through Congress
in 2008... and ultimately succeeded.
But while Goldman's domination of all legislative matters in the US is well known and nobody will
dare to make much of a fuss over it, in Denmark things are different.
Finance Minister Claus Hjort Frederiksen said this month he will release the documents
more than a year after the transaction went through as lawmakers continue to argue over the deal.
Goldman and PFA have said they have no objection to the files being made public.
Would the deal be unwound if it is discovered that Goldman had conspired and manipulated (with
significant kickbacks) the government of Helle Thorning-Schmidt to fast track the deal which Goldman
knew would be a huge IRR in just a few short months? It is unlikely:
Rene Christensen, a spokesman for the Danish People's Party which lobbied to have the documents
released, said there's no risk their contents might trigger political demands that a new deal
be negotiated.
"Altering the deal isn't really what it's about," Christensen said by phone. "It's
about having had a finance minister who said he couldn't trust the committee." Denmark's
lawmakers deserve to know "what was so important about this deal that we weren't allowed to see
more details," he said.
Martin Hintze, a partner at Goldman who sits on the board of Dong, was quoted by Berlingske
as saying the bank has no objections to having the documents made public.
Of course it wouldn't - any objections would be seen as confirmation the sale process was improper.
Which is why Goldman decided to go for the "sure thing" jugular, and just to make
absolutely sure it controls the DONG process,
Goldman hired none other than Anders Fogh Rasmussen, the former Danish prime minister who
governed Denmark from 2001 until 2009 "to help tackle the political hurdles the bank has encountered
since buying into a state utility last year."
Why hire him? Because the current Danish prime minister, Lars Loekke Rasmussen, just happened
to be the subordinate and finance minister under the "other" Rasmussen, the one Goldman just hired:
Anders Fogh.
Because if buying current and former government leaders to control the decision-making process
works in the US and every other developed nation, why not in Denmark.
But that's not all: in this particular case, Goldman gets bonus influence points because in addition
to purchasing the former Danish PM, and by implication, the current PM and his former fin-min protégé,
and assuring the DONG scandal quietly goes away, Goldman just hired the former head of NATO: from
2009 to 2014 Anders Fogh Rasmussen served as the 12th Secretary General of NATO.
In other words, with one hiring decision, Goldman not only assured its financial dominance over
Denmark, but is now sure to capitalize on whatever military developments NATO unleashes in the coming
weeks, which by the looks of things will involve Goldman funding every group in the upcoming Syrian
invasion and the resulting latest and greatest war in the middle east.
'The central institution in almost every modern nation is its central bank. Here is where unofficial
sovereignty lies (in both senses). Central bankers do not claim this authority; they merely exercise
it. They let politicians take the hit for economic failures. They call the shots, because they
control the central institution: money.
The mark of sovereignty never changes in history: coinage. There is usually a politician on
a coin. This goes back to 600 B.C. Ethelbert Stauffer was a theologian, an historian, and an expert
in numismatics. He wrote his great little book, Christ and the Caesars (1955), in terms of the
history of the Roman Empire's coinage: the deterioration from precious metals to copper coins
with fake silver. The coins had images of a god on one side and a Caesar on the other.
Today, we have paper money. Each nation's paper money has different politicians' pictures on
the bills.
This is no longer so important, because most money is digital. We get our choice of credit
cards. Here, there are bank logos, not politicians' pictures. The churches of America are MasterCard,
Visa, and American Express. There is brand competition.
When politicians go to summits to do their deals, they always take the finance ministers. Their
finance ministers are the liaisons between the politicians and the central banks. The politicians
are on tight chains, not the other way around.
The public keeps its collective eye on the politicians. This is exactly what central bankers
prefer.
The politicians are the Great and Powerful Oz. Central bankers are the little man behind the
curtain."
"In addition to these pragmatic goals, the powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control
in private hands able to dominate the political system of each country and the economy of
the world as a whole. This system was to be controlled in a feudalist fashion by the central
banks of the world acting in concert, by secret agreements arrived at in frequent private
meetings and conferences.
The apex of the system was to be the Bank for International
Settlements in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank, in the hands of men like Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Charles Rist of the Bank of France, and Hjalmar Schacht of the Reichsbank, sought to dominate its government by its ability to control Treasury loans,
to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."
but... the rabbit hole goes even deeper. who's behind the central bankers?
"It must not be felt that these heads of the world's chief central banks were themselves
substantive powers in world finance. They were not. Rather, they were the technicians
and agents of the dominant investment bankers of their own countries, who had raised
them up and were perfectly capable of throwing them down. The substantive financial
powers of the world were in the hands of these investment bankers (also called
"international" or "merchant" bankers) who remained largely behind the scenes in their
own unincorporated private banks. These formed a system of international cooperation
and national dominance which was more private, more powerful, and more secret than
that of their agents in the central banks. This dominance of investment bankers was based
on their control over the flows of credit and investment funds in their own countries and
throughout the world. They could dominate the financial and industrial systems of their
own countries by their influence over the flow of current funds through bank loans, the
discount rate, and the re-discounting of commercial debts; they could dominate
governments by their control over current government loans and the play of the
international exchanges. Almost all of this power was exercised by the personal influence
and prestige of men who had demonstrated their ability in the past to bring off successful
financial coupe, to keep their word, to remain cool in a crisis, and to share their winning
opportunities with their associates."
Welllll.....of COURSE Goldman hires the former head of NATO.
Fascist Corp./Gov. does what they are going to do.
The HEART of the world is money. The RULERS of the
world are the bankers. The PRAETORIAN GUARD of the bankers are the governments
of the world.
And just like the governments, bankers need INTEL as well.
Revolving Door Fascism on parade. Move along. Nothing to see here. And nothing can be
done about it.
DeadFred
To give full credit where it's due one has to ask what were the chances of the wind farm deal
going through if Goldman hadn't been sold a large stake in the company. There are benefits to
selling your soul (or company) to the devil. It's not worth it but the benefits are tangible.
"... Mr Eliot how you dare to call our prime minister a "punk"? Who do you think you are you or other journalist around the world? Why you don't write the truth that the hard working Greeks have lost the 60 % of their income and they can't live with less money. Your article as well as other around the world is called "bulling". ..."
"... If you had read even the anti-greek newspapers in the last 5 years you would understand that 90% of the "loans" Greece "took" - i.e. had imposed on them - went directly to German, French and Dutch banks. ..."
"... What I found entertaining, was the statement by Rice, which went "As our managing director has said many times, the IMF never leaves the table," except of course when the entire team gets called back to Washington, and errr... leaves the table... ..."
"... The IMF is not only about money. They have an ideological mandate too. Now, you may agree with this ideological mandate or not. However, if you do not, then it is best to not borrow money from them! ..."
"... Did you know that 29 billion (yes - Billion) euros of income tax were not paid by Greek professionals (doctors, lawyers, etc.) in 2009 according to Univ of Chicago researchers? ..."
"... A very irresponsible and simplistic, really sensationalistic summary. The hallmark of a pseudointellectual, a journalist who has never held a real job and seen how money is made and value is created and lives in the imaginary world of movie one liners and simple messages. ..."
"... "Mr Schauble is the proponent of a "velvet divorce" for Greece: an orderly exit from the euro and a return to the drachma, with the ECB playing a crucial role in stabilizing the new currency. Germany and other creditors would then step in with a "Marshall Plan" to put the country back on its feet within the EU. What Mr Schauble is not prepared to accept is a breach of contract by Greece on the terms of its previous "Troika" rescue, which he fears would lead to moral hazard and the collapse of fiscal discipline across Southern Europe. He is backed by much of the ruling Christian Democrat party (CDU) and its Bavarian allies (CSU) ..."
"... Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts. ..."
Basically, the IMF should officially admit their fatal errors in the development of the first
MoU that "saved" Greece [well, we all know now that the first plan was nothing more than an attempt
to save euro and the French-German banks that was cunningly presented as a token of "European
solidarity" - in reality, they didn't give a sh..t about Greece].
These "errors" were immediately identified by other members of the IMF board, like Brazil,
Argentina, China and .... Switzerland, according to the IMF documents presented by WSJ
I believe that Christine should pick up her pieces and crawl back to the table - and this time
she should present a plan that will restore the damage done.
Or else, they should not get a single euro back - and we should start negotiating with the
BRICS for a fair plan to restructure our economy.
MachinePork 12 Jun 2015 11:30
Make no mistake about it a Greek default is a calamity for the global financial system. Debt
on the periphery is in the trillions. It is carried on the books in banks and treasuries at face
value only because national administrators understand – with the blessing of the automatons at
BIS -- what it would mean if this crap was subjected to a proper stress test or marked-to-market.
At stake in this battle is the entire global financial system. Should a NATO government summon
the cheek to opt out of the prevailing international credit system, issue debt-free capital, invest
in its people, grow exports and prove to succeed; the entire compound interest earning, system
of rent-making privilege would collapse. My sense is the kingdom of Finance, its banking lords
and its lickspittles in policy will never let this happen.
God bless the Greek people. This is going to get messy. They should be commended for their
bravery in the face of endless threats of financial serfdom for intransigence.
The international debt monkey is a doppelgänger. He looks so inviting at first glance but is
more than prepared to reach back and lob a compound interest bearing shit bomb your direction
in a bid to save privilege in the global financial zoo.
Maria Christoulaki 12 Jun 2015 10:43
Mr Eliot how you dare to call our prime minister a "punk"? Who do you think you are you
or other journalist around the world? Why you don't write the truth that the hard working Greeks
have lost the 60 % of their income and they can't live with less money. Your article as well as
other around the world is called "bulling". What do you think that Greeks are? all these
articles except of bulling show a racism against us. You must ask an excuse for this article which
offends both our prime minister and the Greek people, who voted him.
mgtuzairodtiiasn asiancelt 12 Jun 2015 09:08
It is funny! The German bankers stole your money, and you still believe that all this money
went to the Greeks. This money went from the German banks to the German enterprises. Because they
gave bribes to win contracts for useless military equipment. For example, Greece bought 4 submarines
that doesn't need. Even today, only one has been delivered, because there were major design faults,
although the German company has received the money. Regarding the loans of the previous years,
do you believe that the total amount of the Greek debt was to expire in just 3 years? Obviously,
the gang that rules EU today, gave 240 bn Euros to banks of Germany, France, Netherlands etc,
and used Greece as a scapegoat to hide this fraud. Wake up!
mgtuzairodtiiasn Angkor 12 Jun 2015 08:55
Firstly, negotiation is not that you agree to what the institutions require. Secondly, you
are right. The Greek economy and society have been carried many parasites until now.
Remember the German companies like Siemens, Ferrostaal, ThyssenKrupp which gave bribes to many
politicians and Media owners. Or Hochtief, which still has not paid 500 mn Euros of VAT to the
Greek state. It is time to get rid of all this parasites.
elenits -> Anton Brasschaat 12 Jun 2015 07:57
"Loans" imposed by IMF against its mandate = Odious debt.
Greeks shouldering 340 bn of EU, ECB, IMF "loans" to shore up foreign malinvesting banks =
Odious debt
Loans to Greece that were not used by Greeks = Odious debt
IMF breaking its own rules to loan without debt restructure = Odious debt
This is without considering ECB acting outside its mandate, i.e. politically, from Feb 2015
by illegally cutting Greece from bond markets and out of QE.
elenits -> asiancelt 12 Jun 2015 07:49
If you had read even the anti-greek newspapers in the last 5 years you would understand
that 90% of the "loans" Greece "took" - i.e. had imposed on them - went directly to German, French
and Dutch banks. The 10% Greece was allowed to keep paid for the interests on these "loans"
- topped up with money screwed out of the Greek taxpayers.
Apropos the IMF they acted illegally against their own rules by lending to a first world country
[not a "developing" country] and by accepting a greek program that did not include debt restructure,
i.e. the same German, French and Dutch banks having to accept some losses.
There is no such thing as "risk" anymore for banks, corporations or the 1%. Risk and poverty
is only for ordinary people like yourself.
dawisner -> Constantine Alexander 12 Jun 2015 07:30
Constantine, as an American expat living in Greece for the past 21 years now (I was married
in Thessaloniki in 1988), I, too, have frequently lamented how many armchair experts appear in
these chat rooms. I published an e-book last year (Still at Aulis) with a view toward trying to
explain to the casual observer how complex the local situation can be, and how worthy and hard-working
my Greek peers often are. Keep up the good work.
seaspan -> Anton Brasschaat 12 Jun 2015 05:50
French and German banks were generously bailed out of any risk by "taxpayers" from the EU,
including Greeks.
And Greek leverage is honesty: they have a clear understanding of current economic reality,
and a better plan to payback their debts to Euro taxpayers. Anyone who says different is suspect
as to their interests and intentions.
It isnt Syriza you should be questioning if you are sincere about your concern for the taxpayer.
It is the financial advisers and ideologues backing austerity you should question. Are they merely
driven by their egos and reputations as pro austerity hawks? Afraid for their secure positions
as Yes Men in financial institutions?
And anyone in the negotiating process who has loyalties to Russia should be severely scrutinised,
since Putin's interests are for a failure in negotiations, for a Grexit, all toward a long term
desire of an EU breakup.
It could come down to questions of treason why there is no negotiated settlement,,, if such
a word is applicable to the EU project...
Constantine Alexander -> Renato Timotheus 12 Jun 2015 05:43
My life's experiences - including beginning work at 8 years of age; 3 years military service;
professional activities including U.S. investment banking, employment development in Eastern Europe
(e.g. job creation at a Belarus agricultural production facility which is still thriving), 10
years devoted to my passion for wildlife conservation projects with worthy BirdLife Int'l NGO
partners (not as you coyly suggested as a result of "untoward" behaviour); and having a doctor
threaten to refuse to perform my father's surgery unless he receives a 10,000 euro cash bribe
in addition to his customary doctor's fee and the hospital costs - have shaped my perspective
on the factors that contribute to or undermine civil society.
If Greece exits the euro, the resulting cost of vital goods will soar due to the country's
heavy reliance on imports. This will hit the middle class and the poor much harder than the current
austerity measures -- most of which have not been implemented by any Greek gov (e.g. opening up
business sectors to competition, privatization of debt-ridden public institutions, tax collection
which has for decades suffered due to customary and widespread bribery demanded by tax officials,
privatization of public assets).
The long term solution lies in the govt starting to do what most of us have to do - we prioritize
spending based on worthiness and needs (food, health, education, etc), keep a reserve for contingencies,
and spend in relation to our incoming revenue. But rather than contributing to long term stability
and security for the country which benefits everyone's work activities, the society insists upon
short term benefits (e.g. public sector hiring for my children, tax evasion) that it clearly cannot
afford. The broader issue is not lender's conditions vs. austerity relief, but rather a way of
organizing govt and society which, in the Greek model, has gotten way out of hand due to low interest
rates for excessive borrowing by a series of governments. We'll see how the story unfolds.
PyrosT -> Enoch Arden 12 Jun 2015 05:32
destroyed economy was not an alternative to the IMF "help", it was its result, carefully
planned and systematically implemented. It was in a way a remarkable achievement of IMF: to
inflict a greater damage to the Soviet economy than WW2, with the help of the local compradors.
IMF will not do anything about your or anyone elses local corrupt elites or lack of governance.
That is not within their mandate or nature.
If you think that it is possible to convert a centrally planned soviet style (the core of it
to boot) to anything resembling a market economy without major disruption.
Even East Germany, despite the endless billions thrown into it, went through a period of high
unemployment and hardships.
But I guess it is easier to "blame the IMF". Yes the interventions will almost always lower
your GDP - for a quite simple reason that the previous GDP is probably bloated with G (government
spending) and any significant restructuring always causes some depression. And yes, it typically
isn't a "walk in the park". And some measures are probably misguided, inadequate or ineffective.
But...
Why does a country asks for the IMF help in the first place? Because it is sporting unsustainable
policies? Sometimes it could even correct itself, but having an outside partner makes some policies
easier to deploy.
DANIELDS 12 Jun 2015 05:10
Yesterday briefing by G.RICE of IMF
...Greek pension system is unsustainable. The Greek pension funds receive transfers from the
budget of about 10 percent of GDP annually. Now, this compares to the average in the rest of the
Euro zone of two-and-a-half percent of GDP. The standard pension in Greece is almost at the same
level as in Germany and people, again on the average, retire almost six years earlier in Greece
than in Germany. And GDP per capita increase, of course, is less than half that of the German
level.......Terrible errors? reported to justify killing policies of troica and imf......Here
is Greek butjet.
......For pensions 6,3 billion eur.GDP OF 2014 179 bill euros and for pensions goes ONLY 3.5%
OF IT.
This the big obstacle of negotiations.10% of GDP is 18 billion euros .3.5% is only 5.4 billions.They
are killers of a country with false reports.
Angkor Renato -> Timotheus 12 Jun 2015 04:53
Renato on your checklist for Greece's solution to its current problems, a few questions:
1. Default. Well that's a given. It's going to happen anyway whether the Greeks want
it to or not.
2. Secure Russian and Chinese support for the new currency
How will Greece secure Russian and Chinese support for its new currency? Aren't they going to
do a credit check and find out that the Greeks don't honour their loans? They're bound to find
out and its pretty unlikely that they'd be silly enough to line themselves up to be stiffed by
the Greeks. They are not mugs you know.
3. Requisition all German and Luxembourg-owned property/assets in Greece in lieu of WWII
reparation payments. Why stop at Germany and Luxembourg? Poland was part of Germany (the Governor
Generalate) during WWII. As were Austria (the Anschluss), and the Czech Republic and Slovakia
(the Munich Agreement). Why not seize all of the property owed by the nationals of those countries
as well? It only seems fair. Also Italy had a role in the invasion of Greece in WWII. In fact
the Germans would never have invaded but for the Italians botching the job. Shouldn't you be stiffing
the Italians as well?
4. Massive drive to attract British and Russian tourists to a cheaper Greece. A few
questions here. First the Russians. Where will their tourists come from given the parlous state
of their economy? And why would they go to Greece now that they have lovely Crimea, the Pearl
of the Black Sea, back in their hands? Now for the British. What has Greece got that a British
tourist would want that Magaluf doesn't have? Don't say culture because Greece has little of it
(and the Italians do it better anyway) and British tourists don't want it. If they wanted Greek
culture they'd go to the British Museum where it's been sitting for the last 200 years.
5. Threaten to join the SCO, if NATO starts conspiring for a military coup. Don't you
think that the SCO's dialogue partners, Turkey, may have something to say about that? Nothing
kind, of course. That would be a bit too much to expect of the Turks when talking about Greek
matters.
zchabj6 -> JimVxxxx 12 Jun 2015 04:37
The debt jubilee is a very old idea, mentioned in biblical times, but has also had plenty of
implementation in medieval and later times where every 10 years or so all debt is wiped out and
debt issuing starts again.
This was essentially to stop debt slavery where one class monopolizes resources and lends it
out to others to do work for the asset owners to do nothing but live off of the interest on the
loans, which is caustic to society.
As for no compound interest. It essentially is my own idea, based on say religious texts that
ban interest or usury on loans because of the negative debt slavery consequences.
But the question is, who would then lend to business and people, where is the incentive? So
there could be fixed interest on the original sum and no more, unlike today where you pay interest
on the intiial sum and the interest on that.
And if you miss payments and there are delays to paying, interest breeds interest, rather than
having a known fixed sum of interest to pay back which is much more just.
AER and other formulas are really eating up the entire economic structure, it seems to me there
is merit to justice and prosperity too from religious texts, they seem to have a lot of experience
in unseating entrenched oligarchs.
REDLAN1 12 Jun 2015 04:29
What I found entertaining, was the statement by Rice, which went "As our managing director
has said many times, the IMF never leaves the table," except of course when the entire team gets
called back to Washington, and errr... leaves the table...
We are meant to presume that this is a negotiating tactic, and that the IMF is Dirty Harry?
In the final scene, Dirty Harry goads the perp into going for his gun so that he can legally kill
him in self-defence. Although in the first scene where this is used Dirty Harry's gun is empty.
So which is it?
Have they got an empty gun, or are they trying to goad Greece into defaulting, so they can
blow them away?
I assume UK public spending on pensions at 8.6% of GDP. This 2% average sounds like nonsense.
Scipio1 -> Angkor 12 Jun 2015 03:27
In terms of purchasing power parity China does have the largest economy in the world. The US
GDP is roughly $17 trn and China's is roughly $8trn, but a dollar in China goes twice as far as
a $ in the US. Moreover China does not have the same debt levels as the US. US public debt is
over 100% of GDP. When you count how rich a country is remember to factor in the LIABILITIES as
well as the assets. The US is the world's biggest debtor country and China is the biggest creditor.
The US only enjoys (if this is the right word) its current living standards since it controls
the world currency. But this is coming to and end as the BRICS nations are de-dollarizing and
setting up their own institutions which circumvent the dollar. Institutions such as the AIIB and
the BRICS investment bank.
The world is changing old chap, and of course the Americans don't like it; their dominant position
is under threat which is why they are trying to arrest this development by any means - financial,
economic, political and military - at their disposable.
This is the real problem. The IMF should never have been involved in the first place. They
should stick to their mandate of only ever loaning money where that debt is sustainable.
For the IMF to walk out that might not be a bad thing, but they should walk out on Merkel and
the EU for refusing an OSI, the debt writedown which Greece needs.
It has always been a solvency issue and not a liquidity issue. Until the Troika accept that
then no progress can be made.
JimVxxxx -> madrupert 12 Jun 2015 02:35
The IMF is not only about money. They have an ideological mandate too. Now, you may agree
with this ideological mandate or not. However, if you do not, then it is best to not borrow money
from them!
The IMF would argue that they do put people before money; by increasing the competitiveness
of a country they are ultimately benefiting everyone who lives there.
JimVxxxx -> zchabj6 12 Jun 2015 02:28
Some interesting points there... the IMF is a bank, just like any other, with a mandate to
encourage free-market policies (as far as I know).
The ECB are far better positioned to provide tools which would lessen the impact for individual
EU countries facing sovereign debt funding issues, however, it is not explicitly mandated to do
so.
I have never come across the term 'debt jubilee' but it sounds fun; perhaps you could explain
what it is? Also, how would abolishing compound interest help?
hermanmitt -> piper909 12 Jun 2015 02:22
This entire situation is a foreshadowing of what's to come in a world that allows international
banking cabals and corporate investors to dictate policies to sovereign states, regardless of
the will of the people as expressed in open elections.
"Give me control of a nation's money and I care not who makes it's laws" - Mayer Amschel
Bauer Rothschild
This is just the money phase of a process that takes power away from elected government
and hands it to a few bankers. The next stage is to hand the management of that power to the
few who run the corporations.
That process is now well under way in the form of TTIP.
Q: Ever wondered how something this important could be discussed in secret?
A: Because these elites do not consider ordinary people to be part of the process, so why would
they need to consult us.
Constantine Alexander 12 Jun 2015 02:16
It is very obvious that many of you who have commented have never lived in Greece. Although
I have lived and worked in 5 countries, I was born, raised, served my military service and have
returned to work in this country that I have always loved but ... the daily corruption, tax evasion
on a massive scale, refusal to honour the terms of ordinary contracts that Greeks willingly sign
only to later cherry-pick the terms by which they wish to abide and the inherent sense of always
feeling victimized by the rest of the world are not productive features in civil society.
Did you know that 29 billion (yes - Billion) euros of income tax were not paid by Greek professionals
(doctors, lawyers, etc.) in 2009 according to Univ of Chicago researchers?
That figure does not include the tax evasion by the rest of (and the majority of) Greek working
people. I am disappointed in the educational system that is ranked lowest in the EU and, most
of all, in my fellow citizens who cling to this system of daily corruption and bribe-taking but
refuse to recognise this behaviour in themselves. Please stop blaming financial creditors who
have a right to request loan conditions (just as we have home loan conditions) that the Greeks
could have declined. The financial mismanagement in this country is staggering, so, for those
of you who criticize the lenders - don't forget there are two sides to every story and you may
not be seeing everything that goes on here.
Renato Timotheus 12 Jun 2015 02:13
I think the solution for Greece is becoming clearer by the day.
1. Default.
2. Secure Russian and Chinese support for the new currency for a period of 2 years or so.
3. Requisition all German and Luxembourg-owned property/assets in Greece in lieu of WWII reparation
payments (yes, Luxembourg was a part of Germany in WWII, so it too owes reparations, and many
Luxembourg-registered companies have assets in Greece).
4. Massive drive to attract British and Russian tourists to a cheaper Greece.
5. Threaten to join the SCO, if NATO starts conspiring for a military coup.
eastofthesun -> Faith Puleston 12 Jun 2015 02:07
it is a country that thinks the EU is a source of income to make up for them not doing their
sums at home
I'm thinking that if lenders have the right to enforce policy decisions, then maybe they ought
also to bear a share of responsibility. By which I mean that when the IMF was busy throwing money
at Greece's erstwhile administrations it must have been well aware of what was happening with
its money (including that bled away into corruption), yet it tolerated it; certainly the IMF had
more potential say in Greek policy at the time than the current administration.
If the politicians of earlier administrations abused their access to EU funding, they did so
knowing that it would ultimately not be them to pick up the bill. Like most elected politicians
they needed only a short-term perspective. The lenders indulged this when the money was being
spent in the first place, now they're cracking down on the people who inherited the debt - not
those who ran it up. (Of course, the lenders inherit the debt too.)
That's the nature of long-term debt. We need to learn that this lending process is dysfunctional
- but both parties to the debt are complicit in that. This is why it is incumbent on the lenders
to negotiate.
AlexLeo 12 Jun 2015 01:33
A very irresponsible and simplistic, really sensationalistic summary. The hallmark of a
pseudointellectual, a journalist who has never held a real job and seen how money is made and
value is created and lives in the imaginary world of movie one liners and simple messages.
Holding a gun to his head - are you speaking to a juvenile delinquent trying to get a message
across? Pathetic, Cannot see anyone paying money to read this analysis.
Chris Hindle 12 Jun 2015 01:23
IMF to Alexis Tsipras: 'Do you feel lucky, punk?'
Good to see this 'economist' sitting astride the neutral position
I thought everyone realised the Greek people are innocent in all this - that the debts were
accrued illegally and probably only as little as 5-10% actually benefitted the Greek people -
the rest, inevitably, benefitting Greek bent banksters and politicians.
I wonder if this 'economist' was trained in the dreamworld of neo-classical economics
To put it clearly - Bollox to the IMF -- People first!
Notaterrorist 12 Jun 2015 01:00
The best writing on this subject (not just a regurgitation of "she said, he said" like the
above useless piece of "journalism") is by Ambrose Evans-Pritchard in the Daily Telegraph. Below
is what he writes today.
If he is correct, I finally understand Schauble - and to my astonishment agree. Neither Greece
nor the Eurozone can function while Greece remains in the Euro. It's time for Grexit and a Marshall
Plan.
"Mr Schauble is the proponent of a "velvet divorce" for Greece: an orderly exit from
the euro and a return to the drachma, with the ECB playing a crucial role in stabilizing the
new currency. Germany and other creditors would then step in with a "Marshall Plan" to put
the country back on its feet within the EU.
What Mr Schauble is not prepared to accept is a breach of contract by Greece on the terms
of its previous "Troika" rescue, which he fears would lead to moral hazard and the collapse
of fiscal discipline across Southern Europe. He is backed by much of the ruling Christian Democrat
party (CDU) and its Bavarian allies (CSU)
Mrs Merkel appears to have concluded that "Grexit" is fraught with risk and would inevitably
be blamed on Germany, leaving a toxic political and emotional legacy."
Quaestio -> MikeBenn 11 Jun 2015 23:00
Why? Because US investment banks were involved in the Greek debt.
Wall St. Helped to Mask Debt Fueling Europe's Crisis
By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ
Published: February 13, 2010
The New York Times
Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened
the financial crisis shaking Greece and undermining the euro by enabling European governments
to hide their mounting debts.
As worries over Greece rattle world markets, records and interviews show that with Wall Street's
help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created
by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece
forestall the day of reckoning. In early November - three months before Athens became the epicenter
of global financial anxiety - a team from Goldman Sachs arrived in the ancient city with a very
modern proposition for a government struggling to pay its bills, according to two people who were
briefed on the meeting.
The bankers, led by Goldman's president, Gary D. Cohn, held out a financing instrument that
would have pushed debt from Greece's health care system far into the future, much as when strapped
homeowners take out second mortgages to pay off their credit cards.
It had worked before. In 2001, just after Greece was admitted to Europe's monetary union, Goldman
helped the government quietly borrow billions, people familiar with the transaction said. That
deal, hidden from public view because it was treated as a currency trade rather than a loan, helped
Athens to meet Europe's deficit rules while continuing to spend beyond its means.
Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight
of its debts and with its richer neighbors vowing to come to its aid, the deals over the last
decade are raising questions about Wall Street's role in the world's latest financial drama.
As in the American subprime crisis and the implosion of the American International Group, financial
derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs,
JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing
in Greece, Italy and possibly elsewhere.
In dozens of deals across the Continent, banks provided cash upfront in return for government
payments in the future, with those liabilities then left off the books. Greece, for example, traded
away the rights to airport fees and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans, mislead investors and
regulators about the depth of a country's liabilities.
Glen Killoran -> Pomario 11 Jun 2015 22:49
Based upon what?
Tourism? Tried that, it allowed the 1950 Greek economy to rocket into the 20's.
Shipping? Too late, that ship has already sailed.
Manufacturing, yeah, Greece will be #1, right after Bangladesh, Vietnam and Cambodia.
Agriculture? Equipment bought with what money, the Drachma? Hmm, that'll be a competitive business
model.
Real-estate? Just how expensive do you think homes will be when the local populace is cash
poor, in debt, and has no access to credit? Can you say buyers market? It will be the foreign
fire sale buyer that buys low, sells high, not the Greeks.
And, all of this assumes the Greek economic model is reformed, and that is what the troika
is trying to do right?
Seems to me default is really just the long hard road to reform, if it ever gets there because,
there surely no demand for it now.
Mark Richardson 11 Jun 2015 22:46
It is kind of difficult for the new Greek government to give the IMF and its other creditors
anything in new austerity measures considering that the Greek unemployment rate is over 25% and
the youth unemployment rate is 60%. How much more pain would you be willing to force on your own
people if you were a new reform leader considering that this entire crisis was caused when the
previous conservative Greek government hid and failed to report half of its entire deficit? I
don't see a viable future for Greece that includes having to repay the IMF and other major lenders
as any more reforms will just drive the jobless rate and their GDP loss rate higher too.
Basically either the IMF and Germany agree to restructure the Greek debt or Greece will pull-out
of the Eurozone, and right after that happens Italy and Spain will be next, which will cause another
Great Depression in the major lending countries.
Andrew Paul -> Wood Pomario 11 Jun 2015 22:16
There probably won't be a tourism boom if Grexit triggers a global recession when the EU markets
spin into chaos. So why can't they collect tax revenues from the wealthy now and clear up all
their problems in the first place?
fflambeau -> Glen Killoran 11 Jun 2015 22:01
I agree that past Greek governments have made huge mistakes. But the main problem is not in
pension funds, as you claim, but in military spending. In the 1980's the Greek government spent
6% of its GDP on military expenditures. That is now about 2% of GDP but that is still the second
highest of all NATO countries, second only to America.
You seem to miss the point that the current Greek government had nothing to do with the mistakes
made by former governments and has done a noble job of righting the ship.
As for your comments about the overly generous nature of Greek pensions, you are off base.
Maybe that was the case many years ago, but not in the past couple of years.
fflambeau 11 Jun 2015 21:42
Let's compare the "bailouts" that President Obama worked out with huge Wall St. companies and
corporations that failed in 2007-2009. They got enormous funding, trillions of dollars, at virtually
no interest and no oversight.
General Motors took $6 billion of its $50 billion bailout and built an automobile manufacturing
plant (in Thailand, no less!).
What did the USA's taxpayers make off the billions of dollars it gave GM, at the time the largest
corporation in the world? Nothing. In fact, they LOST money.
Reuters and Time both report that the US government LOST money, $11.2 billion, by loaning $50
billion to GM. Source: http://www.reuters.com/article/2014/04/30/us-autos-gm-treasury-idUSBREA3T0MR20140430
Did the US government put pressure on GM to make them pay back the lost $11.2 billion? Nope.
So those complaining here about giveaways to a lazy Greek people should look at what is really
happening in their countries and what the IMF and other international organizations are really
doing.
AnhTay 11 Jun 2015 19:10
One possibility is obvious. Greece is prepared to default. They are, quite rationally, waiting
to see if they can get a deal with the IMF that would be acceptable as an alternative to default.
Even if they cannot, what is the harm in playing out their hand to see if it is possible? There
is no point in getting childish about the issue. Negotiations are about business. If Greece chooses
to default, so be it. No reason for the IMF to get all gnarly on the point.
fceska -> Bowhill 11 Jun 2015 19:07
That's not the only thing that's wrong. The whole article is completely one-sided. This paragraph
for instance:
Up until now, the view in Athens has been that the troika – made up of the IMF, the European
Central Bank and the European commission – has been bluffing. The view has been that there
is always room for a bit more haggling, always time to cut a better deal that would avoid the
need to make the changes to pensions, VAT and collective bargaining being demanded in exchange
for fresh financial assistance.
could be rewritten as:
Up until now, the troika – made up of the IMF, the European Central Bank and the European
commission – has been of the view that Athens has been bluffing. The view has been that there
is always room for a bit more arm-twisting, always time to force a tougher deal that would
ratify the need to make the changes to pensions, VAT and collective bargaining which they were
demanding in exchange for yet more unsustainable financial assistance.
aretzios -> mariandavid 11 Jun 2015 18:37
You have it all wrong. You should read the IMF reports. The IMF actually urged the EU to write-off
part of the Greek debt. The IMF felt that it was put in a bad situation, brought in by the EU
to manage the problem without any of the tools usually allowed in these situations, such as debt
write-off and devaluation. In its 2014 report, the IMF stated that the whole "bailout" deal was
not to rescue Greece but to rescue the Euro. Now, knowing that it is not going to get any assistance
from the EU, it is putting the pressure on Greece to get its funds from there. I think that the
IMF feels trapped in a situation that it was not of its making.
The issue of the pensions is the most galling one. During the 2012 write-down, the EU protected
all its assets; the 50 billion euros in Greek bonds held by the ECB were not subject to the write-down.
However, all Greek pensions funds were forced (literally forced) to participate. They collected
just 17 cents to the Euro (or thereabouts) in the bond exchange. Of course, now the EU claims
that there is no money to service the current pensions, thus the pensions need to be reduced!
Considering that the average pension is about 600 euros (and living costs in Greece are very much
the same as in the UK), one can see how galling this is (and they already have gone down by 40%
in the last five years). If you add to this the demanded tax increases, the whole thing almost
sounds like a Mafia protection racket.
Even though the IMF is not "impressed" with the concessions that the Greek government has made
thus far, this government would not really survive if it brings this package to the parliament.
A good number of its MPs would not vote for it and many of its ministers would resign. The resulting
turmoil would only deepen the political crisis.
At the end, the EU will find a very anti-EU militant country in its southeast corner with more
to follow. Not really good for anybody
Goldman Sachs Group Inc., which called for reform of high-speed stock trading before Michael Lewis's
"Flash Boys" spurred an outcry last year, is diving back in.
... ... ...
The bank's electronic equity-execution unit is hiring executives including Keith Casuccio from
Morgan Stanley and investing in software, trading infrastructure and its dark pool, according to
people with knowledge of the plan.
Goldman Sachs emerged last year as an early supporter of the U.S. stock platform created by IEX Group
Inc., portrayed in Lewis's book as an antidote to the perceived ills of the super-fast, multi-venue
electronic trading in today's market. Now, after few major changes in the way stocks are traded,
the investment bank is seeking to execute faster, catching up with competitors and leveling the playing
field for its clients.
Goldman Sachs is one of the world's top equity-trading banks, climbing to No. 1 by revenue
in the first quarter after ranking second in 2014, when it produced $6.74 billion. The latest
push, which included hiring Raj Mahajan as head of equity electronic-execution services this year,
shows it's focused on establishing itself as one of the top players in automated trading in particular.
In March 2014, Goldman Sachs President Gary Cohn wrote an op-ed in the Wall Street Journal calling
for the industry and regulators to improve the market's structure as risks were "amplified by
the dramatic increase in the speed of execution and trading communications."
Goldman Sachs said in a memo after the op-ed that markets would be well-served if IEX achieved
"critical mass," even if that meant reduced volume at its own dark pool, Sigma X. The firm's focus
had shifted away from the electronic business, with Greg Tusar, who had led the unit for Goldman
Sachs, leaving in the first half of 2013.
Similar groups across Wall Street faced scrutiny because of concerns that their platforms were
too opaque and that high-speed traders were siphoning off profits from everyday investors -- issues
that have led to probes by New York's attorney general, the Securities and Exchange Commission and
U.S. Justice Department.
... ... ...
Goldman Sachs's total trading revenue fell to $15.2 billion last year, the lowest since 2005,
as activity in fixed-income markets declined in recent years and the firm sold units including its
reinsurance business, which reported results within equity trading.
US investment bank Goldman Sachs paid its senior executives the most lucrative bonuses of all
UK-based banks in 2013, statistics compiled by Reuters suggest.
The bank's employees in key high-ranking executive and risk-taking roles were given bonuses of
£2.57 million on average – approximately twice the amount awarded by other banks based in Britain.
Reuters' research, published earlier this week, contrasted salaries doled out by 13 prominent investment
banks operating in London. The survey spanned a total of 2,600 City of London employees.
The study also revealed 2,600 City bankers were paid over £3.4 billion in 2013, almost 50 times the
average yearly salary in Britain.
The Trade Union Congress (TUC), a federation of trade unions throughout England and Wales, criticized
Goldman Sachs, insisting the time had come for its employees' bonuses to come "back to planet earth."
Royal Bank of Scotland (RBS), which is 79 percent owned by the British state, paid its staff more
moderately. Reuters' research shows senior employees and key risk-takers working for the bank were
offered on average £600,000.
Bonus cap or regulatory farce?
The City of London is billed as the investment banking capital of the world. Britain is home to the
vast majority of large investment banks throughout Europe. In a highly competitive financial climate,
analysts suggest Goldman Sachs paid its senior executives and risk-takers 100 percent more on average
than rival banks such as JP Morgan and Citi in an effort to lure and keep the sector's leading talent.
Goldman's hefty bonuses in Britain were found to eclipse the average bonus the investment bank paid
to its US-based employees. The discrepancy may cause tension within the firm when US staff realize
they took home less in 2013 than their UK counterparts.
The bank's 2013 bonuses offered in Britain may mark the peak of City gratuities for the foreseeable
future as the figures relate specifically to earnings prior to the introduction of an EU-wide bonus
cap.
Following the policy shift, financial firms in Britain must adhere to EU rules that limit bonuses
to the size of bankers' basic salaries. Should banks' shareholders collectively agree, however, higher
bonuses may be issued in rare circumstances.
The Treasury, which sets the focus of UK economic policy, previously brought a legal challenge against
the bonus cap to the European Court of Justice (ECJ). But it was unsuccessful in its attempt to overturn
the regulatory shift.
Experts suggest the EU-wide bonus cap, which came into force at the start of 2014, will do little
to tackle wage inequality in Britain. By driving the basic salaries of senior banking executives
upward, it will merely reinforce the status quo – reaping astronomical salaries for elite financiers
that are just as lucrative as ever.
Banks have also created controversial new allowances, which are allocated to their top employees
in tandem with their regular wages and bonuses. These allowances generally take the form of shares,
and allow banks to legally circumvent the EU's bonus caps.
In 2014 alone, the UK's largest four high street banks doled out £30 million in shares to at least
12 of their most senior executives.
Ross McEwan, the CEO of RBS, was the only UK bank boss not to accept an allowance last year in addition
to his annual salary. McEwan will, however, be awarded an allowance in 2015 amounting to £1 million
in shares.
Back to Earth?
While some of Britain's top bankers continue to take home as much as 50 times the nation's average
pay, trade unions warn ordinary workers won't see their salaries recover to pre-2008 levels for almost
a decade.
Economic policy campaigners calling for banks to pay a transaction tax warn the data compiled by
Reuters proves financial firms like Goldman Sachs are not making a fair contribution to British society.
"Even in a financial sector with grossly inflated pay, Goldman Sachs manages to shock with what it
gives its top brass. But Goldman's is the tip of the iceberg – an under-taxed financial sector continues
filling the pockets of its own in a way that is out of proportion to the contribution it makes to
society," a spokesman for the Robin Hood tax campaign told the Guardian.
TUC general secretary Frances O'Grady said a drastic shift in the salaries of elite UK bankers is
paramount.
"Risk-taking banks caused the global crash, yet while pay for the many has fallen every year since
2008, top bankers are still raking it in."
"It's time their pay came out of the stratosphere and back to planet Earth. Let us make 2015 the
year in which employees get a voice on remuneration committees."
Goldman Sachs executives spent Thursday locked in a testy public face-off with members of Congress,
fighting suggestions that the bank had taken too large a role in the commodities market.
In a hearing in Washington, Senator Carl Levin, the chairman of the Senate's Permanent Subcommittee
on Investigations, hammered away at Goldman's ownership of aluminum warehouses in Detroit, coal mines
in Colombia and a uranium trading company in London, which he said put the firm in position to influence
the prices of commonly used commodities. The hearings also touched on the large commodities businesses
run by JPMorgan Chase and Morgan Stanley, but executives from both banks emphasized that they were
generally planning to wind down their ownership of assets like power plants and oil tankers.
Goldman Sachs, on the other hand, has said it is not planning to exit the business. At the hearing,
the firm's representatives defiantly rejected criticism of their operations, frequently leading to
verbal sparring matches with Senator Levin.
"I'm glad that at least two of the three of you are pulling back significantly," Senator Levin said
to a panel with executives from all three banks.
Until about 20 years ago, regulated banks faced tight constraints that barred them from owning physical
commodities and limited them to trading in financial contracts that were linked to the prices of
commodities. But a substantial relaxation of the rules allowed the banks to own actual commodities,
known on Wall Street as physical assets.
Photo
Senators John McCain, left, and Carl Levin questioned bankers on their influence over commodities
on Thursday.
Senators John McCain, left, and Carl Levin questioned bankers on their influence over commodities
on Thursday.Credit Win McNamee/Getty Images
The biggest fireworks of the day came during the first of the hearing's three panels, which focused
on Goldman's practices at aluminum warehouses it owns in Detroit.
The Senate subcommittee released a 400-page report on Wednesday, saying that Goldman had devised
policies that made it hard to get aluminum out of the Detroit warehouses, which, in turn, pushed
up the price of aluminum for American companies. The allegations were previously the subject of an
article in The New York Times.
Christopher Wibbelman, the chief executive of the Goldman-owned warehouse called Metro International
Trade Services, and Jacques Gabillon, a Goldman executive, both refuted the basic assertions in the
report, along with many of the conclusions that Senator Levin drew from specific pieces of evidence.
This led to several terse exchanges in which Senator Levin, Democrat of Michigan, suggested that
the Goldman representatives were dissembling to avoid admitting what it had done, and at a few points
indicated that the Goldman testimony seemed to be untruthful.
"Come on," Senator Levin said at one point to Mr. Wibbelman. "I'm trying to just get you to acknowledge
what is obvious."
After one particularly fiery exchange, Senator John McCain, the top Republican on the subcommittee,
gave a rueful nod and said, "Remarkable."
Photo
From left, Janet Broeckel and Steven Bunkin of Goldman Sachs confer with their attorney, Abbe Lowell,
at a Senate panel on Thursday.
From left, Janet Broeckel and Steven Bunkin of Goldman Sachs confer with their attorney, Abbe Lowell,
at a Senate panel on Thursday.Credit Win McNamee/Getty Images
Goldman won some support from Senator Rob Portman, Republican of Ohio, who came into the hearing
briefly and questioned whether there was really evidence that the issues in Detroit had any real
world impact.
During the second panel of the day, two executives from the aluminum industry said that Goldman's
practices were unusual and were costing aluminum users.
"The warehouse issue is having a profoundly negative impact on our customers' businesses," said Nick
Madden, the chief supply chain officer at Novelis, a producer of rolled aluminum.
Mr. Madden said that when he first saw The Times article on Goldman's practices, he didn't understand
why the warehouse company was encouraging long lines for customers wanting to remove their metal.
"Now I see it in black and white and I understand it," he said, in reference to the subcommittee's
report.
"It's an extremely imaginative approach to maintaining a profitable warehouse company," he said.
Both he and Jorge Vazquez, the founder of Harbor's Aluminum Intelligence Unit, said that regulators
or politicians should step in to stop the practices under review.
The hearing on Thursday is the latest in which Goldman employees sparred with Senator Levin and his
investigative subcommittee. In 2010, a hearing about Goldman's practices in the mortgage market before
the financial crisis exemplified Goldman's reputational problems after the crisis.
The Goldman executives who testified in the 2010 hearing were later criticized for resisting the
committee's findings and showing exasperation with the line of questioning from the politicians.
During the hearing, the executive representing Morgan Stanley's commodities business, Simon Greenshields,
managed to stay out of the spotlight by agreeing with most of the assertions made by Senator Levin.
Mr. Greenshields even concurred with Mr. Levin's suggestion that regulators put new rules in place
to stop insider trading in the commodities markets.
The co-head of global commodities at JPMorgan Chase, John Anderson, put up more of a defense of his
company's past activities. He fought particularly against the Senate report's accusation that, at
one point, the bank went far above regulatory limits on the amount of commodities it could own.
But Mr. Anderson apologized for the bank's past role in manipulating electricity prices, something
for which it has already paid $410 million in fines.
"We've highlighted today some very regrettable activities," he said. "Our business is a people business
and people unfortunately make mistakes."
The Goldman executive on the same panel, Gregory A. Agran, was much less willing to concede to any
of Senator Levin's accusations and a note of annoyance frequently crept into his voice. He said there
was no evidence that any confidential information from the commodities infrastructure that Goldman
owned had ever found its way to Goldman's trading desks.
Senator McCain said that the rules allowing Wall Street banks to own physical commodities gave the
banks an unfair leg up in their trading operations. But his bigger complaint was that the ownership
of coal mines and oil rigs seemed to go far beyond what people expected from banks.
"Most Americans believe you are financial houses that made a lot of money" Senator McCain said, before
referring to the coal mines and power plants. "What's the point? Maybe you can help me out here."
When the panelists answered, Mr. McCain showed no sign of being satisfied.
pete, rochester 21 days ago
I am shocked, SHOCKED that GS is engaged in such a practice. Don't we have Antitrust laws that
would address the manipulation aspects of this and, if so, why is Levin wasting our time with
this grandstanding ? Actually, congress should be more worried about the potential downside of
a bank using FDIC-insured deposits to own commodities which is another argument for reinstating
Glass-Stegall.
Carlos Sant, Miami, USA 21 days ago
Apply the RICO Statutes to those organized hoodlums in Wall Street. They constantly rape the
US public and get away with it.
A., Vermont 21 days ago
Goldman Sachs, Morgan Stanley, Barclays, Citi, Bank of America Merrill Lynch, Macquarie Bank
and First Reserve Corp. are financing the $2.4 billion acquisition of debt-ridden First Wind by
SunEdison (with its roots in Monsanto).
SunEdison is a major player in the global solar business, which uses a lot of aluminum. I wonder
if Goldman Sachs market manipulation of aluminum benefited SunEdison, and if Goldman Sachs is
invested in SunEdison.
Wind turbines use a lot of commodities, better watch for those markets to be manipulated.
EJS, Granite City, Illinois 21 days ago
Good for Senator Levin! Stick it to those unscrupulous fat cats. Maybe they can bring in the
new Senator Joni Ernst in a bipartisan effort to make them squeal.
Stan Continople, Brooklyn 21 days ago
Once again, it's the "invisible hand" picking your pocket.
Anetliner Netliner, is a trusted commenter Washington, DC area
If the Senate report is correct, Goldman Sachs is engaged in outright aluminum market manipulation
at Metro Warehouses. I suppose a bit of good can be traced to the trucking and storage jobs that
Goldman creates at Metro, but this appears to be an ugly scheme in which federal deregulation
is complicit.
In decades past, Goldman Sachs was dedicated to fair business dealings and put integrity first
even if it cost them deals. Goldman Sachs was then a proud name. If this report is correct, it
is a shame to see how low Goldman has sunk. That Goldman has been aided and abetted by an Obama-led
federal government supposedly working to revive the fortunes of ordinary Americans is beyond sickening.
Kudos to Senator Levin and his Senate Committee staff for shedding light on Goldman's probable
efforts to move aluminum prices.
Michael S, is a trusted commenter Wappingers Falls, NY 22 days ago
Until the day a high ranking Goldman partner is prosecuted and incarcerated; until the day
confidential information stops leaking from former Goldman people in government to present Goldman
people these hearings will be nothing but political theater. Senate committee calling the names,
these guys are laughing all the way to the bank.
Jack McGinniss, Las Vegas 22 days ago
Goldman's representatives were coached by legal counsel to avoid straight answers. The 'Metro'
CEO was a mess. So, Goldman pushes legal and ethical limits to gain maximum profit. This is what
sociopathic profit fiends do. They have a contract with their shareholders, and clients, not you,
or the U.S. Congress.
Goldman bought the warehouses to gain an advantage over the aluminum 'all in price' and to manipulate
market intelligence. Of course, they deny any breach of their "just trust me" Chinese wall to
their trading brethren. Ya right.
But, did they break the law?
This hearing is just another in a long line of circus acts that involves the repeal of Glass/
Steagall. It is also the Senate's recognition that they screwed this country by passing the Gramm–Leach–Bliley
Act in 1999. (The law that repealed part of Glass / Steagall Act of 1933, and allowed commercial
banks, investment banks, securities firms, and insurance companies to consolidate under a single
roof (with Chinese Fire Walls below, of course)).
Brilliant! They also failed to give to the SEC or any other financial regulatory agency the authority
to regulate large investment bank holding companies. More brilliance!
Goldman's, J.P. Morgan's, Bank of America and Morgan Stanley's reputations as bankster crooks,
that game the broken regulatory system is legendary. Congress's reputation that is at the bottom
of a sewer.
Reinstate the "New Glass/Steagall" and "End the Fed".
Pretty please, with sugar on top.
Left Behind Parent, San Marino
Aren't McCain and Levin the same people who unanimously confirmed Christopher Cox to run
the SEC? I find it incredible that Senators with no experience can questions experts.
Like Barbara Boxer from CA who grilled GM's Mary Bara; as if Boxer could have done any better.
Let McCain and Levin run a bank or Fortune 500 company for a month and see how they do.
Daniel DeGrandpre -> Left Behind Parent, Vancouver, Wa
If you have some better system for the legislative branch finding out how business leaders
are raping the consumer please present it. FDR and congress put into law regulations that put
a check on such banking practices after the great depression which had wreaked havoc on the world
economy and created long term unemployment and poverty here. But of course rich people are never
really rich enough so all the right palms were greased and Glass Stiegel was changed.
I would rather that these senators got their buddies to pass legislation that would reverse
Citizen's United and get the billions of dollars now being spent on elections back out of them.
We are now in a dangerous spiral that will encourage business practices that will help create
new recessions and encourage multi-national corporations to continue to ruin our financial structure
and our climate to boot. It's all tied together and getting worse. To top it off we're dumbing
down our country because big business wants those education dollars and eventual control of the
masses. Yeah, let's get mad at a couple of senators for trying to do something about it. Maybe
we should hire some CEO's to investigate themselves.
"We had to struggle with the old enemies of peace--business and financial monopoly, speculation,
reckless banking, class antagonism, sectionalism, war profiteering.
They had begun to consider the Government of the United States as a mere appendage to their
own affairs. We know now that Government by organized money is just as dangerous as Government
by organized mob."
Franklin D. Roosevelt
"Why is JP Morgan getting so much heat? Maybe because it is a massive international
crime syndicate."
JPM and Goldman sought and obtained manipulative powers in global commodities, even while they
were being bailed out on the back of the American people? Oh no, nothing like this could
be true, or so the shills and toadies of the moneyed interests will say. Just get the government
out of our way, and everything will be all right. The market is naturally rational and efficient,
pure and pristine. No Bank would risk its reputation by doing anything
illegal.
Especially when they buy off and intimidate enforcement, write the laws, and do what they will.
I doubt that anything meaningful will be done about this. The corruption runs deep.
In corporatism the private and public elites are largely interchangeable. Different roles,
similar objectives.
The politicians may make a good show of it, and talk harshly to their witnesses. And then
take their money, and lick their hands.
But at least we know more about what is true, and what is not.
Perhaps this may help you understand those who do not wish to remain under the power of the Banking
cartel, and may be in a better position to do something about it.
Senate Report Criticizes Goldman and
JPMorgan Over Their Roles in Commodities Market
By Nathaniel Popper and Peter Eavis
November 19, 2014
A two-year Senate-led investigation is throwing back the curtain on the outsize and sometimes
hidden sway that Wall Street banks have gained over the markets for essential commodities like
oil, aluminum and coal.
The Senate's Permanent Subcommittee on Investigations found that Goldman Sachs and JPMorgan
Chase assumed a role of such significance in the commodities markets that it became
possible for the banks to influence the prices that consumers pay while also securing
inside information about the markets that could be used by the banks' own traders
Bankers from both firms, along with other industry executives and regulators, will testify
about the allegations at hearings on Thursday and Friday.
The 400-page report, which was made public on Wednesday evening, included case studies on nine
different commodities in which banks have taken big positions, including the 100 oil tankers and
55 million barrels of oil storage that were owned by Morgan Stanley, and the 31 power plants owned
by JPMorgan at one point.
The subcommittee discussed several reasons that these commodity operations could create problems.
The potential for price manipulation and the unfair advantage that banks can gain in these markets
were among the top concerns expressed by Senator Levin and Senator John McCain, the top Republican
on the subcommittee.
But both senators also echoed previous warnings that the enormous holdings of oil, uranium
and other hazardous materials could expose the banks to significant legal liability that could,
in turn, lead to runs on the banks.
A 2012 study by the Federal Reserve, cited in the report, found that banks have not put aside
enough money and insurance to adequately prepare for the "extreme loss scenarios" involving commodities...
The Financial Times said about 80 percent of the mistaken contracts sent to the New York Stock
Exchange were cancelled, limiting losses for Goldman. But the glitch "provoked a strong reaction"
within the bank, which takes pride in a reputation for risk management, the paper said.(http://link.reuters.com/jeg62v)
The system, called a "trading axis", monitors the Wall Street bank's inventory to determine whether
it should be a more aggressive buyer or seller in the market.
sandral105
The stock market isn't what it was pre-Obama. It's now the fed market. You don't really trade
100% in business and corporate stocks anymore as much as you trade in Bernanke chips and government
forced directions. Anybody who still has money in stocks is flying in a plane with one wing and
no fuel.
AlonzoQuijana .
Can we ban use of the word "glitch?" The other day NASDAQ was down for three hours, with $7
TRILLION in trades stranded, and it was described as just a "glitch."
"Glitch" minimizes the severity of these failure, as in, "well, stuff (glitches) happens" and
glitches are really no one's fault, almost acts of God.
Let's bring back some value-laden words and phrases that hint at someone, somewhere is at fault,
like, I don't know... serious mistake; crash and burn; disaster; failure; negligence; turning
a willful blind eye to problems; incompetence; bad design; poorly written software; dereliction;
failing to do due diligence.
brian farms
Goldman Sachs is one of few great American assets.
photo kimarkintl .
Does Goldman Sachs have any influence on the manipulation of oil prices as a broker?
Replacing lower-level objects, polluting the public's airwaves with PR press releases, and
hiding-in-plain-sight while the vessel continues to capsize, throwing others overboard while the
captains don't get wet and remain on "stable footing," resemble the failed performances we've
already experienced. ...new game, same winners, more losers...
wmsdrejka .
Before hurling all this vitriole at Goldman Sachs be aware that they have been careful stewards
of personal assets and advisors to large pension funds where you critics may have assets. They
have thousands of employees and some eff up. Jealousy for people and companies that do well confound
me.
westend1 .
Gee thanks so much for criminally manipulating the market, packaging and selling mortgage backed
securities that you then bet against, and for accepting fines that amount to less than 2 hours
of business. Tell you what, make up the 14 trillion our economy lost and we will call it even.
If you hack somebody else computer and get caught you go to jail. If you hack financial system you
reap profits and because you own the system you have no risk to be be put to the slammer ;-)
Aug 21, 2013 | The Wall Street Journal
Aluminum deliveries into warehouses run by big banks and trading
firms have plunged this summer, highlighting Wall Street's retreat from the once-lucrative commodities
business amid stagnant markets, new rules and regulatory scrutiny.
The slump marks the unraveling of a practice that boosted profits for several years at warehouse
operators including Goldman Sachs Group Inc. and Glencore Xstrata PLC. Bank warehousing practices
now are the subject of investigations by several U.S. authorities, including a Senate panel.
Fabrizio Costantini for the Wall Street Journal A metals warehouse in Detroit owned by Metro International
Trade Services, a unit of Goldman Sachs Group.
The reversal underscores Wall Street's efforts to wring profits out of power plants, oil pipelines
and metals warehouses. After spending billions of dollars in a decadeslong expansion into all corners
of the raw-materials business, Goldman Sachs, J.P. Morgan Chase & Co. and Morgan Stanley are trying
to sell commodities assets.
"The game as we know it seems to be over," said James Malick, a partner in the capital markets
practice at Boston Consulting Group. "It's hard to see anything new that is bolder, bigger or better"
in commodities.
In its heyday, the firms offered aluminum producers cash, rent discounts and other incentives
to put metal into storage rather than selling to users such as brewers and soft-drink makers, according
to analysts and traders. Meanwhile, the prolonged time in inventory generated hefty rental income
for warehouse owners that more than made up for the incentives paid out.
Industrial aluminum users such as Coca-Cola Co. and aluminum sheet maker Novelis Inc. have complained
to the London Metal Exchange that warehouses had artificially slowed the release of aluminum, limiting
supply and driving up prices. A MillerCoors LLC executive testified in a Senate banking committee
hearing last month that the practices were inflating consumer prices by billions of dollars.
Glencore, Goldman Sachs and J.P. Morgan declined to comment.
Average daily aluminum shipments to LME warehouses were down
79% in the first 19 days of August from two months earlier, according to data provided by New York-based
metals consulting firm CPM Group Inc. August's daily average rate of aluminum deliveries is the lowest
since November 2011, CPM Group said.
At the same time, the cash incentives dangled before producers by the banks and trading firms
that own the facilities have recently dropped to $50 a metric ton from more than $200 this past spring,
traders said.
As more metal comes back into the market, the premium charges for immediate delivery have fallen
7.2% from their record in July, according to Platts. On Tuesday, LME aluminum for three-month delivery
closed at $1,914.50 a metric ton, down 7.6% this year.
Spurring the bank pullback: A decline in commodity profits amid more-placid markets that have
limited trading opportunities and increased capital requirements that have made running these businesses
more expensive. Commodity revenue at the 10 largest global investment banks in 2012 fell 57%, to
$6 billion, compared with 2008, according to Coalition, a research consultant. In the first half
of 2013, revenue fell 25% from the same period last year.
Raw-materials trading in 2008 generated as much as a third of revenue within large banks' market-making
business, which matches buyers and sellers in the fixed income, currency and commodities markets;
it now accounts for less than 7%.
"As things stand right now it's a very, very bleak picture," said Paul Johny, research director
of Coalition.
Employment in commodity divisions at the 10 largest global investment banks dropped to 2,183 at
the end of the first quarter from its peak of 2,775 at the end of 2010, according to Coalition.
J.P. Morgan plans to sell physical assets such as warehouses
and power plants. The Wall Street bank has told potential buyers of its commodities assets that it
expects to kick off sale efforts in early September, said people familiar with the sale process.
Goldman Sachs has explored a sale of its metal warehousing unit, Metro International Trade Services.
Metro International has maintained a stockpile of more than 1.5 million tons of aluminum, or about
27% of the LME's global inventories of that metal, at its Detroit facilities. Metro operates 29 of
37 LME-licensed warehouses there.
UBS AG last year closed all of its commodity trading desks
not tied to precious metals such as gold and silver.
At Morgan Stanley, a pioneer in the commodities business that doesn't own a warehouse unit, the
pain has been acute. The Wall Street securities firm doesn't disclose specific results for the commodities
unit, but people familiar with its performance said revenue has fallen to less than $1 billion last
year from nearly $3 billion five years ago.
The firm sought to sell its commodities business last year,
but talks broke down after the sovereign-wealth fund of Qatar said it wanted only certain parts of
the business, principally oil, according to people briefed on the talks. The sides discussed different
structures for a partnership to run the business together but couldn't reach an agreement, the people
said.
The Commodity Futures Trading Commission last week subpoenaed a number of warehousing operators,
and the Justice Department launched a probe into the matter last month, people familiar with the
probes said. Separately, the Federal Reserve is examining whether banks should be allowed to own
physical commodities assets such as pipelines, warehouses and power plants. Lawmakers also have questioned
the role of banks in the physical raw-materials business. Goldman Sachs and Metro have been targeted
in at least four federal lawsuits in recent weeks alleging abusive practices. The firm has denied
wrongdoing.
Most banks are retaining units that make commodities-related
trades for customers such as hedge funds, airlines and manufacturers seeking to bet on price changes
or hedge risks. But the volume of such trading has fallen sharply, pressuring profits, thanks to
rules limiting bank trading and a decrease in large market swings.
The pullback is compounding the challenges of a low-interest-rate environment that has cut into
investment returns. The commodity business has been highly profitable but accounts for a small chunk
of large banks' revenue.
The London Metal Exchange is the world's largest industrial
metals trading bourse and is considered the global benchmark for aluminum prices. No U.S. exchange
trades aluminum futures. The LME on July 1 announced a proposal to link the amount of metal entering
and leaving warehouses that have long wait times, with the aim of reducing the queues that have prompted
complaints from industrial consumers. If approved, the rule would go into effect in April 2014.
As part of the SEC's consent order with Harbinger's Phil Falcone, we learned that in addition
to the previously well-known stuff Falcone was engaging in (using the fund as his taxpaying piggybank,
giving preferential gating terms to "friends and family", etc), perhaps what really scuttled the
once legendary hedge fund manager is what ended up being an outright war with Goldman, when back
in 2006 Harbinger tried to not only take the other side of a short bet put on by Goldman, but literally
squeezed Goldman and its clients into absolutely misery with the result millions in profit to Falcone
and unknown losses to Goldie. And as one knows, you never fight Goldman and win, without ultimately
losing everything.
Read on, if for no other reason than to know how not to manipulate a short squeeze when Goldman
(which just happens to be your prime broker) is on the other side.
The narrative from the SEC:
Early Transactions
Between April and June 2006, Falcone and the other Defendants purchased 108 million MAAX junior
discount bonds (the "MAAX zips"), which constituted about 63% of the issue, for Harbinger Capital
Partners Master Fund I ("Master Fund").
During the summer of 2006, Falcone heard rumors that Goldman Sachs, & Co. (the "Financial Services
Firm"), a Wall Street financial services firm that provided prime brokerage services to the Master
Fund, was shorting the bonds and encouraging its customers to do the same. Prime brokers provide
a special group of services to certain clients, often hedge funds, including services such as securities
lending, leveraged trade execution, cash management, and margin arrangements.
Defendants' Actions
In September and October 2006, Falcone retaliated against the Financial Services Firm [i.e. GOLDMAN]
for shorting the MAAX Zips by causing the Master Fund and the newly created Harbinger Capital Partners
Special Situations Fund ("Special Situations Fund") to purchase all of the remaining outstanding
MAAX zips in the open market. (The Master Fund and the Special Situations Fund are collectively referred
to hereinafter as the "Harbinger funds.")
By October 24, 2006, the Harbinger funds had purchased more than the available supply of bonds-its
position stood at 174 million notes in a 170 million note issue.
Contemporaneously with these purchases, Falcone and the other Defendants arranged for the transfer
of the 5027 Harbinger Defendants' MAAX positions from its prime brokerage accounts to a custodial
account in a bank in Georgia. The principal purpose and effect of this was that it prevented the
bonds from being lent out or used to cover short positions.
Falcone and the other Defendants then demanded that the Financial Services Firm settle its outstanding
MAAX transactions and deliver the securities it owed. Defendants did not disclose at the time that
it would be virtually impossible for the Financial Services Firm to acquire any bonds to deliver,
as nearly the entire supply was locked up in the Harbinger funds' custodial account and the Harbinger
funds were not offering them for sale.
Even though he had already purchased more than the available supply of bonds, Falcone and the
other Defendants continued to cause the Harbinger funds to purchase the MAAX zips from apparent short
sellers-taking the long side of short sales in the open market. By late January 2007, the Harbinger
funds had acquired another 18 million MAAX notes, increasing their holdings to 113% of the issue.
By this point, the Harbinger funds had purchased 22 million more bonds than had ever been issued.
The total cost of the MAAX position was approximately $90.7 million.
Due to Falcone's and the other Defendants' interference with the normal interplay of supply and
demand, the bonds more than doubled in price during this period.
In the spring of 2007, Falcone and the other Defendants ratcheted up the pressure on the Financial
Services Firm by paying off the Harbinger funds' margin debt to the firm and demanding the return
of any securities, including the MAAX zips, which it had borrowed. In an effort to meet its obligations
to the Harbinger funds, the Financial Services Firm bid daily for the bonds, but could not find any
to purchase.
In May 2007, the Financial Services Firm approached the 5027 Harbinger Defendants and asked if
it had any MAAX zips to sell. Defendants replied that the Harbinger funds had such bonds and that
the Financial Services Firm could have them at the price of 100, or par, despite the fact that the
bonds had been selling at a deep discount to par. At the time of the offer, MAAX was in a dire financial
condition, and the Harbinger funds were carrying the notes on its books at a price of 65.
On July 31, 2007, Defendants sold a block of the Harbinger funds' MAAX zips in the open market,
effecting settlement from a short seller at 95-a price that resulted from the Harbinger funds' ownership
of more than 100% of the issue. The same day, Falcone directed that the price of Harbinger funds'
MAAX zip bonds be marked down from 55 so that they were carried on the funds' books at a price of
In late September 2007, the Financial Services Firm called Falcone to try to resolve the MAAX
situation. During that conversation, Falcone claimed that a price at or above par for the MAAX bonds
was reasonable and tried to induce the Financial Services Firm to buy-in the outstanding MAAX short
positions at a price of 105. At the end of the conversation, Falcone informed the Financial Services
Firm-for the first time-of the material fact that the Harbinger funds had acquired more than the
whole issue of the MAAX zips. This was the first time anyone outside of the 5027 Harbinger Defendants
knew the size of the funds' MAAX position. Several days later, the Financial Services Firm informed
Falcone that the firm could make no further bids for the MAAX zips as long as the Harbinger funds'
position in the MAAX zips was larger than the number of bonds issued. The Financial Services Firm
refused to pay the prices asked by the 5027 Harbinger Defendants.
On December 24, 2007, in response to the Financial Services Firm's concerns about the size of
the Harbinger funds' position in the bonds, Falcone and the other Defendants directed the funds to
sell 25 million face amount of MAAX zips for $0.01 per $100 face amount (for a total of $2,500) to
an off-shore retail account at a brokerage firm through a trader at an inter-dealer broker. The trader,
who had a longstanding relationship with Falcone, executed the trade using trading discretion he
had over the off-shore account. The brokerage firms involved in the transaction did not report it.
For the next year, the trader made no effort to sell the bonds in the open market. Thus, the 25 million
in MAAX zips were effectively unavailable to cover short positions in the bonds. As a result, while
the sale of the 25 million in MAAX zips allowed Defendants to argue that they had reduced the Harbinger
funds' ownership position below the total issue of MAAX zips, the sale did not diminish the impact
of their ownership of MAAX zips.
At the end of the month, Falcone directed the Harbinger funds' investment adviser to write off
the MAAX position as worthless. Falcone and the other Defendants, however, continued to press the
Financial Services Firm to deliver the securities it owed.
In the first week of January 2008, Falcone informed the Financial Services Firm that the Harbinger
funds had sold some of the MAAX notes and that their ownership position was below the total issue
size. Falcone refused to identify the party to whom the Harbinger funds had sold the 25 million notes
or give the Financial Services Firm any details of the transaction. The Financial Services Firm resumed
bidding for the notes, but again could find none to deliver.
On January 11, 2008, the Financial Services Firm learned of two transactions in the MAAX zips
at prices in the $60 range. In order to cover outstanding short positions, the Financial Services
Firm purchased one million MAAX zips in the $60 range. When the Financial Services Firm subsequently
learned that it had purchased the notes from the Harbinger funds, it became concerned that the $60
price was the product of the 5027 Harbinger Defendants' control of the position and again suspended
the firm's trading in the security.
Between March and November 2008, the 5027 Harbinger Defendants adjusted or cancelled all of its
unsettled MAAX trades.
* * *
And when the Financial Services Firm, aka Goldman, learned Falcone had taken it for the proverbial
ride... well, the rest is history.
Oh, and since Harbinger owned 113% or more than the entire issue, that means Goldman was naked
shorting MAAX. But we'll let that slide: last thing we want to do is bring attention to what
the real crime here was...
VD
great way to obfuscate failure to deliver on a bum position.
gmrpeabody
Gang members killing gang members..., OK with me.
disabledvet
"Those are called bankers" and dinner is served.
Save_America1st
Fuck 'em all.
You know I always think about old Bernie Madoff...sittin' there all alone in his jail cell
all these years now.
He must be getting the news too...maybe he even reads ZeroHedge now these days. He's gotta
be wondering how in the hell he's the only fucking Wall Street scumbag who got pinched now that
the whole world knows what total filthy criminal scum all of them are and that they should all
burn for their corruption.
And there's Bernie...all alone and not one other fucker, not even the ultimate scum like John
Corzine have been thrown in the slammer for what they've done.
venturen
Surprised they didn't put a horse head in his bed...typical mafia!
As noted in the Roundup, Goldman Sachs is once again being cited for ripping off its clients,
this time in the IPO space. Goldman had already
paid massive fines
for causing the mortgage crisis by selling its own clients toxic assets. Later the firm would take
considerable reputational damage when a former Goldman Sachs executive, Greg Smith, wrote an
Op-Ed for the New York Times where he claimed Goldman employees routinely took advantage of the
firm's clients and enjoyed mocking them afterwards – the birth of the
"Muppet" meme.
Now
Joe Nocera has obtained, due to a clerical error, documents detailing Goldman Sachs screwing its
IPO clients. Goldman's clients, eToys, are in the midst of a lawsuit against Goldman. eToys is
claiming Goldman conspired to keep the price of the IPO low to benefit their investment bank clients
who gave Goldman a kickback in return. eToys later went out of business partly due to lacking capital
that it could have raised in a more honest IPO.
Recently, however, I came across a cache of documents related to the eToys litigation that
seem to tilt the argument in favor of the skeptics. Although the documents were supposed
to be under seal, they were sitting in a file at the New York County Clerk's Office,
available to anyone who asked for them. I asked.
What they clearly show is that Goldman knew exactly what it was doing when it
underpriced the eToys I.P.O. - and many others as well. (According to the lawsuit, Fitt led
around a dozen underwritings in 1999, several of which were also woefully underpriced.) Taken
in their entirety, the e-mails and internal reports show Goldman took advantage of naïve Internet
start-ups to fatten its own bottom line.
The documents detail that Goldman's focus was on using the eToys IPO to generate more business
with its investment clients. After the investment clients profited the Goldman Sales force sprung
into action calling the clients to secure more business gaining large commissions. A quid pro quo
with eToys and other IPO clients losing out.
Goldman carefully calculated the first-day gains reaped by its investment clients.
After compiling the numbers in something it called a trade-up report, the Goldman sales force
would call on clients, show them how much they had made from Goldman's I.P.O.'s and demand that
they reward Goldman with increased business. It was not unusual for Goldman sales representatives
to ask that 30 to 50 percent of the first-day profits be returned to Goldman via commissions,
according to depositions given in the case.
"What specifically do you recall" your Goldman broker wanting, asked one of the plaintiffs'
lawyers in a deposition with an investor named Andrew Hale Siegal.
"You made $50,000, how about $25,000 back?" came the answer. "You know, you made a killing."
"Did he ever explain to you how to pay it back?" asked the lawyer.
"No. But we both knew that I knew how," Siegal replied. "I mean, commissions,
however I could generate."
30-50%! Now that's an incentive structure.
Luckily for Goldman Sachs they were not so greedy they forgot to do another kickback, this one
in the form of bribes to Congress and the
President.
Otherwise they might have to actually suffer for their misbehavior. But having bought protection
from the Justice Department while getting massive subsidies and bailout guarantees from the Federal
Reserve ensures Goldman's continued survival and dominance. And as long as Goldman has the government
behind them they will have clients no matter how likely they are to treat them like Muppets.
Cynthia Kouril March 12th, 2013 at 7:53 am
One of the problems here is how you define a "successful" IPO. Traditionally, good IPO underwriting
meant that you sold out on the first day. The ability to attract share subscribers in advance
is what you go to a venerable house for.
The important pert here, is the kickbacks.
newcarguy
Luckily for Goldman Sachs they were not so greedy they forgot to do another kickback,
this one in the form of bribes to Congress and the President. Otherwise they might have to
actually suffer for their misbehavior. But having bought protection from the Justice Department
while getting massive subsidies and bailout guarantees from the Federal Reserve ensures Goldman's
continued survival and dominance
Nice having EVERYBODY in your pocket.
newcarguy:
In response to onitgoes @ 5
I can forgive some of the things Obama has done/not done, but his lack of making all these banksters pay, like the S&L crooks did in the 80′s is reprehensible.
The Doj prosecutied almost 1,000 individuals for the manipulation and frau they perpertrated
on the country. RIght now, only S&P seems like they'll pay for the fraud and avarice.
onitgoes March 12th, 2013 at 11:28 am
In response to newcarguy @ 7
Indeed. It makes one almost nostalgic for the S&L disaster, which, clearly was just the dress
rehearsal.
Bastardos!
joanneleon
30-50% kickback on the first day's profits. I've never heard of that before. Amazing.
Teddy Partridge
All of finance is now one big ripoff casino. It serves no social purpose and should be outlawed.
TSF – Opinion Commentary – November 22, 2009 (see also
Apology)
According to SIGTARP1,
both the Federal Reserve and Treasury agreed that an AIG failure posed unacceptable risk to the global
financial system and the U.S. economy. On March 24, 2009, Fed Chairman Ben Bernanke testified before
the House Financial Services Committee [P.9]:
[C]onceivably, its failure could have resulted in a 1930's-style global financial and economic
meltdown, with catastrophic implication[s].
From July 2007, AIG's financial situation deteriorated while so-called "AAA" collateralized debt
obligations (CDOs) dropped in value. AIG sold credit default swaps (CDSs) on these CDOs and had to
post more collateral, as the prices plummeted.
Goldman Sachs was AIGFP's (UK-based AIG Financial Products) largest CDS counterparty with around
$22.1 billion, or about one-third of the problematic trades. Goldman underwrote some of the CDOs
underlying its own CDSs, and also underwrote a large portion of the CDOs against which French banks
SocGen, Calyon, Bank of Montreal, and Wachovia bought CDS protection. Goldman provided pricing on
these CDOs to SocGen and Calyon. Goldman was a key contributor to AIG's liquidity strain and the
resulting systemic risk. (See "Goldman's
Undisclosed Role in AIG's Distress")
Apocalypse AIG
By mid September 2008, AIG's long-term credit rating was downgraded, its stock price plummeted,
and AIG couldn't meet its borrowing needs in the short-term credit markets. According to SIGTARP,
"without outside intervention, the company faced bankruptcy, as it simply did not have the cash that
was required to provide to AIGFP's counterparties as collateral." [P.9] The Federal Reserve Board
with Treasury's encouragement authorized a bailout. 2
The Federal Reserve Bank of New York (FRBNY) extended an $85 billion revolving credit facility,
so AIG could make its collateral payments to Goldman and some of its CDO buyers. AIG also met other
obligations, such as payments under its securities lending programs owed to Goldman and some of its
CDO buyers. (See also: "AIG
Discloses Counterparties to CDS, GIA, and Securities Lending Transactions.")
Goldman "Would Have Realized a Loss"
Fed Chairman Bernanke said AIG's crisis put the world at risk for a global financial meltdown.
Goldman purchased little credit default protection3 against an AIG collapse. Even if Goldman escaped
a collateral clawback of the billions it held from AIG4, the underlying CDOs posed substantial market
value risk (SIGTARP P. 17). As for systemic risk, Goldman CEO Lloyd Blankfein worried about untold
billions in losses. (Too
Big to Fail, P. 382.)
On September 16, 2008, as the FRBNY arranged AIG's $85 billion credit line, Goldman CFO David
Viniar said whatever the outcome, he would expect the direct impact of credit exposure to be "immaterial
to [Goldman's] results." The CDOs' ($22.1 billion) value was down around $10 billion, and AIG
still owed Goldman $2.5 billion in collateral (hedged and partly collateralized by CDSs on AIG).
SIGTARP shows the CDOs' value fell another $2.5 billion in two months, and AIG's new credit line
provided more collateral. The CDOs were losing market value. If AIG had collapsed, the value drop
would have been swift and brutal with new protection either unavailable or too expensive, if past
CDS market mayhem provided any information. As the Wall Street Journal put it, SIGTARP "throws
cold water on [Goldman's] claim."
Before September 16, 2008, AIG tried to negotiate a settlement for forty cents on the dollar.
Other insurers have negotiated
even
deeper discounts to settle their CDS contracts on CDOs. The SIGTARP report shows that the FRBNY's
decision to pay 100 cents on the dollar to resolve $13.9 billion (part of Goldman's $22.1 billion)
of credit default swaps by purchasing the underlying CDOs in Maiden Lane III was important to Goldman
Sachs. "Goldman Sachs…did not agree to concessions, because it would have realized a loss if it had."
[P.16]
Treasury Secretary Timothy Geithner, then President of FRBNY,
is revealed in this New York Times article with apparent Stockholm syndrome rivaled only by Patty
Hearst. He seems to echo
Goldman's talking points after discussions with Goldman's CFO. In the fall of 2008, Henry ("Hank")
Paulson was Treasury Secretary. Paulson was formerly CEO of Goldman Sachs and held that role when
Goldman executed its trades with AIG. Stephen Friedman, a former Goldman Sachs co-chairman, was Chairman
of FRBNY. Friedman owned shares of Goldman Sachs, and was a member of Goldman's board, while he held
his influential Fed position. He resigned the Fed position in May 2009, but not before
purchasing
50,000 shares of Goldman Sachs, when the public was still in the dark about the terms of the
bailout.
1 The November 17, 2009 report of the Office of the Special Inspector General for the
Troubled Asset Relief Programs, "Factors Affecting Efforts to Limit Payments to AIG Counterparties."
The report does not address the risk of collateral clawbacks by authorities on behalf of AIG or the
public, and it does not address the relative size of Goldman's CDS positions and CDO underwriting
activity related to AIG's CDSs mentioned in the above commentary.
2 Fed and Treasury officials thought AIG's derivatives were "more risky and unbalanced
than Lehman's." They were concerned about loss of confidence in AIG's subsidiaries, AIG's failure
to perform on annuities and wraps, losses to state and local governments, global banks and investment
banks, losses to 401k plans, and the credit markets. The Reserve Primary Fund had fallen below $1.00
per share after it wrote off Lehman's debt causing a run on the fund, and officials worried about
an AIG failure causing further "breaking-of-the-buck." (P. 10)
3 SIGTARP says Goldman would have trouble collecting on the credit default protection
it bought to protect against an AIG collapse-which by deduction seems to only be around $2.5 billion.
It is usual to have mark-to-market collateral, but it is unlikely this position was 100% collateralized.
In November 2008, it seems $1.2 billion of this hedge was allocated for illiquid assets that lack
transparency. [P. 16, 17]
4 According to SIGTARP, private participants felt AIG's financial condition was so tenuous
that on September 15, they refused to fund AIG making the Fed's bailout necessary. Their analysis
showed AIG's liquidity needs exceeded the value of the company's assets. [P.8] Goldman's status in
the event of an AIG collapse would have been that of a credit default swap counterparty during a
global crisis with very special circumstances. Goldman thought it would get to keep the billions
in dollars it received from AIG, if AIG collapsed. That would normally be the case, but these would
have been extraordinary circumstances inflamed by value-destroying CDOs over which Goldman had pricing
power, and Goldman had underwritten some of the CDOs. Authorities charged with resolving a collapse
of AIG may have clawed back a substantial portion of the collateral.
Stephanie Ruhle keeps stepping on the interview, often changing direction and hijacking the discussion,
peppering Smith with multiple questions, but it is interesting nonetheless. And she does manage to
ask some good questions, often which she attempts to answer herself. But that is the state
of corporate advocacy journalism today.
As you watch this bear in mind that Goldman and other Wall
Street firms have been acquiring mathematicians and physicists to concoct customised derivatives
and algorithms that few others outside of a select group of quants can fully understand.
And remember the damage that Wall Street CDO's, that were specifically rigged against customers,
had done to some of the major banks in Europe, who are not particularly unsophisticated although
were perhaps too unsuspected of blatant fraud from name firms. And also let us not forget the cases
of bribery of public officials and fund managers with money, sex, and drugs that have been disclosed,
such we have seen in the case of Jefferson County, Alabama.
And then there is the ongoing front-running frauds that are the US equity and commodity markets
with lax regulation, insider trading, and exchange enabled HFT computerized skimming and spoofing.
What I find almost astounding is that after one of the worst financial frauds in US history, Wall
Street and its supporters are able to blithely act as though nothing had happened. And
that is because there has been no real reform and no one has been prosecuted. That is what
is known as 'moral hazard.'
I do think there is a point to be made in not doing business with Goldman at all. But as
Greg points out, if one wishes access to certain types of products and the broader financial markets,
there is much less choice now than there was even four years ago. And Wall Street has
its hands in everyone's pockets, whether you do business with them or not, in this financialised
economy.
I don't think Greg Smith is a whistleblower per se, or even puts himself out there as such
in the manner of revealing the details of some very specific illegal act.
At the end of the day, Greg Smith is raising the same category of concerns about the financial
system as Occupy Wall Street has done, the same alarm and even revulsion with a culture that has
turned predatory rather than constructive, about organizations and a society that are losing their
moral bearings to the point of undermining their own rational self-interest with short-term greed.
And Mr. Smith is being derided and dismissed in much the same manner as many of the same people
dismissed OWS.
The problem with Wall Street is the essential conflicts that were created by merging the functions
of customer-serving banks, which are essentially utilities, with the most aggressive and even abusive
of investment banks acting as hedge funds for their own books. The repeal of Glass-Steagall
was the watershed event, and it was the result of a massive lobbying effort that corrupted Washington
with Wall Street money.
And when a speculative firm like the pre-IPO Goldman moved from a true partnership model, to publicly
traded firms using other people's money and shifting liability to the corporation, Pandora's box
was opened. And this is a despicable lapse in stewardship by the intellectual, financial, and
political leadership of the country for which they should be ashamed.
Until early Wednesday morning, Greg Smith was a largely anonymous 33-year-old midlevel executive
at
Goldman Sachs in London.
Now everyone at the firm - and on Wall Street - knows his name.
Mr. Smith resigned in an e-mail message to his bosses at 6:40 a.m. London time, laying out concerns
that Goldman's culture had gone haywire, putting its own interests ahead of its clients.
What the e-mail didn't say was that about 15 minutes later,
an Op-Ed article he had written detailing his criticisms was to be published in The New York
Times. "It makes me ill how callously people still talk about ripping off clients," he wrote in the
Op-Ed article.
The Op-Ed landed "like a bomb," inside Goldman, said one executive who spoke on the condition
of anonymity.
The article reignited a debate on the Internet and on cable television over whether Wall Street
was corrupted by greed and excess. By noon, television crews crowded outside Goldman's headquarters
in Lower Manhattan. More than three years after the financial crisis, the perception that little
has changed on Wall Street - and that no one has been held accountable for the risk-taking that led
to the crisis - looms large in the public consciousness. While it was an unusual cry from the heart
of a Wall Street insider, many questioned whether it would prompt any change.
Goldman disagreed with the assertions in the Op-Ed article, saying that they did not reflect how
the firm treated its clients. Top executives have previously said that despite some rough times of
late, clients have stuck with the firm.
Friends of Mr. Smith, who had a list of Goldman's business principles taped on a wall by his computers
in London, say they were not surprised by his public farewell. "He has a really high moral fiber
and really cared about the culture of the firm," said Daniel Lipkin, a Miami lawyer who went to Stanford
with Mr. Smith. Mr. Lipkin learned about the Op-Ed on Wednesday from Mr. Smith. "He sounded confident
and felt good about his decision to go public," he said.
Although he isn't highly paid by Wall Street standards - earning about $500,000 last year, according
to people briefed on the matter - Mr. Smith is part of what some Goldman staff members and alumni
refer to as a sizable, yet silent contingent within the investment bank. These people are increasingly
frustrated with what they see as a shift in recent years to a profit-above-all mentality.
Evidence of this shift, they say, can be seen in the accusations brought by the
Securities and Exchange Commission in 2010 that the firm intentionally duped certain clients
by selling a mortgage-security product that was designed by another Goldman client betting that the
housing market would crash. More recently, a Delaware judge criticized Goldman over the multiple,
and potentially conflicting, roles it played in brokering an energy deal. (In both cases, Goldman
has denied any wrongdoing.)
The reaction on Wall Street to Mr. Smith's resignation ranged from those cheering him to others
criticizing him for resigning in such a public way. Some within Goldman sought to portray Mr. Smith
as a lone wolf - he did not manage anyone - who had failed to become a managing director. (There
are about 12,000 executive directors, the equivalent of being a vice president in the United States,
but only about 2,500 managing directors among Goldman's 33,300 employees.)
Still, the ripple effects were felt beyond Wall Street. Shares of Goldman fell 3.4 percent. And
media coverage was worldwide. "Goldman Boss: We Call Our Clients Muppets," screamed the front page
of The London Evening Standard.
Others were less surprised. One Goldman client who spoke on the condition of anonymity called
the letter "naïve," saying that the firm had been trading against its clients for years. "Come on,
that is what they do and they are good traders, so I do business with them."
Another Wall Street executive said it was "unforgivable" for Mr. Smith to make his opinions so
public and he should have taken them privately to the firm's senior managers. While Mr. Smith may
have tried to raise his concerns with his superiors in meetings, as a fairly junior employee, he
did not have much of a voice.
Goldman's top two executives,
Lloyd C. Blankfein and Gary Cohn, said in a letter to employees: "We were disappointed to read
the assertions made by this individual that do not reflect our values, our culture and how the vast
majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.
Everyone is entitled to his or her opinion. But it is unfortunate that an individual opinion about
Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive
feedback you have provided the firm and independent, public surveys of workplace environments."
But questions about Goldman's culture persist at a time when the firm - and the rest of Wall Street
- are undergoing a transition as the postfinancial crisis framework of regulations known as Dodd-Frank
takes hold and as some profitable businesses show little sign of returning to their precrisis highs.
It is not a hospitable environment for trading, yet Goldman remains very much a trading firm. Mr.
Blankfein, a former gold salesman, comes from the trading business, as does the man who is seen as
the most likely to succeed him as chief executive in the next year or two, Mr. Cohn.
Mr. Smith started at Goldman in sales. Born in Johannesburg, Mr. Smith is a grandson of Lithuanian
Jews who emigrated to South Africa. His father is a pharmacist and his mother is pursuing a career
in social work.
He won a full scholarship to Stanford and after graduating in 2001 landed a spot at Goldman, where
he quickly worked his way up in the organization. A table tennis player, Mr. Smith won a bronze medal
in the event at the Maccabiah Games in Israel.
He was sent to London about a year ago to sell United States derivative products to European and
Middle Eastern investment funds.
What motivated Mr. Smith to come forward now? People close to him said he had high hopes for an
internal report that came out after the S.E.C. case, which Goldman settled.
In 2010, Goldman embarked on an internal study that looked at the way it did business. The report
reaffirmed the firm's principles and outlined changes aimed largely at bolstering internal controls
and disclosure.
But Mr. Smith thought it fell on deaf ears among senior managers, his friends say.
"I think this was the ultimate act of loyalty," said Lex Bayer, a friend of Mr. Smith's from high
school in Johannesburg, who went to Stanford with him. "He has always been an advocate for the firm,
but he wanted Goldman to do things the right way. In his mind, this was the only way that he could
change the culture of the firm."
He may not be alone inside Goldman. At staff meetings, Goldman's leadership has been peppered
with questions about the firm's public reputation, say people who have attended those meetings, but
who spoke on the condition of anonymity because they were not authorized to speak on the record.
Mr. Smith is making a considerable financial sacrifice in publicly criticizing Goldman. Most Wall
Street employees sign nondisparagement and nondisclosure agreements before they join a firm. If Mr.
Smith did, Goldman may take legal action and refuse to release stock options he has accumulated.
Mr. Smith may also find it difficult to find work on Wall Street after such a public resignation.
A spokesman said that Goldman tried to contact Mr. Smith on Wednesday. It is not known whether he
responded.
Mr. Smith did not speak publicly about his decision to leave Goldman. On Wednesday, Mr. Smith
received messages of support from clients of Goldman.
"You do not know me, but I am a client of Goldman Sachs," one of them said. "We trade a lot with
Goldman and we know that we have to be very careful when we do so," the person said. "We understand
your message."
People who have spoken to Mr. Smith said that he was flying back to New York on Wednesday night
to see his family and friends. These people say Mr. Smith still has no concrete plan for what to
do next. He tells friends that he wants to effect change in Goldman's business practices, although
it is unclear what that change would be.
Recruiters say it may be tough slogging for Mr. Smith to find work again on Wall Street, at least
in the near term.
"There is a rule of thumb when interviewing - you don't bad-mouth your old boss. No one wants
to hear it," said Eric Fleming, the chief executive of the Wall Street recruiting firm Exemplar Partners.
"You can argue something like this needed to be said, but if you hire the guy who said it you are
taking the risk he will do it again."
TODAY is my last day at Goldman Sachs. After almost 12 years at the firm
- first as a summer intern while at Stanford, then in New York for 10 years, and now in London -
I believe I have worked here long enough to understand the trajectory of its culture, its people
and its identity. And I can honestly say that the environment now is as toxic and destructive as
I have ever seen it.
To put the problem in the simplest terms, the interests of the client continue
to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one
of the world's largest and most important investment banks and it is too integral to global finance
to continue to act this way. The firm has veered so far from the place I joined right out of college
that I can no longer in good conscience say that I identify with what it stands for.
It might sound surprising to a skeptical public, but culture was always
a vital part of Goldman Sachs's success. It revolved around teamwork, integrity, a spirit of humility,
and always doing right by our clients. The culture was the secret sauce that made this place great
and allowed us to earn our clients' trust for 143 years. It wasn't just about making money; this
alone will not sustain a firm for so long. It had something to do with pride and belief in the organization.
I am sad to say that I look around today and see virtually no trace of the culture that made me love
working for this firm for many years. I no longer have the pride, or the belief.
But this was not always the case. For more than a decade I recruited and
mentored candidates through our grueling interview process. I was selected as one of 10 people (out
of a firm of more than 30,000) to appear on our recruiting video, which is played on every college
campus we visit around the world. In 2006 I managed the summer intern program in sales and trading
in New York for the 80 college students who made the cut, out of the thousands who applied.
I knew it was time to leave when I realized I could no longer look students
in the eye and tell them what a great place this was to work.
When the history books are written about Goldman Sachs, they may reflect
that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost
hold of the firm's culture on their watch. I truly believe that this decline in the firm's moral
fiber represents the single most serious threat to its long-run survival.
Over the course of my career I have had the privilege of advising two of
the largest hedge funds on the planet, five of the largest asset managers in the United States, and
three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a
total asset base of more than a trillion dollars. I have always taken a lot of pride in advising
my clients to do what I believe is right for them, even if it means less money for the firm. This
view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.
How did we get here? The firm changed the way it thought about leadership.
Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make
enough money for the firm (and are not currently an ax murderer) you will be promoted into a position
of influence.
What are three quick ways to become a leader? a) Execute on the firm's
"axes," which is Goldman-speak for persuading your clients to invest in the stocks or other products
that we are trying to get rid of because they are not seen as having a lot of potential profit. b)
"Hunt Elephants." In English: get your clients - some of whom are sophisticated, and some of whom
aren't - to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I
don't like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat
where your job is to trade any illiquid, opaque product with a three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of
exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking
questions about how we can help clients. It's purely about how we can make the most possible money
off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe
that a client's success or progress was not part of the thought process at all.
It makes me ill how callously people talk about ripping their clients off.
Over the last 12 months I have seen five different managing directors refer to their own clients
as "muppets," sometimes over internal e-mail. Even after the S.E.C.,
Fabulous Fab, Abacus,
God's work, Carl Levin,
Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don't know of any illegal
behavior, but will people push the envelope and pitch lucrative and complicated products to clients
even if they are not the simplest investments or the ones most directly aligned with the client's
goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: If clients
don't trust you they will eventually stop doing business with you. It doesn't matter how smart you
are.
These days, the most common question I get from junior analysts about derivatives
is, "How much money did we make off the client?" It bothers me every time I hear it, because it is
a clear reflection of what they are observing from their leaders about the way they should behave.
Now project 10 years into the future: You don't have to be a rocket scientist to figure out that
the junior analyst sitting quietly in the corner of the room hearing about "muppets," "ripping eyeballs
out" and "getting paid" doesn't exactly turn into a model citizen.
When I was a first-year analyst I didn't know where the bathroom was, or
how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a
derivative was, understanding finance, getting to know our clients and what motivated them, learning
how they defined success and what we could do to help them get there.
My proudest moments in life - getting a full scholarship to go from South
Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze
medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics - have all
come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts
and not enough about achievement. It just doesn't feel right to me anymore.
I hope this can be a wake-up call to the board of directors. Make the client
the focal point of your business again. Without clients you will not make money. In fact, you will
not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm.
And get the culture right again, so people want to work here for the right reasons. People who care
only about making money will not sustain this firm - or the trust of its clients - for very much
longer.
Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm's
United States equity derivatives business in Europe, the Middle East and Africa.
I am more than willing to extend blame to the Democrats, they have done a very good job
at owning the mayhem put forth by the Republicans. But, the Democrats have convicted the CEO of
Countrywide in massive fraud. The Republicans refused to endorse the Congressional investigation
into Wall street to support their own conclusion that regulation was the cause of the financial
meltdown. And it was the Bush administration that revived a law from the Civil war to keep the
state attorney generals from prosecuting loan fraud and in turn do nothing( check out Elliot Spitzer's
fate when he pushed the issue ) thus setting up the whole mess in the first place. I would have
to say that the elites who control this country have a hand in both parties, but are mostly courted
by the Republicans, who desire to be more elite than any Democrat.
kharris:
Concur with EricT and EMike. If you want to say bad things about Krugman and bad things about
Democrats, go right ahead, by do try to say true things, as well. Democrats have sold their souls
to the military-industrial complex and to corporate America in general, but there is still a substantial
difference between Democrats and Republicans as they exist today. To say otherwise is to say something
untrue. Similarly, it is simply untrue that Krugman has not take Obama to task. On bank rescue,
the budget, and political tactics in general, Krugman has been quite vocal in opposition to Obama.
Let's hold Democrats to account, but let's do it with some sense of reality. Krugman, too,
though that is a somewhat more complicated task, since a great deal of criticism of Krugman has
been outright wrong, and apparently motivated by the desire to undermine his effectiveness as
a critic.
M.G. in Progress:
Ok it's definitely policy elites' faults but one could wonder who
elected or voted those elites in those places... I have one interpretation here,
particularly for the case of Berlusconi. http://mgiannini.blogspot.com/2009/12/cognitive-dissonance-case-of-italy.html
But it appeared that for years of Bush cognitive dissonance was not much better...
Another interpretation, definitely the case in Italy, is The Fundamental Laws of Human Stupidity.
a stupid person is a person who causes losses to another person or to a group of persons while
himself deriving no gain and even possibly incurring losses. There Prof.Cipolla further refines
his definition of "Bandits" (B= Berlusconi or Bush I would say) and
"Helpless People" (H) by noting that members of these groups can either add to or detract
from the general welfare, depending on the relative gains (or losses) that they cause themselves
and society. A bandit may enrich himself more or less than he impoverishes society, and a helpless
person may enrich society more or less than he impoverishes himself."
Then you have stupid persons who causes losses to another person or to a group of persons while
himself deriving no gain and even possibly incurring losses. Where Prof. Krugman would put those
elites and people who voted for them or agreed to let them stay in power?
paine:
if you figure the elite has learned to play the "open ballot" electoral shell game and
the "open press" game at least well enough to stay in power so long as "the folk way type " rules
of engagement" aren't changed why waste time detailing the whys ??
greg byshenk:
I wouldn't want to remove blame from the elites who actually implemented the insane policies,
but that said, I don't want to totally remove blame from the voters who voted for Bush, given
that his policies were in no way a surprise. (I will give a pass to Obama voters, as he promised
change -- even though what he delivered was pretty much more of the same.)
Shouldn't we rather see 2001-2009 as the illustration of Mencken's theory of democracy? ("Democracy
is the theory that the common people know what they want, and deserve to get it good and hard.")
paine:
"2001-2009 as the illustration of Mencken's theory of democracy? "
that suggests you could imagine democracy working differently if the people in its majority
if it knew its best interests could vote in agents to that end
doesn't work that way
open ballot elected rep-gubs allow the subversion of the majority interests quite consistently
even in the face of the majority demonstrating clearly at the ballot box its majority preference
one thinks of the 06 anti-iraq-war majority and the 08 anti-bankster majority
or the likely outcome of a national referendum on medicare for all
tinbox:
The theme of this column--holding elite policy makers accountable--is very important. Personally,
I immediately thought of the moment of maximum leverage, October 2008, when any and all financial
reform was possible. At that time, PK advised us to "hold your nose"--bailout now, reform later.
It is hard to see how that was ever going to work in this country.
While the points PK makes today are valid, the opportunity for action has come and gone. Not
only is banking more concentrated in the USA today, Geithner is even now lobbying for greater
risks to be taken by these TBTF banks in international exposures. After all, what could possibly
going wrong lending large amounts against real estate in China?
Eric:
Villians....who exactly? The principle reason that there have been few prosecustions of high
level bankers is that not so much that got done was illegal. Reckless, maybe. But even here is
it really reckless behavior if you have a belief - which turns out to be true - that public finances
will bear the downside risks on your behalf? In hindsight it feels like these things should have
been illegal, but the available serious punishments, such as not bailing out AIG, not allowing
various investment firms to become bank holding entites, not backstopping the GSEs (read their
debt issues and you'll see that nowhere is a claim made for public backing), not taking first
loss positions on Bear Stearn assets, etc., etc., were foregone by voluntary actions by public
officials. Make peace with the truth that there will be no sweeping prosecutions, least of all
by the federal government of the USA.
JohnH :
Much as I like Krugman, he is noticeably loathe to talk about
military spending, which increased 8.2% per year over the last decade. Added expenditures amounted
to by $2.4 Trillion with no offsetting revenue increases. So we can conclude that increased military
spending since 2000 is directly responsible for 30% of the government's additional debt.
And that doesn't even include "defense related" spending or homeland security.
kievite:
That's a very relevant observation.
I think that we need to analyze the current financial problems in a broader context then Krugman
does.
So it might be that government, already captured by military-industrial complex saw in financial
speculation along with deregulation a remedy that will increase tax flows and actively stimulated
its expansion assigning it "the most preferable industry" status.
I feel there is definitely a link between problems that government run into in late 80 and
subsequent huge expansion and deregulation of financial industry. Also the collapse of the USSR
and growth of China created a huge opportunities of using financial industry as a Trojan horse
for neo colonial policies based on the dollar status as a reserve currency.
So it looks more the larger goals were "not aligned" with the healthy economy and as a result
we have what we have. This type of thinking suggest that the current economic problems are a side
effect (blowback) of a larger policy goals and first of all imperial foreign policy. Andrew Bacevich
wrote about this link in many of his publications. See for example http://www.washingtonpost.com/wp-dyn/content/article/2010/06/25/AR2010062502160.html
kievite:
I think one of the reasons for the current situation is that computer created multiple and
very efficient ways of hacking the financial system regulations. This subversive role of computers
in the hands of financial system hackers needs to be researched more deeply.
In a way firms like GS can be views as a bunch of highly qualified and highly paid hackers
dedicated to subverting the financial system regulation for their own profit.
Or is we use more sinister analogy a cancer cells which goal is the growth without any concern
of the health of the host.
There is a very peculiar article by Steven Davidoff up at the New York Times: "As
Wall St. Firms Grow, Their Reputations Are Dying." It asks a good question: why does reputation
now matter for so little in the big end of the banking game? As we noted on the blog yesterday,
a documentary team was struggling to find anyone who would go on camera
and say positive things about Goldman, yet widespread public ire does not seem to have hurt its business
an iota.
craazyman:
I don't believe it's inconceivable that some financiers want Wall Street to be reigned in -
although certainly not all, for sure.
They don't need the money they make for any useful and healthy life purpose. So they operate
in the throes of an addiction. And they know they are controlled by their addiction, and so they
hate themselves, like addicts will, for their lack of self-control. They also see what their addiction
is doing to the nation and the world, and guilt collides with craving, making the addiction even
more disturbing.
And so they hate their actions, they hate the world that lets them act, and they dehumanize
the victims who suffer from it as a third means of rebellion - in that instinctive blood-level
way that the strong hate the weak.
I doubt it is a very happy life they lead, seeking continuous distractions from the baubels
of riches and ego, racing headlong at the gigantic void.
ambrit:
Dear Drip; The independant and nonconforming elements of society are always disproportionatly
sanctioned as an "easy" way of enforcing the primacy of the top tier elites. It is always easier
to demonize a group than tolerate it. Tolerance suggests alternate views of social organization,
and thus threatens the elites "elite" status. Such narrow minded thinking generally leads to spectacular
social meltdowns via systemic collapse. That's the beauty of it all. Today, socio-economic practicioners
do the hard work of searching for models and methods to reduce this wild "boom and bust" cyclic
system. All while working for people who don't want to understand, much less do anything signifigant
about it. Oh my, what's a poor semi sentient bipedal critter to do?
Justicia:
If investors keep throwing their money at them regardless of their lack of ethics or integrity,
then the banksters win. The sad truth is most investors don't care as long as they think they're
getting good returns. Despite getting burned repeatedly, they still invest in the fraud economy.
Pension fund fiduciaries - even the ones that are supposedly "responsible investors" (check out
the PRI website)– are still clients of Goldman et al.
LeeAnne:
a documentary team was struggling to find anyone who would go on camera and say positive
things about Goldman, yet widespread public ire does not seem to have hurt its business an iota.
There are no people in the equation, and Wall Street is Santa Claus to the people they actually
hang out with. So, what's to care about? The guy with the most pricey toys wins.
As for wanting to be reined it, it should be obvious that in a land with no rules, killers,
thieves and liars rise to the top.
Even their minions making millions might wish they could relate to a higher self in their work.
But of course, there's always the charitable event to tell yourself you actually care.
Jim A:
At some level, the root of this is a part of many cons. You DON'T have to convince the mark
that that you're not a con-man. You just have to convince him they you are partners and that somebody
else is the mark. So people send money to the biggest crooks on Wall Street convinced that those
crooks will leverage that money and savagely Rodger somebody else.
Main Street Muse:
The loss of the partnership model is key. Not only are investment bankers no longer accountable
for their mistakes, but they focus on short term gain to appease shareholders. This is a very
dangerous combination, one that lately has torn down our economy.
In "Liar's Poker," Michael Lewis talks about the freakishly voracious and greedy behavior
he saw in the investment banking world – back in 1989. Our regulators unfortunately have blatantly
ignored that voraciously greedy behavior for decades. Everyone on Wall Street knows they can get
away with a lot of unethical behavior. (Except Martha Stewart, apparently.) Even after the collapse
of our entire financial sector in 2008, the regulators have done nothing to change the voraciously
greedy behaviors of our top bankers.
And correct me if I'm wrong, but I believe the only banker other than Madoff who's been charged
with ANYTHING AT ALL following the collapse of our economy is the Fabulous Fabrice Tourre of Goldman
Sachs, who was apparently acting as a 20-something lone gunman bent on destroying the financial sector.
IF true, that is an appalling failure on the part of our justice system.
Absolutely appalling because it reveals that our financial/legal/regulatory system
is built to uphold shysters and scam artists, not to protect the interests of the nation. This means
there is absolutely no incentive for bankers to change their behavior; thus we will reach the brink
once again soon enough.
Are you sure Goldman's business has not been affected? Or if unaffected, is it because customers
have so little choice these days following the crash, which saw major consolidation and reduction
in the number of banks who engage in that business?
It is eminently clear to everyone outside of Wall Street and Washington that the executives in
our financial sector are devoted to growing just one thing – their bonus. They are not investing
in the country. They absolutely are not "helping us rebuild" – as the new JP Morgan Chase ad campaign
would have us believe. [NOTE TO JP MORGAN MARKETING DEPARTMENT - WE'RE NOT AS STUPID AS YOU THINK]
And FYI – this is a sentiment expressed not only by residents of Main Street, but by various C-level
execs I've worked with. The business of America simply cannot trust our financial sector. That is
a very, very serious issue, one that Alan Greenspan recently overlooked in his article on Activism.
The bank duly revealed it's the subject of a(nother) class action lawsuit involving one of its
Collateralised Debt Obligations (CDOs) in
the 10-Q it filed on Tuesday - only to set-off another
wave of reports
- even though the
court filing is old.
From the 10-Q:
On September 30, 2010, a putative class action was filed in the U.S. District Court for the
Southern District of New York against GS&Co., Group Inc. and two former GS&Co. employees on behalf
of investors in notes issued in 2006 and 2007 by two synthetic CDOs (Hudson Mezzanine 2006-1 and
2006-2). The complaint asserts federal securities law and common law claims, and seeks unspecified
compensatory, punitive and other damages.
Quick background - the case involves two Goldman-constructed synthetic CDOs - Hudson Mezzanine
Funding 2006-1 Ltd and Hudson Mezzanine Funding 2006-1 Corp., already
the subject of an SEC investigation announced earlier this year.
Goldman was the sole buyer of protection on the entire $2bn of assets in the deals - which meant
it stood to gain if the underlying (subprime) Residential Mortgage-Backed Securities (RMBS) deteriorated.
Which of course ended up
happening.
The lawsuit centres on the claim that Goldman didn't disclose to investors that the deal was structured
by the bank but "doomed to lose value" or that Goldman "would profit enormously from proprietary
short positions when the CDOs did lose value." It's about disclosure, in a very similar way to that
other CDO-scandal, Abacus.
We
wrote back in June, when the Hudson SEC investigation first came to light, that this case might
end up being trickier for the bank to defend. It can't fall back on the argument of client confidentiality,
which is what it
used in the Abacus case. There's no Paulson equivalent in Hudson - it was Goldman all the way
through.
Those still interested in structured finance errata, would do well to revisit the Senate subcommitee
docs on Wall Street and the subprime crisis - which mention Hudson, Abacus and plenty of other deals
too. We're particularly fond of this gem:
Goldman Sachs made millions through its stake in EDMC, whose schools peddle arts degrees costing
up to $100,000. Some debt-crippled students are crying foul
Carrianne Howard dreamed of designing video games, so she enrolled in a program at the Art Institute
of Fort Lauderdale, a for-profit college part-owned by Goldman Sachs (GS).
Her bachelor's degree in game art and design cost $70,000 in tuition and fees. After she graduated
in December 2007, she found a job that paid $12 an hour recruiting employees for video game companies.
She lost that job a year later when her department was shuttered.
These days, Howard, 26, makes her living in a way that doesn't require a college diploma: by stripping
at the Lido Cabaret, a topless club in Cocoa Beach, Fla. "I didn't know what else to do," she says.
"I've got a worthless degree. It's like I didn't attend school at all."
Like many investors, Goldman, owner of 38 percent of the Art Institute's
parent, Education Management Corp. (EDMC),
was drawn to for-profit colleges by their rapid growth and soaring stock prices. Now
Goldman, which recently agreed to pay $550 million to settle U.S. civil-fraud charges related to
the subprime mortgage meltdown, is invested in an industry under attack from Congress, the Obama
Administration, and dissatisfied students. This week the Senate held a hearing featuring a Government
Accountability Office undercover probe that found recruiters at EDMC's Argosy University in Chicago
and 14 other for-profit colleges misled investigators posing as potential students about the cost
and quality of their programs. Near their peak in April, Goldman's shares in EDMC were worth $1.39
billion. Since then they've fallen by 42 percent, to about $800 million.
A proposed government crackdown could have a disproportionate effect on EDMC. The U.S. Education
Dept. could restrict taxpayer-funded grants and loans to for-profit colleges like EDMC that offer
$50,000 associate's and $100,000 bachelor's degrees in such low-paying fields as cooking, art, and
design.
Until recently the education business looked like a bonanza for Goldman. Pittsburgh-based EDMC,
the second-largest U.S. chain of for-profit colleges after Apollo Group's (APOL)
University of Phoenix, has 136,000 students-more than three times as many as the University of Michigan.
Its annual revenue doubled over the last five years, to $2.4 billion. Goldman and two other firms
bought EDMC in 2006 and took it public in 2009. Along the way they shared at least $70 million in
advisory, management, and other fees, according to securities filings. Goldman also became EDMC's
biggest stockholder.
Government grants and loans to students, combined with booming enrollment, have made for-profit
colleges a rewarding investment. Federal aid to for-profit colleges jumped to $26.5 billion in 2009
from $4.6 billion in 2000, according to the Education Dept. EDMC currently receives almost 82 percent
of its revenue from federal financial aid programs.
On July 23, the Obama Administration proposed restricting-and in extreme cases, cutting off entirely-programs
whose graduates end up with the highest debts relative to their salaries and have the most trouble
repaying their student loans. EDMC will be affected more than most other for-profit companies because
of its focus on "passion" fields, such as art and cooking, rather than more practical accounting
or business degrees, says Jeffrey M. Silber, an analyst with BMO Capital Markets in New York. Cooking,
fashion, and arts jobs tend to have low starting salaries: A beginning cook, for example, earns an
average of $18,000 a year, according to U.S. Bureau of Labor Statistics data, while a two-year culinary
degree can cost $40,000 to $50,000. EDMC spokeswoman Jacquelyn P. Muller says Art Institute students
tend to earn more, with those holding culinary degrees starting at $28,000.
EDMC also faces complaints from its own graduates and employees. A lawsuit filed in Texas state
court by 18 students alleges they were misled about the accreditation status of their program, diminishing
their degrees' value and leaving them with debts they can't repay. In another suit a former admissions
officer claims the company engaged in high-pressure sales tactics, paying staff to sign up students.
In July, dozens of faculty who tried, unsuccessfully, to form a union at one Art Institute campus
complained that unqualified students were being let into their classes.
Goldman spokeswoman Andrea Raphael said in a statement that the company invested in EDMC "because
of its leading position in the private higher-education space, its successful track record, and its
demonstrated commitment to its students." She referred other questions to EDMC, which said that the
student complaints don't reflect the quality of EDMC's academic programs or the success of its graduates.
EDMC says it takes seriously any alleged shortcomings uncovered by the GAO. Declining to discuss
individual students, EDMC denies the allegations in the lawsuits.
"The vast majority of our students" are "satisfied with their experience and go on to successful
careers after graduation," Muller said in a statement. She also said EDMC's chain of institutes has
illustrious alumni, including tennis star Venus Williams, who graduated with a fashion design degree
from Fort Lauderdale in December 2007, on the same day as Howard; Logan Neitzel, a 2005 graduate
of the Art Institute of Seattle and a 2009 contestant on television's Project Runway;
and Carol Guzy, a 1980 graduate from Fort Lauderdale who is now a Pulitzer Prize-winning photographer
at The Washington Post.
Over the last two years, Muller says, students have found work at companies such as Electronic
Arts (ERTS),
Neiman Marcus, and Sony (SNE).
The company cites students such as David Suppe, who graduated in 2005 from the Art Institute of Las
Vegas and now works as a chef at the MGM Resorts International's Excalibur Hotel. "I got so much
out of my education," says Suppe, 41. "I never would have advanced in this career without it."
As evidence that EDMC's students are succeeding, Muller notes that the company's latest government
student-loan default rate-which measures loans that go bust in the first two years students owe money-is
7.5 percent, vs. an average of almost 12 percent at all for-profit schools. EDMC's rate is twice
that of four-year nonprofit universities-though many graduates of traditional schools find themselves
with heavy debts and low-paying jobs as well.
Like some of its students, EDMC has substantial debt. In 2006, Goldman Sachs, Providence Equity
Partners, and Leeds Equity Partners borrowed $2 billion when the group purchased the company for
$3.4 billion, taking it private in a leveraged buyout. Goldman, which made the investment through
GS Capital Partners, a private-equity fund that uses money from Goldman and outside clients, took
EDMC public again last October. The company has reduced its debt to $1.53 billion.
The debt from the acquisition changed the culture of EDMC, according to Robert T. McDowell, who
retired as EDMC's chief financial officer shortly after the buyout. Before the acquisition, McDowell
says he and other executives resisted calls from Wall Street analysts to pursue growth opportunities
that could undermine academic quality. "You take on that amount of private-equity debt, you need
to earn high rates of return for these investors," says McDowell, who worked at the company for 18
years. "I was worried that the quality of the experience for employees and students was going to
deteriorate."
Muller says the borrowing hasn't hurt employees, faculty, students, or programs. EDMC has invested
more than $1 billion in campus buildings, technology, and other capital projects over the last 10
years-more than half over the last four years, she says.
At the New England Institute of Art in Brookline, Mass., administrators show off classes averaging
16 students using new computers and the latest software in the animation program. The school has
a $500,000 sound studio, a 14,000-volume library, and a student-run art gallery.
In its promotional materials, EDMC highlights graduates such as Jonathan Lukason, who received
his bachelor's in audio and media technology in 2008 from New England and has worked as a freelance
audio engineer for NBC (GE)
and ESPN (DIS).
In an interview, Lukason calls the institute's program "the best one around." Still, Lukason complains,
he earned $25,000 in his first year out of school, and he is struggling with $55,000 in student loans.
"At this rate, I'll be dead before I pay it off," he says.
To sell students on degrees, EDMC de-emphasized their costs and offered sales incentives to employees
for signing up prospects, says Brian Buchanan, a former admissions officer whose lawsuit against
EDMC was unsealed in May. Top producers won spots in the "President Club," which entitled them to
trips to foreign beach resorts, gift cards, and iPods, according to Buchanan's suit, which was filed
in 2007 in U.S. District Court in Pittsburgh. Buchanan, a former waiter, worked as an admissions
representative for EDMC's South University online from December 2005 until May 2007.
In an interview, Buchanan said EDMC gave admissions staff a matrix showing them how much money
they would make for each enrollment. Generally, each student was worth $800, he said. To recruit
students, EDMC told employees to use the "bring the pain" sales tactic, according to his lawsuit.
For example, a single mother would be told, "How are you going to explain to your children that you
cannot buy them the things they need because you couldn't be bothered to finish your education?"
the complaint says. Buchanan's case is a whistle-blower suit that seeks to recover damages on behalf
of the federal government with the plaintiff keeping a share. In a Securities & Exchange Commission
filing, EDMC said the claims are "without merit."
In July, instructors at the Art Institute of Seattle raised questions about EDMC when they tried
to join the American Federation of Teachers. The union lost in a 48 to 64 vote. Instructors objected
to high-pressure marketing to students to take out loans they couldn't afford, says Sandra Schroeder,
president of the AFT in Washington State. The institute encourages faculty to give passing grades
to students who aren't making progress, she says, so the school can keep collecting federal aid money.
EDMC administrators take the allegations seriously and "respect and promote the principles of academic
freedom without fear of repercussion or interference," Muller says.
Students also object to EDMC practices. Argosy University in Dallas falsely told applicants to
the clinical psychology doctoral program that the institution would get accredited by the American
Psychological Assn., 18 former students claim in a lawsuit filed in Dallas County District Court
last year. Stephanie Capalbo, one plaintiff, moved from suburban New York City to go to the Texas
university. In an interview, Capalbo, who got her doctorate in 2008, says officials told her the
school was in the process of getting accreditation, which it still hasn't achieved. Capalbo says
she now owes about $130,000 in government loans for Argosy tuition and fees and another $150,000
in private loans for living expenses. Her payments are $1,500 a month, draining the $60,000 the 29-year-old
makes each year working for a nonprofit that evaluates children for foster care in New York. Many
employers turned her down for higher-paying jobs because she lacks a degree with APA accreditation,
she says. "I love being a psychologist, but I have a family," she says. "I'll be working the rest
of my life to pay off these student loans. It's an unbearable debt."
EDMC spokeswoman Muller says the allegations in the lawsuit against Argosy are "unfounded" and
that APA accreditation isn't required for graduates to become licensed as clinical psychologists
in most jurisdictions, including Texas. Argosy hasn't submitted an application to the APA and continues
to prepare for the accreditation process, which takes time because of the data required, Muller says.
She adds that colleges can't control the amount of debt that a student takes on.
Carrianne Howard, the Florida student, didn't borrow for her education. Instead her parents paid
roughly $70,000 in tuition bills. Her mother, an airline data analyst, and her father, a computer
engineer, sold their California home and moved to Virginia after her father lost his job and her
mother retired. They used money from the sale to pay for tuition, and her parents are now struggling
financially, Howard and her mother say.
Howard grew up in Valencia, Calif., a suburb of Los Angeles, and became drawn to video gaming
during high school. One afternoon in 2004, an Art Institute ad popped up on her PC. "I was as excited
as can be," she says. "I thought it was a dream come true." She and her mother toured the Fort Lauderdale
campus, a bright, modern three-story building flanked by reflecting pools and palm trees. Her tour
guide "just made it sound really exciting and a lot of fun, like I was going to make hundreds of
thousands of dollars," Howard says. EDMC schools train representatives to make "no promise, implication,
or guarantee" about employment, Muller says.
A couple of years into her studies, Howard says she grew disenchanted. Some classes consisted
largely of playing video games, she says. She wanted to drop out but her mother insisted she finish
because the family had spent so much already. She graduated in December 2007; in March 2009 she lost
her first job, at GameRecruiter, a Fort Lauderdale-based gaming industry employment agency where
she was making $12 an hour. Marc Mencher, GameRecruiter's president and CEO, says she was let go
only because he closed down her entire department, and calls her "an exceptional performer."
She may be struggling to find work in part because of inadequate preparation from the Art Institute's
gaming department, Mencher says. "It's a weak program because it's understaffed," says Mencher, who
serves on the Art Institute's national advisory board for gaming programs. "I personally feel the
students aren't getting their money's worth." After Bloomberg Businessweek asked EDMC
for comment, Mencher sent a follow-up e-mail, saying that although the Art Institute is "not perfect
and they have issues like any organization," it is "an excellent program built on input from respected
industry professionals along with local employers." It has an "outstanding placement" record for
graduates, he said.
Howard applied for dozens of jobs, not only in gaming but also in grocery stores and nursing homes,
mostly for minimum wage, she says. In October 2009, Howard turned to adult entertainment by doing
paid Web chats. In March she started dancing at Lido Cabaret, earning $400 to $1,000 a week, she
says.
She now hopes to save enough to go back to college and get a business degree. As she considers
returning to school, Howard also helps run an anti-Art Institute website, where she has collected
more than 70 names in a petition to send to the U.S. Education Dept.
The private, nonprofit Florida Institute of Technology, where Howard would like to enroll, won't
accept any of her credits from EDMC, according to spokeswoman Karen Rhine, because the Art Institute
doesn't have the kind of accreditation the traditional college requires. In its school catalog and
other documents, the Art Institute "does not imply or guarantee" that credits will transfer to other
universities, says EDMC's Muller.
At 1 a.m. on a recent weeknight, Howard finished a shift at Lido. "This is what I do," she says.
"When I'm in here, I try not to think about the Art Institute
The blog is the work of
Antonio Garcia-Martinez, a former "quant" at the bank, who quickly became disillusioned with
Wall Street's "Boschian" culture . The title 'Why founding a three-person startup with zero revenue
is better than working for Goldman Sachs," pretty much says it all.
Adgrok, which Garcia-Martinez formed with two partners, is backed by the influential seed stage
venture fund
Y Combinator, After leaving the physics program at the University of California, Berkley, Garcia-Martinez
left to take a high-paying job at Goldman. Here, he describes the money-obsessed culture at the bank:
Wall Street is even simpler than religion. Your entire worth as a human is defined by one number:
the compensation number your boss tells you at the end of the year. See, pay on Wall Street works
as follows: your base salary is actually quite modest, but your 'bonus' is where the real money
is...So, come mid-December, everyone on the desk lines up outside the partner's office, like the
communion line at Christmas Mass, and awaits their little crumb off the big Wall Street table.
Even for someone trained in quantum mechanics, Wall Street's complex securities and deals were
nearly incomprehensible. And at Goldman, the "quants" -- mostly failed scientists, the author writes
-- were simply there to justify the money-making machine:
Peering into these deals was kind of like the zoomed-in penetration shot in a cheesy porn video:
you could barely tell which end was up, which part was which, or, more importantly, who exactly
was screwing whom. The quant aspect didn't really matter at the end, as one lacrosse-playing Penn
graduate would agree on price via phone with another lacrosse-playing Cornell grad, and life would
resume its speedy course to another deal.
The sad truth is: quants were the eunuchs at the orgy. The fluffers on the porn set of high
finance. We were the ever-present British guy in every Hollywood WWII film: there to add a touch
of class and exotic sophistication, but not really matter much to the plot (and maybe even conveniently
take some bad guy's bullet).
"Giving sophisticated models and fast computers to traders is like giving handguns and tequila
to teenage boys. Only complete mayhem can result (and as we saw recently, complete mayhem did
result)."
Here is a piece I found interesting from a quant who left Goldman Sachs. It matches what I have seen
first hand over the years doing business with the brokers and exchanges, and from friends who joined
other high energy Wall Street firms including Lehman and Bear Stearns and Morgan Stanley.
The investment
banks and brokers are an adolescent culture, high on macho and low on expansiveness in thinking to
put it politely.
I do not have a problem with that, per se. I enjoyed hanging with most of these guys,
their odd sense of irreverent cynicism and gallows humour, and the grab-asstic frat life style. It
is fun, if you do not take it too seriously. I used to follow an annual race on the stairs among
brokers in a large NY skyscraper with interest, a friend phoning in the results. Big money was bet
on it. It's a good time, and a means of relieving the tremendous pressures of a high stress profession.
The difficulty is that over the past ten years the financial sector, including the once staid
commercial banks, has been absolutely overwhelmed by the hedge fund and investment banking mentality,
and that power in turn has been influencing serious policy discussions in Washington to the detriment
of the nation, because money is power. Most of it had to do with deregulation.
Banks must keep up with their competitors, and if one does it, they all must do it to stay in
business. That is why regulation is so vital in this highly competitive sector. One cannot be virtuous
as a commercial entity with obligations to shareholders and customers under brothel rules.
Goldman Sachs is primarily a big hedge fund with a lot of political clout and an inside line with
the Fed. They have a trading, hedge fund culture these days. It was not always like this. At one
time a firm's reputation and their word was everything in a system founded on confidence. With a
trading culture it's all about the bottom line, with profit as virtue, and deceit in the name of
profit is no vice. You do not wish to have fellows with this mindset running any substantial part
of your country.
Quite a bit of that came with their change in status from a predatory trader to mainstream bank
in name only, with a predator's instincts and reward system. And this multiplied their potentially
negative impact and influence on the entire financial system.
Even worse, their self-centered and short term thinking and clever manipulation of the rules has
become the tail wagging the big dog of the country, because the political climate in Washington,
and elsewhere, has been largely corrupted by money. And in a bubble economy, the financial centers
are where the money is.
Wall Street is like the Gauls (or the Ferengi for the sci-fi fans), ruthlessly obvious and lacking in subtlety, wallowing in the raw and often ostentatious use of
amoral power for gain. Washington, on the other hand, tends to effete decadence and
studied pretense, the sly and subtle subornation of character and too often the law in the service
of power. The mix of these two cultures is an antichrist on the rocks, a deadly cocktail indeed.
I had the opportunity to work with several congressional and even presidential campaigns and administrations
starting with Nixon. I don't claim to be an insider, but I have seen a side of things that is transparent
to most. I liked that culture as well. I used to go to Washington for the State of the Union message
each year, to meet old acquaintances from the Staffs for drinks and chat at Bullfeathers or The Palm
to catch up on things, while the big dogs were attending the show. You get the best view of things
from the servants, especially if you are benign, an interested non-player.
The deterioration in Washington is evident. These men are not the brightest stars in the firmament,
and at times they are downright ignorant of things we might take for granted because they often live
a rarefied existence with access to people and information managed by staffs. That is a necessity
because they are drinking from a firehose of information.
Their chief ability seems to be to know what to say and to whom, what
levers to pull to get something done, making deals, gaining and trading power, and how to get elected.
They are great at networking. But this leaves them terribly vulnerable to influence, and group think,
and brother, inside the Beltway these days it is all about lawyers, guns (power) and money.
There has always been an element of this, but over the past twenty years, with the whole deregulatory
movement, it has become supersized, like a feeding frenzy. I have had the opportunity to discuss
this with some older friends in the business and they tend to agree that things have changed.
There are always creepy and seriously warped people who are attracted to the halls of power. I
have met a few who were simply chilling. More common are the broken people, with drugs and drink
and sex filling the holes in their being, hollowed out by the power and fame that lured them in.
But these were always the exceptions.
In government there always had been an element of service to the country and a kind of dignity
underpinning the system, a kind of shared camaraderie, that seems to have been tossed in a ditch
of expediency and greed, and the lust for power on a mass scale.
What had been the exception is now the rule, at least beneath the urbane, often pietistic, veneer.
You can still be tossed out of office in the government for doing things that would still make you
a legend on Wall Street.
When the politicos were doing something wrong back then at least they knew it, and they were ashamed
of it, despite the usual bluff and bravado. A stiff conversation with a federal prosecutor would
make a Congressional staffer's blood run cold. Now it is more like business as usual, and even getting
caught is not all that bad, given the current trend to bipartisan professional courtesy, mavericks
excepted.
Greed is indeed the greatest good, the fatal flaw behind the decline of the 'me generation.'
The law, that much maligned government of regulations and restraints,
abused and fallible as it may sometimes be, is the bulwark of society, and often the only thing standing
between the people and packs of ravening wolves.
Those who would tear down the law in some misguided pursuit of reform, or of an adolescent anarchy
or utopia of 'no rules' at all, might find it hard to stand when the cold winds of avarice and tyranny
of power blow across the land, with no laws to stop or restrain them. The madness serves none, consuming
all.
"Equal protection" under the law is the best safeguard that the average person enjoys. Remove
the law and you remove the protection, and it is every man for himself, and the individual is irrelevant.
This is why the Banks must be restrained, and the financial system reformed, with balance restored
to the economy, before there can be any sustained recovery. And underpinning all of this is the integrity
of the regulatory and law enforcement process, and a serious pass at campaign finance reform and
limitation of the power of large corporations and organizations to buy influence with other people's
money.
The story of the 21st century will be the struggle of the individual versus the organization,
the machine controlled by the elite few. A cyclical theme no doubt, but the powerful few seem to
become more efficient in their promotion of tyranny on each iteration.
adgrok Why founding a three-person startup with zero revenue is better than working for Goldman
Sachs By Antonio
23 Jul, 2010
I joined Goldman Sachs in 2005, after five flailing years in a physics Ph.D. program
at Berkeley.
The average salary at Goldman Sachs in 2005 was $521,000, and that's counting each and every
trader, salesperson, investment banker, secretary, mail boy, shoe shine, and window cleaner on
the payroll. In 2006, it was more like $633,000.
In the summer of 2005, I took one look at my offer letter and the Goldman Sachs logo above
it, another look at my sordid grad student pad, and I got on a plane to New York within the week.
I packed my copy of Liar's Poker for reference.
My job on arrival? I was a pricing quant on the Goldman Sachs corporate credit trading desk1.
We traded credit-default swaps, both distressed and investment-grade credit, and in the bizarre
trading experiment assigned to me, the equity part of the corporate capital structure as well.
There were other characters in this drama. The sales guys were complete tools, with a total
IQ, summing over all of them, still safely in the double digits. The traders were crafty and quick-witted,
but technically unsophisticated and with the attention span of an ADHD kid hopped up on meth and
Jolly Ranchers. And the quants (strategists in Goldman speak)? Mostly failed scientists (like
me) who had sold out to the man and suddenly found themselves, after making it through two years
of graduate quantum mechanics, with a bat-wielding gorilla peering over their shoulder (that would
be the trader) asking them where their risk report was.
Wall Street is inward-looking and all-consuming. There exists nothing beyond the money game,
and nothing that can't be quantified into dollars and cents...
Submitted by Tyler Durden
on 07/24/2010 13:53 -0500
Just as Goldman's hope that the BP gusher's taking front page priority, especially in the aftermath
of the rather amusing settlement between the firm and the SEC, was finally appearing to bear fruit
as for the first time in over a year there was nothing relevant on the news front regarding the 200
West company, here comes Senator Chuck Grassley lobbing a grenade full of provocative and very much
unanswered questions directed at the GAO, at Elizabeth Warren, and at Neil Barofsky that demand clear
and prompt answers. We are also quite content that Blackrock and AIG once again manage to get themselves
dirty.
In just the year before the A.I.G. bailout, Goldman collected more than $7 billion from A.I.G.
And Goldman received billions more after the rescue. Though other banks also benefited, Goldman received
more taxpayer money, $12.9 billion, than any other firm.
In addition, according to two people with knowledge of the positions, a portion of the $11 billion
in taxpayer money that went to
Société Générale, a French bank that traded with A.I.G., was subsequently transferred to Goldman
under a deal the two banks had struck.
Goldman stood to gain from the housing market's implosion because in late 2006, the firm had begun
to make huge trades that would pay off if the mortgage market soured. The further mortgage securities'
prices fell, the greater were Goldman's profits.
In its dispute with A.I.G., Goldman invariably argued that the securities in dispute were worth
less than A.I.G. estimated - and in many cases, less than the prices at which other dealers valued
the securities.
The pricing dispute, and Goldman's bets that the housing market would decline, has left some questioning
whether Goldman had other reasons for lowballing the value of the securities that A.I.G. had insured,
said Bill Brown, a law professor at
Duke University who is a former employee of both Goldman and A.I.G.
The dispute between the two companies, he said, "was the tip of the iceberg of this whole crisis.""
It's not just who was right and who was wrong," Mr. Brown said. "I also want to know their motivations.
There could have been an incentive for Goldman to say, 'A.I.G., you owe me more money.' "
...Still, documents show there were unusual aspects to the deals with Goldman. The bank resisted,
for example, letting third parties value the securities as its contracts with A.I.G. required. And
Goldman based some payment demands on lower-rated bonds that A.I.G.'s insurance did not even cover.
To be sure, many now agree that A.I.G. was reckless during the mortgage mania. The firm, once
the world's largest insurer, had written far more insurance than it could have possibly paid if a
national mortgage debacle occurred - as, in fact, it did.
Perhaps the most intriguing aspect of the relationship between Goldman and A.I.G. was that without
the insurer to provide credit insurance, the investment bank could not have generated some of its
enormous profits betting against the mortgage market. And when that market went south, A.I.G. became
its biggest casualty - and Goldman became one of the biggest beneficiaries.
Longstanding Ties
For decades, A.I.G. and Goldman had a deep and mutually beneficial relationship, and at one point
in the 1990s, they even considered merging. At around the same time, in 1998, A.I.G. entered a lucrative
new business: insuring the least risky portions of corporate loans or other assets that were bundled
into securities.
But perhaps more revealing than the executives' explanations was the release of
500 pages of documents
by the panel, the
Financial Crisis Inquiry Commission, showing how Goldman's aggressive and repeated demands for
billions in cash from A.I.G. drove the insurer to the brink of failure in September 2008.
The documents also revealed for the first time the dollar amounts behind Goldman's negative bet
on A.I.G., which Goldman put in place to hedge its risk that A.I.G. might fail and not pay its obligations.
"Goldman was first going in the door asking for collateral. Goldman was by far the most aggressive
in terms of the timing and amount asked for," Phil Angelides, the chairman of the commission, said.
"You were way ahead of everyone else in terms of the amount being demanded and the timing for that."
The collapse of A.I.G., once the world's largest insurer, and its dealings with Goldman and other
major banks in the months leading up to that failure, have been the subject of significant Congressional
interest since it was bailed out by taxpayers in the fall of 2008.
Under the terms of the $182 billion rescue, which was overseen by the
Federal Reserve Bank of New York and the
Treasury, the banks that had insured mortgage securities with A.I.G. were made whole on those
contracts when they agreed to unwind them. Some $46 billion of the A.I.G. bailout money went to those
banks.
In his first public appearance since A.I.G.'s collapse, Joseph J. Cassano, the former chief executive
of the unit that insured the mortgage securities, said that he had fought back against demands for
cash from banks like Goldman until his retirement from A.I.G. in March 2008.
He told commission members that he could have saved taxpayers billions of dollars if he had stayed
at the company as its "chief negotiator" because he knew the ins and outs of A.I.G.'s legal contracts
with the banks.
"I would have gone to the counterparties, and I think even then I would have been able to negotiate
substantial discounts by using the rights available to us, such that the taxpayer would not have
had to accelerate the $40 billion to the counterparties," Mr. Cassano said.
A.I.G.'s battle with Goldman began in the summer of 2007 and, the documents show, centered on
the value of the underlying mortgage securities that A.I.G. had insured. The documents
include a timeline of Goldman's collateral calls and show that in the summer of 2008, Goldman
at one point had received nearly half of all the cash A.I.G. gave to counterparties, even though
Goldman's deals with A.I.G. made up only a fifth of the insurer's book of business insuring complex
mortgage securities.
While Mr. Cassano remained at A.I.G., the insurer resisted when Goldman demanded cash to shore
up deterioration in the securities; A.I.G. officials argued that the investment bank's valuations
were inappropriately low and were well below those of any other dealer on Wall Street, the documents
show.
For example, on Feb. 6, 2008, even as A.I.G.'s dispute with Goldman over valuations was escalating,
the documents indicate that requests for cash from
Société Générale, another large A.I.G. trading partner, used values that were in line with A.I.G.'s
assessments.
After Mr. Cassano left A.I.G., Goldman succeeded in more of its demands for cash. When Mr. Cassano
left, A.I.G. had put up $3 billion; six months later, A.I.G. had transferred $7 billion to Goldman.
The market for mortgage securities was declining during this period, but the commission documents
indicate that Goldman's demands were far more aggressive than that of other banks.
When asked by commission members about this, Goldman's executives explained that their valuations
came from actual trades at the time the cash demands were made.
Mr. Angelides of the commission asked Goldman to provide evidence that such trades had actually
occurred.
A Congressional
document released late Friday lists those institutions and shows that Goldman was exposed to
losses in an A.I.G. default because some of the investment bank's trading partners, such as Citibank
and
Lehman Brothers, were financially unstable and might have been unable to make good on large claims
from Goldman.
The document details every institution that had sold credit insurance on A.I.G. to Goldman as
of Sept. 15, 2008, the day before the
New York Fed arranged the insurer's rescue with an $85 billion backstop. The document, supplied
by Goldman Sachs, was released by
Charles E. Grassley of Iowa, the ranking Republican on the Senate Finance Committee.
Goldman had purchased credit protection on A.I.G. worth $402 million from
Citigroup and $175 million from Lehman Brothers, the document shows. As of the date of the document,
Lehman had already filed for bankruptcy protection.
"This illustrates that the Goldman version of reality is not entirely accurate," said Christopher
Whalen, managing director at Institutional Risk Analytics. "They did have exposure to A.I.G., and
that is what drove their behavior in the bailout."
... ... ...
"It's as if the New York Fed used A.I.G. as a front man to bail out big banks all over the world,"
Mr. Grassley said in a statement. "It took nearly two years for the public to learn these details,
and they only were revealed because Congress wouldn't take no for an answer. Taxpayers deserve to
know what happened with their money."
The article should probably have title Did Goldman have an incentive to act
against AIG's interests? "AIG said in March 2009 that $93 billion had been paid to banks, including
$12.9 billion to Goldman Sachs, which was the most received by any bank. The banks who sold Goldman
protection against an AIG collapse were also AIG counterparties who received payouts as part of the
taxpayer bailout, raising questions about the quality of the protection that Goldman purchased. The
interconnectedness of major banks was a important factor in the spread of the financial crisis, and
led the U.S. Congress in 2008 to authorize a $700-billion bailout package for the financial system."
Commission members questioned whether Goldman had an incentive to act against
AIG's interests.
WASHINGTON (Reuters) – Morgan Stanley (MS.N),
Citigroup (C.N) and JPMorgan Chase (JPM.N) were among banks that
sold Goldman Sachs (GS.N) protection against the risk of a collapse of giant insurer American International
Group (AIG.N), a source familiar with the matter said on Friday.
Goldman Sachs has turned over
a list of the counterparties, which also includes
Deutsche Bank (DBKGn.DE) and Credit Suisse (CSGN.VX), to the Financial
Crisis Inquiry Commission (FCIC) following a recent hearing exploring the links between Goldman and
AIG, the source said.
The source spoke anonymously because the list has not been made public.
Goldman Sachs did not immediately respond to a request for comment, and Citigroup and
JPMorgan declined comment. Credit
Suisse also declined to comment, and Deutsche Bank did not immediately respond.
Goldman has long been criticized for benefiting from the U.S. taxpayer bailout of AIG. Taxpayers
pledged up to $182 billion to address problems at
AIG's financial products division.
The latest detail on Goldman's dealings in connection with AIG further highlights how the investment
bank not only bought protection from AIG but also sought to protect itself against AIG.
U.S. and European banks that had purchased
credit protection from AIG were quickly made whole after the U.S.
government bailed out AIG.
Goldman, as a major trading partner of the insurer, was one of the biggest beneficiaries of the
government rescue of AIG.
AIG said in March 2009 that $93 billion had been paid to banks, including $12.9 billion to Goldman
Sachs, which was the most received by any bank.
The banks who sold Goldman protection against an AIG collapse were also AIG counterparties who
received payouts as part of the taxpayer bailout, raising questions about the quality of the protection
that Goldman purchased.
The interconnectedness of major banks was a important factor in the spread of the financial crisis,
and led the U.S. Congress in 2008 to authorize a $700-billion bailout package for the financial system.
The tangled relationship between AIG and Goldman was the focus of a crisis commission hearing
held three weeks ago.
Commission members questioned whether Goldman had an incentive to
act against AIG's interests.
Goldman Sachs officials insisted their demands for billions of dollars from AIG ahead of the government
rescue were based on legitimate market prices. They denied gaming values
to get a massive payout and said Goldman got no special benefit from AIG's
bailout.
(Reporting by Karey Wutkowski in Washington, with additional reporting from Steve Eder, Elinor
Comlay and Maria Aspan in New York, editing by Tim Dobbyn)
Dell's
$100 million settlement with the SEC is notable for the fact that Michael Dell is personally
being fined as well:
The SEC's allegations with respect to Mr. Dell and his settlement are limited to the alleged
failure to provide adequate disclosures with respect to the company's commercial relationship
with Intel prior to Fiscal 2008…
Under his settlement, Mr. Dell has consented to a permanent injunction against future violations
of these negligence-based provisions and other non-fraud based provisions of certain federal securities
laws and SEC rules. In addition, Mr. Dell has agreed to pay a civil monetary penalty of $4 million.
The size of the penalty, here, is less important than its existence: Dell is coughing up a $4
million fine for allegedly failing to provide adequate disclosures while chairman and CEO of the
company.
Now cast your mind back to the Goldman Sachs settlement, where Goldman, too, was accused of failing
to provide adequate disclosures. In that case, the chairman and CEO of the company, Lloyd Blankfein,
paid no fine whatsoever.
A lot of people were expecting that Blankfein might have to resign as part of the SEC settlement.
But in fact he didn't even get a Dell-style slap. Maybe there's no realistic way that Blankfein could
stay on as chairman and CEO after paying the fine; Dell, as the founder of the company, is in a slightly
different position. But this case does underline that the SEC wasn't nearly as tough on Goldman as
it might have been.
Today the Wall Street Journal has a very good article analyzing the Goldman victory over the SEC.
The article is not yet gated, so I put the reference first.
Scannell, Kara and Susanne Craig. 2010. "SEC
Split Over Goldman Deal." Wall Street Journal (17 July): p. A 1.
Question 1: Is Ms. Casey really asking if the agency caved? Probably not, but if so, that
is interesting.
Republican Commissioner Kathleen Casey questioned the SEC staff Thursday on their decision to
abandon the strongest fraud charge and strike a settlement involving a lesser allegation, and
given that, how the SEC could justify such a large penalty on a lesser charge.
Question 2: Is Russell Ryan saying that the SEC did not have enough proof to charge Goldman
with intentional fraud rather than giving incomplete information? After all, the fraud has been public
knowledge for some time. Why did the SEC cave?
Russell Ryan, a former SEC enforcement lawyer, said the negotiation to drop the strongest fraud
charge is "usually a strong indication the SEC had some doubt whether it could prove intentional
fraud. Mr. Ryan, now a defense lawyer at King & Spalding, said the SEC typically insists a defendant
settle on the strongest allegation made in its complaints. Watering down the toughest charge,
as in this case, is unusual.
Question 3: Why would the fraud charges be dropped in the course of negotiations with Goldman?
The SEC initially alleged that Goldman violated a rule -- known as Rule 10b of securities laws
-- which contains a sweeping antifraud provision covering trading in securities. The charge is
one of the most serious the SEC can make, and carries greater stigma for a financial firm than
the lesser charge included in the settlement. The lesser charge Goldman settled on comes under
a rule known as 17a. These charges can involve intentional and unintentional fraud, as well as
negligence. The SEC staff, led by Kenneth Lench, head of the agency's structured-products unit,
told the commission the shift stemmed from the settlement negotiations, a person familiar with
the matter said.
Question 4: The SEC suggests that lessening the charge did not make the offenses less serious.
Then why lessen the charges?
Lorin Reisner, deputy director of the SEC's enforcement division, said "Section 10b and Section
17a1 are functional equivalents. Section 17a1 is a more appropriate claim in the context of a
fraud in connection with the offering of securities." He declined to comment on why the agency
dropped the 10b charge.
Question 5: How can anybody believe that the SEC did not cave?
The division in the settlement vote casts a cloud over what the SEC had claimed on Thursday was
a major victory. Investors had expected any SEC fine in the case to be $1 billion or more. Goldman's
shares have jumped since Thursday.
Question 6: Did Goldman hit a home run?
Combining a settlement of the SEC suit with a resolution of related SEC probes could calm Goldman's
restive clients and investors, while shielding the firm from information that could be used against
Goldman in private litigation. Goldman's paramount concern was removing the more serious fraud
charge rather than knocking down the size of the fine, say people familiar with the matter.
Question 7: Why would the SEC be upset about Goldman leaving the cat out of the bag?
On Wednesday, upon learning The Wall Street Journal was preparing an article on catch-all settlement
talks, SEC enforcement chief Robert Khuzami grew furious and blasted Goldman. He accused the firm
of leaking a story that suggested Goldman had bested the SEC, a person familiar with the matter
says.
Last question: How many staffers is Goldman going to hire and how many Goldmanites will join
the SEC?
On July 15, it was announced that Goldman had reached a settlement of the SEC's charges regarding
material misrepresentations in an Abacus CDO deal, acknowledging that its materials were "incomplete".
See Chan & Story,
Goldman Pays $550 Million to Settle Fraud Case, NY Times (July 15, 2010).
Goldman sold the deal to buyers without informing them of the involvement of the counterparty
to the deal. The counterparty was Paulson, a hedge fund manager, who had personally selected "most
likely to fail" mortgages on offer and gotten Goldman to create a CDO package with those deals in
it so that he could bet against the deal. The bet against the deal was a naked credit default swap.
The person who bought the other side of Paulson was essentially buying a deck intentionally stacked
against him, rather than a more diversified cross-section of subprime mortgages. Not surprisingly,
that particular Abacus deal was particularly bad and went south within months of its creation and
sale.
Now, in my view naked credit default swaps should be illegal. They are nothing but an insurance
contract when the protected insurance buyer has no insurable interest in the reference property.
As many have observed, such a situation presents a dangerous moral hazard-- it is like letting an
arson take out an insurance contract on the most expensive house in the neighborhood and then reap
the benefit of the payout after he burns the house down. Nonetheless, the financial lobby is extraordinarily
powerful, and Congress did not yet bite the bullet to ban naked credit default swaps in the financial
reform package. (I say "yet" because I am convinced that we must dampen the use of such derivatives
or stand by to witness destruction of both financial system and economy through continuing crises
fueled by rampant speculation.)
But even if naked credit default swaps aren't illegal (which is the current situation), that doesn't
mean that a bank should be able to cater to one client to create a financial product stacked with
the worst of the worst subprime mortgages and neglect to tell another client about that critical
fact. The SEC might have had difficult proving fraud: Goldman is no dumbie, and it is adept at selecting
facts to cast itself in the best life and working to obscure facts that do not. Anyone hearing Paulson's
side of the story (read Michael Lewis, The Big Short) would want to know about his involvement in
a deal, especially when those products were nonetheless rated AAA. (Yeah, rating agencies were in
on the game too, but the banks were tailoring their synthetic CDOs to match the known rating agency
procedures, sort of like stacking up a room full of people paid the average income and needing to
boost it to make it look like incomes are higher, so adding a multimillionaire with just the right
income to the mix to bring the average up to the desired goalpost and no more. Crapola.) And
I for one suspect that the SEC could have rather easily proven material misrepresentation.
Goldman took a battering from having the suit out there and clearly wanted to settle. But Big
Banks want to settle on terms that don't produce real pain. So Goldman got a deal with essentially
a $550 million price tag, which, as the weekend Wall St. Journal editorial notes, is "a mere two
weeks worth of recent trading profits." Goldman's Bailout Fee, Wall St. Journal, July 17-18, 2010,
at A12. Too little, methinks, even with the concession not to seek a tax deduction for any part of
the fine which might otherwise have been deductible. See Donmoyer,
Goldman Sachs Waives Tax Deduction on SEC Settlement, Bloomberg.com (July 16, 2010). In my view,
anything under 10% of Goldman's profits last year, plus no tax deduction, is de minimis. Anything
smaller than that will be viewed by the financial industry as no more than a slap on the wrist. To
be instructive and to spur more prudential banking from Big Banks, the penalty needs to be severe
enough to be taken very seriously.
___________________________________________________
Naked swaps should be regulated by the gaming commission since they are gambling. I suspect
that you could find a bookie somewhere in the world willing to take a bet on the situation.
In fact perhaps we should divide financial products into gaming products
and useful products (A fairly narrow list of basically old instruments such as
stocks bonds options and futures). The rest are called gambling, and in gambling one recognized
that the position to be in is the house as they always win. So lets call a spade a spade and make
it pure gambling.
Again, you are still wrong because you only look at the statute and ignore what actually encompasses
the "law".
What is a "Material Fact"?
Online Definition:
"A material fact is a fact that would be to a reasonable person germane to the decision to be
made as distinguished from an insignificant, trivial or unimportant detail. In other words, it
is a fact which expression (concealment) would reasonably result in a different decision."
There are two issues here:
1) The selection of the underlying securities in the CDO.
2) The statement by Fab that Paulson was long.
For #1, it is more than clear from the facts of the case that the counter party was more than
aware that Paulson was helping select the securities underlying the CDO. You have Paulson's right
hand man visiting the counter party to discuss the CDO. You also have the basket of underlying
going back and forth between ACA/GS/Paulson. So the other party was aware that Paulson was involved
in selecting the securities but ACA ULTIMATELY chose the basket and thus it would be very difficult
to argue the materiality of Paulson's involvement in the selection process.
For #2, this is wide open to interpretation as to what Fab actually said, how it was interpreted,
and whether or not the statement could have influenced the decision of ACA. The Prospectus clearly
discloses the CDS and Paulson's people told ACA they were buying the CDS. This is where a good
securities attorney goes to work with Wall Street terminology in complex transactions of synthetic
CDOs with sophisticated investors. You could say Fab made a mistake in not clarifying Paulson
was "long the CDS" and that was SIMILAR TO "shorting the CDO" (which is basically all that GS
admitted to, a mistake in clarification of terminology during the transaction).
If you watch the 6 hours of the GS testimony before the Senate, it is incredibly clear to me
this is how they were planning to set it up. That's why they spent the whole day using terms the
Senators were mixing up. It's the ol' "You just don't speak or language and that's why it looks
bad" defense. In a court, in front of a jury, Goldman would get to go over transactions like this
in detail until the jury was so confused they wouldn't know whether Fab really misstated a fact
and whether that fact was material.
And with the materiality, I am not sure that in 2007 the fact that an unknown hedge fund wanted
to bet against what everyone thought was a booming market would have been material to the transaction.
ESPECIALLY, because it was so common of these firms like ACA to buy the CDO and sell the CDS specifically
because they wanted the extra return. It could be argued that they were happy there was an investor
out there willing to buy the CDS and that's why they use Goldman.
NOW AS I KEEP SAYING, if you want some material misstatements that influence investment decisions
look no further than Repo-105. 2008 has Lehman execs going on TV saying David Einhorn is wrong,
they aren't hiding things off their balance sheet, reporting huge earnings, while issuing secondary
offerings to cover the losses from their off balance sheet transactions. THAT IS A 10b-5 SLAM
DUNK! Where is that case?
To his mind he might be "just a banker doing God's work", but in the
popular imagination Lloyd Blankfein has become the devil incarnate.
The company he runs, Goldman Sachs, has come to epitomise everything wrong with Wall Street and
investment banking generally. The Goldman chief executive has found himself
in the uncomfortable position of lightning rod for much of the torrent of criticism aimed at "the
firm".
Comments like Blankfein's quip in a newspaper interview that he was "doing God's work" have stoked
the public fury that has engulfed the organisation. That's despite the fact that the line was not
meant seriously. It was an off the cuff aside, made by a man whose humour usually serves as one of
his saving graces.
Humour, of course, is one way the short, chubby, but clever kid can survive in a tough inner city
school. And Blankfein certainly went to one of those. His rise to the top from humble origins is
the sort of story Americans gush over, epitomising the concept of "the dream".
Lloyd Blankfein was born into a Jewish family of very modest circumstances in the South Bronx
district of New York in September of 1954. When he was three, they moved to Brooklyn where his father
took a job in the sorting office of the US postal service, after losing his job as a truck-driver.
The younger Blankfein has described this as a clever move on Dad's part – such a job was all but
impossible to lose. His mother was a receptionist for a company that sold burglar alarms, another
solid position in the type of neighbourhood the Blankfeins called home.
Being raised in this environment, it is perhaps no surprise that Blankfein started working young.
He got his first job at the age of 13, selling sodas at New York Yankees baseball games on commission.
"I'd remember walking along and somebody in the upper part of the upper decks would raise his hands
and say 'I'd like a soda'", he said in a TV interview. "And I'm thinking, this tray is unbelievably
heavy, and the lids didn't work so well in the 1960s as they do today, and I'm going to walk all
the way up there for two and three quarter cents? And guess what? I walked all the way up there for
two and three quarter cents."
This work ethic and the willingness to do anything for a buck, or even a cent, were to serve him
prodigiously well. Blankfein graduated from Thomas Jefferson High School as valedictorian – a title
conferred in the US on the highest ranking student to graduate from an institution in any one year.
This led him to Harvard, and then Harvard Law School, where his eye-popping fees were funded through
the help of a combination of scholarships and government
financial aid.
From there he joined an LA law firm, where he dealt with tax issues for the entrainment industry.
However, overcoming the odds, as he did, did not immunise Blankfein from bad habits. The prince of
"casino capitalism" used to indulge in a more prosaic form of gambling, driving out to Las Vegas
with a friend to play Blackjack for relaxation. Goldman's PR people were, of course, horrified when
this revelation emerged as Blankfein assumed the position of heir apparent to Hank Paulson, who was
to become George Bush's Treasury Secretary.
He reached that position after what he has described as "pre-mid life crisis" that led him to
see if he could break into investment banking. Initially rejected by Goldman's exhaustive selection
process (it's not unusual for candidates to undergo 15 or more interviews to ensure they have the
right "fit"), he got in through the back door, finding a role as a gold salesman with
commodity trader J. Aron (his wife,
also a corporate lawyer, cried when informed of the news). Aron was a rough and ready place, but
had become one of Goldman's rare acquisitions the previous year. As a salesman, Blankfein was put
in charge of traders, and made a success of it. He gained a lot of kudos by structuring a $100m bond
for a Muslim client so that it complied with the prohibition Islam puts on earning
money through interest.
And yet anecdotes from that time show he was aware of the firm's customer-centred approach, snatching
a phone out of the hands of one trader who was preparing to yell at a client. In one interview he
said he was "invisible for the first 24 of my 27 years here", before adding: "It's not like I asked
for this." But getting to the top at an organisation like Goldman is not done easily. It requires
sharp elbows and ruthless determination. So along the way, Blankfein also smartened up his act. Today
he couldn't be further from the tubby, bearded, and sometimes rather dishevelled figure who nonetheless
made such a big impression at Aron. While he's balding and has retained his slightly squeaky Brooklyn
accent, he is now smartly dressed and trim. He sees himself as a communicator. He has eulogised in
interviews over the firm's "flat" management structure and the encouragement staff are given to raise
issues where something is "not right". He has a habit of leaving voice messages to staff: "It was
up to about one a day during the crisis," he says.
Most recently, he used one to mount a defence of the firm and its decision to fight the fraud
case brought against it by the Securities and Exchange Commission. After introducing himself ("this
is Lloyd, in New York, on Sunday") he said: "The core of the SEC's case is the allegation that one
employee misled two professional investors by failing to disclose the role of another market participant
in a transaction. Importantly, we had assumed risk in the deal and we lost money, just like the other
two long investors. I will repeat what you have heard me say many times in the past: Goldman Sachs
has never condoned and would never condone inappropriate activity by any of our people."
His willingness to fight the watchdog shows another side of Blankfein's character. He is a different
beast from his predecessor, Paulson, the urbane consensus builder who successfully made the transition
into politics. The suits may have improved and the paunch may have been worked off, but there is
still something of the street fighter about him. Another criticism that has been levelled at Blankfein
is that he is only really comfortable with "his people" and has surrounded himself with a coterie
of them from the now dominant trading side of the business, which has boomed as a result of people
like Blankfein realising they could make more by using Goldman's own money to put its people's clever
ideas into practice than clients would ever be prepared to pay.
Goldman knows that the firm has a public relations problem. The bank has done things like barring
its staff from its lavishly appointed suite at the New York Yankees' palatial new stadium during
the worst of the financial crisis. Blankfein, too, has taken a hit to his stupendous earnings. He
took home an astonishing $68.5m in 2007, setting a record for a Wall Street CEO. That had been clipped
to a more "modest" $9.8m by 2009. But such PR gestures have done little to assuage the firm's mounting
army of critics. Perhaps that's because Blankfein doesn't acknowledge the business has rather wider
issues to grapple with than just a poor public image.
He regularly repeats the firm's mantra that the client comes first, above everything. Critics
say that what recent events have show is that what Goldman puts first, above everything, is Goldman,
and the army of wannabe Blankfeins that work for it.
In fighting fraud charges levelled by the SEC, Blankfein, the man with a genius for analysing
risk, has taken one of the biggest gambles of his life, violating what many financiers see as one
of the unwritten golden rules of Wall Street: you don't take on the regulator. As one of them, from
a rival firm, says: "Really they're in an impossible position; they lose if they fight and they lose
if they don't. But if they do lose this case, Lloyd very probably will have to go."
Goldman's image has been battered, not as bad as say a company like BP, but not far behind.
Lloyd Blankfein's Days Are Numbered as Chairman of Goldman Sachs
It's a testament to the odd world in which we live that when a Wall Street firm pays a $550 million
fine by conceding negligence in how it dealt with clients, its stock surges, adding billions of dollars
in market value for the firm's shareholders.
But that's what's happening to Goldman Sachs, as it reached its long awaited settlement with the
Securities and Exchange Commission over how it sold a basket of mortgage related debt to investors
in 2007.
Back when the SEC brought the case, the conventional wisdom on Wall Street and the financial media
was that Goldman didn't have to settle -- the case was weak and Goldman is, after all, Goldman.
As I wrote on these pages back then, Goldman would have to settle because: (a) the SEC dug up
some real questionable activity; and (b) no Wall Street firm, not even one with the ties to government
that Goldman possesses can go to war with its primary regulator.
Now that Goldman has indeed settled, the news is being spun, again mostly by the financial media,
that the deal with the SEC was a victory for Goldman's CEO Lloyd Blankfein, who survived the investigation
largely unscathed, paying a measly $550 million to the government (equivalent to a few days trading
gains at Goldman) and without having to give up any power, such as relinquishing his role as chairman
of the board, as senior executives both inside Goldman and at competing firms believed would be part
of any settlement.
Well, if history is any guide, Blankfein may not go tomorrow, or even
next month, but sometime in 2011, Blankfein will at the very least no longer be chairman of Goldman,
and may also be forced out of the firm altogether.
If you don't believe me ask former Citigroup CEO Sandy Weill. Like Blankfein, Weill (at least
on paper) was a good CEO from an operational standpoint. Following the creation of Citigroup in 1998,
shares of the big bank soared. The bank was what's known as a Wall Street darling for its strong
earnings and a surging stock price, and Weill was regarded as the King of Wall Street, having engineered
the largest financial deal ever when he merged his company, the Travelers Group brokerage, insurance
and investment banking empire, with commercial banking powerhouse Citicorp.
At the height of his power, Weill suddenly popped up on the radar screen of New York Attorney
General Eliot Spitzer. Before Spitzer got involved with hookers and became a TV host, he was the
sheriff of Wall Street, looking to right wrongs from the last great scandal, the internet bubble
where firms sold worthless dotcom and tech stocks to unsuspecting investors. Emails he uncovered
showed that Weill at least did something stupid, if not fraudulent: He pressured an analyst, Jack
Grubman, to inflate his stock rating on telecom giant AT&T, which was an investment banking client
(Weill also sat on AT&T's board, while AT&T CEO Michael Armstrong sat on Citi's board)
Grubman wrote in an email that as a favor for upgrading the stock, Weill got his kids in an exclusive
pre-school. The scandal, was described by the Wall Street Journal, as a "kid pro quo."
Weill continued to deny wrongdoing and was never charged. Citigroup, however, was charged with
fraud and ended up paying a $400 fine to settle the matter, but Weill appeared to have retained his
control of the bank. The initial reaction in the press and among his peers in the financial business
was that Weill had won, by having the bank pay a relatively small fine, and his status as CEO and
the King of Wall Street secure.
Not quite. A few months later, Citigroup announced that Weill was stepping down as CEO, handing
that job to Chuck Prince, who basically negotiated the settlement package. Citigroup maintained that
the two moves were unrelated. But people in Spitzer's office told me they really weren't: While negotiating
the settlement, Citigroup's board made it clear to investigators that Weill's days were numbered
at the top of the firm that he founded. Spitzer was merely affording Weill a graceful exit in an
effort to end the case.
Full disclosure: I have no knowledge that Goldman's board has tacitly agreed to pull a Weill on
Blankfein and has plans for him to step aside, but the circumstances involving the two men are so
remarkably similar. While Blankfein wasn't directly involved in the questionable
trade that landed Goldman in trouble, he is responsible for remaking Goldman into predatory trading
culture that has caught the attention of regulators, Congressional committees (recall
Sen. Carl Levin badgering Goldman traders for selling "shitty" investments to their clients) and
hurt Goldman's once stellar reputation, as Weill's actions hurt Citigroup's.
Some would say that's where the comparisons end; Citigroup deals with the general public that
buys stocks through its brokerage unit (Smith Barney) and makes deposits in its branch banking offices.
Goldman deals with large sophisticated investors who couldn't care less how Darwinian the company
behaves.
That used to be true, but no more. Goldman's image has been battered,
not as bad as say a company like BP, but not far behind. And image does count these
days given the scrutiny and oversight placed on Wall Street and the banks following the financial
collapse-induced bailouts.
Now that financial reform has been passed, Goldman will have to cut
back on some of that aggressive trading that powered its earnings and was Blankfein's forte. That means it will have to devote more and more resources to developing its client business
and relationships, convincing blue chip companies that it is the right firm to handle delicate negotiations
involving mergers, acquisitions, and other corporate financing assignments.
More and more, these clients do care about image (ask yourself why has so many top companies embraced
the useless but politically correct "green agenda"). In fact some have already jettisoned Goldman
as scrutiny of the firm grew over the past year.
Who is the right guy to change Goldman's image to fit the new paradigm it faces? It's not Lloyd
Blankfein and that's why he won't survive.
David Fiderer :
While Sandy Weill relinquished the CEO position, he remained Chairman of the sprawling financial
conglomerate until 2006. That's not exactly being forced out. Plus, he was in his 70s and the
scope of Citigroup's operations were such that it made sense to separate the CEO and Chairman
functions.
The testimony of Goldman's CFO before the Financial Crisis Inquiry Commission indicates that
Goldman is not about to concede that any of its standard practices were unethical.
The comparison seems strained.
poorold:
Goldman's Behaviour Exposes Fatal Systemic Structural Weaknesses
Debts Owed and Assets Pledged versus Maturity Level of Debts Owed
As witnessed during the S&P's decline to 666, the stock market significantly overstates the
current value of wealth contained therein. From the DJIA high of XX,XXX, the decline to X,XXX
represented a loss of XX trillion in wealth. However, only X trillion of cash was extracted, and
that amount is overstated several multiples based on "trading activity (gambling)" versus actual
"redemptions for cash."
The stock market represents a hope for future value, yet it is presented and perceived by most
to be a store of value whose present value--measured by the number of shares you own multiplied
by the last closing price--is equal to your current cash value.
If anything, the last two years should galvanize in every person's mind, the absolute fallacy
in that way of thinking. The stock market trades on the margin. Wealth
measured by such a vehicle is elusive at best.
The current recession was brought on because of the occurrence of a severe mismatch in debts
owed versus the ability to pay off those debts-in CASH. Cash being the ultimate measure of the
liquidation value of an asset.
When the debts owed were due (or called in) it became clear that nobody had the cash to make
the repayment. Assets (those collateralizing the debts and all other assets for that matter) simply
did not have the cash value people thought the assets represented..
Is this a ponzi scheme? No, not necessarily. It could be simply a mismatch of Debt Maturity
Date versus the Economy's ability to repay those debts-in cash.
Except, of course, in this case the Debts Owed were and are based on Asset Values that are
suspect at best. Faulty, and as time went on even criminally negligent valuations of Debt were
put forth and Cash extracted from the Economy. This is self-evident because those who sold the
Debt (whose valuation was criminally negligent) took out side bets indicating their belief the
Debt they just sold would NOT be repaid.
What company in America manufactures a product and then makes a bet the product will FAIL?
And, we are not talking about product liability insurance here, we are not even talking about
running out and betting the number 8 horse at Aqueduct. We are talking about using a stacked deck
to deal a lousy hand to your partner in a poker game and deal yourself a Royal Flush.
The net result of this has been to expose the system as broken. The widely held belief of Value
which investors have held for years is shown to be seriously flawed. Your 401(k), your mutual funds, your stock portfolio, your municipal bond portfolio, your promised
pension…they are, very simply, not worth what you think they are. And they are worth significantly
LESS than you believe.
How much less? Probably much more than you can even imagine.
Does the Government understand what has happened and are they working to solve the problem?
The simple answer is NO. Government is expanding entitlement programs and ratcheting up their
spending in the face of a private sector that is providing less tax revenue.
Simple, the government will raise taxes. Wrong answer. Raising taxes will certainly occur,
but once again there is an obvious mismatch in the Maturity of Debts Owed and the ability to liquidate
assets for CASH to pay those Debts.
Society will be forced to borrow from itself because there is simply not enough outside investment
to provide the CASH owed to meet the Maturing Debts.
What happens at that point? In fact, what happens when it is clear that is the only path available
to keep the system going?
This is where we are now.
And rest assured, the money will be printed to keep the system going.
My thoughts do not lead me to think inflation/hyperinflation. Instead, I think about printed
dollars paying for more and more people's basic needs and from a wider economic perspective, average
personal consumption declining and "assets" heretofore valued on a "cash basis" being generally
recognized to be worth significantly less.
One real question is when people "admit" the "cash value" they believe their "asset" is worth
is not a "valid" cash value, how many will decide they would prefer to have "cash" and see how
events unfold.
The real black swan is likely to be a dash for cash more than anything else.
As a close observer of the cases and allegations made regarding problem CDOs, we imagine potential
CDO investors will be mightily encouraged that Goldman ended up returning the full amount of investment
to the one true third party investor in the deal – IKB. While Goldman was permitted to say that they
did not admit any wrong doing, the settlement amounted to the same thing: they made inaccurate statements,
which were misleading and led to losses for the investor. These losses were refunded in full by Goldman
presumably because the inaccurate statements were material. In addition, from the perspective of
the investor, Goldman effectively paid punitive damages, in the amount of $300 million (the amount
in excess of the damages awarded to IKB and RBS/ABN).
Remember, this case was always going to be a settlement, only the terms
were up for discussion. In the range of possible outcomes, this settlement came out tilted against
Goldman. Many observers of the SEC's complaint against Goldman argued the case was weak: Goldman
had no duty to disclose Paulson's role (after all, he was a nobody, "everyone" knew the other side
of the deal was a short, and so on). However, in the settlement agreement, Goldman concedes that
it was a "mistake" not to disclose Paulson's role in selecting the bonds and that Paulson's interests
were adverse to the investors. This would seem to imply that the SEC's case was solid and that they
played their cards well.
An investor considering bringing an action against a bank that sold them a CDO that failed (meaning
virtually all 2006 and 2007 "mezzanine" CDOs) would probably be encouraged that a bank was required
to pay such a large amount for making inaccurate statements about the true nature of the CDO.
1. While Goldman didn't "admit guilt", they said their statements misled Investors and caused
them to lose money. Since Goldman's pitchbook and offering document were completely normal for the
market, many other deals likely fit in this category. Even if the SEC doesn't bring more claims,
litigants in private claims now have evidence that (a) Goldman will pay on CDOs for misstatements
and (b) Goldman has admitted its misstatements misled Investors enough for Goldman to repay them
in full (or pretty close).
2. The two remaining long Investors in the deal were in large measure paid back. IKB was reimbursed
in full. RBS recouped a large portion of its share, since they stood in for ACA, who probably paid
some amount and against whom ABN/RBS certainly had CDS protection.
So if Goldman was willing basically to fully reimburse Investors for their loss, disgorge all
of their profits and pay effectively punitive damages for this "weak case", that seems to be a decent
indicator for future actions. Plaintiffs who sue CDO sellers have good reason to be optimistic. If
they believe they have a reasonable argument that they were misled in the selling process. The Goldman
example suggests they can push for and win major damages.
Private litigants now have good reason to hope that banks that misled them in a material way that
produced losses can be pressed to reimburse those costs.
3. Goldman escaped a fraud judgment, but will now be known as the bank that paid the largest SEC
penalty ever. As stated earlier, Goldman was always going to settle. They settled paying off most
investor losses, admitting misleading Investors and setting a new record. Not so good for Lloyd Blankfein.
4. All the analysis in the world won't matter if the deal seller makes materially inaccurate statements
to an investor when he asks questions and does diligence. Goldman was not forced to admit they committed
fraud but they admitted they make inaccurate disclosure and, by their actions (paying large amounts
of money to the investors), Goldman conceded that the inaccurate disclosure was a cause of the investor
losses. This stands in stark contrast to
its claims in April when the SEC filed its lawsuit:
We believe the SEC's allegations to be completely unfounded both in law and fact, and will
vigorously contest this action.
• The core of the SEC's case is based on the view that one of our employees misled these two
professional investors by failing to disclose the role of another market participant in the transaction,
namely Paulson & Co., and that the employee thereby orchestrated the creation of materially defective
offering materials for which the firm bears responsibility.
• Goldman Sachs would never condone one of its employees misleading anyone, certainly not investors,
counterparties or clients. We take our responsibilities as a financial intermediary very seriously
and believe that integrity is at the heart of everything that we do.
• Were there ever to emerge credible evidence that such behavior indeed occurred here, we would
be the first to condemn it and to take all appropriate actions.
• This particular transaction has been the subject of SEC examination and review for over eighteen
months. Based on all that we have learned, we believe that the firm's actions were entirely appropriate,
and will take all steps necessary to defend the firm and its reputation by making the true facts
known.
Paulson, by implication, earned his money on the ACA trade thanks
to Goldman's misrepresentations, rather than his shrewdness. The settlement thus tarnishes the popular
myth that the subprime shorts were insightful outsiders who executed "the greatest trade ever".
Paulson's purported $1 billion in profits from this ACA deal depended, in part, upon inaccurate statements
made by Goldman for his benefit. In effect, Paulson's gain cost Goldman $550 million while the parties
on the other side of Paulson's trade (the ones that are still around, since ACA is defunct) got most
of their money back.
This implies that had Goldman not made the inaccurate disclosure about the deal, the investors
might not have bought the bonds and Paulson would not have made such a killing. The settlement does
nothing to discourage the notion that other CDO transactions had similar inaccuracies which resulted
in ill-gotten gains for the shorts and unwarranted losses for the long investors.
I guess from the reformist point of view there'll be endless argument over whether or not this
is a win for Goldman.
From the point of view of taking back our country from these gangsters, the only question is
whether or not this was a significant step toward the complete destruction of Goldman and all
casino banking.
It sure seems not to be. On the contrary, the "best" case scenario seems to be that gamblers
outside the bank hope the settlement will circumscribe the way Goldman can rig the game to
their disfavor going forward.
But the game itself, which is purely destructive from any broader point of view, is to continue
in its full ferocity.
Indeed, if the perception here is that the game will be "less rigged" vs. the client gamblers,
then the settlement is a retrograde step, since one of the few good trends we've been seeing is
the growing realization that Goldman's a criminal against everyone including its own clients.
So anything that seems to improve the position of the clients is bad for the American people.
From our point of view, it would've been better if the settlement had been more obviously a whitewash.
Or if Goldman had fought all the way and won. This kind of insidiousness is always worse.
I agree that the corporate media will do all they can to spin this as a win for everyone. The
SEC (Obama) got tough; "investors" will be better protected; but Goldman is also vindicated on
the worst charges; and implicitly the casino is now in better shape, and the American people should
have more confidence in it going forward.
We have to fight that propaganda.
ben there done that:
Attempter – I agree with you that we have to fight the propaganda. Nobody won on this one.
But, propaganda aside, I do think this settlement will have some
modestly positive outcomes. There will be no pound of flesh but I predict
there will be a (temporary) change in behavior because a new level
of acceptability and accountability has been rendered. Just like your basic ole
criminals, there will always be a bad lot and those too brazen or too stupid to get on the deterrent
bandwagon. So as long as everybody plays fair for 3 years……….
That gives the brazen a couple of years to figure out how to come up with the next innovation!
Neil D:
Answer? Like every gambler, they alway believe they can beat the house and in this case, they
almost always can because the "house" is the taxpaying public
ben there done:
The fundamental difference in this case was the outright misrepresentation by the disclosure
party, Goldman, that ACA selected the assets. That is the only fact that matters in this case
and Goldman was made to pay.
It is easy and tempting to get hung up on the ins and outs of complex CDO transactions, but
at the heart of all good and successful litigation is a simple fact that cannot be denied. Perhaps
to bring it home and slap Goldman around a little bit more, the SEC in the Consent precludes Goldman
from arguing that it did not violate the federal securities laws as alleged in the Complaint (see
para 6). Yes they also had to admit a "mistake" but they also are basically estopped from arguing
they settled for the mere convenience of being done with it.
As for other potential loss claims by Investors in other CDOs, I am not convinced that this
case opens the door any wider than it has always been. You basically cannot knowingly lie/misrepresent
the material terms of a deal. Nothing new here. There will be a few more cases that emerge but
not because the Goldman settlement reached too far. The settlement finally reached far enough.
Goldman Sachs was fined $550 Million for duping customers. We do not need to recap the charges
in detail. Goldman helped hedge fund manager John Paulson pick toxic waste sure to go bad for
collateralized debt obligations (CDOs) that Goldman would sell to its own patsy clients. Goldman
and Paulson then bet against the clients. Since Paulson had picked "assets" guaranteed to go
bad, it was a sure bet that Paulson and Goldman would win and that Goldman's clients would
lose. Oh, and by the way, although Goldman let Paulson meet the patsies, Goldman never told
the patsies that Paulson arranged the deals and would win when they failed. Business as usual
on Wall Street. In the SEC's settlement, Goldman agreed that this was "incomplete information"-ie
the patsies might have liked to know that Goldman and Paulson worked together to ensure the
bets were rigged and the patsies would lose. Duh. For Goldman it was a tiny slap on the wrist-it
still controls the Obama administration, with its moles, Timmy Geithner and Larry Summers still
in charge of fiscal policy, thus prepared to funnel whatever money is necessary to prop up
their firm-and the fine amounts to just 14 days of Goldman's earnings. Time to celebrate-which
Goldman did, as its stock rallied on the news that it had been found to have screwed its customers.
Is there a better reason to party?
So, Is the SEC Settlement Really a Win for Goldman?
Simple answers to simple questions: Yes
Doug Terpstra:
Surely it was a rhetorical question, Lambert.
Ah, but nothing "in the settlement … would be negative for private parties considering lawsuits
against sellers of CDOs."
The good news: there will be maximum employment in legal services and future employment for
SEC collaborators, but sadly, little for the productive economy, the Main St commonwealth, or
wealth creation overall. Parasitism* in society thus remains undiminished, and the corrupt system
undaunted. Godman Blankfein shrugs off the cost-of-business fine representing a fraction of taxpayer-funded
bonuses (14 days earnings?), while GS stock soars and he and the lawyers laugh all the way to
the Treasury vault.
(*Apologies to bloodsucking leeches, vampires, and eels.)
Sometimes, when chasing the bouncing ball of fraud and corruption on a daily basis, it is easy
to lose sight of the forest for the millions of trees (all of which have a 150% LTV fourth-lien on
them, underwritten by Goldman Sachs, which is short the shrubbery tranche). Luckily, Charles Hugh
Smith, of oftwominds.com has taken the time
to put it all into such simple and compelling terms, even corrupt North Carolina congressmen will
not have the chance to plead stupidity after reading this.
Of course, to those familiar with the work of Austrian economists, none of this will come as a
surprise.
1. Enable trillions of dollars in mortgages guaranteed to default by packaging unlimited quantities
of them into mortgage-backed securities (MBS), creating umlimited demand for fraudulently originated
loans.
2. Sell these MBS as "safe" to credulous investors, institutions, town councils in Norway,
etc., i.e. "the bezzle" on a global scale.
3. Make huge "side bets" against these doomed mortgages so when they default then the short-side
bets generate billions in profits.
4. Leverage each $1 of actual capital into $100 of high-risk bets.
5. Hide the utterly fraudulent bets offshore and/or off-balance sheet (not that the regulators
you had muzzled would have noticed anyway).
6. When the longside bets go bad, transfer hundreds of billions of dollars in Federal guarantees,
bailouts and backstops into the private hands which made the risky bets, either via direct payments
or via proxies like AIG. Enable these private Power Elites to borrow hundreds of billions more
from the Treasury/Fed at zero interest.
7. Deposit these funds at the Federal Reserve, where they earn 3-4%. Reap billions in guaranteed
income by borrowing Federal money for free and getting paid interest by the Fed.
8. As profits pile up, start buying boatloads of short-term U.S. Treasuries. Now the taxpayers
who absorbed the trillions in private losses and who transferred trillions in subsidies, backstops,
guarantees, bailouts and loans to private banks and corporations, are now paying interest on the
Treasuries their own money purchased for the banks/corporations.
9. Slowly acquire trillions of dollars in Treasuries--not difficult to do as the Federal government
is borrowing $1.5 trillion a year.
10. Stop buying Treasuries and dump a boatload onto the market, forcing interest rates to rise
as supply of new T-Bills exceeds demand (at least temporarily). Repeat as necessary to double
and then triple interest rates paid on Treasuries.
11. Buy hundreds of billions in long-term Treasuries at high rates of interest. As interest
rates rise, interest payments dwarf all other Federal spending, forcing extreme cuts in all other
government spending.
12. Enjoy the hundreds of billions of dollars in interest payments being paid by taxpayers
on Treasuries that were purchased with their money but which are safely in private hands.
Charles' conclusion does not need further commentary as it is absolutely spot on:
Since the Federal government could potentially inflate away these trillions in Treasuries,
buy enough elected officials to force austerity so inflation remains tame. In essence,
these private banks and corporations now own the revenue stream of the Federal government and
its taxpayers. Neat con, and the marks will never understand how "saving our financial
system" led to their servitude to the very interests they bailed out.
The circle is now complete: in "saving our financial system," the public borrowed
trillions and transferred the money to private Power Elites, who then buy the public debt with
the money swindled out of the taxpayer. Then the taxpayers transfer more wealth every year to
the Power Elites/Plutocracy in the form of interest on the Treasury debt. The Power Elites will
own the debt that was taken on to bail them out of bad private bets: this is the culmination of
privatized gains, socialized risk.
In effect, it's a Third World/colonial scam on a gigantic scale: plunder the
public treasury, then buy the debt which was borrowed and transferred to your pockets. You are
buying the country with money you borrowed from its taxpayers. No despot could do better.
The Con of the Decade (Part II) meshes neatly with the first Con of the Decade. Yesterday I described
how the financial Plutocracy can transfer ownership of the Federal government's income stream via
using the taxpayer's money to buy the debt that the taxpayers borrowed to bail out the Plutocracy.
In order for the con to work, however, the Power Elites and their politico toadies in Congress,
the Treasury and the Fed must convince the peasantry that low tax rates on unearned income are not
just "free market capitalism at its best" but that they are also "what the country needs to get moving
again."
The first step of the con was successfully fobbed off on the peasantry in 2001:
lower the taxes paid by the most productive peasants marginally while massively lowering the effective
taxes paid by the financial Plutocracy.
One Year Later, No Sign of Improvement in America's Income Inequality Problem:
Income inequality has grown massively since 2000. According to Harvard Magazine, 66% of 2001-2007's
income growth went to the top 1% of Americans, while the other 99% of the population got a measly
6% increase. How is this possible? One thing to consider is that in 2001, George W. Bush cut $1.3
trillion in taxes, and 32.6% of the cut went to the top 1%. Another factor is Bush's decision
to increase the national debt from $5 trillion to $11 trillion. The combination of increased government
spending and lower taxes helped the top 1% considerably.
The second part of the con is to mask much of the Power Elites' income streams behind tax shelters
and other gaming-of-the-system so the advertised rate appears high to the peasantry but the effective
rate paid on total income is much much lower.
The tax shelters are so numerous and so effective that it takes thousands of pages of tax codes
and armies of toadies to pursue them all: family trusts, oil depletion allowances, tax-free bonds
and of course special one-off tax breaks arranged by "captured" elected officials.
Step three is to convince the peasantry that $600 in unearned income (capital gains) should be
taxed in the same way as $600 million. The entire key to the U.S. tax code is to tax earned income
heavily but tax unearned income (the majority of the Plutocracy's income is of course unearned) not
at all or very lightly.
In a system which rewarded productive work and provided disincentives to rampant speculation and
fraud, the opposite would hold: unearned income would be taxed at much higher rates than earned income,
which would be taxed lightly, especially at household incomes below $100,000.
If the goal were to encourage "investing" while reining in the sort of speculations which "earn"
hedge fund managers $600 million each (no typo, that was the average of the top 10 hedgies' personal
take of their funds gains), then all unearned income (interest, dividends, capital gains, rents from
property, oil wells, etc.) up to $6,000 a year would be free--no tax. Unearned income between $6,000
and $60,000 would be taxed at 20%, roughly half the top rate for earned income. This would leave
95% of U.S. households properly encouraged to invest via low tax rates.
Above $60,000, then unearned income would be taxed the same as earned income, and above $1 million
(the top 1/10 of 1% of households) then it would be taxed at 50%. Above $10 million, it would be
taxed at 60%. Such a system would offer disincentives to the speculative hauls made by the top 1/10
of 1% while encouraging investing in the lower 99%.
Could such a system actually be passed into law and enforced by a captured, toady bureaucracy
and Congress? Of course not. But it is still a worthy exercise to take apart the rationalizations
being offered to justify rampant speculative looting, collusion, corruption and fraud.
The last step of the con is to raise taxes on the productive peasantry to provide the
revenues needed to pay the Plutocracy its interest on Treasuries. If the "Bush tax cuts"
are repealed, the actual effective rates paid on unearned income will remain half (20%) of the rates
on earned income (wages, salaries, profits earned from small business, etc.) which are roughly 40%
at higher income levels.
The financial Plutocracy will champion the need to rein in Federal debt, now that they have raised
the debt via plundering the public coffers and extended ownership over that debt.
Now the con boils down to insuring the peasantry pay enough taxes to pay the interest on the Federal
debt--interest which is sure to rise considerably. The 1% T-Bill rates were just part of the con
to convince the peasantry that trillions of dollars could be borrowed "with no consequences." Those
rates will steadily rise once the financial Power Elites own enough of the Treasury debt. Then the
game plan will be to lock in handsome returns on long-term Treasuries, and command the toady politicos
to support "austerity."
The austerity will not extend to the financial Elites, of course. That's the whole purpose of
the con. "Some are more equal than others," indeed.
h/t Andrew
JR :
I remembered this from reading my dad's collect text, A History of England and The British
Empire by Walter Phelps Hall, Princeton University, and Robert Greenhalgh Albion, Harvard University:
"The king (Edward) meanwhile cut off one old source of royal revenue in 1290, when he banished
all Jews from England. The earlier kings (see page 86) had allowed them to make fortunes at lending
money and then had fleeced them regularly. Edward's edict, which met with popular approval, kept
the Jews banished until about 1650…" p. 151
Page 86:
"The pipe roll reveals some additional sources of revenue which throw little credit on the
'Lion of Justice.' In addition to the usual fines from regular and forest courts, Henry accepted
bribes to influence court judgments. In a case where a Norman was being sued for a debt by three
Jews, the king was offered £133 by the former and got £24 cash from the latter. We do not know
who won the case, but it was understood that the loser's bribe would be returned. The Jewish moneylenders,
who began coming to England in the Conqueror's wake, and whose usurious interest rates sometimes
reached 86 percent a year, were called the 'king's sponges' because they were tolerated by Henry
at the price of frequent heavy fines on trivial pretexts. They had a monopoly of moneylending
in the early middle ages because the Church forbade Christians to lend money at interest."
aurum:
if you believe in an excecutive to non management compensation ratios of 300 or 400 to 1 then
i can understand your feelings...theres absolutely no reason for the disparity other than greed.
in the end (as we now see approaching) it is a contributor to the downfall of our society. if
the ratio was cut in half or better yet to 100-1 at most and dispersed back to the employees which
in turn would push the newly found earnings back into the economy, we would we all would be better
off. greed at the top has provoked revolutions since the onset of civilization. if things do not
change, the result will be the same.
trav7777:
You are both correct. A big problem is this income disparity. Outsourcing didn't lower costs
for consumers. It increased profits for corporations which executives and their cronies decided
to pay to themselves for gutting our industrial and economic base.
CEO payscales at 25:1 were sane and were what were the norm throughout most of the heyday of
this nation.
But the answer is not government, it is actually unions. The problem now is that union leadership
sold out to the executive class and now forms an interlocking directorate with corporations.
Another wrinkle is the fact that in reality, pensions and mooch funds truly own US corporations.
Their directors have sat back and allowed this to occur when several companies own enough shares
on behalf of 401ks that they could seat their OWN directors just by voting their beneficial shares.
Yet, they sat and let companies like CSCO pay an entire DECADE's worth of profits to directors,
instead of paying dividends.
It appears everyone got caught up in the stock ponzi; the share price appreciation was "good
enough" for mgmt to provide to shareholders, as opposed to real cash flow and real income.
The executives TOOK the real cash and they left price ponzi gains to owners. Those gains have
now been unwound and they are not coming back. Never ever trade ponzi price for real cashflow.
Ever. I cannot fathom how supposedly conservative, professional investment managers the likes
of John Bogle fell for this shit. He's Mr. Vanguard and he constantly talks about dividends and
cashflow and income yet his funds own companies that pay meager or no dividends and he depends
upon price ponzi for his gains despite knowing in his core philosophy that this .com phenomenon
is total bullshit. I guess perhaps the mooch fund and pension directors are in on the scam in
some way.
Honest unions were the only entities which forced disgorgement by directors and owners to employees
of a greater share of profits. Unfortunately, the former have all now been corrupted. Consequently,
there no longer remains any labor pricing power. Corporations these days will cut their own foot
off and show you the door rather than pay you a growing wage, even for high-skilled work that
cannot be replaced.
But, at the same time, executives constantly "negotiate" ever more
lucrative "compensation" packages with their cronies on the boards. It's like pro athletes.
Ticket sales are in the shitter but the salaries keep going up up up. Corporations
make that up by cutting wages in the lower levels and by reducing staffing. Anything they can
to keep the executive bonuses and payscales rising.
russki standart :
The congressmen are not stupid, they are bought and paid by the same banksters.
Goldenballs:
Capitalism is consuming itself, profit is destroying the very bedrock of a stable society which
in turn makes its leaders ever more desperate to hide the truth and point the finger in other
directions instead of being accountable themselves.
The truth will come out in the future as to whether the worlds financial systems are beyond
repair or whether we are seeing the death spiral with each move ever more desperate than the last
one.
SWRichmond:
Patrick Henry at the Virginia Ratification Debates:
"But we are told that we need not fear; because those in power, being our representatives,
will not abuse the powers we put in their hands. I am not well versed in history, but I will submit
to your recollection, whether liberty has been destroyed most often by the licentiousness of the
people, or by the tyranny of rulers. I imagine, sir, you will find the balance on the side of
tyranny. Happy will you be if you miss the fate of those nations, who, omitting to resist their
oppressors, or negligently suffering their liberty to be wrested from them, have groaned under
intolerable despotism! Most of the human race are now in this deplorable condition; and those
nations who have gone in search of grandeur, power, and splendor, have also fallen a sacrifice,
and been the victims of their own folly. While they acquired those visionary blessings, they lost
their freedom."
Goldman Sachs executives first threatened to stop making exotic trades with the American International
Group in July 2007 unless the insurance giant posted $1.8 billion in cash collateral to compensate
for a slide in the mortgage securities market, internal AIG e-mails show.
When AIG refused to meet its demands, Goldman began betting hundreds
of millions of dollars on the insurer's collapse, ramping up those wagers to $3.2 billion over the
next 10 months in a strategy that put AIG under huge financial pressure, a congressional commission
found.
While Goldman executives defended those tactics in testimony to the Financial Crisis Inquiry Commission
Thursday, panel members took turns publicly pushing the embattled investment bank to fully disclose
dealings that brought it hefty profits and might have helped force a $162 billion taxpayer bailout
of AIG.
A central issue surrounding Goldman, panel Chairman Phil Angelides
said, was whether the Wall Street titan turned the screws so tightly on AIG that it created a "self-fulfilling
prophecy," forcing the insurer into a massive cash squeeze.
The commission, appointed by Congress to ferret out the root causes of the worst financial crisis
since the Great Depression, was mostly docile in January in taking sworn testimony from Goldman chief
executive Lloyd Blankfein.
However, with four Goldman executives and six present and former AIG officials under oath over
two days this week, several panel members turned skeptical and confrontational in asking about AIG's
management failures and Goldman's wagers against the housing market that drained the world's largest
insurer of more than $15 billion.
The panel also heard from present and former state and federal officials also described gaping
regulatory holes that allowed a London-based unit of AIG to build a $2.7 trillion book of exotic
trades with little reserve capital, all but forcing the taxpayer bailout of the insurer to avoid
systemic chaos.
David Viniar, Goldman's chief financial officer, told the panel that Goldman behaved toward AIG
as it always does with insurance-like contracts known as credit-default swaps. When the housing market
began to sour in the summer of 2007, he said, Goldman "tightly managed" contract provisions requiring
AIG to post collateral to compensate for drops in the securities' value.
"We're pretty passionate about fair value accounting," Viniar said. " . . . We have 1,000 people
in our controller's department. Probably half of them spend their time trying to verify marks," or
securities' valuations.
In a lesson in how steel-knuckled Wall Street executives duke it out in high-stakes deals, commission
investigators pieced together a chronology of Goldman's negotiations with AIG. Even in July 2007,
the market for mortgage securities had begun to freeze, leaving few trades on which to gauge the
market value of securities in the AIG deals.
Nonetheless, on July 27, Goldman jolted AIG with a demand for $1.8
billion in collateral, simultaneously making its first purchase of swaps that would pay $100 million
if AIG went bankrupt.
The moves led to a series of tense exchanges over the ensuing days. After a conference call on
Aug. 1, Tom Athan of AIG's Financial Products unit e-mailed Andrew Forster, a former AIG senior vice
president for financial services, that Goldman had warned that AIG must honor the contract or it
wouldn't do similar deals in the future.
Goldman executives promised to set a mid-market valuation of the securities to determine collateral
requirements, AIG executives wrote, but that Goldman posed "a very credible threat" because it could
influence market valuations.
For example, Athan wrote on Aug. 8, 2007, if Goldman asked rival Merrill Lynch to submit bids
on 100 mortgage-backed bonds similar to those that AIG was insuring and prices them at 80 cents of
face value, dealers could use the bid to set market prices.
By Aug. 10, investigators wrote, Goldman had bought $575 million in swaps that would pay off if
AIG defaulted. AIG ultimately posted $450 million in response to Goldman's demands, but that was
just round one.
On Aug. 16, Forster wrote that he'd heard rumors that Goldman was
"marking down asset types that they don't own so as to cause maximum pain to their competitors."
The two companies haggled over the next year, as Goldman's collateral demands mounted and its
swap "protection" reached $3.2 billion.
Viniar told the commission that Goldman was primarily an "intermediary" buying swaps with AIG
after selling similar credit insurance to investors. When AIG posted collateral, he said, Goldman
posted the same amounts in cash with investors.
However, Commissioner Byron Georgiou pressed Goldman executives about a McClatchy story published
Tuesday describing Goldman making proprietary trades - wagers with its own money - on so-called bets
with AIG in which neither party actually bought any mortgage securities.
When Viniar said he knew nothing about it, Angelides and Vice Chairman Bill Thomas told Viniar
that the commission wants records of all such trades.
The commission, which recently subpoenaed documents from Goldman, wasn't through with its demands
for information.
Georgiou asked Viniar to identify the companies that sold Goldman coverage on an AIG collapse,
saying he was "incredulous" that other financial institutions could cover such huge bets if AIG couldn't
during the meltdown of 2008.
"I do not know the specific names of the parties," Viniar said, but added that the bets "were
predominantly with other major financial institutions."
In addition, Georgiou noted that Goldman likely sold swaps for higher fees than the typically
modest amounts it paid to AIG, saying that Goldman's $2.1 million in fees for $1.76 billion in coverage
in a 2004 deal amounted to 0.12 percent. He asked Goldman to provide details of all fees it charged
clients for whom it was an intermediary with AIG.
Commissioner Brooksley Born, a former chairwoman of the Commodities Futures Trading Commission,
said she found it odd that Goldman couldn't say how much profit it made on swaps and other exotic
bets known as derivatives.
"Your risk officer said the other day you can't manage something that you can't measure," she
said. "I am very skeptical that you can't measure these profits."
Born also demanded to know how Goldman and other swap partners of AIG wound up with releases of
legal liability, meaning taxpayers would have a difficult time suing them for fraud, as part of settlements
awarding them the full $62 billion face value of those contracts in late 2008.
Viniar said that Goldman would cooperate with the panel's requests.
Goldman Sachs denied responsibility for the collapse of insurance giant AIG in 2008, saying its
demands for billions of dollars in collateral from the company were a prudent response to deteriorating
financial conditions. Executives at the two companies traded accusations in front of the Financial
Crisis Inquiry Commission yesterday, on the second day of a hearing into the role of derivatives
in the credit crunch.
Goldman had earlier been accused by the FCIC chairman, Phil Angelides,
of behaving like "a cheetah chasing down a weak member of the herd" as it demanded more and
more money to protect itself from losses on AIG's mortgage trading with the bank.
Demands for collateral were generated mathematically, based on calculations about the market value
of AIG's mortgage positions, Goldman's chief financial officer, David Viniar, said. AIG had insured
trading partners such as Goldman against losses on hundreds of billions of dollars of mortgage derivatives.
The insurer believed the eventual losses would be so small that it could make easy money from the
premiums, but it did not count on clauses in the contracts that allowed trading partners to demand
collateral.
It was those demands that crippled the company and forced it into a $180bn (£120bn) bailout by
the US government. An AIG official, Elias Habayeb, told the panel that AIG tried to negotiate with
Goldman and other counterparties to lower their demands, but with little success. "Unfortunately,
AIG had little negotiating leverage," he said.
Even if AIG went bankrupt, the counterparties would get special protection under bankruptcy law.
By March 2009, Goldman had received $12.9bn of the $93bn in money paid to AIG counterparties, the
most of any bank. Mr Angelides again yesterday wondered if Goldman was deliberately driving prices
down on the debt securities linked to the credit insurance sold by AIG. Mr Viniar and other Goldman
officials insisted they based their collateral demands on the price of actual trades – trades the
panel has asked for further details on.
Speculators set up a casino where the chips were the stomachs of millions. What does it say about
our system that we can so casually inflict so much pain?
By now, you probably think your opinion of Goldman Sachs and its swarm of Wall Street allies has
rock-bottomed at raw loathing. You're wrong. There's more. It turns out that the most destructive
of all their recent acts has barely been discussed at all. Here's the rest. This is the story of
how some of the richest people in the world – Goldman, Deutsche Bank, the traders at Merrill Lynch,
and more – have caused the starvation of some of the poorest people in the world.
It starts with an apparent mystery. At the end of 2006, food prices across the world started to rise,
suddenly and stratospherically. Within a year, the price of wheat had shot up by 80 per cent, maize
by 90 per cent, rice by 320 per cent. In a global jolt of hunger, 200 million people – mostly children
– couldn't afford to get food any more, and sank into malnutrition or starvation. There were riots
in more than 30 countries, and at least one government was violently overthrown. Then, in spring
2008, prices just as mysteriously fell back to their previous level. Jean Ziegler, the UN Special
Rapporteur on the Right to Food, calls it "a silent mass murder", entirely due to "man-made actions."
Earlier this year I was in Ethiopia, one of the worst-hit countries, and people there remember
the food crisis as if they had been struck by a tsunami. "My children stopped growing," a woman my
age called Abiba Getaneh, told me. "I felt like battery acid had been poured into my stomach as I
starved. I took my two daughters out of school and got into debt. If it had gone on much longer,
I think my baby would have died."
Most of the explanations we were given at the time have turned out to be false. It didn't happen
because supply fell: the International Grain Council says global production of wheat actually increased
during that period, for example. It isn't because demand grew either: as Professor Jayati Ghosh of
the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent. Other
factors – like the rise of biofuels, and the spike in the oil price – made a contribution, but they
aren't enough on their own to explain such a violent shift.
To understand the biggest cause, you have to plough through some concepts that will make your
head ache – but not half as much as they made the poor world's stomachs ache.
For over a century, farmers in wealthy countries have been able to engage in a process where they
protect themselves against risk. Farmer Giles can agree in January to sell his crop to a trader in
August at a fixed price. If he has a great summer, he'll lose some cash, but if there's a lousy summer
or the global price collapses, he'll do well from the deal. When this process was tightly regulated
and only companies with a direct interest in the field could get involved, it worked.
Then, through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished.
Suddenly, these contracts were turned into "derivatives" that could be bought and sold among traders
who had nothing to do with agriculture. A market in "food speculation" was born.
So Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that
contract can be sold on to speculators, who treat the contract itself as an object of potential wealth.
Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000
to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles's
crop at all.
If this seems mystifying, it is. John Lanchester, in his superb guide to the world of finance,
Whoops! Why Everybody Owes Everyone and No One Can Pay, explains: "Finance, like other forms of human
behaviour, underwent a change in the 20th century, a shift equivalent to the emergence of modernism
in the arts – a break with common sense, a turn towards self-referentiality and abstraction and notions
that couldn't be explained in workaday English." Poetry found its break with realism when T S Eliot
wrote "The Wasteland". Finance found its Wasteland moment in the 1970s, when it began to be dominated
by complex financial instruments that even the people selling them didn't fully understand.
So what has this got to do with the bread on Abiba's plate? Until deregulation, the price for
food was set by the forces of supply and demand for food itself. (This was already deeply imperfect:
it left a billion people hungry.) But after deregulation, it was no longer just a market in food.
It became, at the same time, a market in food contracts based on theoretical future crops – and the
speculators drove the price through the roof.
Here's how it happened. In 2006, financial speculators like Goldmans pulled out of the collapsing
US real estate market. They reckoned food prices would stay steady or rise while the rest of the
economy tanked, so they switched their funds there. Suddenly, the world's frightened investors stampeded
on to this ground.
So while the supply and demand of food stayed pretty much the same, the supply and demand for
derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and
the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US
that the speculators had to slash their spending to cover their losses back home.
When I asked Merrill Lynch's spokesman to comment on the charge of causing mass hunger, he said:
"Huh. I didn't know about that." He later emailed to say: "I am going to decline comment." Deutsche
Bank also refused to comment. Goldman Sachs were more detailed, saying they sold their index in early
2007 and pointing out that "serious analyses ... have concluded index funds did not cause a bubble
in commodity futures prices", offering as evidence a statement by the OECD.
How do we know this is wrong? As Professor Ghosh points out, some vital crops are not traded on
the futures markets, including millet, cassava, and potatoes. Their price rose a little during this
period – but only a fraction as much as the ones affected by speculation.commodities trading have
been stunningly sluggish. In the US, the House has passed some regulation, but there are fears that
the Senate – drenched in speculator-donations – may dilute it into meaninglessness. The EU is lagging
far behind even this, while in Britain, where most of this "trade" takes place, advocacy groups are
worried that David Cameron's government will block reform entirely to please his own friends and
donors in the City.
Only one force can stop another speculation-starvation-bubble. The decent people in developed
countries need to shout louder than the lobbyists from Goldman Sachs. The World Development Movement
is launching a week of pressure this summer as crucial decisions on this are taken: text WDM to 82055
to find out what you can do.
The last time I spoke to her, Abiba said: "We can't go through that another time. Please – make
sure they never, never do that to us again."
Readers know that I have perilous little sympathy for Goldman. However, it is important that investigations
focus on matters likely to hit pay dirt. And despite the sabre rattling at the New York Times and
various websites on the matter of Goldman's collateral marks, we think the ire is misguided, and
this is one of the few cases where Goldman's defense is sound. By contrast, the Commission missed
other smoking guns.
To recap: Goldman, like other major dealers, had bought credit default swaps from AIG to hedge
against some CDO exposures. The case against Goldman, in simple terms, is:
1. Goldman was overly aggressive in marking down the CDOs it had insured with AIG. Remember,
the bigger the losses reported on the CDOs, the more cash AIG would have to pony up to Goldman
2. Goldman's actions contributed to AIG's demise.
Tom Adams, a former monoline executive, and I have performed considerable, in-depth examination
of the AIG CDS on CDOs that were bought out by the Fed at par (the CDOs wound up in a vehicle called
Maiden Lane III). We
debunked this thesis, presented in a New York Times article, in February:
There is a wee problem with this account. Goldman's marks were proven correct. With the benefit
of hindsight, most players, particularly AIG, were in denial….
In late 2007 and early 2008, the monolines were facing similar issues to AIG….The rating agencies
not long afterwards started downgrading AAA asset backed securities CDOs, verifying the "aggressive"
position [monoline short Bill] Ackman and Goldman were taking.
The story also repeats the AIG/Fed flattering claim that these CDOs have "rebounded." We've
discussed long form in other posts that given the continued, serious deterioration in the underlying
mortgages, this notion is simply not credible. The decay in credit quality across the portfolio
is severe, and there has been no "rebound" in prices of severely distressed CDOs….
The jig was up for AIG by January of 2008 and the debate was only one of timing, not of what
the actual outcome would be. Coincidentally, Ambac, FGIC and XLCA were downgraded in January 2008
directly as a result of high expected losses in their CDO portfolios. Any case against Goldman
for aggressive marks against AIG by the SEC or other parties would have take the market environment
into consideration. Across the board, CDOs were causing losses and downgrades for the people who
insured them. It therefore makes plenty of sense that Goldman would be requesting more collateral
for their exposure with AIG.
Yves here. So why were the other AIG counterparties more generous
in their marks than Goldman? They held considerable CDO inventory. If they were the
packager and had marked down their AIG positions, they'd have to provide similar marks to any customer
who had bought a long position in the same CDO from them. And more important, they might be required
by auditors or regulators to reduce the prices of similar CDOs, which would result in losses.
While this line of inquiry looks misguided, others have been neglected. Why has no one questioned
any of the banks of the absurdity of relying on guarantees from the monolines and AIG? Insurance
on subprime was rife with what traders call "wrong way risk": if you needed to collect on your insurance
policy, the very events that would lead you to put in a claim would be likely to damage the guarantor.
(Goldman would assert it did recognize the risk and had bought CDS on AIG, but that is similalrly
absurd: as we saw, an AIG default was a probable systemic event. Those contracts suffered from wrong
way risk too). Put more bluntly, the idea that you could hedge subprime risk, particularly on the
scale Goldman could likely have inferred was taking place, was almost certain to result in non-performance
on the insurance. Did this occur to Goldman's vaunted risk management operation? It might be revealing
to follow that thread.
The Independent highlighted another missed opportunity:
As well as diffusing the spat with the FCIC, Mr Cohn provided new numbers that he said proved
the bank did not "bet against its clients" in the market for mortgage derivatives as the credit
crisis unfolded, as has been alleged…..
He said Goldman had reviewed all the mortgage securities and derivatives it had created since
December 2006, following fraud charges levelled by US regulators earlier this year. It underwrote
$47bn (£31bn) of residential mortgage-backed securities and $14.5bn of collateralised debt obligations,
and took short positions on the products – which would rise in value if the products fell – of
less than 1 per cent of their value.
"During the two years of the financial crisis. Goldman Sachs lost $1.2bn in its residential
mortgage-related business," Mr Cohn told the panel. "We did not 'bet against our clients', and
the numbers underscore this fact."
Yves here. This smacks of being the sort of artwork that is technically accurate in its detail,
but misleading in the picture it presents.
The role of a financial firm is to facilitate commerce, by helping companies raise money, by allowing
investors and savers to deploy funds. But they have lost sight of their role, and many of their activites
at best have no social utility and at worst are extractive and destructive. For instance, short sellers
have a useful role to correct the pricing of instruments that were created for legitimate uses. But
no one until recently would have considered creating positions anew to serve the interests of short
sellers was a good idea. It is pouring talent and capital into purely speculative activities. Bear
Stearns, far from a vestal virgin, refused to work with subprime short John Paulson to create synthetic
CDOs designed to suit his interests.
Now let's look at Cohn's remarks. They aren't just a little misleading, they are a lot misleading.
1. Cohn isolates Goldman's shorting in 2007 and 2008. But Goldman's Abacus program, which was
designed for the firm to establish short positions, started in 2004. Goldman had insured
5 2004 and 2005 Abacus trades with AIG, along with 22 2004 and 2005 CDOs structured by Merrill,
9 2004 and 2005 CDOs structured by other banks, and 2 of its own 2005 cash CDOs. So the roughly $15
billion that Goldman made from AIG is expressly excluded from Cohn's presentation.
2. The comparison is further misleading by comparing its activity over a period of time (underwriting
over a two year period) versus its short position that was presumably measured at a single point
in time
3. What does "short positions on the products" mean, exactly? Technically, if you take down the
short sided of a synthetic CDO, you have short positions in tranches of subprime bonds and other
assets. If you only kept the short side on particular RMBS in that CDO, not all, you are arguably
not short the CDO, but short some bonds. Similarly, Goldman may also have used the ABX or the TABX
indices to establish short positions, so it could be taking a view against the market without being
short the specific transactions it was pedalling.
4. Pray tell, how was this "less than 1%" arrived at? The dollar amount of the short position
was CERTAIN to be small because Goldman used credit default swaps. The cost of establishing a short
position was only 100-140 basis points until spreads started blowing out at the end of 2006 (and
they tightened again in March 2007). The proper comparison would be the notional amount insured versus
the cash position.
The FCIC also bears other signs of being badly unprepared, witness this exchange reported in the
Huffington Post (hat tip reader Francois T):
The panel created to investigate the roots of the financial crisis escalated the government's
assault on Goldman Sachs on Thursday, criticizing the Wall Street firm for failing to turn over
basic documents and accusing it nearly lying under oath.
For a second consecutive day, the bipartisan Financial Crisis Inquiry Commission reiterated
its request for additional data from Goldman, namely figures regarding the firm's derivatives
activities. And for a second consecutive day, Goldman's top executives demurred.
"We generally do not have a derivatives business," David Viniar, Goldman's chief financial
officer, told the panel Thursday under oath.
Goldman Sachs holds more than $49 trillion in notional derivatives contracts, making it the
third-largest derivatives dealer among U.S. banks, according to first quarter figures from national
bank regulator the Office of the Comptroller of the Currency. The commission has found that Goldman
is a party to more than 1 million different derivatives contracts, Commissioner Brooksley Born
disclosed Thursday.
"We don't separate out derivatives and cash businesses," Viniar clarified under questioning.
The derivatives units are "integrated" into the firm's cash businesses, making it difficult for
the firm to isolate its derivatives data, he said.
In January, the panel asked Goldman chairman and chief executive Lloyd C. Blankfein for a breakdown
of the firm's revenues and profits from its derivatives activities. He said the firm would comply.
The commission reiterated that request Wednesday and Thursday.
Viniar said the firm doesn't "keep" records outlining its revenues from its derivatives dealing.
"I am very skeptical that you can't measure these revenues and profits," Born told Viniar.
"I urge you to provide us with this information. It's been about six months we've been asking
for it… and it makes one wonder also why Goldman has the incentive or impetus not to reveal this
information.
"You're suggesting you don't give it to your regulators. You don't put it in your financial
reports… so you don't give it to the market… [or to your counterparties]," Born continued. "And
you're refusing to give it to us. I hope very much that we will see this very shortly."
Viniar took exception to that last comment.
"Commissioner, again, we're not refusing anything," Goldman's chief financial officer said.
"We don't have a separate derivatives business."
Viniar then said that Goldman isn't alone in not breaking out its derivatives-specific revenues
and profits.
Born quickly shot back.
"They don't," Born, the nation's former top derivatives regulator, conceded. "But some other
firms have provided us with that data when we've asked for it, and Goldman Sachs hasn't."
Phil Angelides, the panel's chairman, could barely contain his incredulousness.
"Are you telling me you have no system at your company that tracks revenues or assets of contracts,
and liabilities and payments under contracts?" Angelides asked. "You have no management reports,
no financial reports that track these contracts?"
"I've never seen one," Viniar responded. Pressed further, Viniar added that the firm doesn't
track these things because it's "not meaningful."
Viniar again was asked to provide the data.
Yves here. I have to tell you, this is a ridiculous line of questioning. What the hell is the
FCIC trying to get at? There is NO SUCH THING as a "derivatives business". This in fact illustrates
how industry lobbyists have managed to muddy policy debates, to the advantage of the industry, by
lumping a lot of disparate activities under the derivatives banner.
Goldman no doubt has commodities futures businesses, FX and currency swaps, and corporate and
asset backed credit default swaps activities. I'm sure it also engages in stock and bond index and
futures trading in a number of markets. I'm a big believer in knowing what questions you are trying
to answer when drilling into data, and I see no utility in having an aggregate figure across these
activiites.
And some firms do manage the cash and derivatives businesses of related businesses on an integrated
basis. In particular, it appears from the voluminous Goldman documents released by the Senate that
Goldman ran its cash and synthetic CDO packaging business from the same business unit. This would
not be unusual.
Now the flip side is Goldman clearly does have transaction level information and could no doubt
provide analyses to address specific FCIC questions . But it isn't clear at all what the FCIC wants.
This reminds me of the sort of exercise I'd fight tooth and nail as an associate at McKinsey, because
it was a complete waste of client time and money, that of simply taking whatever data the client
had and cutting it various ways to see if anything emerged. It would provide a lot of charts for
a progress review, and if it produced any insight, it was completely random and could have been arrived
at much more cheaply with a more deliberate approach.
So as much as Goldman is a deserving target, the FCIC appears to be quite overmastered by them,
in part due to insufficient preparation (a function of insufficient budget, staffing, and unrealistic
deadlines) and lack of well honed interviewing skills on behalf of its commissioners.
charles:
'We were gratified to hear that Brooksley Born left Viniar with
the obligation to provide a P&L split. The second this document is public we will
assist the FCIC in decoding it: we are certain that for Goldman, which derives the bulk of its
profits by being the monopolist in wide bid/ask-spread OTC products, most notably CDS, about 80%
of trading revenue will come precisely from unregulated derivatives trading.'
We're getting closer to the question and maybe the answer of why AIG held onto high marks when
others were writing things down. Davidowitz said it yesterday to Aaron Task on Yahoo's Techticker
and I have been saying it on my site for years: The auditors allowed it so the executives could
further an illusion for their own interests. Fraud occurred. The case of AIG/GS is particularly
interesting because it is the same firm, PwC, on both sides. I've written about it extensively
and you have linked to these stories. The crime of the century is
that PwC is still AIG's auditor, earning 205 million from the engagement last year.
Independent Accountant:
Francine:
Agree! That's why I oppose the PCAOB's existence. Would PWC have had the nerve to do what it
did without the SEC, Treasury and NY Fed running interference for it?
Today, during the FCIC's second day of hearings, Goldman CFO David Viniar was forced to provide
additional data about the firm's AIG CDS trades. Luckily the firm kept a record of all entry and
exit points, and thus will be able to confirm just what the P&L of the associated trades is (and
if not, we are happy to teach Goldman's risk department how to use the Bloomberg CDSD function in
conjunction with RMGR run scraping to build a real time CDS portfolio tracker)... Which is ironic,
because when asked by Brooksley Born why the firm has not yet provided a break down of its derivative
revenue Mr. Viniar by all accounts perjured himself. As Bloomberg
reported: "We don't have a separate derivatives business," Viniar told the panel. "It's
integrated into the rest of our business."
Uh... what?
Every evening, a firm's back office (and that most certainly includes Goldman) takes the EOD CDS
and cash marks from every single prop trader, be they equity, fixed income, mortgage, FX, etc. and
using its own integrated pricing system or an outsourced one, compiles a daily P&L which is immediately
sent to the head of the risk division, the head of trading, and other various listserv participants.
And most certainly the traders, who have every interest of knowing just how they did in any given
day as they prepare their bonus speech at the end of the fiscal year. Traders, who combine cash and
CDS trading simply look at a consolidated P&L on the basis of DV01 exposure, which makes the form
of product used completely irrelevant, and is a process whereby every change in 1 basis point in
interest rates is equivalent to a profit or loss. Every single derivative is presented in Goldman's
daily risk summary on a DV01 basis to show not only maximum possible loss, but what the daily profit
or loss may have been. This makes the tracing of both revenue from derivatives and cash products
seamless.
Obviously even the FCIC panel was fully aware of this:
"When you tell us that you don't know how much you make in your derivatives business,
nobody here really believes it," [Commissioner Byron] Georgiou told Viniar. "Nobody here
believes that you don't know how much money you're making on the various aspects of your business,
it doesn't make any sense."
And Goldman's very own documents confirm that the firm, as part of its daily P&L summary, tracks
the revenue by every product line, most certainly including derivatives, as can be seen from the
email by Ki-Jun Bin from July 20, 2007, obtained as part of the Abacus discovery process:
As for Goldman's claim that due to possible commingling of strategies between cash and synthetic
legs, any P&L report will be distorted, you will pardon our French, but this is a pile of crap. Every
time a trade ticket is punched, it is the responsibility of the trader and/or their supervisor to
allocate a trade to a given strategy. In other words, in the P&L of a given group, the 20MM notional
of XYZ CDS would be paired with the 5MM in cash bonds of the firm whose CDS are being referenced,
and then the combined EOD P&L would be derived based on the change in DV01. But leave it to Moody's
to not be aware of this most fundamental principle of how banks organize their risk by various strategies:
"Reporting a revenue number, just the profit on derivatives without looking at cash positions
associated with hedging those, is going to be a highly imprecise exercise," Yavorsky said in an
interview today.
Fine, so look at the cash positions which can all be reconciled. As for commingled legs, it is
again the trader's responsibility to allocate portions of any given trade to various strategies on
a pro rata basis. At the end of the day, it is the "view by strat" of any portfolio, and every single
back office can do this, that provides precisely this data. And out of this view, the cash legs,
if any even exist, can immediately be removed. Of course, Goldman knows this all too well.
Yet all of this is very much irrelevant. As the Abacus discovery taught us, Goldman rarely if
ever actually hedges: recall that the firm's Mortgage group was almost exclusively short in trading
daily derivatives (look at the P&L above and note how many various portiona have the same sign) in
order to hedge existing legacy cash product balance sheet exposure. In other words a forensic analysis
of all Goldman positions in a given period will indicate that the prop trades were mostly unidirectional
and unhedged, making all of Viniar's and Moody's concerns moot. Typically traders put on one position
via either cash or CDS, and on 10%, a combination of both, and wait for it to hit stops on either
side. In other words, 90% of trades will be completely unhedged, with not confusion about what is
attributable to derivatives and what to cash.
We were gratified to hear that Brooksley Born left Viniar with the obligation to provide a P&L
split. The second this document is public we will assist the FCIC in decoding it: we are certain
that for Goldman, which derives the bulk of its profits by being the monopolist in wide bid/ask-spread
OTC products, most notably CDS, about 80% of trading revenue will come precisely from unregulated
derivatives trading. Which, of course, is the real reason why David Viniar is stalling so hard and
doing everything in his power to avoid disclosing that not only would derivative regulation massively
impair the firm's profitability, but that the ongoing lie about Goldman generating just 10% from
prop trading is blatantly false, and in reality the real number is the inverse. Which also explains
why by the time the Fin Reg bill finally passes, the Volcker Plan will be gutted beyond all comprehension
and Wall Street will be back to doing everything it used to do before, but this time with the Frank-Dodd
stamp of approval.Until the next inevitable crash.
williambanzai7:
This is really obstruction of justice. Even if we assume they don't collate the information
(which is absurd to even consider) you know that the Squids have the systems to spit it out every
which way in any form imaginable. This is all consistent with their document dumping tactics.
Their behavior just confirms the obvious conclusion, as usual.
Someone should just nail their asses on this.
I'm not a crook...
Richard Nixon
JR:
Wall Street will be back to doing everything it used to do before, but this time with the
Frank-Dodd stamp of approval-mainly because life support on government bailout will be kept
within the country's financial oligarchy by those who run Wall Street-namely for those Wall Street
bankers who have estates in the affluent enclave of North Salem north of New York City--courtesy
of its leading member, Larry Fink of BlackRock.
Here is how in 2009 thesmartasset.com described "the Rescue Racket": "How
do we repair the flattened hen house that used to be our economy? By hiring a fox - not just to
guard it but to tell us how to rebuild it, carry out the actual repairs and then receive a welcome
inside to feed off the newly fattened hens…
"BlackRock's role blares conflict of interest all over the place - it advises the government
on how to fix the economy, gets huge federal contracts (some of them no-bid contracts) to fix
the economy, and produces big profits for its investors on the changes in the economy. (BlackRock
manages $1.3 trillion of assets.)"
Thus began its article, 'Crony capitalism': BlackRock's profitable conflict of interests
in Obama's rescue plans-sorry it's called 'symbiotic.'
I also liked this take by Dwight Baker posted yesterday on Ambrose Evans-Pritchard's
website regarding the man Vanity Fair's Suzanna Andrews said "may be the most powerful
man in the post-bailout economy" in her April magnum opus, Larry Fink's $12Trillion
Shadow. Wrote Baker:
"MY TAKE ---- What is the shadow about those facts? Larry Fink, created mortgage backed
securities; now the USA has hired his firm to get to the bottom of all the corruption in Fannie
Mae and Freddie Mac. The wolf is in charge of our hen house. Try to figure that one out!!!"
There also are many BlackRock gems in Suzanna's highly laudatory and informative Vanity
Fair article on the enormous power given by the government to Larry Fink, "the Wall Street
Wise Man." Here are a few:
"If Larry Fink is currently 'at the hub of the wheel of American capitalism,' as his friend
Ken Langone, the co-founder of Home Depot and a former director of the New York Stock Exchange,
puts it, he has achieved this position largely in the shadows." (I liked that bit about capitalism.)
Or this take on Fink from former investment banker and author of House of Cards, William
D. Cohan, as quoted by Suzanna: "He's like the Wizard of Oz. The man behind the curtain."
But best of all: "During the next decade (the 80s), Fink would become something of a legend
on Wall Street. Along with Lew Ranieri, of Salomon Brothers, he would be credited with developing
the multi-trillion-dollar debt-securitization market that transformed the face of finance. By
2008 this market-of mortgages, and car and credit-card loans, purchased from banks, sliced into
pieces, repackaged, and sold to thousands of investors-would help bring the economy to its knees.
But long before it spiraled out of control, it was considered an incredible innovation."
And, now, amidst a whirlwind of potential conflicts of interests and through an array of government
contracts, "BlackRock has effectively become the leading manager of Washington's bailout
of Wall Street"-- in charge of cleaning up all the Street's created messes, including
some of its own, for the Fed, the Treasury, the government, and the TBTFs such as Goldman--with
government taxpayer guarantees. BlackRock was selected specifically and noncompetively, as NYFed/US
Treasurer Geithner put it, because "the interest of the American taxpayer would be best served."
Andrews ends her probe of Fink's "role in the crisis" and his "unique risk-assessment system"with
these words: [If}there is indeed an American oligarchy today, it does seem as if Larry Fink wants
to be the good oligarch."
The quadrillion dollar question is: Good for whom?
I have always contended that the SEC's best shot at discovery for gaming and outright ballistic
risk is to follow individual compensation stats. When somebody or a business group starts pumping
big comp numbers, something is going on.
And Viniar is going to tell us that a moneymaker is going to to accept comp which is a best
guess by GS? And GS so loves and trusts their traders that a successful one who leaves to go to
JPM is going to then thank GS by telling them exactly what he was doing?
Everybody knows, everybody would fuck them for nickle. Comp is massively and precisely fit
to the business, and GS wants to be able to review the movement of every penny.
Instead of watching comp, (and the relatively small number of transactions of one trader) the
SEC would rather wait until something is a mega-macro mess, and then confess there is too much
data for them to figure it out in less than 6 months.
The problem with the SEC, besides their passive and aggressive incompetence, is that they are
always 6 months to year behind the WS curve, until they can figure something out.
By then, WS has morphed it into something more "innovative".
stoverny:
Viniar might be the all-time master of obfuscation. I remember his conference call about the
AIG payments, by the time he was done I don't think the analysts on the call knew what day it
was.
It is a rather rare talent, one perfectly suited for his position.
WASHINGTON - A congressional commission pressed Goldman Sachs executives Wednesday to spell out
how much their company has earned from its exotic bets against the housing market, including $20
billion in wagers that helped force a $162 billion taxpayer bailout of the American International
Group.
However, Goldman's president and chief risk officer told members of the Financial Crisis Inquiry
Commission that their company never breaks out its figures that way.
"We can dig and dig and dig," Goldman President Gary Cohn said in sworn testimony. "We won't find
that report."
Many of Goldman's trades with AIG offset protection it wrote for clients on mortgage securities,
but McClatchy reported Tuesday that Goldman wagered its own money on some swaps purchased from AIG.
A special Senate investigations panel disclosed in April that Goldman bet billions of dollars of
its own money on a housing downturn.
The panel, which opened two days of hearings into Goldman's dealings with AIG, has been seeking
information since February on how much the Wall Street giant reaped from bets against the housing
market. Overall, Goldman posted profits of $2.32 billion in 2008, despite the meltdown, and $13.4
billion in 2009. Earlier in June, commission leaders subpoenaed Goldman, accusing the Wall Street
giant of deluging them with 2.5 billion documents.
The commission also heard Wednesday from the man who oversaw AIG's disastrous decision to insure
nearly $80 billion in subprime mortgage securities. Joseph Cassano, who recently was cleared of criminal
wrongdoing after lengthy FBI and Securities and Exchange Commission inquiries, emerged publicly for
the first time since the economic meltdown and said that his ouster might have cost taxpayers tens
of billions of dollars.
Cassano contended that his departure as the head of London-based AIG Financial Products in March
2008 apparently left no one with the expertise to fend off Goldman's demands for billions of dollars
in collateral - demands that helped put AIG into a cash squeeze.
"The taxpayers would have been served better," Cassano said, if the company's chief executive
hadn't requested his resignation. Cassano said that he'd succeeded for months in paring Goldman's
demands for cash and would have continued to assert the insurer's "rights and remedies" in private
contracts, known as credit-default swaps, that effectively insured Goldman against losses on risky
home mortgages.
The commission, which faces a December deadline to deliver a comprehensive report to Congress
on the causes of the nation's financial crisis, has intensified its focus on Goldman and AIG while
examining the role of swaps in mushrooming the dimensions of the economic collapse.
The panel released internal AIG e-mails and other documents tracing Goldman's demands for collateral,
which ballooned from $1.8 billion in July 2007 to $10 billion, which stunned AIG executives. The
two firms haggled for more than a year over the value of underlying mortgage securities as credit
markets froze and the market for the securities shrank and all but disappeared.
Cohn said, however, that the parties' trading agreements stated "very specifically" that if there
were declines in "fair value" on the insured securities, AIG would have to post cash collateral to
make up for the loss. As the securities lost value, he said, eventually trades occurred and "we used
those actual real-live trades as reference points."
Commission members, however, questioned Goldman's motives in pushing AIG. When then-Treasury Secretary
Henry Paulson, a former Goldman chief executive, and other Bush administration officials committed
as much as $182 billion for a taxpayer bailout, Goldman collected $12.9 billion, the most of any
U.S. bank.
In an e-mail on Sept. 11, 2007, an AIG official reported after speaking with a representative
of the French bank Societe Generale that Goldman had shared its "marks," or estimated values of offshore
mortgage securities, with SocGen.
At first, SocGen disputed Goldman's estimates, which were lower than those of most banks, but
by November, it, too, was demanding collateral from AIG. Goldman's value estimates ultimately proved
accurate as the housing market continued to slide.
In pressing for more information from Goldman, Commission Chairman Phil Angelides told Cohn and
Craig Broderick, the firm's chief risk officer: "It's pretty clear that you (Goldman) helped build
the bomb. It's pretty clear that you built a bomb shelter. Now the question I want to get to is,
did you light the fuse?"
The panel detailed one Goldman bet with AIG, dating to 2004, in which Goldman paid the insurer
$2.1 million annually for $1.7 billion in insurance coverage on a so-called synthetic deal in which
neither party actually bought any mortgage securities. In the deal, one of the first in a series
known as Abacus, Goldman wound up collecting $806 million in a negotiated settlement with AIG, the
commission said.
Cohn likened Goldman's bet to buying a fire insurance policy on a home.
Such deals, he said, are "leveraged on the probability your house is going to burn down."
Cassano defended AIG's swap-writing on mortgage securities, saying that none of the securities
acquired on behalf of taxpayers by the Federal Reserve Bank of New York has yet soured.
"I still think that the underwriting standards we had set will support those transactions," he
said.
Cassano, who was flanked by former AIG President and Chief Executive Martin Sullivan and current
chief risk officer Robert Lewis, noted that AIG stopped writing swaps on securities backed by subprime
mortgages to marginally qualified borrowers. The commission noted that AIG's swap exposure tripled
that year from $17 billion to $54 billion and reached $78 billion by 2007.
The federal inquiries into the behavior of Cassano and two other AIG executives related to whether
the company illegally failed to disclose the declining value of the insured securities to shareholders.
Commissioner Byron Georgiou traced the events surrounding a Dec. 5, 2007, investor conference
in which Sullivan played down AIG's housing-related risks, despite a $1.5 billion adjustment due
to collateral calls. Georgiou said commission investigators were told that Sullivan, Cassano and
other executives had discussed risks reaching $5 billion days earlier, prompting Sullivan to remark
at the time that he was "going to have a heart attack."
Sullivan testified that he didn't recall making such a comment.
After a review by AIG's auditor, PricewaterhouseCoopers, the insurer restated earnings two months
later, making an $11.1 billion adjustment for mortgage risks. AIG's stock fell from $50 a share to
$44.
Angelides told Sullivan that he found his "lack of knowledge, lack of recognition disturbing"
and reflective of the "failure of leadership and management" at AIG.
Goldman
Sachs Group Inc. racked up trading profits for itself every day last quarter. Clients who followed
the firm's investment advice fared far worse.
Seven of the investment bank's nine "recommended top trades for 2010" have been money losers for
investors who adopted the New York-based firm's advice, according to data compiled by Bloomberg from
a Goldman Sachs research note sent yesterday.
Clients who used the tips lost 14 percent buying the Polish zloty versus the Japanese yen, 9.4
percent buying Chinese stocks in Hong Kong and 9.8 percent trading the British pound against the
New Zealand dollar.
As the housing crisis mounted in early 2007,
Goldman Sachs was busy selling risky, mortgage-related securities issued by its longtime client,
Washington Mutual, a major bank based in Seattle.
Although Goldman had decided months earlier that the mortgage market was headed for a fall, it
continued to sell the WaMu securities to investors. While Goldman put its imprimatur on that offering,
traders in the same Goldman unit were not so sanguine about WaMu's prospects: they were betting that
the value of WaMu's stock and other securities would decline.
Goldman's wager against its customer's stock - a position known as a "short" - was large enough
that it would have generated at least $10 million in profits if WaMu collapsed,
according to documents recently released by Congress. And by mid-May, Goldman's bet against other
WaMu securities had made Goldman $2.5 million, the documents show.
Goldman's bets against WaMu, wagers that took place even as it helped
WaMu feed a housing frenzy that Goldman had already lost faith in, are examples of conflicting roles
that trouble its critics and some former clients. While Goldman has legions of satisfied customers
and maintains that it puts its clients first, it also sometimes appears to work against the interests
of those same clients when opportunities to make trading profits off their financial troubles arise.
Goldman's access to client information can also give its traders an advantage that many of the
firm's competitors lack. And because betting against a company's shares or its debt can create an
atmosphere of doubt about a company's financial standing, Goldman because of its size and its position
in the market can help make the success of some of its wagers faits accomplis.
Lucas van Praag, a Goldman spokesman, declined to say how much the firm earned on its bets against
WaMu's stock. He said his firm lost money on its bets against the other WaMu securities. In an e-mail
reply to questions for this article, he said there was nothing improper about Goldman's wagers against
any of its clients. "Shorting stock or buying credit protection in order to manage exposures are
typical tools to help a firm reduce its risk."
WaMu is not the only Goldman client the firm bet against as the mortgage disaster gained steam.
Documents released by the Senate Permanent Subcommittee on Investigations show that Goldman's mortgage
unit also wagered against
Bear Stearns and
Countrywide Financial, two longstanding clients of the firm. These documents are only related
to the mortgage unit and it is unknown what other bets the rest of the firm made.
Goldman also bet against the
American International Group, which insured Goldman's mortgage bonds, and National City, a Cleveland
bank the firm had advised on a sale of a big subprime mortgage lender to
Merrill Lynch.
While no one has accused Goldman of anything illegal involving WaMu, National City, A.I.G. or
the other clients it bet against, potential conflicts inherent in Wall Street's business model are
at the core of many of the investigations that state and federal authorities are conducting. Transactions
entered into as the mortgage market fizzled may turn out to have been perfectly legal. Nevertheless,
they have raised concerns among investors and analysts about the extent to which a variety of Wall
Street firms put their own interests ahead of their clients'.
"Now it's all about the score. Just make the score, do the deal. Move on to the next one. That's
the trader culture," said Cornelius Hurley, director of the Morin Center for Banking and Financial
Law at
Boston University and former counsel to the Federal Reserve Board. "Their business model has
completely blurred the difference between executing trades on behalf of customers versus executing
trades for themselves. It's a huge problem."
Goldman has come under particularly intense scrutiny on such issues since the financial and economic
downturn began gathering momentum in 2007, in part because it has done so well, in part because of
the power it wields
in Washington and on Wall Street, and in part because regulators have taken a keen interest in
its dealings.
The Securities and Exchange Commission filed
a civil fraud
suit against the firm last month, contending that it misled clients who bought a mortgage security
that the regulators
said was intended to fail. Goldman has said it did nothing wrong and is fighting the case. Legislators
in Washington are also considering financial reforms that limit potential conflicts of interest in
the way that firms like Goldman trade and invest their own money.
Still, Goldman's many hats - trader, adviser, underwriter, matchmaker of buyers and sellers, and
salesperson - has left some clients feeling bruised or so wary that they have sometimes avoided doing
business with the bank.
When the SEC filed its civil suit against Goldman, the firm and its stalwarts argued that the firm
would come through with its reputation intact.
Anyone who watched Goldman over the last decade
had reason to doubt that cheery view. The firm has undergone a remarkable change, from one that was
notoriously aggressive but had a keen sense of where the boundaries of propriety lay, to one out
to maximize its bottom line with little regard to the long-term consequences. Greed and short-termism
won in 1999 when the firm went public. At most times in the preceding 15 years, if not even earlier,
Goldman could have gone public or sold itself, producing a nice killing for its current partners.
But most saw Goldman as an institution and felt that selling it would be an act of opportunism, of
cashing in on what others had built without compensating them fairly.
I would occasionally have dinner with a senior staff member, one in an influential position that
put him regularly in front of the CEO and the management committee. He had been with the firm a very
long time and had institutional memory, a very scarce commodity. He was always discreet, but his
unhappiness with the devolution of the firm was palpable. He did not have much respect for Hank Paulson,
but it appeared the other members of the management committee, particularly John Thornton and John
Thain, were thoughtful and acutely aware of the tradeoff between short-term profits and maintaining
the firm's franchise. By contrast, after Blankfein took the helm and the management team came to
be dominated by traders, I could see him do everything in his power to steer our conversations away
from Goldman, even the Goldman of long ago. And it became obvious why: the times we did wind up on
that topic, he would be unable to contain his contempt for the people leading the firm, and the damage
he was convinced they were doing to the firm's culture, which he was also certain would play out
in its reputation. It has taken a few years for him to be proven correct.
The New York Times chronicles how some of the firm's
corporate
clients are increasingly uncomfortable with how Goldman will use the information the firm gains
from its business dealings (meaning its corporate finance relationships and underwritings, where
the banker is expected to treat its customers as a relationship, not a trade) for its own profit,
particularly to bet against the client. This would have been completely unthinkable when I was briefly
at Goldman (the early 1980s);
Sidney Weinberg would
spin in his grave if he could read this story.
The article describes in particular how the firm both represented WaMu as a manager of its mortgage-backed
securities offerings, yet shorted its bonds and its stock. Goldman maintains, in effect, that the
short wasn't "personal" but was part of a broader portfolio management strategy. If you believe that,
I have a bridge I'd like to sell you.
The suspicions of WaMu's CEO Kerry K. Killinger appear well founded:
In that [e-mail] message, Mr. Killinger noted that he had avoided retaining Goldman's investment
bankers in the fall of 2007 because he was concerned about how the firm would use knowledge it
gleaned from that relationship. He pointed out that Goldman was "shorting mortgages big time"
even while it had been advising Countrywide, a major mortgage lender.
"I don't trust Goldy on this," he wrote. "They are smart, but this is swimming with the sharks."
One of Mr. Killinger's lieutenants at Washington Mutual felt the same way. "We always need
to worry a little about Goldman," that person wrote in an e-mail message, "because we need them
more than they need us and the firm is run by traders."
Yves here. WaMu is not an isolated case. I have had a former financial firm executive tell me
that when Goldman was pitching to manage an offering, its executives asked point blank, "Are you
shorting our company?" They did not get a straight answer, which they took to mean, "Yes".
The article also contends that the firm encourages its staff to ignore conflicts of interest,
a charge the firm's spokesman, Lucas Van Praag, denies:
When new hires begin working at Goldman, they are told to follow 14 principles that outline
the firm's best practices. "Our clients' interests always come first" is principle No. 1. The
14th principle is: "Integrity and honesty are at the heart of our business."
But some former insiders, who requested anonymity because of concerns about retribution from
the firm, say Goldman has a 15th, unwritten principle that employees openly discuss.
It urges Goldman workers to embrace conflicts and argues that they are evidence of a healthy
tension between the firm and its customers. If you are not embracing conflicts, the argument holds,
you are not being aggressive enough in generating business.
Yves again. The article alludes to two of the 901 pages of exhibits released by the Senate Permanent
Subcommittee on Investigations. I'm puzzled that the web version did not point to them directly;
they are a revealing example of Newspeak in action (click to enlarge, or
see pages 259-260):
Yves here. Van Praag reportedly contends, "This policy and the excerpt cited from the training
manual simply reflects the fact that we have a diverse client base and give our sales people and
traders appropriate guidance."
Ahem. Anyone who has lived in Corporate America will recognize these pages as CYA. One thing Goldman
has long-ago mastered is getting its story straight BEFORE it engages in questionable behavior. I
saw that first hand when I worked for Goldman in the 1980s. For instance, I once walked into the
Syndicate department well after normal hours for that group to find two junior staffers being briefed
by one of the most powerful partners from Goldman's main law firm, Sullivan & Cromwell (i.e., someone
who would normally never deal with people so far down the totem pole) walking them through the party
line on an upcoming deal. It was an unusual type of underwriting; the head of Syndicate had crowed,
"I'm going to make that stock sing!" but that was not the sort of thing you say to the SEC should
they happen to come calling.
Similar legalistic positioning in the excerpt is obvious to anyone who has an operating brain
cell. The Goldman argument is that trading decisions are not based on "any one piece of data" which
seeks to claim that no one piece of information (which of course could come fro a client and hence
constitute front running or simply abusing a presumed relationship) would lead to a trade. Huh? Traders
often jump to take or lighten a position PRECISELY because they have gotten a SINGLE piece of information
which they see as significant and believe the market does not have yet.
The story accounts other examples of less than savory conduct by Goldman. One case involved the
auction rate securities market. Goldman refused to to waive a contract provision, as other banks
had, after they abandoned the auction rate securities market. The article does not state as clearly
as it might that the reason the issuer in question, a hospital, wanted a waiver was because it was
paying a penalty rate precisely because Goldman and other firms who had once been willing to act
as market makers, were refusing to do so. This is more serious than it might seem because an underwriter
is expected to continue to make a market after an issue is sold; this is an important service to
investors and issuers. But there is no contractual obligation, even though it is widely regarded
as an essential part of the business. Hence the hospital's outrage when Goldman welshed on its part
of the deal but insisted the hospital adhere to its contract.
Another juicy item: Goldman recommended shorting the debt of six states….the same year it had
underwritten bonds for those states, which meant it sold them to (presumably) other investors.
The article describes more incidents: how Goldman sold a notoriously toxic CDO, Timberwolf, to
a Bear Stearns hedge fund (the one that blew up in July 2007, ushering in the first acute phase of
the credit crisis) and then shorted Bear's stock, and how aggressive collateral calls might have
led to the demise of Thornburg Mortgage.
While Goldman is a sufficiently embattled firm these days it is well nigh impossible for outsiders
to get candid answers, the firm's conduct in the Senate hearings and some of Lloyd Blankfein's star
turns give the impression that the firm's moral compass is so badly broken that its leadership and
many of its employees genuinely thinks there is nothing questionable about this type of conduct.
And if that is true, the firm is beyond redemption.
Vampire Squid is the product of fiat financial system and deregulation. They tried to hack financial
system to extract parasitic rents and enjoyed success beyond imagination, but this is not a computer
were damage is limited. This is a society that sustained damage. So they cut the branch on which they
were sitting. Now they need to be shut down and perpetrators need to go to jail. But it's easier said
than done. Those are Mafiosi, or financial terrorists in the most exact meaning of this word including
the secrecy of the planned operations. To penetrate inner circle of those companies you need three letter
agencies and covert agents. Regular investigations will be subverted.
This whole thing was a fraud of absolutely massive proporions. Some charges need to come, and
Goldman among others was very deep into alot of grey areas. If you have ever heard the term 'regulatory
arbitrage' you know that these guys were playing a dangerous game. Whether that behavior is actually
illegal needs to be tested in a court. By the way alot of these things need to regulated away.
Synthetic CDOs provide completely useless leverage in most cases, they are not a mechanism of
capital allocation and are not always used for risk mitigation, they were generally directional
unhedged trades. Let the charges come, let the rules be tested in court and let the regulation
come for poor products. No one wants to see this thing happen all over again.
Regulatory arbitrage occurred between insurance companies and Investment Banks. Insurance companies
had different ways of valuing credit default protection, thus giving rise to the "Arb" which you
refer to. The monoline insurance companies (AIG, AXA, ACE, AMBAC) always sold CDO tranche protection.
I always thought it was underpriced. I noticed that AIG was on the other side of every single
deal. When I raised this issue at Bank of America in 2001 I was told that I didn't understand
this, AIG was AAA, and besides "we are making money". The guy who told me this was later fired
for, among other things, selling equity CDO tranches to a retail Italian Bank - BoA settled for
$80MM.
Peter Marlow:
Goldman is a criminal enterprise. The charges and investigations will make this obvious. And
then, another obvious conclusion will follow:
"a product of pure intellectual masturbation…which has no purpose, which is absolutely conceptual
and highly theoretical and which nobody knows how to price."
I am wondering if the investors who bought the CDOs share his sexual fantasy?
I wish people, media in particular, would stop with the buzzwords and stupid comparisons and
tell people what really happened. CDOs have an implied default rate in them at which investors
of different tranches break even. However since each underlying mortgage is its own universe those
are very difficult to guess. But there are two big factors which really matter, one is the overall
direction of the economy and employment in particular which dictates housing prices and cash on
hand to make payments. The second is correlation between the different mortgages. These led to
two fatal assumptions in the way these things are priced. The two assumptions were that the economy
would stay strong and this would support housing prices and ability to pay, the second was that
mortgages in different geographical areas would have largely uncorrelated default rates. So if
people in AZ couldn't pay, your people in Florida probably could, your CDO is more robust because
it is diversified. There is huge amounts of historical data available about default correlations,
home price behavior during different phases of the business cycle, etc.
What people didn't realize is that when they were making these products, they made so many
that they fundamentally altered the forces that created the data they were using to price the
securities. Basically they unwittingly created a circular system that put the economy
into seemingly virtuous cycle of rising home prices, strong economic performance, high employment
etc. this reinforced the original assumptions and people engaged in more of this behavior.
Of course we all know now that it was a vicious cycle of increasing
risk and artificial returns that created an ever more unstable system. finally the wind blew and
the straw house fell down.
Until it all fell apart people thought they could price these things. The theory of it is all
there, but the theory of it is only as good as the data that theoretical models employ, and in
their circular would their own activities affected the integrity of the data.
Synthetic CDOs are much more theoretical because they were one more step removed from reality.
They just became a numbers game where you customized an asset to beat a model that a ratings agency
was using. It really is a problem when the fox and the hound get too cozy, they are supposed to
be adversarial. It's what keeps us all safe.
George Macdonald:
It was neither Freddit not Fannie who knowingly wrote bad mortagages, securitized them, and
then paid off the ratings agenicies to give them AAA ratings.
True, Freddie and Fannie were doing the bidding of the Bush administration to suck some of
those bad mortgages --- but they were not the root cause of the problem. It was the criminals
at Countrywide, GS, Citibank, etc....
George Macdonald:
The Wall Street Financial Houses committed fraud on a massive scale -- Goldman was just one
of many. And, that massive fraud brought this nation to its knees -- and it may never recover
from the damage that it (and the Bush Administration) have done to it...
The trouble is: NONE of them have admitted to doing anything wrong. And, most importantly,
they are continuing the practices that got them and us into this financial crisis...
There is only one thing that will work: enforce the law: First, put some of the higher ups
in jail and also take away the money that they stole from innocent investors who trusted the information
that they were given when they bought into the scam these guys were running.
For those who cry" "Buyer Beware!" (i.e., that it is up to the buyer to figure out if he is
being scammed): The NYSE cannot exist without some assurance that the representations made for
the securities that are being sold are as they are represented to be. Anything else is fraud.
Aleynikov case represents certain danger for GS as he probably knows a lot about real usage of the
platform. Information that can be leaked in this case might complicate GS other suits.
The reputed "Goldman Sachs Spy," Sergey Aleynikov, was indicted today on charges that he stole
the secrets to the bank's closely guarded
high-frequency
trading platform.
(Scroll down for a link to Aleynikov's wacky home videos and ballroom dancing clips.)
The platform, according to the indictment, gave Goldman Sachs a "competitive advantage" by executing
high volumes of trades at breakneck speeds. Aleynikov, who could face 25 years in jail, was in charge
of a group of computer programmers who maintained the bank's trading platform. The platform reportedly
generated "many millions" in profits each year.
According to the indictment, Aleynikov went to work for Teza, a newly-formed firm in Chicago,
in April of 2009, and was tasked with developing a high-frequency trading platform for the company.
With a pay package totaling $400,000 at Goldman Sachs, Aleynikov was certainly already well-compensated.
Teza, however, offered him a guaranteed salary of $300,000, a guaranteed bonus of $700,000 and a
profit-sharing agreement that was worth about $150,000.
Prosecutors from the U.S. Attorney's office in Manhattan allege that Aleynikov, after 5 p.m. on
his last day at Goldman Sachs, "executed the transfer of thousands of lines of source code for Goldman's
high-frequency trading system." And, the indictment alleges, he skirted Goldman's security apparatus
by uploading the source code files to a server in Germany.
Aleynikov then encrypted the files and, several days later, logged onto a computer from his home
in New Jersey and downloaded Goldman's proprietary data. He then carried that data into a meeting
with Teza workers, according to the indictment.
In November, the government indicated that it was discussing a plea deal with Aleynikov that might
have resulted in little or no jail time,
reported
Reuters.
Zero Hedge wonders whether or not a trial will reveal some crucial details of Goldman Sachs's
secret sauce:
"The indictment comes at a time when most observers had expected this case would be settled quietly,
as the prevailing sense was the Goldman had no actionable case, especially after numerous months
of court delays. The question now is how much information will be
made available for discovery, and how much will be filed under Seal so that no additional Goldman
HFT secrets enter the public domain."
"In our experience, Buy Side investors today don't do business with GS or the other major Sell
Side firms because they trust them. They do business with firms like GS because they believe that
the firm has better access to information than do the other dealers in the marketplace.
The sad fact is that the trust that once made firms like GS and
the old JP Morgan & Co special has long since been lost, leaving the marketplace that remains
a hideous, barbaric place that is bereft of honor - and a source of infinite risk to the participants."
If Goldman Sachs settles or loses at trial, "people are going to ask, 'Am I one of the clients
who Goldman does deals for, or am I one of the clients Goldman does deals against?' " Dombalagian
said. "There's the saying that if you don't know who the mark at the table is, you're probably
the mark."
The GS attitude toward their clients brings to mind Animal House where Otter (I think) said,
"You f'ed up; You trusted us."
bacala:
Sounds kinda like Madoff. From what I understand, some clients knew he was a crook, but thought
he was their crook…
Fritzskelly:
Having done considerable business with the Squid in the past, I can say with no hesitation
that they will not be getting the phone calls in the future.
Trust is totally gone.
Mannwich:
They are likely to become as toxic as the crap they were peddling to their clients and betting
against.
cleargulf:
The GS crowd reminded me of a bit of Roman history. Crassus was one the 1st Triumvirate.
From wikipedia:
Most notorious was his acquisition of burning houses: when Crassus received word that a house
was on fire, he would arrive and purchase the doomed property along with surrounding buildings
for a modest sum, and then employ his army of 500 clients to put the fire out before much damage
had been done. Crassus' clients employed the Roman method of firefighting-destroying the burning
building to curtail the spread of the flames.
Manny – that would depend on whether or not the bulk of GS's "clients" are themselves trustworthy
though right?
Rightline:
I am not trading this, but.. Is GS being unworthy of trust really a revelation? This too shall
pass. Gee, I havent heard MSM burying Toyota once since this story broke. Something else will
be orchastrated to get all hot and bothered about. It may take a litle longer, but the well timed
hue and cry shall pass. The bill will pass and everyone will move on.
Interesting that the SEC incompetence and malfeasanece story lasted a nanosecond. Prosecute
those SEC bastards for theft by getting paid for surfing porn all day long while the country went
to hell. It is becoming all too common now for the self serving investigations and prosecutions
being initiated. Chris Christie discovers corruption just in time to be elected. Cuomo miraculously
gets the goods to make Paterson go away. Give me a break, this crap has been, and will continue
to go on forever. The selective enforcement is almost as bad as the offfences.
Todd in SM:
The intriguing part of the quote for me is the final section "leaving the marketplace that
remains a hideous, barbaric place that is bereft of honor - and a source of infinite risk to the
participants." That has been the biggest/scariest revelation for a "small fish" like myself. How
much more volatility this current secular bear market has in store for us keeps me up at night,
so to speak.
RW:
I think I disagree with Walen's diagnosis. It is quite possible to argue that the exposure
of GS, JPM et al helps restore the rationality of a market which has too long suffered from an
inadequate appreciation of risk. The argument is here at
http://tinyurl.com/2dfyubo (ht Robert's
Stochastic thoughts and Brad DeLong). The money quote:
"Goldman Sachs has damaged its reputation as a fair broker with this scam. I think that is
an excellent thing, because that reputation caused people to trade if they thought they were smarter
than average. Fear of being cheated by Goldman Sachs makes up for irrational over confidence and
will lead the economy towards where it would be if everyone were rational. To put it briefly,
what's bad for Goldman Sachs is good for the world."
cognos:
So people like Fritzkelly, who says "they wont be getting calls in the future"… Hmm, this makes
no sense. This seems like a comment from someone NOT in this business.
I have $1B of product, like keep it simple and call it a "stock", I want to buy… do I call
Goldman? Why not… I just want the best price. I call 4 dealers and ask them to make markets in
$1B lots of QCOM. Each gives me a buy/sell price. Say 37.50/38.50.
Someone on this board wants to give away your money and your clients money to some other firm
because they dont like Goldman? Personally… I take the best price. Its commoditized.
Thing is… what GS is good at…. is being the best buyer when THEY want to be and being the best
seller when THEY want to be. But bid/offer that is hit/lifted is just the BEST PRICE for each
client. Why complain if GS gave you the best price?
I have NEVER worked with an institutional client that didnt get 3-5 markets made in most trades.
Some clients hit every dealer (bc they want even more size). This basic "lack of honor" works
both ways. Clients used to be clubby with firms and hand them constant deals with no price checking.
It used to be an "honor" filled club of 10x the fees and 10x the liquidity spreads. Its a GOOD
thing that this is gone.
NormanB:
Goldman works for Goldman, always has and always will. All else is commentary.
Casual Onlooker:
I'm wondering how much of this lack of honour has to do with the "arrogance of specialized
knowledge"?
I was struck by a comment made by a wall street type when being interviewed by NPR about the
president's recent finacial speech. With an obvious air of disdain the broker stated that (paraphrased)
the president should stick to "talking about things he understands". The expertise of the president
is immaterial and off-topic, what was striking and material was how apparent it was that the broker
felt like he and those like him were superior in some fashion because he knew more about a specialized
topic than someone else.
This is not unique to wall street, I've found it quite common in my profession (computers).
When I was an IT Director a number of years ago, I had to deal with an arrogant tech who had very
strong opinions about what programs a particular doctor should be able to access. His premise
was that the doctor wasn't able to use the particular program, and that only someone that "was
smart enough" should be able to access it.
The point was that the tech had specialized knowledge that the doctor didn't, so the tech's
premise was that the doctor wasn't as smart as him. Of course this is ridiculous, knowledge and
intelligence are different things. I doubt anyone would think a computer tech could step in and
do surgery, but think of how many times we hear of people being called stupid, or idiots because
they didn't understand something.
I can't tell you how many times I've seen this behaviour, it is quite common. What I have also
seen is as people become more knowledgeable, the power of those those with specialized knowledge
diminishes. The more transparent the knowledge, and the better those who don't understand become
knowledgeable, the less arrogant those holding specialised knowledge are.
"We all seem to suffer a common, self-inflicted wound that can be summed up simply as a lack
of trust. The lack of trust, in our view, stems from the breakdown in the rules which once governed
and also limited the actors in the world of finance, particularly the rules regarding the creation
and sale of securities. Banks, funds and the rating agencies all share the blame, but none more
than the politicians in Washington and the Congress who enabled this mess. Remember that as you
watch the hearings before the Senate Permanent Subcommittee on Investigations this week."
cognos:
Hammer…. go try and trade $10B/wk in product with BBH. Doesnt exist. They dont have it, cant
support it.
Lots of clients in this world run $100-500B portfolios. Insurance companies, large banks, foreign
sovereigns, etc. These clients put $1-10B PER WEEK to work. This is why they trade things like
"structured synthetic CDOs".
impermanence:
How it is possible that anybody in their right mind could actually trust anybody in financial
services?
You have undertaken to cheat me. I will not site you, for law takes too long. I will ruin you.
Sincerely yours,
Cornelius Vanderbilt.
-----------– Old Daniel [Drew]pulled out his proverbial red bandanna handkerchief to mop his brow before
sitting down with some fellow speculators. A slip of paper bearing a 'point,' or tip, fell to
the floor; a bystander put his foot on it. As Drew left, apparently not noticing the incident,
the others pounced upon the piece of paper, which proved to be an order. They bought Erie stock
in large quantities, and were soon gulled.
-----------– http://www.time.com/time/magazine/article/0,9171,747147-3,00.html
-----------–
Whatever exists has already been named,
and what man is has been known;
no man can contend
with one who is stronger than he.
The more the words,
the less the meaning,
and how does that profit anyone?
Lloyd really needs to brush up on his Ecclesiastes.
constantnormal :
If you read some history, the thing that jumps out at you about the situation leading up to
the Great Depression is that Wall Street and the financial industry were totally amoral, with
attitudes like cognos' being the rule instead of the exception. As things came apart, all the
convoluted beggar-thy-neighbor deals came apart and the entire economy collapsed into a jumble
of distrust.
Trust is the necessary ingredient that makes economic transactions possible. If neither side
in an economic transaction trusts the other, if fear overcomes greed, the transaction does not
get made.
THAT, in a nutshell, is the thing that destroyed the economy in the 1930s. And when there is
enough pain, evenly distributed over all the world, we will walk that path again, until people
who are fearful and distrustful enough bond together and form a framework of protection, not out
of trust, but out of distrust and fear.
We have some distance to go in that journey, but I have no doubt that we will get there. I
don't know what the nature of the next fraud will be, whether it will be an individual fraud,
some "rogue trader" or a con man like Madoff, or some corporate monster that sees only its own
betterment, and ignores any rules that might get in the way. As we progress to the inevitable
end point, more and more of the players (including the public at large) will join in the get-mine-while-the-gettin-is-good
mentality. With a huge demographic bubble of boomers fast approaching retirement with their meager
savings decimated, they will be the front-line troops, eager to do whatever it takes to "get well".
In the end, all there will be is failed frauds. Enjoy the ride.
@constant: Correct x10. Simple and direct. But it's more like gangrene or diabetes than H1N1.
A long slow process.
Great book a few years back "Trust" by Fukuyama (SP?). Made that point in great historical
detail.
Leo Sands:
"They do business with firms like GS because they believe that the firm has better access to
information than do the other dealers in the marketplace."
What kinds of information? Are they insider information? Clients will not consider where the
information comes from. The clients' main objectives are to invest to have returns. They should
also recognize that the investment banks' benefit is always in a higher place than their own benefits.
There are analysts, own trading desks, brokers, dealers, money management etc in an investment
bank. Large chunk of money earned are from own trading(in the expense of shareholder & taxpayer),
commissions(sometimes selling products seems to be AAA), management fees(regardless of performance)……
It is naive to believe that there are not conflicts of interest, client/client or bank/client.
The IBs are the financial armies of USA. They are essentials to US companies and federal government.
Through them, the money from all over the world flows into government debts, corporate debts/funds.
They are the heart and the blood vessels of USA.
In coming eras, government will even more depends on the help of the banks. As many regional
banks and some large investment banks collapsed in the past years. The banks remained will even
earns more money while the federal debts balloon.
The banks are greedy. However, I think the most immoral group of the Wall Street are the rating
agencies!
constantnormal:
"Why complain if GS gave you the best price?"
This is the exact same argument that brought Bernie Madoff so much business - people suspected
that he was doing something unsavory, front-running, whatever, they didn't care, so long as they
got a "better deal". In fact, I suspect that many of the victims didn't want to know the details,
but took some secret pleasure at getting some "unfair advantage" themselves. This is how it spreads.
Where they lacked imagination was in the ability to conceive that THEY might be the ones providing
the consistent superior returns.
"Why complain", indeed? Go ahead and give an amoral monster your business, it's all good, right?
cognos:
You guys need to re-read your history… what caused the Great Depression was poor policy responses
by the govt and central bank (many of which you guys seem to recommend regularly).
Specifically - interest rates too high, allowing banks to fail broadly, worrying about prices/inflation/gold.
So then a genius of a guy named Keynes wrote a book. Today we follow many of his best inventions
and generally, they keep us from Great Depressions (pretty regular in the 1800s as well).
Its really easy to "witch hunt" on Wall Street after they sold people products THAT THEY WANTED!
They did the same thing in the late 90s with dot coms. What about realtors? And real-estate developers?
They seem like the real culprits. But who cares? People are adults. You guys are shocked, SHOCKED!
that sometimes (especially right before a big economic crisis) Goldman Sachs and others sell products
that perform poorly. Really?
Its ignorance of the most dangerous kind.
cognos:
Goldman sold plenty of "toxic assets" (as even BR still calls them) … 1 yr ago in early 2009…
to clients who are up 300%, 500%, 1000% on the purchase.
I bet you can find emails saying certain companies and assets are "dogs" or "shitty deals"
that are up 5-10x over the past year.
The difference is not Goldman… the different is NOT the quality of the deal… the difference
is the timing in the cycle. Duh! Welcome to financial markets.
Leo Sands:
I think banks like GS have to be broken into smaller independent companies.
Regulations are also needed to cope with the products which the banks sells. Toxic assets are
like drugs. Government entities have responsibilities to regulate them or even prohibit them.
The Obama's administration is in right direction to regulate not only the financial intermediaries
but also the self-claimed independent credit agencies.
Personally, I think the reputation damage to the credit agencies are more severe than that
of banks. Hey, who didn't know that bankers' reputation before they deal with them? They gets
what they expected but at the same time, sadly, what they unexpected – risks which are understated
by the bank itself and by the credit agencies.
RW:
"…what caused the Great Depression was poor policy responses by the govt and central bank …"
This is circular and specious: What were the govt and central bank responding to in the first
place? A functional financial sector and an economy that is providing do not need "responses"
so what was it? Just a matter of timing or a matter of the Ponzi finance boil bursting into its
crescendo of pus and blood?
Timing is relevant to the game of musical chairs but economy is the structure of livelihood;
best to learn the difference if only to fully understand GS et al's marginal relevance to the
latter.
Pat G.:
It's Robin Hood in reverse. The banks want your money for profits. The government wants the
banks money for contributions. And we are the schleps that grease the wheels which make it all
happen. As long as it remains that way the banks and the government will do whatever is in their
power to maintain that status quo. Pure and simple.
Mr. Blankfein said. "We have been a client-centered firm for 140 years, and if our clients
believe that we don't deserve their trust we cannot survive."
I was lucky to get out of high school but with that said i have been watching and reading and
i have been trying to "think" and not just repeat the thoughts of others……..We have LEH. We have
AIG . We have Enron and now we have the most revered Goldman Sachs. …..We are in a state of anarchy
yet we are to dumb and stupid to know it…..Its much like a "bubble" that we can't detect until
it bursts. We need a TV special , maybe a PBS series modeled after the show " Meeting of the Minds
" . We don't need a Senator Dodd or a Chris Cox…..We need the Einhorns and the Bill Flecks of
the world. We need the small group , the correct group, that were warning all along…The business
schools are lost, the law schools are lost. CNBC is lost and our government is lost . 60 minutes
is lost…Ritholtz was the brains , energy and demeanor to act as host …just as Steve Allen acted
as host of the PBS series " Meeting of the Minds"
cognos:
Troubled T –
Nah, were not "all lost" as you say.
Most people have a highly cyclical reaction function. 3 years ago they thought everything was
great. Today everything is lost (federal debt, banks, housing, jobs). Thing is its already over
and the next boom is on the way.
Get out of thinking like everyone else and you'll see opportunity in life and business just
about everywhere.
troubled times:
Most people just repeat what they heard last…Most people vote party line…Most people watch
stupid TV…Most look for leaders who use the same line " Follow me, accept my word. join my flock
and i will show you never ending happiness and joy "..Wall street does that….Government does that…The
church does that…Ali did that….They ALL do that… …….The next boom ?
Oh i see, more spending of other peoples money on crap you don't need……
nobetanofun:
"cleargulf : The GS crowd reminded me of a bit of Roman history. Crassus was one the 1st Triumvirate.
From wikipedia:
Most notorious was his acquisition of burning houses: when Crassus received word that a house
was on fire, he would arrive and purchase the doomed property along with surrounding buildings
for a modest sum, and then employ his army of 500 clients to put the fire out before much damage
had been done. Crassus' clients employed the Roman method of firefighting-destroying the burning
building to curtail the spread of the flames."
don't forget how Crassus met his end – he over-reached and took on the Parthians and lost.
They decided to tailor his punishment and poured molten gold down his throat.
It looks like FT shills try to disorient public. There is just too much dirty underwear in this
case for Goldman to fight it. There is just too much of anger against GS and "whose f*#king guys" (financial
terrorists) as Jon Steward put it to be ignored even by the corrupt, controlled by Wall Street administration.
Lloyd Blankfein will be extremely lucky just to lose his current position.
One person who received a call from the Goldman chief said he was told the regulator's case against
the bank was politically motivated and would ultimately "hurt America".
Mr Blankfein mounted the campaign to bolster the confidence of its business partners in the wake
of the SEC charges that the bank had sold investors a security designed to fail.
In conversations with private equity executives and others, Mr Blankfein left clients with the
impression that he was eager to fight the charges in court. The SEC has requested a jury trial.
"He was very aggressive," said one person called by Mr Blankfein on Wednesday. "He feels that
the government is out to kill them, that they are under attack and the whole thing is totally political."
Mr Blankfein said the SEC action "hurts America", this person said.
Mr Blankfein did not initiate talk about the politics or timing of the SEC charge, announced on
Friday. A person familiar with the matter said: "Clients brought up the politics . . . and there
was a discussion around the context of what happened."
The Goldman boss's charm offensive with clients came as it emerged that Fabrice Tourre, the employee
also named in the SEC case, would appear with him next week before a US Senate panel investigating
Wall Street's role in the financial crisis.
Mr Blankfein said a female staffer at ACA, the manager of the security, knew that Paulson & Co
intended to bet against the transaction, according to a person who was called. This goes against
the SEC charges that Goldman failed to disclose that Paulson was taking the opposite side of the
deal. Paulson's short position yielded it a profit of about $1bn while investors who bought into
the security lost $1bn, the SEC complaint says.
Goldman this week bolstered its legal team by hiring Greg Craig, a former counsel to the Obama
White House. Though Mr Blankfein did not indicate on the calls whether he was considering settling
the suit, some clients close to Goldman say they believe it is gearing up for a fight. "They will
likely fight aggressively and hope to win clean," the person said.
SEC staff have said that regulators would seek disgorgement of Goldman's profits on the transaction
as well as penalties and injunctive relief.
Goldman maintains that it made a loss on the transaction. But its argument was hurt by the disclosure
on Wednesday that the loss resulted from a failure to sell some positions in the deal.
● The SEC also raised the verbal temperature on Wednesday, as
Mary Schapiro, its
chairman, issued a statement denying that the Goldman case was part of a political agenda and
defending the commission's independence.
"We will neither bring cases, nor refrain from bringing them, because of the political consequences.
We will be governed always and only by the facts and the law," she said.
Goldman may have made a fatal mistake. Fatal not to the existence of the firm, but to its standing,
reputation, legitimacy, and ultimately, to the thing it covets most, its profits.
Power is most effective when it is used as sparingly as possible. Niall Ferguson, in book The
Cash Nexus, stressed the importance of financing to military success (he argues that England was
able to punch above its economic weight due to its superior tax collection apparatus and more highly
developed bond markets). The Rothschilds, which among other things financed governments at war, went
to some lengths to underplay their influence so as not to threaten their state patrons/clients.
The problem is that the behaviors that contributed to Goldman's commercial success have over time
become unbalanced, and are putting it at odds with governments. It is one thing to abuse the likes
of a Jefferson County, as JP Morgan has. As deplorable as that behavior is, they cannot retaliate.
It is quite another to mess with bodies that really are, ultimately, bigger than you are.
When I was young and worked briefly at Goldman, the firm was a pig and let even the very junior
staffers understand precisely how its pigginess worked so that they would improve upon it when they
grew up. For instance, on the deals it lead managed Goldman managed its stock and bond syndicates
so as to extract as much as possible, to the disadvantage of other members of the syndicate, who
shared the underwriting risk. I was told that Goldman was far more aggressive than other firms in
hogging the deal revenues than any other firm on the Street, but could get away with it as a major
lead manager. Similarly, on another deal, I walked into the Syndicate department when one of the
most powerful partners at Sullivan & Cromwell was on a conference call, instructing the younger members
of the department what the right answers to questions would be when the SEC came in asking questions
on what they were about to do on this particular transaction, an underwritten call (note: what made
Goldman savvier than most firm was that everyone got the official rationale for technically legal
but questionable behavior BEFORE they did it, which made it much easier to maintain party line, rather
than after the fact, when some conversations and communiques might contain remarks that were decidedly
unhelpful. Note that this practice was well established over two decades before e-mails became pervasive).
Anyone who has read Roger Lowenstein's account of the LTCM crisis, When Genius Failed, will recall
how Goldman's lawyer is assigned to a key negotiating role, and proceeds to cut the transaction in
ways that favor Goldman over the other rescue group members. It is almost an uncontrollable reflex,
the sort you see a predator take when someone makes the mistake of standing between it and its kill.
Now this aggressiveness was tempered (somewhat) by the posture Goldman called "long term greedy",
which basically meant not bleeding customers too much. One of the corporate accounts I worked on
was a very reliable fee generator, and the M&A bankers were desperate to talk it out of a deal (on
which they would have earned a fee) because they were convinced it was a turkey.
But the Goldman of the new millennium has kept the same relentless focus on the firm's financial
interest, and has become utterly, hopelessly sociopathic, incapable of understanding right versus
wrong. The firm's defense strategies vary among priggish and legalists reports (a Lucas van Pragg
speciality), insincere, non-specific apologies (Blankfein), or stony silence. But the truth of how
the members of the firm see things comes out again and again, through the many ways the Goldmanites
keep maintaining that they really deserve what they make (starting with the heinous Blankfein "God's
work" comment), revealing again and again their inability to see how sharp practices and numerous
forms of government support are an integral part of their recent "success".
Every generation seems to have at least one financial firm that abuses its priviledges and power
to the point when their pathological behavior brings about their downfall: Drexel, Salomon, Bankers
Trust, Enron (Frank Partnoy argues that Enron was a "highly profitable derivatives bank"). It is
too early to say for sure, but Goldman looks to be at risk of joining their ranks.
Although the Fed is far from an aggressive investigator, the fact that is has taken interest in
Goldman's role in Greece is significant. And the FCIC is also probing Goldman's too clever by half
strategy of using collateralized debt obligations to tee up short bets, since the buyers of the CDO
would assume that they were purchasing a legitimate investment, not something that Goldman would
have an incentive to design to fail.
The US central bank is looking into Goldman Sachs's role in arranging contentious derivatives
trades for Greece, which helped the country to massage its public finances, Ben Bernanke, chairman
of the Federal Reserve, revealed on Thursday.
"We are looking into a number of questions relating to Goldman Sachs and other companies and
their derivatives arrangements with Greece," Mr Bernanke said, apparently referring to Greek currency
transactions structured by Goldman….
Mr Bernanke said default swaps are "properly used as hedging instruments" and that "using these
instruments in a way that intentionally destabilises a company or a country is counterproductive".
The Securities and Exchange Commission is "examining potential abuses and destabilising effects
related to the use of credit default swaps and other opaque financial products and practices",
said a spokesman.
Separately, Phil Angelides, chairman of the US Financial Crisis Inquiry Commission, told the
Financial Times he was concerned about the practice of creating securities and "fully betting
against them" – and about Goldman's role in particular. Goldman declined to comment.
The US comments came as an official in German chancellor Angela Merkel's ruling Christian Democratic
Union party said the G20 nations were discussing whether a ban on the speculative use of CDS was
workable.
However, Goldman will survive. It is inside the government. It drives our economically disassociated
equity "markets". It will do what it pleases. Maybe a small fine or stern talking to by Hope and
Change. But, that's all.
I agree. Goldman has been doing sociopathy since the Twenties. This post is extreme wishful
thinking but will no doubt be picked up by timid reformers as a hope to cling to in our more robustly
regulated financial future.
Meanwhile, it is the simple existence of CDS and OTC derivatives that enable Goldman's endless
chicanery. It is these toxic financial products unleashed as innovation that explode on the unsuspecting
and produce all the profits of all the banks and corrupt all the toothless enablers and their
flunkies in the regulatory agencies and the Congress and the White House too.
Running after Goldman in search of instances of unethical conduct in the derivatives business
is a supreme waste of time. It is the business itself which must be dismantled while those outside
the financial sector still have anything left of which to be robbed by these financial innovations.
The extensive public relations blitz of the past year building up Diamond Jim Jamie Dimon at JP
Morgan now makes more sense given that Goldman is the Squid du Jour of the Federales, especially
when singled out in public by the Fountainhead of Liquidity Helioptrix Bernankex. Flippant remarks
to be sure by me but the bus seems to have acquired a Toyota braking system and the preening arrogance
of Blankfein will make a suitable speed bump. Also can you expand on the criminogenic term and elaborate
on the possibility that the people of the elite create their environment as much or more than they
exploit one created for them. Cheers. May we all enjoy some calamari soon.
I mused today over the possibility that Goldman has positioned itself over the past several years
to facilitate the collapse of the Euro, and - if the stars so aligned - benefit from the resultant
disaster as the last bank standing in the West through its bipartisan presence in the White House.
Perhaps further examination of Mayan hieroglyphs will reveal a Goldman Sachs bonus structure
for 2012 Euro-collapse-CDS mayhem–cephalopod supremacy. Cheers and vaya con Dios.
I'm also amazed by the public's familiarity with Goldmans' executive ranks. But I think its
a good thing.
Who knows anything about Goldman's sub-senior executives? According to Kate Kelly's "Street
Fighters", Gary Kohn brought along David Solomon & Don Mullen, two members of Goldman's management
committee & former Bear employees, to examine Bear Stearns' ledgers before that firm collapsed.
Mssrs. Solomon & Mullen worked at Drexel, Salomon Brothers, Bear Stearns, (are there others?)
and now Goldman Sachs.
What role have execs like these two played played at Goldman in recent years?
The world situation is very precarious, and if there is a crash, Goldman will be crushed in the
aftermath. This is the ending of a long financial cycle as described by Hyman Minsky and Irving Fisher,
and I doubt that the climax has yet been reached. The only thing preventing it vary aggressive government
intervention, and it remains to be seen if it will work. I have great doubts with players like Goldman
afoot. But Bernanke seems to be figuring this out.
Goldman owns this country, don't hold your breath. Geithner, Summers, Rubin and the rest will
make sure that we all lose this bet.
Wait, aren't we just envious?
I think of Microsoft. It never seems to have recovered from its run ins with the European bureaucrats.
I have zero belief that our government will do anything but run interference for Goldman, but if
German and French politicians don't get in the way of the Eurocrats, GS could be slowly inexorable
chewed up by them. This process could be accelerated if the French and the Germans decide to sign
off on a ban. The kicker is would Obama, Geithner, and Bernanke threaten retaliation in defense of
GS. How likely is this? All I can say is that I have found it impossible to overestimate how bought
our government is by GS.
1. I assume the short term greedy Vs long-term greedy came about because Goldman went public–is
that your take?
2. Do you think the Fed is doing this for anything other than politically generating headlines?
Is it really interested in investigating? Will anything come out of this?
I can't read this very well–Goldman was not the only bank to make such deals with Greece; why
did Bernanke single out Goldman, but not mention the other banks by name? Is it to placate Americans,
or Europeans (or to placate the Europeans in the future if the US pays Goldman out on their Greek
bets via AIG)? Or is it to warn the banks to fall into line?
Sorry, I'm just really lost on how to interpret Bernanke's comments, and your comments about hitting
GS in their profits–Bernanke said nothing to suggest this, so what are you getting between the lines?
Same thing for the SEC–if they didn't want to be aggressive with BofA for something blatantly
illegal that occurred within the borders of its jurisdiction (the US), how likely are they to go
after GS for something borderline?
Other readers can probably add some insight, but let me take a stab.
On your 1., my sense is there was a slide well before the firm went public, with the rise in
importance of derivatives and fixed income as sources of profits. Both are lightly to almost unregulated.
That led to a slide in standards in conduct across the industry in the 1990s. But yes, going public
made a big difference. The firm was pretty balanced in its mix of business, according to its IPO
documents, and the key bit was that investment banking and asset management were both large enough
to have some clout. Those businesses have much longer time frames than trading, and reputation
matters. Now something like 80% of the firm's profits come from trading. It's often described
as a hedge fund with some client businesses attached.
2. Normally, I'd be cynical, but this may be in response to pressure from the EU. I've heard
from quite a few people that central bankers and international regulators are cooperating a lot
in the wake of the crisis.
Re profits, I'm not speaking in the immediate sense, but longer term. If someone with subpoena
power goes into Goldman, I am sure they will find stuff that reflects badly on the firm. That
is more likely to be the FCIC or SIGTARP.
Remember, what hurt Bankers Trust was that Proctor & Gamble got its hands on some amazingly
damaging tapes. Goldman is much more clever than BT was, but I am sure some of the business they
did will not stand much scrutiny.
"We are looking into a number of questions relating to Goldman Sachs and other companies and
their derivatives arrangements with Greece," Mr Bernanke said
Herewegoagain, I had the same question you ask: why did Ben single out GS by name, and not
naming others. I then answered our question: the outcome of the FED's looking into this is preordained.
The FED has already concluded, and will inform the public both in the US and EU at a later date,
that GS and others did nothing illegal. Anybody who from then on still laments GS, can be silenced
by Lucas van Praag with: 'It has been studied and we did not do anything wrong'.
Realize that the FED can not be audited. So how can anybody - be it the Greek prime minister,
or Angela Merkel - ever proof that the FED looked into it with both eyes closed?!
All critics on this particular matter will be silenced, hence 'Mission accomplished' as far as
Government Sachs is concerned.
It is historically that true that those who overreach relative to the actual balance of power
eventually destroy themselves.
But in this case those who in theory should want to smash Goldman seem self-hindered (by corruption,
ideology, and preceived shared goals that allegedly outweigh conflicts) to an exceptional extent.
Mr Bernanke said default swaps are "properly used as hedging instruments" and that "using these
instruments in a way that intentionally destabilises a company or a country is counterproductive".
Ya think? According to the things he says, Bernanke sure is the dunce of the class, given how
long it takes him to learn lessons that were obvious from the beginning decades ago. You would think
Fed chairman doesn't have a steep learning curve.
(And of course it doesn't. Wingnut welfare means it's a flat, even downhill grade forever, as
long as you're on board with the bankster party line. That's the only way it was both possible and
desired that Heckuva Job Bennie, one of history's monumentally incompetent fuckups, could ever have
even been considered for a second term.
So speaking of structures overreaching and psychopathically defying reality, part of those goals/traits
Goldman shares with bigger structures like the US government is that same unnsustainable aggression.
Reappointing Bennie was certainly as belligerent a gesture of spitting in everyone's face as anything
Goldman's done.
The same "character" and quality of action is recursive at every level.)
Getting back to what Bennie said, how it allegedly portends constructive action, while I'd love
to see it, as always I'll believe it when I see it.
The very quote betrays continued lunacy or more likely bad faith. Yes, the only possible proper
"use" for these things would be legitimate hedging by those who have a real stake in some transaction
and not a purely derivative, gambler's stake.
But that was always true of all derivatives. So who is Bennie fooling when he singles out
CDS as somehow different, and implicitly says that just in this case speculation is an abuse, when
the entire system he so ardently fights to empower and whose main bagman he is is based upon that
same speculation?
Well, everything has to start somewhere, so maybe it's possible that Goldman went so far in this
case that even its political connections have to "run for cover", as Tom warned Sonny (in "The Godfather")
would allegedly happen if he went too far.
But it's more likely this is just a mood with no will for action behind it. That's been the case
every other time so far.
I'm surprised no one seems to have mentioned this on the blogs, but hasn't GS gone from a privately
funded balance sheet to a government funded balance sheet since the October meltdown.
They paid only $6.5B interest on only $500B of debt in 2009. Thats about 1.3%. Given that some of
their debt is long term debt (e.g Buffet's 10% loan etc) issued prior to 2009, they must have replaced
almost all of the $500B in debt with loans from the Fed.
Looks like the financial crisis worked out very well for GS. They are paying $25B a year less
in interest than they paid in 2008 and it looks like no one is even talking about why GS should not
be given this huge and ongoing government subsidy.
Is Goldman Finally About to be Leashed and Collared?
Thanks I needed a good laugh this morning!!!
McMike:
The Goldman/Enron comparison is a good one. Enron was also heavily connected
all the way to the top, and had flacks running interference for it at every level, including Congress
writing custom legislation just to increase their profits. Enron also of course fleeced the entire
state of California and created political crises by tampering with the power supply.
They were untouchable, the golden boys held up as an example of the new anti-regulated economic
alchemists, until they weren't.
If (when) the worm turns (meaning a major political crisis at home), Goldman's visibility will
become its liability. Overnight, no one will return Blankfein's calls, Treasury dept staffers will
be shredding visitor logs, the media will discover a new villian faster than Donald Rumsfeld discovered
that hils old business partner Saddam Hussein was an evildoer.
The C-level leaders will face a few heated Congress hearings, a couple second-tier execs will
do some time, and the firm will be dissolved into other firms. Geithner will end up as President
of some third rate university and Paulson will retire to fly fish with Cheney. The GOP will campaign
as the anti-wall street party and then the entire episode will dissapear down the memory hole.
Lyle says:
If you read the Partnership a history of Goldman, you find that every few years it has a near
death experience. Corzine got fired over one involving Goldman mimicking LTCM. In the 1920 Goldman
Sachs trading nearly did the partnership in. It seems to be a human trait relating to the old pride
goeth before a fall line. The culture mentioned leads every so often to someone being so motivated
for money that they step over the line from the public point of view but not their own.
As noted and reinforced by reading the book, its clear that Goldman sells its people that they are
the best and can almost walk on water.
As noted and reinforced again by the book, the long term view win win at goldman has been replaced
by win and damn what happens to the customer (as much of wall street became the house of the great
casino).
WASHINGTON - In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities
backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting
that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown,
enabled the nation's premier investment bank to pass most of its potential losses to others before
a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments
were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that
bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation
has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing
crash may have violated securities laws.
"The Securities and Exchange Commission should be very interested in any financial company
that secretly decides a financial product is a loser and then goes out and actively markets that
product or very similar products to unsuspecting customers without disclosing its true opinion,"
said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul
of the nation's banks. "This is fraud and should be prosecuted."
John Coffee, a Columbia University law professor who served on an advisory committee to the
New York Stock Exchange, said that investment banks have wide latitude to manage their assets,
and so the legality of Goldman's maneuvers depends on what its executives
knew at the time.
"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping
these investments because it saw them as toxic waste and virtually worthless."
Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this
article.
A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce
its mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like
bets, called credit-default swaps, to "hedge" against a housing downturn.
DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its
risk, nor would investors have expected us to do so ... other market participants had access to
the same information we did."
For the past year, Goldman has been on the defensive over its Washington connections and the
billions in federal bailout funds it received. Scant attention has been paid, however, to how
it became the only major Wall Street player to extricate itself from the subprime securities market
before the housing bubble burst.
Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks
still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms
of retail banks, while another, Lehman Brothers, folded.
To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents,
SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar
with the firm's activities.
McClatchy's inquiry found that Goldman Sachs:
Bought and converted into high-yield bonds tens of thousands of mortgages from subprime
lenders that became the subjects of FBI investigations into whether they'd misled borrowers
or exaggerated applicants' incomes to justify making hefty loans.
Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide,
including European and Asian banks, often in secret deals run through the Cayman Islands, a
British territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
Has dispatched lawyers across the country to repossess homes from bankrupt or financially
struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages
anyway because Wall Street made it easy for them to qualify.
Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury
Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included
several other Goldman alumni.
The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and
when he organized a massive rescue of tottering global insurer American International Group while
in constant telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing,
AIG later used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.
These decisions preserved billions of dollars in value for Goldman's executives and shareholders.
For example, Blankfein held 1.6 million shares in the company in September 2008, and he could
have lost more than $150 million if his firm had gone bankrupt.
With the help of more than $23 billion in direct and indirect federal aid, Goldman appears
to have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion.
By repaying $10 billion in direct federal bailout money - a 23 percent taxpayer return that exceeded
federal officials' demand - the firm has escaped tough federal limits on 2009 bonuses to executives
of firms that received bailout money.
Goldman announced record earnings in July, and the firm is on course to surpass $50 billion
in revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.
THE BLUEST OF THE BLUE CHIPS
For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated
an elite reputation as home to the best and brightest and a tradition of urging its executives
to take turns at public service.
As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson,
as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008,
and former Goldman employees populate some of the most demanding and powerful posts in Washington.
Savvy federal regulators have migrated from their Washington jobs to Goldman.
On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's
enforcement division.
Goldman's financial panache made its sales pitches irresistible to policymakers and investors
alike, and may help explain why so few of them questioned the risky securities that Goldman sold
off in a 14-month period that ended in February 2007.
Since the collapse of the economy, however, some of those investors have changed their opinions
of Goldman.
Several pension funds, including Mississippi's Public Employees' Retirement System, have filed
suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently
made "false and misleading" representations of the bonds' true risks.
Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it
invested in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely
to lose "hundreds of millions of dollars" on those and similar bonds.
Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."
California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million
in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny
percentage of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a
drop of nearly 75 percent, according to documents obtained through a state public records request.
In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts
attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed
to pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.
Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate,
cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her
office focused on investment banks because they provided a market for loans that mortgage lenders
"knew or should have known were destined for failure."
New Orleans' public employees' retirement system, an electrical workers union and the New Jersey
carpenters union also are suing Goldman and other Wall Street firms over their losses.
The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained
by McClatchy show that insurance companies, whose annuities provide income for many retirees,
collectively paid $2 billion for Goldman's risky high-yield bonds.
Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers
Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70
million; and Allstate, $40.5 million, according to the data from the National Association of Insurance
Commissioners.
In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted
price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12
million.
Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted
most traditional lending criteria in favor of loans that required little or no documentation of
borrowers' incomes or assets.
While Goldman was far from the biggest player in the risky mortgage securitization business,
neither was it small.
From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans,
according to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.
In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007,
Goldman marketed at least $17 billion more for others.
It also was the lead firm in marketing about $83 billion in complex securities, many of them
backed by subprime mortgages, via the Caymans and other offshore sites, according to an analysis
of unpublished industry data by Gary Kopff, a securitization expert.
In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million
of risky securities, describing the underlying mortgages as "prime" or "midprime," although in
the U.S. they were marketed with lower grades.
Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades
because the borrowers had high credit scores.
Goldman's securities came in two varieties: those tied to subprime mortgages and those backed
by a slightly higher grade of loans known as Alt-A's.
Over time, both types of mortgages required homeowners to pay rapidly rising interest rates.
Defaults on subprime loans were responsible for last year's housing meltdown. Interest rates on
Alt-A loans, which began to rocket upward this year, are causing a new round of defaults.
Goldman has taken multiple steps to put its subprime dealings behind it, including publicly
saying that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las
Vegas conference, avoiding any images of employees flashing wads of bonus cash at casinos.
More recently, the firm has launched a public relations campaign to answer the criticism of
its huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued
that Goldman's activities serve "an important social purpose" by channeling pools of money held
by pension funds and others to companies and governments around the world.
KNOWING WHEN TO FOLD THEM
For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime
game before getting burned.
New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told
Congress that his researchers discovered by early 2006 that many subprime loans covered the homes'
entire value, with no down payments, and so he figured that the bonds "would become worthless."
He soon began placing exotic bets - credit-default swaps - against the housing market. His
firm, Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults
soared in 2007 and 2008. (He isn't related to Henry Paulson.)
At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky
mortgages, the first of multiple strategies it would employ to reduce its subprime risk.
The company has closely guarded the details of most of its swaps trades, except for $20 billion
in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults
or ratings downgrades on subprime-related securities it offered offshore.
In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief
Financial Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman
spokesman DuVally said.
Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling
off its inventory of bonds and betting against those classes of securities in secretive swaps
markets.
DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing
or financial market conditions would become."
In early 2007, the firm's mortgage traders also bet heavily against the housing market on a
year-old subprime index on a private London swap exchange, said several Wall Street figures familiar
with those dealings, who declined to be identified because the transactions were confidential.
The swaps contracts would pay off big, especially those with AIG. When Goldman's securities
lost value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted
$7.5 billion, Viniar disclosed last spring.
As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in
September 2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout
from AIG included more than $8 billion to settle swaps contracts.
DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure
its own subprime risks and to take positions against the housing market for its clients. Until
the end of 2006, he said, Goldman was still betting on a strong housing market.
However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in
the U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion
in February 2007, after it had intensified its contrary bets. Goldman also stopped buying risky
home mortgages after the December meeting, though DuVally declined to say when.
I'VE GOT A SECRET
Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its
secret wagers.
Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the
company's mortgage business "has extensive barriers designed to keep information within its proper
confines."
However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous
bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps
trading, also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when
he abruptly resigned for personal reasons.
The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of
securities, which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed
securities from March 2006 to February 2007.
The firm maintains that the requirement doesn't apply in this case.
DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional
Buyers, a class of sophisticated investors that are afforded fewer protections than small investors
are under federal securities laws. He said Goldman made all the required disclosures about risks.
Whether companies are obliged to inform investors about such contrary trades, or "hedges,"
is "a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of
San Diego law professor who specializes in securities. One issue is how specific companies must
be in disclosing potential risks to investors, he said.
Coffee, the Columbia University law professor, said that any potential violations of securities
laws would depend on what Goldman executives knew about the risks ahead.
"The critical moment when Goldman would have the highest liability and disclosure obligations
is when they are serving as an underwriter on a registered public offering," he said. "If they
are at the same time desperately seeking to get out of the field, that kind of bailout does look
far more dubious than just trading activities."
Another question is whether, by keeping the trades secret, the company withheld material information
that would enable investors to assess Goldman's motives for selling the bonds, said James Cox,
a Duke University law professor who also has served on the NYSE advisory panel.
If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational
investor would not only consider Goldman's conduct material, but likely compelling a decision
to take a pass on the recommendation to purchase."
Cox said that existing laws, however, don't require sufficient disclosures about trading, and
that the government would do well to plug that hole.
In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001
to 2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility
of a pullback in overheated real estate markets, especially in California and Florida, where the
most subprime loans had been made.
Suits filed by the pension funds, however, allege that Goldman made materially false or misleading
statements in its public offerings, failing to disclose that many loans were based on inflated
appraisals and were bought from firms with poor lending practices.
DuVally said that investors were fully informed of all known risks.
"What's going to happen in the next few years," said San Diego's Partnoy, "is there's going
to be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or
not?"
(Tish Wells contributed to this article.)
(This article is part of an occasional series on the problems in mortgage finance.)
COMING TOMORROW
Since the economic collapse that swept millions of Americans out of their jobs and homes, Goldman
Sachs has moved aggressively to recover its losses. The firm is pursuing marginally qualified
borrowers into state courts federal and bankruptcy across the country and seeking to seize their
homes. McClatchy examines one couple's multi-year attempt to get Goldman to admit that it had
purchased their mortgage.
Gretchen Morgenson and Louise Story
have a good article up at the New York Times on synthetic CDOs (or more accurately, synthetic
ABS CDOs, for "asset backed securities" CDOs). The press is finally starting
to turn some lights onto one of the activities that played an important role in the crisis, but has
not gotten the attention it deserved.
There has been a tendency to lionize subprime shorts, with no consideration to the destruction
they left in their wake. While I am not opposed to stock shorting (all it takes is the uptick rule
to prevent bear raids), shorting via CDS is quite another matter, particularly since, with CDS, the
exposures are typically a multiple of the value of the cash bonds. Given the levered nature of a
short via CDS, this creates a very big incentive for the CDS holders to see if they can take action
to make events turn out their way.
Now that may seem like a peculiar characterization; how could people who shorted subprime have
done damage? After all, the housing market is huge. But CDS made the
exposures to subprime going bad much bigger than the size of the market, and the parties on the wrong
side of the bet were often highly levered players like big capital markets firms (per
the BIS, with only 3-4% equity on average) and insurers.
The part that has surprised me is that the John Paulson story, which Gregory Zuckermann attempted
to tell glowingly in his book The Greatest Trade, is actually quite damning. Deutsche Bank
and Goldman come off badly too. To make a much longer story short, credit default swaps on mortgages
became possible starting in June 2005 when ISDA came up with a protocol.
Zuckermann credits Greg Lippmann of Deutsche, a particularly aggressive derivatives salesman,
as the moving force behind this effort:
Lippmann's radical thought was, What if an investment could be created to mimic the existing
mortgages? That way, new mortgages wouldn't have to be created to satisfy hungry investors; rather,
a "synthetic" mortgage could be sold to them.[emphasis in original]
In February, Lippmann called traders from Bear Stearns, Goldman Sachs, and a few other firms
struggling with the same issues, inviting them, along with a battalion of lawyers, to a conference
room at Deutsche. Sitting around a blond-wood conference table, they debated ideas into the night,
while picking at take-out Chinese food. Their light-bulb idea: Create a standardized, easily traded
CDS contract to insure mortgage-backed securities made up of subprime loans
Yves here. Zuckermann contends that Paulson went to Wall Street to create synthetic CDOs so Paulson
could short subprime. Paulson was open about his intention: he wanted to create the deal (by funding
the equity tranche, typically 4-5%) and go short the ENTIRE deal, that is, buy all the CDS used in
the synthetic CDO (well probably not all; even subprime CDOs had to have a certain potion be less
drecky stuff). This was an out and out plan to toast the party on the other side, particularly since
the party funding the equity layer had (at a minimum) veto rights (which in this case could be used
to exclude better quality exposures!).
Bear Stearns, ironically, thought the Paulson plan did not pass the smell test, but Deutsche and
Goldman were eager. Paulson was responsible for creating $5 billion in synthetic CDOs, but in the
end this was not his main mechanism for shorting the subprime.
To the
New York Times article. It's good yet odd. It does signal very clearly the destructive potential
of synthetic CDOs. It presents Goldman's synthetic CDO program as first a way to lay off its exposures,
later a way to get short for fun and profit. It has a graphic that shows a sampling of deals. Reading
between the lines, it looks as if the authors are on the Goldman-AIG
trial, but going where the story and their sources take them, which was into the bigger question
of the use of synthetics:
Pension funds and insurance companies lost billions of dollars on securities that they believed
were solid investments, according to former Goldman employees with direct knowledge of the deals
who asked not to be identified because they have confidentiality agreements with the firm.
Goldman was not the only firm that peddled these complex securities - known as synthetic collateralized
debt obligations, or C.D.O.'s - and then made financial bets against them, called selling short
in Wall Street parlance. Others that created similar securities and then bet they would fail,
according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller
firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs,
who this year became a special counselor to Treasury Secretary Timothy F. Geithner….
But Goldman and other firms eventually used the C.D.O.'s to place
unusually large negative bets that were not mainly for hedging purposes, and investors and industry
experts say that put the firms at odds with their own clients' interests.
The article also indicates that Goldman engaged in Paulson-like behavior, teeing up the deals
(presumably providing the equity tranche) and took pretty much the entire short side (the reason
we highlight this issue is we believe some firms were stealthier and teed up CDOs without buying
all the CDS protection created by the deal):
Rather than persuading his customers to make negative bets on Abacus, Mr. Egol kept most of
these wagers for his firm, said five former Goldman employees who spoke on the condition of anonymity.
On occasion, he allowed some hedge funds to take some of the short trades.
The piece also indicates that official investigations are honing in on the key question:
One focus of the inquiry is whether the firms creating the securities
purposely helped to select especially risky mortgage-linked assets that would be most likely
to crater, setting their clients up to lose billions of dollars if the housing
market imploded.
Yves here. Um, exhibit one is the Zuckermann book…I cannot believe Paulson gave out so much ammo
to critics, and that no one in the officialdom (yet) seems to have decided to make use of it.
The story also mentions how the dealers stacked the deck in their favor:
In early 2005, a group of prominent traders met at Deutsche Bank's office in New York and drew
up a new system, called Pay as You Go. This meant the insurance for those betting against mortgages
would pay out more quickly. The traders then went to the International Swaps and Derivatives Association,
the group that governs trading in derivatives like C.D.O.'s. The new system was presented as a
fait accompli, and adopted.
Other changes also increased the likelihood that investors would suffer losses if the mortgage
market tanked. Previously, investors took losses only in certain dire "credit events," as when
the mortgages associated with the C.D.O. defaulted or their issuers went bankrupt.
But the new rules meant that C.D.O. holders would have to make
payments to short sellers under less onerous outcomes, or "triggers," like a ratings downgrade
on a bond. This meant that anyone who bet against a C.D.O. could collect on the
bet more easily.
"In the early deals you see none of these triggers," said one investor who asked for anonymity
to preserve relationships. "These things were built in to provide
the dealers with a big payoff when something bad happened."
Yves here. The New York Times is running this as a front page story, but on one of the slowest
business days of the year, which means it may have less impact than it should. Design or an accident
of timing?
Selected Comments
Michael M Thomas:
"So if it was synthetic, you were effectively a protection seller and stood to take a loss
if the market cratered. The protection buyers were the shorts that made the synthetics possible."
This is what needs to be understood. Goldman was buying protection from the same investors
to whom it was flogging these synthetic CDOs. This would add X basis points of notional pass-through
yield from the "underlying" CDOs. Probably while expressing a grudging willingness to do so in
the interest of facilitating its customers' thirst for yield. And permitting GS to assert, when
and if, that it was sharing the risk with its customers.
This is a process that needs to be made comprehensible to an intelligent tenth-grader. It deserves
more outrage than it can possibly generate if explications remain obtuse and confusing.
Markets are regulated so that ordinary investors have a "level playing field" when they make
their investments. You will recall that a few years back Martha Stewart went to jail because she
traded on insider information that she had on Imclone shares.
Now it appears that insider trading was standard practice for the large investment banks such
as Goldman Sachs, who shorted CDO's that they themselves had created in order to make a small
fortune when housing prices collapsed.
I am outraged that Martha Stewart went to jail, yet insiders in Goldman Sachs and other Wall
Street traders were able to manipulate the market to make a small fortune while retirement funds
for millions of Americans took a hit. Many will be working far into their 70's to make up for
losses in their retirement funds, in order that Goldman Sachs and other investment banks could
make profits at their expense.
Part of the problem must be that since they were poorly regulated, there are no explicit laws
which send traders to jail when they trade CDO's and credit default swaps using insider information.
Indeed, this lack of transparency is exactly what has made insider trading in these securities
so profitable for insiders.
We saw such financial engineering before in the case of Enron. In that case, CEO Jeff Skilling
went to jail. We can only hope that vigorous prosecution in the current insider trading scandal
will also result in jail time for the perpetrators.
NYC Father
Speaking as someone who worked in the IT and risk area for credit derivatives at one of the
largest financial institutions -- it was fraud on a massive scale.
Nobody really believed the risk management numbers for CDO's were
anything more than so many angels dancing on the head of a pin. I'm talking about the quants/mathematicians,
the traders and most of all the high level executives at the top of the fixed income food chain.
What they did believe was that bonuses were paid out on an annual basis for performance that
was measured largely by sales. Not the eventual value of the trades, which ended up being worthless.
These bankers should be dressed in orange pajamas and sent down to Guantanamo.
They are the real terrorists.Not the fake movie style terrorists and bank robbers that the government wants us to believe
in -- who wear masks and carry guns.
No, these are the real bank robbers who work inside the institution and would need tractor
trailers to carry out all the money. Real bank robbers wear suits and have the money transferred
directly to their own bank accounts.
What a joke that Goldman pretends to be innocent, and claims to have "paid off their TARP money,"
while their biggest creditors -- including AIG -- were given huge amounts of taxpayer dollars
to pay off trades they had with Goldman.
The Goldman bonuses are our tax dollars at work. Plain and simple.
I was a witness to history. I saw it happen. The mathematical models were so complex even the
mathematicians made jokes about them.
Well, the joke is on all Americans.
KF
I am a lawyer who used to work on some of these deals. The whole time I worked on synthetic
CDOs (in 2006 and 2007) I kept wondering how it was possible that we made it seem like everybody
was going to make money forever for that was the impression created by marketing materials referred
to in the article. These deals were making money out of thin air, it seemed to me, so somoeone
would have had to foot the bill. I kept asking my boss about it, but he just talked about the
"equity tranche" (the lowest rated bonds) taking the hit if something happened to housing prices,
but it being very unlikely that the highest rated bonds would be affected.
Of course, billions of dollars of securities are not (ought not be be) bought by sophisticated
investors based on a 20-page power point presentation by a sales guy. Investors agree to buying
securities based on offering documents and other long and convoluted contracts drafted up by lawyers
like I used to be. We made sure that every piece of disclosure and warning required by (the, admittedly,
very few) applicable laws and regulations was there.
The reality is, of course, that the Rating Agencies' seal of approval was all that mattered
and these "sophisticated investors" were all too happy to promise to hand over the cash some time
in the future for what seemed like a safe and lucrative investment. Some of them likely didn't
truly understand that they were, in effect, selling protection on these risky securities and many
of them probably didn't do all the research and investigation they implied they did by buying
the securities.
The banks did something that is clearly wrong. They should not be able to bet against the investments
they are selling to their clients; that just doesn't feel right. BUT, I am not sure, unfortunately,
that what they did was technically illegal. I will be curious to see what the SEC and FINRA come
up with, but based on how these documents were drafted and the type of investors who bought the
securities I think they will have a difficult time nailing down securities laws violations.
The Financial Times reported that Goldman Sachs suffered only one losing day during the 65 business
days of the third quarter. On 36 separate days during the quarter, the firm's trades netted more
than $100 million.
In addition, Bloomberg reported that Goldman Sachs' effective income tax rate for 2008 was 1%.
In dollars, Goldman's tax liability was $14 million. For the same year, Goldman reported a $2.3 billion
profit and paid out $10.9 billion in bonuses.
One could argue that a record of 90%+ winning trades and a 1% tax rate could only be accomplished
with certain connections to high-ranking government personnel.
An op-ed
in the Sunday New York Times by former investigators and prosecutors Eliot Spitzer, Frank Parnoy,
and William Black calls for AIG to put non-privileged e-mails, accounting documents, and financial
models on line to allow for an "open source" investigation. The questions they want to examine include:
As fraud investigators, we would like to examine the trading patterns of A.I.G.'s financial
products division, and its communications with Goldman Sachs and other bank counterparties who
benefited from the bailout. We would like to understand whether the leaders of A.I.G. understood
that they were approaching a financial Armageddon, and whether they alerted their counterparties,
regulators and shareholders to the impending calamity.
We would like to see how A.I.G. was able to pay huge bonuses to its officers based on the short-term
income they received from counterparties for selling guarantees that, lacking adequate loss reserves,
the companies would never be able to honor. We would also like to know what regulators knew, and
what they did with the information they had obtained.
This idea no doubt will strike most readers as quixotic. But the authors point out that three
individuals have the power to force this to take place:
A.I.G.'s board of directors, a distinguished group of senior business executives, holds the
power to decide whether to publish the e-mail messages and other documents. But those directors
serve at the behest of A.I.G.'s shareholders. And while small shareholders of public corporations
generally do not have the right to force publication of internal documents, in this case one shareholder
- the taxpayer - holds an 80 percent stake. Anyone with such substantial ownership has effective
control over corporate decisions, even if the corporation is a large public one.
Our stake is held by something called the A.I.G. Credit Facility Trust, whose three trustees
are Jill M. Considine, a former chairman of the Depository Trust Company and a former director
of the Federal Reserve Bank of New York; Chester B. Feldberg, a former New York Fed official who
was chairman of Barclays Americas from 2000 to 2008; and Douglas L. Foshee, chief executive of
the El Paso Corporation and chairman of the Houston branch of the Federal Reserve Bank of Dallas.
Ultimately, these three trustees wield all the power at A.I.G., and have the right to vote
out the 11 directors if the directors are unwilling to publish the e-mail messages. In other words,
if these three people ask A.I.G.'s board to post the messages and other documents, the board will
have no choice but to comply. Ms. Considine, Mr. Feldberg and Mr. Foshee have the opportunity
to be among the most effective and influential investor advocates in history. Before A.I.G. escapes,
they should demand the evidence.
This is a good proposal, but I have a far more basic question: why was no forensic work done as
a requirement of the bailouts?
The Swiss Federal Banking Commission required UBS to perform an extensive investigation of exactly
what it did so wrong that it needed a government handout, and it hired (presumably at the insistence
of the regulators) third parties to conduct the investigation. It provided considerably more detail
than any bank has provided so far of how a firm with a solid franchise drove itself into an abyss.
Why has there been NO serious investigation of ANY kind of the recipient of such extraordinary
taxpayer largesse? Why has virtually NOTHING been demanded of them? Why the unseemly rush to let
them off the hook and let them "pay back the TARP"? This is completely unwarranted in the case of
AIG, which has had its deal with the government retraded in AIG's favor a full four times. Why has
AIG at every turn gotten a better and better deal, each time at the public's expense, and is now
allowed to lobby that it should be freed of its obligations? No private sector lender would allow
a troubled borrower that could not meet its commitments to renegotiate and get IMPROVED terms. The
inability to meet the terms of the original funding (one on terms private sector lenders were willing
to consider, and that per Sorkin, AIG itself proposed) only strengthens the case to continue with
the original plan, which is to break up AIG and sell the pieces for what they can fetch. This is
the course that would yield the highest returns to the public, and that program will not produce
a systemic event, which should be the ONLY offsetting consideration. There is no business rationale
to have an agglomeration of diverse insurance businesses, particularly one that has been as badly
managed as AIG (Sorkin's account also reveals a shocking lack of financial and operational controls).
So why have there been no investigations? In AIG, the Goldman conspiracy theorists have a real
case. Consider this commentary from a reader who was a senior executive at a monoline, on an article
that looked like a PR effort to get ahead of a possible source of trouble for Goldman. The Wall Street
Journal story noted that
Goldman guaranteed $23 billion of CDOs with AIG and allegedly made a mere $50 million…. which
is utter bullshit. Normal CDO originating spread are 1.25% to 1.5%. Its profits on these deals, separate
on how it might have booked its trades with AIG, was at least $287.5 million. Even more important,
a some of these trades were part of its Abacus program, which was a series of synthetic CDOs that
it used to lay off its real estate risk (both RMBS and CMBS). In other words, the "short subprime"
trade that everyone has lauded Goldman for was in part, if not in significant measure, borne by taxpayers.
The most curious part of this pattern is that Goldman used ONLY AIG for its CDO guarantees; all
other banks also used the monolines to a significant degree. So Goldman would benefit far more than
other firms from an AIG rescue; they would all still lose out on their monoline exposures.
The monolines started hitting the wall before Goldman did; in fact, their wobbly state played
a direct role in the failure of the auction rate securities market (Feb 2008), when it became clear
that Eric Dinallo's efforts to create a bailout for Ambac and MBIA were likely to come to naught
(the monolines were major guarantors of municipal paper, and municipalities were major issuers of
ARS). Both retail investors and municipalities suffered as a result (retail investors who needed
access to their funds but could not get liquidity; issuers who had to pay penalty rates because their
maturing paper could not be rolled). The monolines, who Goldman had not used, were allowed to twist
in the wind, but AIG was rescued. And Goldman hands are far from clean. From a reader who was a senior
executive at a monoline on the WSJ story:
I find it amazing that after stuffing AIG with $23 billion of CDOs, which lead to AIG failing,
Goldman's spokesman has the audacity to blame the problem on AIG. meanwhile, Goldman researchers
and CFO were criticizing Merrill and Citi for taking on so much exposure to the other bond insurers
and insisting that these insurers not get bailed out. It also highlights again how outrageous
it was that Goldman and the others gold paid off at par for taking a combination of CDO and AIG
risk while the rest of the world (investors and insurers) got burned for taking CDO risk. The
Goldman spokesperson acts indignant at the suggestion that somehow they shouldn't have gotten
this. This was the scam they played with the Fed.
While the subprime deals and CDOs were obviously going bad, an argument was made by many people
at the time that the aggressive mark downs by AIG acelerated the death spiral for the market.
It is pretty clear, here and elsewhere, that Goldman was the one that initiated the mark downs
of collateral value. it would be interesting to explore this all the way through. Though not discussed
in this article, Goldman shorted subprime through the Abacus deals, and perhaps elsewhere. this
gave them an incentive to force mark downs. the intermediation deals described in the article,
combined with AIG's collateral posting, gave them another incentive to be agressive with mark
downs. they were acting like they wanted to grab the money before anyone else could get their
hands on it. this would have raised some issues in an AIGFP bankruptcy. (note – Hank Greenberg
suggested that this was going on in his october 2008 testimony but there was a chorus of attacks
on him for being a crook and unreliable, thanks to his problems with Spitzer.)
So here we have the pattern:
1. Goldman creates or sells $23 billion (or more) of CDOs and stuffs them into AIG.
2. Goldman proclaims to the world they have no exposure to CDOs and warns that banks and
insurers with CDO exposure will get downgraded.
3. Goldman initiates the mark downs of CDOs with AIG and others, acelerating the market's
downward spiral.
4. Huge mark to market losses lead insurer and bank credit to freeze, short term markets
to lock up, ABCP to collapse.
5. AIG posts as much collateral as it has to Goldman, who has more aggressively marked down
the exposure.
6. Bond insurers are downgraded, banks begin commutations with them.
7. AIG fails, Fed steps in, Goldman gets bailed out at par.
Yves here. This looks like no accident. I suspect it was no accident. And no one in authority
wants to find out where the truth lies.
I was hugely impressed with Eliot Spitzer's interview on BBC Worldwide. He squirmed a bit on
the personal stuff but with regard to his pursuit of truth and justice he came across as the real
deal.
David says:
Which is why Spitzer was blown up politically, in my opinion.
But for all the grief he takes, David Paterson is doing a solid and honest job in the Governor
hotseat.
Blurtman:
Any idea if Goldman bought CDS on AIG, and then destroyed the company?
Itamar Turner-Trauring:
I started reading Richard Koo's "Holy Grail of Macroeconomics" about Japan's great recession;
his description of how insolvent companies with positive cash flow proceed seems apropos. The
management of the company will attempt to hide the insolvency from employees, creditors, suppliers,
investors less they jump ship or cut off resources. Those creditors who do know about the problem
try to keep quiet as well, so that the value of their investments doesn't crash. So long as the
company is cash flow positive and can pay for its debt this can continue. Koo writes that "… balance
sheet recessions [are] invisible and inaudible." Eventually Japanese corporations paid off their
debt, and meanwhile government spending took the place of the reduced corporate spending caused
by debt paydown.
Keeping in mind that this is a book with an approving quote from Larry Summers on the cover,
we can assume that the government has at least some knowledge of Koo's model. So quite possibly
in this case we have a third party that is knowing but silent: the government, trying to help
the insolvent banks earn their way out of the hole every way it can … and trying very hard to
make sure no one notices how insolvent they really are.
mike:
Finally, attention is being paid to the topic of who benefits from collateral valuation markdowns
There's a bigger story to mine there. William Cohan discussed it too briefly in his book on
Bear Stearns' collapse, which you can read here:
Why has there been NO serious investigation of ANY kind of the recipient of such extraordinary
taxpayer largesse? Why has virtually NOTHING been demanded of them? Why the unseemly rush to let
them off the hook and let them "pay back the TARP"?
So why have there been no investigations? In AIG, the Goldman conspiracy theorists have a real
case.
I don't see why anybody outside the establishent should call it a "conspiracy theory".
To argue that Goldman has captured the government through many years of high-level infiltration
of personnel and campaign contributions, so that by 2008 the (any) administration literally believes
"what's good for Goldman is good for America" and enacts policy based on this principle, and that
the proximate goal of the AIG bailout was to launder a bailout to GS, is the theory which best
fits the evidence, while no other theory fits the evidence anywhere near as well.
(Personnel placement far more systematic than the normal revolving door, campaign contributions,
how Bear and Lehman were allowed to be destroyed, how GS itself may have helped engineer Bear's
immediate collapse through a dubious novation refusal, all the tricky moves with AIG detailed
above, how Blankfein was the only CEO seemingly deputized as a de facto government official
to attend the Fed's consultations on AIG, yet how just days earlier Geithner had refused to discuss
AIG at the Lehman conclave when JPM and Citi wanted to talk about it, and then of course the bailout
and Goldman laundering itself, and all the subsequent AIG bailouts, and the psychotic secrecy
about it all…)
Occam's Razor itself demands this way of looking at it.
The same is true of the bailout as a whole. Detractors and the people at large instantly and
correctly recognized it as nothing but a massive loot job. Here too every subsequent piece of
evidence has proven us 100% correct.
YS:
Amen! I've followed the AIG-Goldman story for over a year. It is clear to me that no one in the
US government wants to expose what really happened at AIG. Why not? All roads lead to the Vampire
Squid and its "former" executives like Hank Paulson.
The trio writes, "So far, prosecutors have been unable to build such evidence into anything
resembling a persuasive case against any financial institution". This is an indictment of the
SDNY US attorney's office. Preet Bharara (PB), are you listening? I can write the indictments
for you. I accuse PB of "wilful blindness" in not handing out indictments like haloween candy
in the AIG-Goldman scam. Yes, you PB. If you can't find the "ostrich instruction" West's Key,
here it is: criminal law 772(5). Now read it and pull half of Vampire Squid's (VS) officers out
of 85 Broad Street. In handcuffs. See how easy this is? I've even given you VS's address! Show
us peasants that VS doesn't own the SDNY US attorney's office. No more crap from you and Benton
Campbell like the Bear Stearns Two case. PB, we're watching you.
Peter T:
Get over Eliot Spitzer's past minor transgression already and make him chief investigator of
Wall Street past major sins.
Michel Delving :
Monolines did not just hit the wall. They were smashed into it. Proprietary traders rigged
their bets using a steady stream of servicing data from subsidiary servicers
engaged in fabricating bogus mortgage defaults. MBIA
is fighting back, citing inappropriate mortgage servicing by Credit Suisse subsidiary Select Portfolio
Servicing
in this recent suit:
http://www.mbia.com/investor/publications/603751-09-complaint.pdf
And yet, mortgage servicing fraud continues to feed CDS casinos and no doubt servicers are
already ramping up for Markit's launch of ABX.PRIME which is certain to be another stacked deck.
Just like ABX.HE, market makers will select reference entities, paint targets on them and servicers
will go to work making those credit events happen.
Goldman Fueled AIG Gambles: Wall Street Titan's Role Shown in Journal Analysis; Firm Says Problems
Hidden
Goldman Sachs Group Inc. played a bigger role than has been publicly disclosed in fueling the
mortgage bets that nearly felled American Insurance Group Inc.
Goldman was one of 16 banks paid off when the U.S. government last year spent billions closing
out soured trades that AIG made with the financial firms.
A Wall Street Journal analysis of AIG's trades, which were on pools of mortgage debt, shows that
Goldman was a key player in many of them, even the ones involving other banks.
Goldman as Middleman
Goldman originated or bought protection from AIG on about $33 billion of the $80 billion of U.S.
mortgage assets that AIG insured during the housing boom. That is roughly twice as much as
Société
Générale and Merrill Lynch, the banks with the biggest exposure to AIG after Goldman, according
an analysis of ratings-firm reports and an internal AIG document that details several financial firms'
roles in the transactions.
In Goldman's biggest deal, it acted as a middleman between AIG and banks, taking on the risk of
as much as $14 billion of mortgage-related investments. Then Goldman insured that risk with one trading
partner-AIG, according to the Journal's analysis and people familiar with the trades.
The trades yielded Goldman less than $50 million in profits, which were mostly booked from 2004
to 2006, according to a person familiar with the matter. But they piled risks onto AIG's books, which
later came to haunt the insurer and Goldman. The trades also gave Goldman a unique window into AIG's
exposure to losses on securities linked to mortgages.
When the federal government bailed out the insurer, Goldman avoided losses on its trades with
AIG covering a total of $22 billion in assets.
A Goldman spokesman says that up until AIG was rescued by the government, the insurer "was viewed
as one of the most sophisticated financial counterparties in the world. It wasn't until the government
intervened in September 2008 that the full extent of AIG's problems became apparent."
"What is lost in the discussion is that AIG assumed billions of dollars in risk it was unable
to manage," the Goldman spokesman added.
An AIG spokesman declined to comment on the firm's trades with Goldman.
More clarity has emerged recently over the roles that firms such as Goldman played, as complex
deals carried out by banks are now being untangled in legal and regulatory inquiries. Last month
a government audit of part of the AIG bailout described Goldman's middleman role.
One of Goldman's trades with AIG involved a financial vehicle called South Coast Funding VIII.
South Coast was one of many pools of bonds backed by individual homeowners' mortgage payments that
Wall Street turned into collateralized debt obligations or CDOs.
Merrill Lynch, now part of
Bank
of America Corp., underwrote the South Coast CDO in January 2006 by stuffing it with packages
of home loans originated by firms such as Countrywide Financial Corp., the big California lender.
Once a CDO debt pool is assembled, it is sliced into layers based on risk and return. Merrill
sold the safest, or top layer, of deals like South Coast to large banks, including in Europe and
Canada.
The banks wanted protection in case the housing market tanked. Many turned to Goldman, which effectively
insured the securities against losses. Then, to cover its own potential losses, Goldman bought protection
from AIG, in the form of credit-default swaps.
Goldman charged more than AIG for the protection, so it was able to pocket the difference, making
millions while moving the default risks to AIG, according to people familiar with the trades.
The banks eventually realized they didn't need to use Goldman as a middleman.
The trades seemed prudent at the time given AIG's strong credit rating and the fact that AIG agreed
to make payments to Goldman, known as collateral, if the value of the CDOs declined. The trades were
also low risk for Goldman as long as AIG stayed afloat.
Other banks also acted as middlemen, including Merrill Lynch, which did roughly $6 billion of
these deals compared to $14 billion for Goldman, according to people familiar with the trades and
the analysis of banks' exposures to AIG.
"It seems shocking to me that Goldman would become so exposed to AIG and kept doing deals with
them and laying on the risk," says Tom Savage, a former chief executive of AIG's financial products
unit who left in 2001 before the explosive growth of insuring mortgage-debt pools.
The middleman trades began to unravel in mid 2007 when the U.S. mortgage market started slumping.
Goldman was the first of AIG's trading partners to notify AIG that the CDOs were losing value and
demand collateral. Other banks including Société Générale and a unit of
Credit
Agricole that had bought insurance from AIG eventually did the same.
A Goldman spokesman said that between mid-2007 and early 2008, Goldman showed AIG "market price
levels" at which trades could be undone, allowing AIG to decrease its risk, but "AIG refused to accept
that the market was deteriorating."
When Goldman didn't get as much collateral as it wanted from AIG, in 2007 and 2008 it bought protection
against a default of AIG itself from other banks.
AIG officials were skeptical of the prices Goldman presented, according to the minutes of a February
2008 AIG audit committee meeting, which noted that Goldman was "unwilling or unable to provide any
sources for their determination of market prices."
Additional calls for collateral from Goldman and other banks eventually led to AIG's September
2008 bailout and led the New York Federal Reserve two months later to fully cover $62 billion of
insurance contracts Goldman and 15 other banks had with the financial products unit of AIG.
Goldman's other big role in the CDO business that few of its competitors appreciated at the time
was as an originator of CDOs that other banks invested in and that ended up being insured by AIG,
a role recently highlighted by Chicago credit consultant
Janet Tavakoli. Ms.
Tavakoli reviewed an internal AIG document written in late 2007 listing the CDOs that AIG had insured,
a document obtained earlier this year by CBS News.
The Journal analysis of that document in conjunction with ratings-firm reports shows that Goldman
underwrote roughly $23 billion of the $80 billion in mortgage-linked CDOs that AIG agreed to insure.
One such deal was called Davis Square Funding VI. That CDO, assembled by Goldman in March 2006,
contained mortgage securities underpinned by subprime home loans originated by firms such as Countrywide
and New Century Mortgage Corp., one of the first subprime lenders to fail in 2007.
A big investor in Davis Square's top layer was Société Générale, which bought protection on it
from AIG, according to the internal memo. The French bank was the largest beneficiary of the New
York Fed's Nov. 2008 move to pay off banks in full on their AIG insurance contracts.
A company financed largely by the New York Fed ended up owning both the Davis Square and South
Coast CDOs. Société Générale received payments from AIG and the New York Fed totaling $16.5 billion.
Goldman received $14 billion for its trades that were torn up, including $8.4 billion in collateral
from AIG.
A representative of Société Générale declined to comment.
The special inspector general for the Troubled Asset Relief Program, which recently reviewed the
New York Fed's effort to stanch collateral calls last year, said Goldman officials said the company
believed it would have been fully protected had AIG been allowed to fail because of collateral it
had amassed and the additional insurance it had bought against an AIG default.
The auditor, however, questioned that conclusion. The report said Goldman would have had a difficult
time selling the collateral and that the firm might have been unable to actually collect on the additional
insurance.
When the federal government bailed out the insurer, Goldman avoided losses on its trades with
AIG covering a total of $22 billion in assets."
Isn't that an interesting coincidence. I wonder what Hank Paulson knew and when he knew it.
GS has certainly done well, after all they are one of the most "financially sophisticated" companies
on Wall Street.
You mean the $17 Billion Bonus pool set by Goldman was funded by US Treasury? You mean US borrowed
from China to pay GS wiseguys big fat bonuses? Surprised?
Let's also not forget that Hank Paulson allowed Lehman to fail, and pretty much pushed Merrill
Lynch into the arms of B of A.
So, Paulson bailed out Goldman Sachs, and destroyed their largest competitors.
Will the readers of the WSJ finally wake up to the fact that we have Crony Capitalism / Socialism
for the Rich in these United States?!?!?!
DAVID LAWRENCE:
Blaming Goldman is a bit like blaming a gas station attendant for Molotov cocktails. "Would
you like matches with that sir?" The line can become blurry depending on what was known and when.
Franklin Brock:
In this case, Goldman ran the gas station, pumped the gas into the bottle, inserted the fuse,
lit the match, and used flame retardant (Paulson and US taxpayer funds) to avoid the heat while
the rest of us got burned alive.
Allen Chambers
What is perhaps even more interesting is that Goldman KNEW AIG wouldn't have the cash and couldn't
encumber regulated, insurance assets in the event of default. It seems reasonable to conclude
that Goldman developed a game plan in advance. More than bit curious why the other insurers were
not bailed out and settled contracts for less than par.
If we can investigate Clinton's sex life, we can certainly investigate this. The problem is
that both parties are in on this one.
Good point Allen, it speaks volumes about how politics run on the hill. It doesn't matter what
party you gravitate toward anymore. Politicians are virtually owned by special interests and the
special interests have nothing to do with the U.S. Constitution's definition of public funds and
how they are suppose to be used.
Special interests are about profits supported by government policy toward large corporations.
While OB trashed the pharmaceutical companies they contributed 3 times more money into his campaign
than they did John McCain. Why? Because, they knew that national health care was No.1 on his agenda.
They had to calculate which of the two would wind up improving their bottom line. It wasn't McCain.
What does that make O.B.? He's a politicians. And, ideology is not part of his agenda, it's
how to best achieve his agenda and if sleeping with the devil is part of that, then so be it.
OK, OK, I'll stop before this turns into a rant... actually it came pretty close to that....
We will never know the truth about GoldmanSach and AIG, since King Bernanke is being protected
by Obama.
But we can derive some conclusions. These guys were playing for Billions. They (GoldmanSachs)
did make lots of money already. Some of that money must have ended up as kickbacks to Obama/Federal
Reserve staff (speaking fees, professorships like Henry Paulson is enjoying at Johns Hopkins?).
Maybe King Bernanke did not get any Kickback directly, but on the other hand he wrote a term
paper on the Great Depression and look where he is now! So just to preserve his job he will do
anything. GoldmanSachs can guarantee the King Bernanke gets reappointed. So in the end, its a
very high stakes game. And it is kept secret with the blessing of congress with the excuse that
the Fed must be independent!
If only the American people where not all obsessed with their own house prices and stock investments,
they would probably complain enough to break up these 'clubs'. Sadly no one cares, Everyone just
hopes that his house will appreciate, his stocks will go up, ... and King Bernanke is trying hard
to do that, -by printing money. Subprimes loans have now been replaced by US Government Tax Payer
funded Fannie/Freddie/FHA or whatever loans.
There is a reason why civilizations rise and fall.
"If only the American people where not all obsessed with their own house prices and stock investments,
they would probably complain enough to break up these 'clubs'. Sadly no one cares, Everyone just
hopes that his house will appreciate, his stocks will go up, ... and King Bernanke is trying hard
to do that, -by printing money. Subprimes loans have now been replaced by US Government Tax Payer
funded Fannie/Freddie/FHA or whatever loans."
You're right to a degree. It is not so much that people are obsessed with their own house prices
and stock investments, as it is that these are the only things in which they have some measure
of control (less in house prices). When it comes to the ruling oligarchy on Wall St, the banking
fraternity and insulated politicos in DC, the average person feels futility in being able to make
a difference. I believe that sense of futility gives rise to resignation and apathy and directs
one's attention myopically to one's own immediate interests - at least to provide for the needs
of themselves and their families.
Tyranny relishes and feeds on apathy and lack of resolve and public inertia. It takes a great
force to move public inertia, but once it starts to move, it also takes a great force to stop
it. Maybe if we keep exhorting the American people and informing them of how we are all being
taken advantage of by a relative few, some good and positive change will come of it.
Forbes magazine had an article about the trading arm of GS bankrupting a major US pipeline
company. GS is an amoral if not evil company. It should be broken up and their ill-gotten bonuses
be taxed to the max.
So how much money did Goldman make betting against AIG using their intimate knowledge of the
potential size of the AIG mortgage insurance book? Don't forget that Goldman had started betting
heavily against the mortgages and made Billions from that trading prior to the AIG blow-up. Since
they also knew the real quality of the 13B in rotten CDO they assembled it was a rather obvious
trade for them. Produce a lot of garbage and then bet against it and those who insure it. This
is not top talent genius trading but the work of fraudsters preying on their customers and counterparties.
Time for a special proscutor with plenty of FBI and forensic accounting support.
"So how much money did Goldman make betting against AIG using their intimate knowledge of the
potential size of the AIG mortgage insurance book? Don't forget that Goldman had started betting
heavily against the mortgages and made Billions from that trading prior to the AIG blow-up. Since
they also knew the real quality of the 13B in rotten CDO they assembled it was a rather obvious
trade for them. Produce a lot of garbage and then bet against it and those who insure it. This
is not top talent genius trading but the work of fraudsters preying on their customers and counterparties.
Time for a special proscutor with plenty of FBI and forensic accounting support."
Their "genius" was in getting away with it. What better situation than to profit enormously
by ethically challenged activity that should be deemed criminal, but is not! GS refined and elevated
common fraud to an art form that instead of being abhorred is lauded by many.
You are absolutely right about a special prosecutor. Unfortunately, I fear that those who could
call for such action have been bought and paid for by the foxes guarding the hen house!
To John S. and Douglas below. How about suggesting your ideas to the newly formed Financial
Crisis Inquiry Commission? The lead attorney of this Commission is Tom Greene who handled the
anti-trust suit against Microsoft for the State of California. He doesn't know Wall Street as
well as he should for someone in that position but I think his anti-trust experience will come
in handy for breaking these banks up. I also like Douglas' RiCO idea.
The Pecora Hearings of the 1930's revealed a lot of what the crooks on Wall Street were doing
at that time. Those revelations were the bases of the tough securities laws that were passed in
that period. The problem we have now is Congress is first passing the legislation (to CTA) . This
Commission isn't issuing their report until December of 2010 - a month after the election. I guess
they knew people of BOTH parties are to blame for this mess.
David Heitel
The fact that Goldman Sachs was securitizing selling CDOs while buying unhedeged CDSs betting
on their failure strikes me as something out of the Sopranos. That has to be a breach of fiduciary
responsibility. I would like to see Attorney General Eric Holder pursue a RICO investigation of
Goldman. Their conduct seems no less egregious than that of the mob
Douglas Kurz
Goldman should be formally investigated and perhaps prosecuted under RICO. When will someone
have the courage and competency to take on this aggressive, overly powerful, greed-driven empire
and subject it properly to the just constraints of law and equity? The only thing that drives
the culture at a place like Goldman is the bonus pool. Short of federal investigations, criminal
prosecutions, and civil actions, the only thing that would constrain them would be to TAX THE
BONUS POOL. Those are obviously ill-gotten gains to which the firm is NOT entitled, as it would
NEVER have survived the AIG debacle without massive government support (orchestrated by its own
former co-Chairman, Mr. Paulson). It is time to break Goldman up, force them to disgorge their
wrongly obtained gains, and investigate the hell out of them.
I got news for you: if AIG hadn't been bailed out and the whole financial system didn't survive
- our economy would have collapsed.. Which means that if not for government's support - none of
us would have a paycheck to rely on.. Does this mean that we are not entitled to our paychecks?
You can't prove that Igor. It is the same blanket statement of fear that was used by the criminals
who perpetrated this in the first place. Hank Paulson being the most wanted financial gangster
in history. Tyrants always take advantage of a crisis. There were other ways that the government
could have stepped in and supported the financial system without picking favorites. For one, they
could have held insolvent institutions in receivership, fired the management and gave a haircut
to the bondholders. Depositors would have been saved and paychecks would still be flowing through
the bank system. This was a criminal act which, if prosecuted may well bring GS down ... just
like Enron and Arthur Andersen. I hope it does.
TOM OKEEFE:
Igor, do you know this for certain? The Banksters are masters of the Big Lie and Fear. They
did the same thing in the 30's when they cried that the 33 and '34 Securities Acts would kill
their industry. Now they are crying ( and this may be you) that they will move out of the country
if tough legislation is passed.
Real tough legislation like a Windfall Profits Tax or increasing Section 31 fees to .80 of
one percent instead of .25 would be a start.
If they threaten to move - let them . There are plenty of good banks in this country that could
take their business and I mean TAKE their business because they shouldn't be allowed to operate
in this country at all if that happens.
Goldman Sachs recently published its 13F, a quarterly filing in which all asset managers reveal
their largest holdings. In it, Goldman's asset management group reveals their largest long positions
and their largest short positions. Now, Goldie is widely held to be the "smartest" guys on Wall Street
(not my opinion) so their net shorts (the stocks or companies they're betting AGAINST) were particularly
interesting to me:
The above positions combine Goldman's long and shorts (stock and option based positions) for the
NET short positions. In simple terms, Goldman MAY be long these companies, but because the bank is
ALSO shorting them (and shorting more shares than it is going long) it has NET short positions.
Put another way, these are the companies or positions that Goldman is betting the most money
on falling in the future.
For starters, FOUR of the top 10 are financial companies. The largest financial short is Wells Fargo,
which Goldman has committed $289 million to betting against. After that it's Mastercard ($266 million),
then PNC ($202 million), and finally AIG ($152 million). Looking at Goldman's positions, it's plain
as day that Wall Street's "finest" do NOT believe the financial crisis is over (why are they betting
against the banks if they do?). It's also clear that Goldman's analysts have noted as I have that
both Wells Fargo and PNC both have massive exposure to the derivatives market (the fact that Goldman
ALSO has massive derivative exposure is beyond ironic).
However, where things get absolutely absurd is Goldman's short position of AIG. Goldman, as has
been widely documented, was one of the largest benefactors of AIG's bailout (the then investment
bank had MASSIVE counter party exposure to AIG's toxic balance sheet). To see Goldman now betting
AGAINST AIG after receiving $13 billion in tax payer money to insure the former didn't go under along
with the latter is outrageous (if not infuriating) to say the least.
On a final note, I wanted to point out Goldman is also shorting a Euro index (betting against
that currency) as well as two gold mining companies (Barrick and Agnico Eagle Mines). This indicates
that Goldie is bearish on both the euro and gold which hints that Wall Street's finest are likely
betting on a US Dollar rally (that would, after all, be the most obvious catalyst for a correction
in gold and the euro). To be blunt, it's clear that Goldman (like me) believes the financial crisis
is nowhere near over: four of its top ten largest shorts are financial companies. It's also worth
noting that Goldman is betting against gold and the euro. Given Goldman's incredible access to and
close relationship with the regulators and federal government, I see this as further proof that we
may be seeing another stock crisis triggered by a Dollar rally in the near future.
Here are five reasons why we want Goldman Sachs destroyed and buried so we can dance on its grave
and why these crony apologists are wrong when they say that the "populist outrage at Goldman Sachs
is misplaced".
1. The AIG bailout was a covert bailout of Goldman and we want our money back. Every dime of it.
Goldman had been placing a bunch of bets against real estate derivatives at a casino called AIG.
Goldman started to realize that AIG didn't have enough money to pay all the bets they'd taken, so
sucked some $6 billion out of AIG in the weeks before AIG went belly up (a cash drain which indeed
helped caused AIG to go belly up). But Goldman still had $13 billion in profitable bets that they'd
placed at the AIG casino and without the cash they were due from those bets, Goldman would be insolvent
and be forced into bankruptcy. So Goldman called up the chairman at the NY Fed, one Stephen Friedman,
and asked for welfare help. Stephen used to run Goldman before he decided to move over and run the
NY Fed arm of Goldman - I mean, the NY Fed arm of the Federal Reserve (which come to think of it,
is owned by Goldman and the other banks that it bailed out with your taxpayer money). Stephen promptly
went out and bought tens of thousands of shares of Goldman Sachs stock to supplement the millions
he already owned of it, and then had the NY Fed cover all the bets at the AIG casino in full with
taxpayer money.
Yup, Goldman's former chairman used his power despite all those obvious conflicts of interest,
and funneled a full $13 billion of taxpayer money to Goldman Sachs via the bailout of AIG.
We want every dime of the AIG counterparty bailout back. We could buy 2.6 million Americans $5000
worth of insurance with the amount of money that Goldman got from AIG from the taxpayer.
2. Goldman became a "financial holding company" after it became a "bank holding company"after
it realized it was going to be insolvent even after it got Stephen Friedman to write them a $13 billion
check from AIG funded with taxpayer money. Goldman had to lobby for special exemptions and all kinds
of favoritism in order to get such a petition passed by all the bureaucracies who are supposed to
be doing all kinds of due diligence in order to make us citizens believe that either of the "holding
company" status means anything other than the fact that the "holding company" gets access to cheap
welfare loans from the Fed and guarantees against losses for the holding company which mean that
the taxpayer is always left holding the bag.
Okay, and here's where we really get outraged by this "financial holding company" status crap.
See, since Goldman's got that status (and since it's also "too big to fail" of course) it can go
out and gamble tens of billions of dollars on currencies, commodities, bonds, Treasuries, stocks,
derivatives, private equity, venture capital and anything else they want to gamble on - and if they
make money, they keep the profits and payout bonuses, but if they, heaven forbid, actually lose money
on that levered gambling addiction they have…well, that taxpayer is going to eat the losses.
Goldman is guaranteed privatized gains and socialized losses. We want that stopped now and we
want every dime of profit they've made gambling this year applied against the government deficit.
3. We know for a fact that Goldman's executives get to talk to and even advise the Treasury and
the Fed on how the Treasury and the Fed should be buying and selling in the Treasuries market, in
the derivatives markets, in the overnights markets, in the CDO markets and so on. Does anybody reading
this article actually believe that Goldman doesn't use all that information to place those bets that
are resulting in all those record trading profits for Goldman this year? Come on. And not only are
they screwing other private investors with such front-running,but it's usually you and me the taxpayers
on the other side of these trades this year.
We want Goldman execs to have absolutely no private access to government officials. Given all
the obvious and repeated conflicts of interest in such interactions with taxpayer funds and policies
on the line, let's require Goldman and the Treasury/Fed to conduct all interactions completely in
the public via webcam, conference calls, or even Op Eds. But no more calls or private meetings between
Goldman dudes and government dudes.
4. Goldman was packaging and selling toxic derivatives for hundreds of billions of dollars to
investors around the world, telling those investors that such derivatives were safe and smart bets.
At the same time, Goldman was out at the AIG casino not just hedging their own exposure to the derivatives
while they were packaging them, but Goldman was actually betting against those very products. They
were literally selling products they were so confident would fail that they bet tens of billions
of dollars of their own money at AIG against those products they were telling investors were safe.
We want some perpwalks for this obvious fraud.
5. Goldman propaganda is insulting to anybody paying any attention.
- Goldman says: "We didn't want or need TARP money." Lie! They were so desperate for capital at
that point, they took $10 billion in TARP funds and needed ANOTHER $5 billion in funds from Warren
Buffett. Buffett put the screws on Goldman with onerous, expensive terms on that loan, and Goldman
was so desperate they took it anyway.
- Goldman says: "We already paid back the taxpayer." Uh, like I said above, you're still gambling
with my money keeping the profits since you got lucky and front ran the taxpayer in a bull market
for the last six months and we still want every dime of the AIG bailout back too. Goldman and the
taxpayer ain't even close to square.
- Goldman says: "We were just smart and have done nothing wrong." Oh, wait Lloyd Blankfein, the
CEO, finally admitted that the company "participated in things that were clearly wrong." Like I said,
let's prosecute those clear wrongdoings!
- Goldman says: "We were hedged against any AIG losses even without the taxpayer." Lie - those
AIG bets would have been a $13 billion write off that Goldman would have been fighting for in a legal
bankruptcy if Stephen Friedman, former Goldman chairman, hadn't orchestrated a complete bailout for
Goldman via AIG when Stephen was buying Goldman stock behind the scenes while running the NY Fed.
That's part of why everybody said it was a "credit crisis" at the time - nobody had the money to
cover all the bets and the counter bets and the hedges at places like Goldman.
–
Goldman begged for and got tons of help from the taxpayer, and even if you weren't against the
Wall Street bailouts like I was from day one, you're probably livid at Goldman's arrogance and greed
and denials.
Hey Goldman, if nothing else, how about a little gratitude for us saving your butt when you needed
it.
The rage against Goldman isn't just populist. The rage against Goldman isn't just popular. The
rage against Goldman is right.
And unfortuntely, the only thing you and I can do about it is to vote out every single incumbent
who empowered Goldman and its ilk with all their bailouts, stimulus and other wealth redistribution
policies.
I'd also look to short Goldman on strength now that the stock has finally dipped about 10% from
its highs. I'm not sure what else this company can do to jack up its profits in the near term even
as it destroys its brand for the future. I'd look at slowly but surely building a Goldman short position.
Maybe even some long-dated put options - say something at the $200 strike range out in 2011 or so.
You'd pay a little premium once again, but you'd expose less capital and limit your losses by using
the put instead of outright shorting the stock.
Regardless of Goldman as a trade or an investment - but for the sake of our society:
You tell me - would America be better off without Goldman Sachs?
(Reuters) New York: Having inoculated its employees with H1N1 vaccine dosages usurped from pregnant
women and children, Goldman Sachs has increased its vigilance against the contagious virus by banning
employee contact with spare change.
An internal memo outlines steps staff should take to avoid becoming ill, starting with the eradication
of the potentially infected currency that may have lodged itself under the seats of their automobiles.
The hazardous materials are being collected and sent to Small Business for disposal.
The memo also advised employees to "resist the urge to open your own car door ; let your driver
do it."
-Richard Ambrose
Space_Cowboy_NW:
Somehow, the poingant tone of 'F#ck The Masses' seems to resonate instep with "Doing God's
Work".
As always, your mileage may vary……
"Action speaks louder than words but not nearly as often. " -Mark Twain
bsneath:
While the risk of such an occurence is considered remote, Goldman employees were advised not
to perform holiday volunteer work at soup kitchens or other locations frequented by poor people.
"We are taking this action to avoid any potential contamination of employees in key profit centers."
Said Lucas Von Pragg, spokesperson for Goldman Sachs. He went on to say, "We feel we can better
help these people by continuing our good work at making the markets more efficient for all."
"Goldman's public disclosures in September 2008 obscured its contribution to AIG's near bankruptcy
and the need to bailout Goldman's trading partners in AIG related transactions. Goldman's trading activities
played a starring role in the near collapse of the global markets."
November 17, 2009
"Goldman's trading activities played a starring role in the near collapse of the global markets."
Goldman wasn't the only contributor to the systemic risk that
nearly
toppled the global financial markets, but it was the key contributor to the systemic risk posed
by American International Group, Inc.'s (AIG) near bankruptcy in September 2008.
When it came to the credit derivatives AIG was required to mark-to-market, Goldman was the 800-pound
gorilla. Calls for billions of dollars in collateral
pushed
AIG to the edge of disaster. The entire financial system was imperiled, and Goldman Sachs would
have been exposed to
billions in devastating losses.
A Goldman spokesman
told me its involvement in AIG's trades was only as an "intermediary," but Goldman
underwrote some of the collateralized debt obligations (CDOs) comprising the underlying risk
of the protection Goldman bought from AIG. Goldman also underwrote many of the (tranches of) CDOs
owned by some of AIG's other trading counterparties.
Goldman was AIG's largest counterparty, and its trades made up one-third of AIG's approximately
$62.1 billion in transactions requiring market prices. Societe Generale (SocGen) was AIG's next largest
counterparty with $18.7 billion. SocGen, Calyon, Bank of Montreal, and Wachovia bought several (tranches)
of Goldman's CDOs and hedged them with AIG.
Just look at Goldman's recent huge "profits," two-thirds of which went for bonuses. It is now
estimated that this year's bonus pool will be plus or minus $23 billion, the largest ever. Less than
a year ago, these same guys were on the edge of a run on the bank. They were saved only by "government"
- the taxpayers' supposed agents - who decided to interfere with the formerly infallible workings
of capitalism.
Just as remarkably, it is now reported that remuneration for the entire
banking industry may be approaching a new peak. "Well, we got rid of some of those
pesky competitors, so now we can really make hay," you can almost hear Goldman and the others say.
And as for the industry's concern about the widespread public dismay, even disgust, about excessive
remuneration (and, I would add, plundering of the shareholders' rightful profits)? Fuhgeddaboudit!
In the thin book of "lessons learned," this one, like most of our other examples, will not appear.
You'd think the SEC was populated solely with morons incapable of basic arithmetic. If not, then
GS did God work, or at least authorities approved work in destruction of the US economy...
Submitted by Cheeky Bastard on 11/01/2009 11:43 -0500
Much speculation was done over the past year about the nature of the hedges Goldman Sachs has
done in the housing securities. While there was no certain proof of Goldman Sachs misleading its
investors many believed, among them ZeroHedge, that the nature of Goldman Sachs hedges was basically
illegal and fraudulent, given the two tier treatment of the housing securities by Goldman Sachs.
In the recent report published by McClatchy some new and interesting details concerning those
hedges are being brought into the spotlight. We hope that the regulatory bodies will perform their
task and launch an investigation about the nature of those hedges.
Also, if Goldman Sachs was hedged via the CDS contracts underwritten by AIGFP,
the possible default of the insurance giant would, almost certainly, issue a lethal blow to Goldman
Sachs itself. While those hedges are in no way illegal by itself,
the way and the time when Goldman was hedging his housing exposure is,
to say the least, suspicious.
A detailed view is presented in McClatchy article published today, and we hope that the article
will bring the much needed attention and finally result in an investigation into those hedging practices
done by Goldman Sachs.
You can read the whole article here:
WASHINGTON - In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities
backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting
that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown,
enabled the nation's premier investment bank to pass most of its potential losses to others before
a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments
were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that
bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation
has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing
crash may have violated securities laws.
"The Securities and Exchange Commission should be very interested in any financial company that
secretly decides a financial product is a loser and then goes out and actively markets that product
or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence
Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's
banks. "This is fraud and should be prosecuted."
John Coffee, a Columbia University law professor who served on an advisory committee to the New
York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so
the legality of Goldman's maneuvers depends on what its executives knew at the time.
"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these
investments because it saw them as toxic waste and virtually worthless."
Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.
A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its
mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like
bets, called credit-default swaps, to "hedge" against a housing downturn.
DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk,
nor would investors have expected us to do so ... other market participants had access to the same
information we did."
For the past year, Goldman has been on the defensive over its Washington connections and the billions
in federal bailout funds it received. Scant attention has been paid, however, to how it became the
only major Wall Street player to extricate itself from the subprime securities market before the
housing bubble burst.
Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks
still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms
of retail banks, while another, Lehman Brothers, folded.
To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents,
SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar
with the firm's activities.
McClatchy's inquiry found that Goldman Sachs:
Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders
that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated
applicants' incomes to justify making hefty loans.
Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide,
including European and Asian banks, often in secret deals run through the Cayman Islands, a British
territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
Has dispatched lawyers across the country to repossess homes from bankrupt or financially
struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages
anyway because Wall Street made it easy for them to qualify.
Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury
Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several
other Goldman alumni.
The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when
he organized a massive rescue of tottering global insurer American International Group while in constant
telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later
used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.
These decisions preserved billions of dollars in value for Goldman's executives and shareholders.
For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have
lost more than $150 million if his firm had gone bankrupt.
With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to
have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By
repaying $10 billion in direct federal bailout money - a 23 percent taxpayer return that exceeded
federal officials' demand - the firm has escaped tough federal limits on 2009 bonuses to executives
of firms that received bailout money.
Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in
revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.
THE BLUEST OF THE BLUE CHIPS
For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated
an elite reputation as home to the best and brightest and a tradition of urging its executives to
take turns at public service.
As a result, Goldman has operated a virtual jobs conveyor belt to
and from Washington: Paulson, as Treasury secretary, sent tens of billions of taxpayers'
dollars to rescue Wall Street in 2008, and former Goldman employees populate some of the most demanding
and powerful posts in Washington. Savvy federal regulators have migrated from their Washington jobs
to Goldman.
On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement
division.
Goldman's financial panache made its sales pitches irresistible to policymakers and investors
alike, and may help explain why so few of them questioned the risky securities that Goldman sold
off in a 14-month period that ended in February 2007.
Since the collapse of the economy, however, some of those investors have changed their opinions
of Goldman.
Several pension funds, including Mississippi's Public Employees' Retirement System, have filed
suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently
made "false and misleading" representations of the bonds' true risks.
Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested
in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds
of millions of dollars" on those and similar bonds.
Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."
California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million
in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage
of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly
75 percent, according to documents obtained through a state public records request.
In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts
attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to
pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.
Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate,
cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office
focused on investment banks because they provided a market for loans that mortgage lenders "knew
or should have known were destined for failure."
New Orleans' public employees' retirement system, an electrical workers union and the New Jersey
carpenters union also are suing Goldman and other Wall Street firms over their losses.
The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained
by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively
paid $2 billion for Goldman's risky high-yield bonds.
Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers
Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70
million; and Allstate, $40.5 million, according to the data from the National Association of Insurance
Commissioners.
In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted
price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.
Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted
most traditional lending criteria in favor of loans that required little or no documentation of borrowers'
incomes or assets.
While Goldman was far from the biggest player in the risky mortgage securitization business, neither
was it small.
From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according
to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.
In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007,
Goldman marketed at least $17 billion more for others.
It also was the lead firm in marketing about $83 billion in complex securities, many of them backed
by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished
industry data by Gary Kopff, a securitization expert.
In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million
of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the
U.S. they were marketed with lower grades.
Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because
the borrowers had high credit scores.
Goldman's securities came in two varieties: those tied to subprime mortgages and those backed
by a slightly higher grade of loans known as Alt-A's.
Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults
on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans,
which began to rocket upward this year, are causing a new round of defaults.
Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying
that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference,
avoiding any images of employees flashing wads of bonus cash at casinos.
More recently, the firm has launched a public relations campaign to answer the criticism of its
huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that
Goldman's activities serve "an important social purpose" by channeling pools of money held by pension
funds and others to companies and governments around the world.
KNOWING WHEN TO FOLD THEM
For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime
game before getting burned.
New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told
Congress that his researchers discovered by early 2006 that many subprime loans covered the homes'
entire value, with no down payments, and so he figured that the bonds "would become worthless."
He soon began placing exotic bets - credit-default swaps - against the housing market. His firm,
Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared
in 2007 and 2008. (He isn't related to Henry Paulson.)
At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky
mortgages, the first of multiple strategies it would employ to reduce its subprime risk.
The company has closely guarded the details of most of its swaps trades, except for $20 billion
in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults
or ratings downgrades on subprime-related securities it offered offshore.
In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial
Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman
DuVally said.
Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling
off its inventory of bonds and betting against those classes of securities in secretive swaps markets.
DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing
or financial market conditions would become."
In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old
subprime index on a private London swap exchange, said several Wall Street figures familiar with
those dealings, who declined to be identified because the transactions were confidential.
The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost
value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5
billion, Viniar disclosed last spring.
As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September
2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included
more than $8 billion to settle swaps contracts.
DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure
its own subprime risks and to take positions against the housing market for its clients. Until the
end of 2006, he said, Goldman was still betting on a strong housing market.
However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the
U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February
2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages
after the December meeting, though DuVally declined to say when.
I'VE GOT A SECRET
Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret
wagers.
Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the
company's mortgage business "has extensive barriers designed to keep information within its proper
confines."
However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous
bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading,
also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly
resigned for personal reasons.
The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities,
which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities
from March 2006 to February 2007.
The firm maintains that the requirement doesn't apply in this case.
DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional
Buyers, a class of sophisticated investors that are afforded fewer protections than small investors
are under federal securities laws. He said Goldman made all the required disclosures about risks.
Whether companies are obliged to inform investors about such contrary trades, or "hedges," is
"a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego
law professor who specializes in securities. One issue is how specific companies must be in disclosing
potential risks to investors, he said.
Coffee, the Columbia University law professor, said that any potential violations of securities
laws would depend on what Goldman executives knew about the risks ahead.
"The critical moment when Goldman would have the highest liability and disclosure obligations
is when they are serving as an underwriter on a registered public offering," he said. "If they are
at the same time desperately seeking to get out of the field, that kind of bailout does look far
more dubious than just trading activities."
Another question is whether, by keeping the trades secret, the company withheld material information
that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a
Duke University law professor who also has served on the NYSE advisory panel.
If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational
investor would not only consider Goldman's conduct material, but likely compelling a decision to
take a pass on the recommendation to purchase."
Cox said that existing laws, however, don't require sufficient disclosures about trading, and
that the government would do well to plug that hole.
In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001 to
2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility
of a pullback in overheated real estate markets, especially in California and Florida, where the
most subprime loans had been made.
Suits filed by the pension funds, however, allege that Goldman made
materially false or misleading statements in its public offerings, failing to disclose that many
loans were based on inflated appraisals and were bought from firms with poor lending practices.
DuVally said that investors were fully informed of all known risks.
"What's going to happen in the next few years," said San Diego's Partnoy, "is there's going to
be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or not?"
(Tish Wells contributed to this article.)
The article states some serious allegations, and reveals a colossal failure in investigating Goldman
Sachs. We hope, yet again, that an investigation, into this, is being prepared by the SEC and other
regulators. But that is a long shot, and it would bring some necessary crackdown and some light on
the black box which is Goldman Sachs.
Also, I would like to thank the people over at McClatchy for providing us with this overview of
the GS hedges concerning the housing market. Thank you.
CB - Your information quest has borne fruit thanks to McClatchy.
Color me skeptical. The policy of judicial exclusion is firmly entrenched with respect to GS
and the "regulators" that oversee the firm. In the current context "justice" is a long forgotten
concept with respect to the lynch pins of finance or the governments that serve them.
AN0NYM0US:
this is a good companion article from November 5, 2007
Paulson's Focus on `Excesses' Shows Goldman Gorged
...Paulson, 61, doesn't mention that Goldman still has on the market some $13 billion of almost
$37 billion in bonds backed by subprime loans or second mortgages that it created while he was
chief executive officer. Those bonds have an average delinquency rate of almost 22 percent, higher
than the average of other subprime bonds from the period, according to data compiled by Bloomberg....
cheeky...thanks very much for presenting this information.
bottom line is that gs is a disgusting group of people who would
screw anybody to make a buck. karma will find a way to make the payback interesting.
AN0NYM0US:
Goldman's CEO sees no big write-down
Nov. 13, 2007
Blankfein says investment firm remains short on mortgages
Blankfein also said Goldman is comfortable standing behind its valuations for some $50 billion
of risky and illiquid assets that it holds. They include private-equity, real-estate and leveraged-buyout
loans.
"We are confident that we know how to evaluate these assets," Blankfein told his audience at
the conference, which was sponsored by Merrill Lynch.
Goldman shares closed up 8.5% at $233.04.
In September, Goldman said its third-quarter profit rose 79%, driven by higher mortgage trading
revenue from short positions, among other things.
Buying CDS from an undercapitalized counter party (AIG) Seems like very poor risk management
unless there is Hank with his helpful services in play. Nothing cheesy about this game.
Cheeky Bastard :
yes move along, move along, nothing to see here ....
hence the now infamous bailout of GS via AIG bailout .... hate the game and the players ...
defender :
Unscarred, I agree with you that hedging your exposure is not a immoral action (point #4).
The problem that I have is that once they knew things were going to collapse, GS:
1. Kept the CDS. This is a personal opinion, I see no reason why someone should be able to
hold hedges for something that they do not have exposure for, and still call it an investment.
It should be labled as gambling, and regulated as such.
2. Sold them as fast as they could. This is also not immoral by itself, but couple it with
3. and get a picture that involves a pitchfork and a barbed tail.
3. Didn't include in the marketing that the performance of the loans was down, and the market
was deteriorating rapidly. This is the equivilent of a car salesman selling a car that he knows
the transmision is about to go out in, and saying that it is "in tip top shape, with no mechanical
problems". I am sure that Travis can tell you exactly what happens to car dealers that do this
sort of thing. If no store in the country can get away with this sort of behavior, why should
GS?
I think that our difference in opinion basically boils down to you seeing the move as CYA,
and me seeing the move as screw the little guy. Anyway, I hope that wasn't too preachy.
Off topic, your avatar is completely spot on. The end of starbucks would be a very good thing
for this country.
defender :
That is actually my entire point. These actions were taken with
full knowledge of what was done in the other departments. Just as there were emails
floating around BoA about how bad these products were, I am quite certain that at least the same
number were floating around GS. I have worked in several large corporations, with two that were
geographically isolated from the rest of the company, without exception you could find out everything
that was happening in the rest of the branches all the way down to "private" business negotiations
with other corporations. All of this information was garnered from the people that worked on the
floor, so you can only imagine what the managers knew.
The other angle from this is that GS had internally published research
which stated that these products weren't worth the paper they were printed on.
How is it not fraud that this information was excluded from the marketing for these products.
Isn't this the same as shorting a product that you have on a conviction buy list?
Basically my sense of morality is sorely chafed on this issue. "The American way" has degenerated
to nothing more than making a quick buck in any manner possible, because it is your right as an
American. We have long since lost the restraining hand of justice, and now all that we have is
grift. I think what pains me the most is that I see no peaceful way to change this.
AN0NYM0US :
more from the archives (and I thought Jamie was the Wunderkid) but then maybe he too was playing
both sides of the trade
Mortgage-backed issuance is forecast to achieve record volumes this year
23 Oct 2006
Steven Schwartz, co-head of the real estate finance group at JP Morgan, said: "The commercial
mortgage-backed securities market remains active and I would not be surprised if this year was
another record with volumes up 30% from last year."
This view is shared by Schwartz's boss, Jamie Dimon, chief executive of JP Morgan, who said
last week he expected the investment bank to sell up to $20bn (€16bn) of mortgage-backed securities
in the final months of the year.
Steve Cummings, head of corporate and investment banking at Wachovia, said: "A significant dip
in the real estate business would affect investment banking activities but we have not seen that
and market conditions remain strong."
Wachovia and Merrill Lynch last week advised Tishman Speyer, the owner of New York's Rockefeller
Center, and BlackRock Realty on the purchase of Stuyvesant Town-Peter Cooper Village, Manhattan's
largest apartment complex, for $5.4bn. The deal will be financed in the CMBS market. The sector's
boom has meant investment banks are taking the opportunity to boost their presence. Bear Stearns
became the fifth bank this year to expand its mortgage business through acquisition when it bought
Encore Credit, a subprime mortgage origination platform, this month. Merrill Lynch agreed to buy
Californian mortgage origination and servicing business First Franklin Financial. Other banks
that have bought US mortgage platforms include Morgan Stanley, Deutsche Bank and Barclays Capital.
This is such an obvious example of corporate swindle. The GS defense is simply that the folks
swindled should have known that the ratings agencies were crooked, and that, because they were
so sophisticated, they needn't have been told that these AAA bonds were worthless.
I can see all these lawsuits against GS prevailing. Too big to fail, watch when all the pension
funds get to take all the GS money and GS goes out of business.
I can't wait.
DaddyWarbucks:
I agree. The seller offered the goods as AAA and knew otherwise, that's fraud. Claiming that
the buyer should have known it was a lie is no defense. Whenever the lawyers start doing verbal
and conceptual gymnastics you know that, as Marla would say, "Here comes an avalanche of bullsh!t".
bonddude:
Thank you for this Cheeky.
I guess that anonymous G old man guy doesn't like people gettin' in his kitchen.
Yes, of course they were all doing this shit. But G S went the opposite route from Merrill
who just stupidly decided to keep going push the accelerator to the floor hence their demise.
It's beautiful, just write insurance against the shit that's gonna bust.
The bullet point claim that they went to the end borrower is, well if true, it's so stupid
it's scary.
I won't hold my breath for Government Sux to pay except for individual chump deals like the
Massachusetts AG deal.
Cheers
Careless Whisper :
Is GoldmanSachs an investment bank holding company?
or a hedge fund?
or a criminal enterprise run by well educated people who control
strategically placed operatives in responsible government positions?
Goldman Sachs is whatever it wants to be. Secretary of Treasury Hank "the mole" Paulson, Ben
"the bag man" Bernanke, Tim "the go for" Geither, and all the Goldman Sachs alumni, lackeys, wannabes,
campaign $ recipients, etc. insure that the government allows Goldman Sachs to be whatever it
wants to be to accomplish whatever bailout Goldman Sachs needs.
Goldman Sachs survives ultimately not by its business and financial
acumen, but by its friends in high places. Like Lehman employees, Goldman Sachs
employees would have been dumped onto the street with their cardboard boxes if it had not been
for multiple rescues by Goldman Sachs friends in high places.
Careless Whisper :
Yes indeed, and the list of operatives all over the place goes on and on. Let's not forget
Robert Rubin who engineered the end to glass-steagel, Neel Kashkari who is supervising TARP, Edward
Liddy who worked as CEO of AIG just long enought to help insure that Goldman got $13 billion of
bailout loot. Then there's Gary Gensler, former Goldman partner who is now head of Commodity Futures
Trading Commission (just in case they ever regulate CDS). Robert Steele at Wachovia, who was there
just long enough to convince Wells Fargo to buy that toxic dump. Robert Zoellick, now president
of the World Bank. I haven't even mentioned Europe...
Here is Spitzer with Dylan Ratigan, 3 days ago.
Spitzer: I would NOT let Tim Geithner negotiate a house purchase for me.
Spitzer: Stop (Goldman) proprietary trading with Federally guaranteed money.
http://www.youtube.com/watch?v=1maBM5hOV3Y
tom a taxpayer :
One of Goldman Sachs greatest penetrations into the federal government is Stephen "no conflict
of interest" Friedman. While on the Goldman Sachs Board of Directors, and while Chairman of the
Board of the NY Federal Reserve, Stephen Friedman was also Chairman of the President's Foreign
Intelligence Advisory Board and Intelligence Oversight Board.
"In 1999, Bill Clinton appointed Friedman to the President's Foreign Intelligence Advisory
Board. In 2005, Bush named Friedman chairman of that board, a surprise second-term replacement
for Brent Scowcroft. He has been chairman of the Intelligence Oversight Board, an independent
body that assesses the state of national intelligence, since January 2006."
Goldman Sachs Stephen "no conflict of interest" Friedman was Chairman of the President's Foreign
Intelligence Advisory Board and Chairman of the Intelligence Oversight Board from January 2006
to January 2009.
"This is fraud and should be prosecuted." Thank you, Laurence Kotlikoff,
Boston University economics professor, for speaking truth to power.
The Achilles heel of Goldman Sachs is their despicable treatment of pension funds: widows,
widowers, children, the aged, the life savings of hard-working people.
Enough is enough. It's time for criminal charges, not just civil settlements or fines. Fines
are just a cost of doing business, and now, GS could be using taxpayer money to pay their fines.
Only criminal charges on the top echelons of Goldman Sachs, the masterminds, the ringleaders,
the Wall Street Teflon Dons flipping the bird to law enforcement, have any hope of arresting the
rape and pillage of pension funds, investors and taxpayers.
DaddyWarbucks:
I'm thinking RICO where you just round up the whole group and don't worry about individual
details. I hear GITMO is available.
tom a taxpayer :
"You said the secret word, "RICO", and you win $100", as Groucho Marx might have announced
on "You Bet Your Life".
Perhaps this latest expose of GS will be the tipping point for a fast-track Racketeer Influenced
and Corrupt Organizations Act (RICO) investigation of Goldman Sachs and the rest of the gang that
raped and pillaged the mortgage industry, ruined the housing market, destroyed the credit system,
endangered municipal financing, pension funds, and the banking system, sent the economy into a
downward spiral, and continues to endanger the world financial system, and continues to hold the
world in ranson to pay them billions$ or face the destruction of the world financial system and
economy.
Anonymous :
Why beat yourselves up about it? We all know that nothings going
to happen so long as the campaign funds keep flowing.
Anonymous :
Former Wall Street Player Reveals the Inside World Behind Shady Bailouts to Bankers
The top guy on Geithner's speed dial today is Goldman Sachs CEO
Lloyd Blankfein. There's no scenario under which Geithner would ever say that what
he did during the bailout and crisis period was wrong. Bill Clinton still doesn't see how repealing
Glass-Steagall was at all involved in this crisis. Summers of course, was treasury secretary that
day, a decade ago, when the Glass-Steagall Act was repealed, in fact, he introduced the ceremony.
JH: Now, we hear a lot about the little people's irresponsibility in all this -- in the collapse.
They took on more debt than they could sustain, they thought the good times would roll forever.
You argue this was never about the little guy, right?
NP: Neither the crisis, nor the bailout was about the little guy. Former Treasury Secretary
Henry Paulson was explicit in stating several times, and in several ways, that the government
should not be bailing out homeowners who got in over their heads. And true to those sentiments,
it didn't. Instead, amidst trillions of dollars of subsidies to the industry were made available
in the most original and creative of ways, and no heed was paid the jointly humane and economical
solution which would have been to find ways to restructure personal mortgages and loans, as opposed
to dumping buckets of money over the top layers of the financial community and promising it would
somehow trickle down and loosen credit for the "little guy."
For the money spent on subsidizing the industry, the government could have bought out every
single outstanding mortgage in the country. Plus, every student loan and everyone's health insurance.
And on top of that, still have trillions of dollars left over.
Thanks for posting. It was as it will ever be, caveat emptor and institutional buyers should
know better. However, the class of investors who purposefully stayed at the very top of the capital
structure were getting fucked (by not just Goldman, it's widely prevalent).
However, when a seller of new-issue / non-agency MBS is purposefully short the ABX for reasons
that firm knowingly later admits was an outright short that is a serious problem for any buyer
(stupid or informed, don't matter). I care not if the MBS basis is hedged, as is quite prudent
to do so (excepting cases of blatant idiocy by Goldman competitors).
The institutional buyers, again, must know better. But if the prospectus / new-issue documents
are read, and studied, by multiple & otherwise qualified persons how on earth could Goldman or
any other bank defend these practices? they can't. Knowingly fucking your customers over, I thought
those tasks resided with the US govt or the mob (or professional sport team owners).
And the mass media heap praise upon them.
AR :
Cheeky / Here is my favorite personal saying, which I repeat daily:
"Wall Street... the most highly regulated, legally CORRUPT. industry in the World."
I remember a Christmas party 20+ years ago, standing there, while someone ask me to tell them
all about Wall Street? I muttered out the above definition. And, still to this day, it's profound,
and holds more meaning today than at any other time in our history.
AR :
Follow up: You know, we teach our children, and some of us, our grand children, morals, ethics,
principals of hard work and honesty. Frankly, today, it's very easy to become greedy, lazy, dishonest,
and the like. It's hard (because of society) to stand tall, be honest, and work hard. Just remember
something (no matter what) -- just because the rest of the world is jumping like lemmings off
the cliff, it doesn't mean you have to join them. In the end, everyone reaps what they sow. There
are no shortcuts. Only people (like the Goldman's) who in the short term, think there is. Funny...ever
been around someone dying of cancer? When no amount of money can save their life? They discover
very, very quickly -- that TIME is the most precious commodity in life, not money. Which is Zero
Hedge's basic tagline if no one has noticed. Stay true to yourself and family. Life is SHORT.
Good luck everyone.
Anonymous:
It is vital that the two functions are kept as separate as possible, so in my mind it is symbolic
of a strong risk management culture that two similar parts of the firm can take such opposing
views. ---Ok..this does not happen..the Chinese Wall is a sieve...ask anyone who's worked on the
street; it's a comforting bon mot for "investors".
Here's an example...you put an fx order in with your guy at an i-bank -- he IM's the trading
desk and say bubkis wants to sell 1/2 a yard of $/JPY...trader sell $25mln..then your 1/2 yard...buys
his $25mln back and he books the difference..or he puts you in on a wide quote. It's not a game
for anyone but institutions and it is a game.
No one could top quarter after quarter after quarter of earnings if Chinese Walls worked. Ask
a block trader sometime how well they work.
Anonymous
Isn't the new watchdog at the SEC a former Goldmanite? Sure the SEC is really going to be interested
GS took out counterpart risk insurance against AIG.
Goldman treated AIG like other counterparties, where it bought "insurance" through special
contracts called credit-default swaps that would pay Goldman money if AIG went bankrupt. These
CDS contracts are a common feature of trading relationships in the markets.
That's not poor risk management. That's what makes them the best merchant bankers in the world.
(Looking for Bubby and/or Cheeky to continue the conversation)
Anonymous:
GS is just symptomatic of much broader issues (crazy notions like trust or fiduciary duty)
that have gone sorely lacking. To label any of them best is highly subjective. Always, always
GS was better than Jimmy Cayne or Richard Fuld would ever be. That in mind, (institutional) customers
of any bank beware: you have reserved the right to be fucked no matter what questions you ask
or any semblance of due diligence that is done.
Personally I carry a much greater disdain for Moody's or S&P. Those assholes deserve to burn.
Today as in prior times of crisis, there is a commonality to the NRSRO complete lack of competence
& no discernible leadership.
McGriffen
Unscarred :
That in mind, (institutional) customers of any bank beware: you have reserved the right
to be fucked no matter what questions you ask or any semblance of due diligence that is done.
McGiffen, you hit the nail on the head with that one! Don't think for two seconds that GS (or
any other i-bank, for that matter) is ever going to enter into an agreement with a client/peer/politician/fallen
angel that isn't 100% in their OWN best interests, first and foremost.
BANNING, Calif. - Goldman Sachs Group got into the residential mortgage business in 1984, and
for 17 years, it ran a staid operation that simply bought and sold loans.
All that changed in 2001, when the elite investment bank leaped aggressively into the burgeoning
subprime securities market that was becoming a fountain of money for its Wall Street rivals. The
Goldman Sachs Mortgage Co. sold $8.7 billion in subprime bonds that year, amounting to a third of
its business.
Soon, the Goldman subsidiary was in the jet stream, dealing with some of the most aggressive and
controversial subprime lenders - including Ameriquest (through a subsidiary), New Century, Fremont
General, National City and First Franklin.
A spokesman for Goldman, Michael DuVally, declined to explain how a firm of its stature was drawn
into a business dogged by questions about the integrity of its lending practices.
Before they bought pools of thousands of mortgages, Goldman and other Wall Street firms hired
contractors to comb through sample batches of the loans to weed out unsound or fraudulent applications.
Not much weeding occurred, however, several of the contractors said, because the Wall Street firms
had agreed to accept mortgage lenders' relaxed credit guidelines.
Melissa Toy and Irma Aninger, among scores of contract risk analysts who thumbed through mortgage
files for the San Francisco-based Bohan Group from 2004 to 2006, said that supervisors overrode the
bulk of their challenges to shaky loans on behalf of Goldman and other firms.
They couldn't recall specific examples involving loans bought by Goldman, but they said their
supervisors cleared half-million-dollar loans to a gardener, a housekeeper and a hairdresser.
Aninger, whose job was to review the work of other contract analysts, said that she objected to
numerous applications for loans that required no income verification, her supervisor would typically
tell her, "You can't call him a liar ... You have to take (his) word for it."
"I don't even know why I was there," she said, "because the stuff was gonna get pushed through
anyway."
Toy said she concluded that the reviews were mostly "for appearances," because the Wall Street
firms planned to repackage "bogus" loans swiftly and sell them as bonds, passing any future liabilities
to the buyers. The investment banks and mortgage lenders each seemed to be playing "hot potato,"
trying to pass the risks "before they got burned," she said.
"There was nobody involved in this who didn't know what was going on, no matter what they say,"
she said. "We all knew."
Goldman spokesman DuVally said that the firm's standards for reviewing the loans were "at least
as high, if not higher, in 2006 than they were in 2002."
But he didn't elaborate on what scrutiny was demanded.
In 2007, attorneys general in New York, Connecticut and Massachusetts subpoenaed reports that
now-defunct Bohan and another due diligence contractor, Clayton Holdings Inc., provided to their
Wall Street clients about the loan reviews.
Clayton revealed last year that it was cooperating with New York's inquiry in return for immunity
from prosecution. A spokesman for New York Attorney General Andrew Cuomo declined to comment on the
status of the inquiry.
Aninger and Toy, however, said that Bohan's and Clayton's reports to clients would be of limited
value to investigators because they wouldn't mention verbal exchanges in which loan challenges were
snubbed.
John Talbott, a former Goldman investment banker and the author of a new book, "The 88 Biggest
Lies on Wall Street," said "it wasn't a mistake" when illegal immigrants got home mortgages.
The lenders, he said, "just wanted somebody, anybody to sign a note" so they could sell it to
Wall Street, where ratings agencies that were paid hefty fees by the investment banks bestowed triple-A
grades or their equivalent on most subprime bonds.
"It's not just unethical," Talbott said of the chain of profiting subprime players extending from
real estate appraisers to Wall Street. "It's totally criminal."
WASHINGTON - More than a year into the gravest financial crisis since the Great Depression, millions
of Americans have seen their home values and retirement savings plunge and their jobs evaporate.
What they haven't seen are any Wall Street tycoons forced to swap their multi-million dollar jobs
and custom-made suits for dishwashing and prison stripes.
There are plenty of civil and class-action lawsuits from aggrieved investors angered by the losses
in their mortgage bonds, hedge funds or pensions. Regulators have stepped up their vigilance after
the fact. But to date, no captain of finance tied to the crisis has walked the plank.
There have been some high-profile arrests and federal convictions of financial giants - such as
Ponzi scheme king Bernard Madoff and Stanford Financial Group chairman Robert Allen Stanford. They
weren't among the causes of the financial meltdown, however, just poster boys for an era of lax enforcement,
weak regulation and devout faith in free markets.
WASHINGTON - In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities
backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting
that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Goldman's sales and its clandestine wagers, completed at the brink of the housing market meltdown,
enabled the nation's premier investment bank to pass most of its potential losses to others before
a flood of mortgage defaults staggered the U.S. and global economies.
Only later did investors discover that what Goldman had promoted as triple-A rated investments
were closer to junk.
Now, pension funds, insurance companies, labor unions and foreign financial institutions that
bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation
has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing
crash may have violated securities laws.
"The Securities and Exchange Commission should be very interested in any financial company that
secretly decides a financial product is a loser and then goes out and actively markets that product
or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence
Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's
banks. "This is fraud and should be prosecuted."
John Coffee, a Columbia University law professor who served on an advisory committee to the New
York Stock Exchange, said that investment banks have wide latitude to manage their assets, and so
the legality of Goldman's maneuvers depends on what its executives knew at the time.
"It would look much more damaging," Coffee said, "if it appeared that the firm was dumping these
investments because it saw them as toxic waste and virtually worthless."
Lloyd Blankfein, Goldman's chairman and chief executive, declined to be interviewed for this article.
A Goldman spokesman, Michael DuVally, said that the firm decided in December 2006 to reduce its
mortgage risks and did so by selling off subprime-related securities and making myriad insurance-like
bets, called credit-default swaps, to "hedge" against a housing downturn.
DuVally told McClatchy that Goldman "had no obligation to disclose how it was managing its risk,
nor would investors have expected us to do so ... other market participants had access to the same
information we did."
For the past year, Goldman has been on the defensive over its Washington connections and the billions
in federal bailout funds it received. Scant attention has been paid, however, to how it became the
only major Wall Street player to extricate itself from the subprime securities market before the
housing bubble burst.
Goldman remains, along with Morgan Stanley, one of two venerable Wall Street investment banks
still standing. Their grievously wounded peers Bear Stearns and Merrill Lynch fell into the arms
of retail banks, while another, Lehman Brothers, folded.
To piece together Goldman's role in the subprime meltdown, McClatchy reviewed hundreds of documents,
SEC filings, copies of secret investment circulars, lawsuits and interviewed numerous people familiar
with the firm's activities.
McClatchy's inquiry found that Goldman Sachs:
Bought and converted into high-yield bonds tens of thousands of mortgages from subprime lenders
that became the subjects of FBI investigations into whether they'd misled borrowers or exaggerated
applicants' incomes to justify making hefty loans.
Used offshore tax havens to shuffle its mortgage-backed securities to institutions worldwide,
including European and Asian banks, often in secret deals run through the Cayman Islands, a British
territory in the Caribbean that companies use to bypass U.S. disclosure requirements.
Has dispatched lawyers across the country to repossess homes from bankrupt or financially
struggling individuals, many of whom lacked sufficient credit or income but got subprime mortgages
anyway because Wall Street made it easy for them to qualify.
Was buoyed last fall by key federal bailout decisions, at least two of which involved then-Treasury
Secretary Henry Paulson, a former Goldman chief executive whose staff at Treasury included several
other Goldman alumni.
The firm benefited when Paulson elected not to save rival Lehman Brothers from collapse, and when
he organized a massive rescue of tottering global insurer American International Group while in constant
telephone contact with Goldman chief Blankfein. With the Federal Reserve Board's blessing, AIG later
used $12.9 billion in taxpayers' dollars to pay off every penny it owed Goldman.
These decisions preserved billions of dollars in value for Goldman's executives and shareholders.
For example, Blankfein held 1.6 million shares in the company in September 2008, and he could have
lost more than $150 million if his firm had gone bankrupt.
With the help of more than $23 billion in direct and indirect federal aid, Goldman appears to
have emerged intact from the economic implosion, limiting its subprime losses to $1.5 billion. By
repaying $10 billion in direct federal bailout money - a 23 percent taxpayer return that exceeded
federal officials' demand - the firm has escaped tough federal limits on 2009 bonuses to executives
of firms that received bailout money.
Goldman announced record earnings in July, and the firm is on course to surpass $50 billion in
revenue in 2009 and to pay its employees more than $20 billion in year-end bonuses.
THE BLUEST OF THE BLUE CHIPS
For decades, Goldman, a bastion of Ivy League graduates that was founded in 1869, has cultivated
an elite reputation as home to the best and brightest and a tradition of urging its executives to
take turns at public service.
As a result, Goldman has operated a virtual jobs conveyor belt to and from Washington: Paulson,
as Treasury secretary, sent tens of billions of taxpayers' dollars to rescue Wall Street in 2008,
and former Goldman employees populate some of the most demanding and powerful posts in Washington.
Savvy federal regulators have migrated from their Washington jobs to Goldman.
On Oct. 16, a Goldman vice president, Adam Storch, was named managing executive of the SEC's enforcement
division.
Goldman's financial panache made its sales pitches irresistible to policymakers and investors
alike, and may help explain why so few of them questioned the risky securities that Goldman sold
off in a 14-month period that ended in February 2007.
Since the collapse of the economy, however, some of those investors have changed their opinions
of Goldman.
Several pension funds, including Mississippi's Public Employees' Retirement System, have filed
suits, seeking class-action status, alleging that Goldman and other Wall Street firms negligently
made "false and misleading" representations of the bonds' true risks.
Mississippi Attorney General Jim Hood, whose state has lost $5 million of the $6 million it invested
in Goldman's subprime mortgage-backed bonds in 2006, said the state's funds are likely to lose "hundreds
of millions of dollars" on those and similar bonds.
Hood assailed the investment banks "who packaged this junk and sold it to unwary investors."
California's huge public employees' retirement system, known as CALPERS, purchased $64.4 million
in subprime mortgage-backed bonds from Goldman on March 1, 2007. While that represented a tiny percentage
of the fund's holdings, in July CALPERS listed the bonds' value at $16.6 million, a drop of nearly
75 percent, according to documents obtained through a state public records request.
In May, without admitting wrongdoing, Goldman became the first firm to settle with the Massachusetts
attorney general's office as it investigated Wall Street's subprime dealings. The firm agreed to
pay $60 million to the state, most of it to reduce mortgage balances for 714 aggrieved homeowners.
Attorney General Martha Coakley, now a candidate to succeed Edward Kennedy in the U.S. Senate,
cited the blight from foreclosed homes in Boston and other Massachusetts cities. She said her office
focused on investment banks because they provided a market for loans that mortgage lenders "knew
or should have known were destined for failure."
New Orleans' public employees' retirement system, an electrical workers union and the New Jersey
carpenters union also are suing Goldman and other Wall Street firms over their losses.
The full extent of the losses from Goldman's mortgage securities isn't known, but data obtained
by McClatchy show that insurance companies, whose annuities provide income for many retirees, collectively
paid $2 billion for Goldman's risky high-yield bonds.
Among the bigger buyers: Ambac Assurance purchased $923 million of Goldman's bonds; the Teachers
Insurance and Annuities Association, $141.5 million; New York Life, $96 million; Prudential, $70
million; and Allstate, $40.5 million, according to the data from the National Association of Insurance
Commissioners.
In 2007, as early signs of trouble rippled through the housing market, Goldman paid a discounted
price of $8.8 million to repurchase subprime mortgage bonds that Prudential had bought for $12 million.
Nearly all the insurers' purchases were made in 2006 and 2007, after mortgage lenders had lifted
most traditional lending criteria in favor of loans that required little or no documentation of borrowers'
incomes or assets.
While Goldman was far from the biggest player in the risky mortgage securitization business, neither
was it small.
From 2001 to 2007, Goldman hawked at least $135 billion in bonds keyed to risky home loans, according
to analyses by McClatchy and the industry newsletter Inside Mortgage Finance.
In addition to selling about $39 billion of its own risky mortgage securities in 2006 and 2007,
Goldman marketed at least $17 billion more for others.
It also was the lead firm in marketing about $83 billion in complex securities, many of them backed
by subprime mortgages, via the Caymans and other offshore sites, according to an analysis of unpublished
industry data by Gary Kopff, a securitization expert.
In at least one of these offshore deals, Goldman exaggerated the quality of more than $75 million
of risky securities, describing the underlying mortgages as "prime" or "midprime," although in the
U.S. they were marketed with lower grades.
Goldman spokesman DuVally said that Moody's, the bond rating firm, gave them higher grades because
the borrowers had high credit scores.
Goldman's securities came in two varieties: those tied to subprime mortgages and those backed
by a slightly higher grade of loans known as Alt-A's.
Over time, both types of mortgages required homeowners to pay rapidly rising interest rates. Defaults
on subprime loans were responsible for last year's housing meltdown. Interest rates on Alt-A loans,
which began to rocket upward this year, are causing a new round of defaults.
Goldman has taken multiple steps to put its subprime dealings behind it, including publicly saying
that Wall Street firms regret their mistakes. Last winter, the company cancelled a Las Vegas conference,
avoiding any images of employees flashing wads of bonus cash at casinos.
More recently, the firm has launched a public relations campaign to answer the criticism of its
huge bonuses, Washington connections and federal bailout. In late October, Blankfein argued that
Goldman's activities serve "an important social purpose" by channeling pools of money held by pension
funds and others to companies and governments around the world.
KNOWING WHEN TO FOLD THEM
For investment banks such as Goldman, the trick was knowing when to exit the high-stakes subprime
game before getting burned.
New York hedge fund manager John Paulson was one of the first to anticipate disaster. He told
Congress that his researchers discovered by early 2006 that many subprime loans covered the homes'
entire value, with no down payments, and so he figured that the bonds "would become worthless."
He soon began placing exotic bets - credit-default swaps - against the housing market. His firm,
Paulson & Co., booked a $3.7 billion profit when home prices tanked and subprime defaults soared
in 2007 and 2008. (He isn't related to Henry Paulson.)
At least as early as 2005, Goldman similarly began using swaps to limit its exposure to risky
mortgages, the first of multiple strategies it would employ to reduce its subprime risk.
The company has closely guarded the details of most of its swaps trades, except for $20 billion
in widely publicized contracts it purchased from AIG in 2005 and 2006 to cover mortgage defaults
or ratings downgrades on subprime-related securities it offered offshore.
In December 2006, after "10 straight days of losses" in Goldman's mortgage business, Chief Financial
Officer David Viniar called a meeting of mortgage traders and other key personnel, Goldman spokesman
DuVally said.
Shortly after the meeting, he said, it was decided to reduce the firm's mortgage risk by selling
off its inventory of bonds and betting against those classes of securities in secretive swaps markets.
DuVally said that at the time, Goldman executives "had no way of knowing how difficult housing
or financial market conditions would become."
In early 2007, the firm's mortgage traders also bet heavily against the housing market on a year-old
subprime index on a private London swap exchange, said several Wall Street figures familiar with
those dealings, who declined to be identified because the transactions were confidential.
The swaps contracts would pay off big, especially those with AIG. When Goldman's securities lost
value in 2007 and early 2008, the firm demanded $10 billion, of which AIG reluctantly posted $7.5
billion, Viniar disclosed last spring.
As Goldman's and others' collateral demands grew, AIG suffered an enormous cash squeeze in September
2008, leading to the taxpayer bailout to prevent worldwide losses. Goldman's payout from AIG included
more than $8 billion to settle swaps contracts.
DuVally said Goldman has made other bets with hundreds of unidentified counterparties to insure
its own subprime risks and to take positions against the housing market for its clients. Until the
end of 2006, he said, Goldman was still betting on a strong housing market.
However, Goldman sold off nearly $28 billion of risky mortgage securities it had issued in the
U.S. in 2006, including $10 billion on Oct. 6, 2006. The firm unloaded another $11 billion in February
2007, after it had intensified its contrary bets. Goldman also stopped buying risky home mortgages
after the December meeting, though DuVally declined to say when.
I'VE GOT A SECRET
Despite updating its numerous disclosures to investors in 2007, Goldman never revealed its secret
wagers.
Asked whether Goldman's bond sellers knew about the contrary bets, spokesman DuVally said the
company's mortgage business "has extensive barriers designed to keep information within its proper
confines."
However, Viniar, the Goldman finance chief, approved the securities sales and the simultaneous
bets on a housing downturn. Dan Sparks, a Texan who oversaw the firm's mortgage-related swaps trading,
also served as the head of Goldman Sachs Mortgage from late 2006 to April 2008, when he abruptly
resigned for personal reasons.
The Securities Act of 1933 imposes a special disclosure burden on principal underwriters of securities,
which was Goldman's role when it sold about $39 billion of its own risky mortgage-backed securities
from March 2006 to February 2007.
The firm maintains that the requirement doesn't apply in this case.
DuVally said the firm sold virtually all its subprime-related securities to Qualified Institutional
Buyers, a class of sophisticated investors that are afforded fewer protections than small investors
are under federal securities laws. He said Goldman made all the required disclosures about risks.
Whether companies are obliged to inform investors about such contrary trades, or "hedges," is
"a very hot issue" in cases winding through the courts, said Frank Partnoy, a University of San Diego
law professor who specializes in securities. One issue is how specific companies must be in disclosing
potential risks to investors, he said.
Coffee, the Columbia University law professor, said that any potential violations of securities
laws would depend on what Goldman executives knew about the risks ahead.
"The critical moment when Goldman would have the highest liability and disclosure obligations
is when they are serving as an underwriter on a registered public offering," he said. "If they are
at the same time desperately seeking to get out of the field, that kind of bailout does look far
more dubious than just trading activities."
Another question is whether, by keeping the trades secret, the company withheld material information
that would enable investors to assess Goldman's motives for selling the bonds, said James Cox, a
Duke University law professor who also has served on the NYSE advisory panel.
If Goldman had disclosed the contrary bets, he said, "One would have to believe that a rational
investor would not only consider Goldman's conduct material, but likely compelling a decision to
take a pass on the recommendation to purchase."
Cox said that existing laws, however, don't require sufficient disclosures about trading, and
that the government would do well to plug that hole.
In marketing disclosures filed with the SEC regarding each pool of subprime bonds from 2001 to
2007, Goldman listed an array of risk factors that grew over time. Among them was the possibility
of a pullback in overheated real estate markets, especially in California and Florida, where the
most subprime loans had been made.
Suits filed by the pension funds, however, allege that Goldman made materially false or misleading
statements in its public offerings, failing to disclose that many loans were based on inflated appraisals
and were bought from firms with poor lending practices.
DuVally said that investors were fully informed of all known risks.
"What's going to happen in the next few years," said San Diego's Partnoy, "is there's going to
be a lot of lawsuits and judges will have to decide, should Goldman have disclosed more or not?"
(Tish Wells contributed to this article.)
(This article is part of an occasional series on the problems in mortgage finance.)
COMING TOMORROW
Since the economic collapse that swept millions of Americans out of their jobs and homes, Goldman
Sachs has moved aggressively to recover its losses. The firm is pursuing marginally qualified borrowers
into state courts federal and bankruptcy across the country and seeking to seize their homes. McClatchy
examines one couple's multi-year attempt to get Goldman to admit that it had purchased their mortgage.
Analysts at Goldman Sachs suggested Tuesday that, despite a 50 percent run-up in stock prices
that has left the Dow Jones industrial average just shy of 10,000 and the S&P 500 selling at 20 times
earnings, stocks are still cheap. In fact, according to Goldman, stocks are so cheap that corporations
are going to start using all that cash on their balance sheets not for product development or marketing
or some other productivity-enhancing investment, but for acquiring other companies.
In case you just fell off a turnip truck, you might think "Monetizing the M&A Revival" is serious
research aimed at helping Goldman clients figure out how to profit from these uncertain times. The
helpful analysts from Goldman even provided the names of companies they think are so underpriced
that they are ripe for a takeover -- companies like Devon Energy, AK Steel and Red Hat.
But those with any memory at all will probably recognize this report for what it really is: a
marketing brochure for Goldman's investment bankers, who are just itching to begin cranking up the
old M&A machine and generating those big fees again. With deal flow, of course, comes an equally
lucrative flow of new stock and bond issues to pay for all those ill-advised and overpriced acquisitions,
along with increased volume on Goldman's trading desk from speculators hoping to cash in on the latest
takeover rumors.
Just because Goldman is recommending this to its clients, however, doesn't mean Goldman is putting
its own money behind the new bull market in mergers and acquisitions. Indeed, it is just as likely
that Goldman is preparing to short the very takeover stocks it is touting to the public, just as
it did in the late stages of the real estate and mortgage bubble. It's all perfectly legal. And it
is perfectly in keeping with what we know about Wall Street's most successful firms, which is that
if they stumble on a profitable trading strategy, the last person they are likely to share it with
is you.
What we're witnessing here is pretty simple: another bubble in financial assets. All that "liquidity"
created by the Federal Reserve and other central banks has accomplished its task and prevented a
global financial meltdown. But unless they move now to begin sopping up that liquidity, the central
bankers run a serious risk of reinflating many of the same bubbles that got us into this mess in
the first place.
Many analysts now look at the economy and conclude that unemployment is still way too high and
the threat of inflation still way too low for the Fed to even think about beginning to raise interest
rates again. By one calculation, the appropriate federal funds rate today would be something like
negative 5 percent. Since that's impossible, the Fed has signaled that it would not only stick
by its zero-interest-rate policy for the indefinite future, but also will continue to inject additional
money into the financial system by using freshly printed dollars to buy up the debt issued by government-owned
Fannie Mae and Freddie Mac.
The problem is that because we didn't get into this recession in the normal way, the normal analysis
and remedies are not appropriate. Slow growth and high unemployment are indeed going to be a big
problem over the next several years, but they aren't going to be solved by pumping out lots of cheap
money that is used to speculate in stocks, bonds and commodities rather than be invested in the real
economy. And if all this speculation has the effect of driving up the price of commodities and driving
down the value of the dollars we use for imports, then it is perfectly possible to wind up with high
inflation and high unemployment at the same time -- as happened in the late 1970s.
The right policy response is for the Fed to begin withdrawing some of this extraordinary monetary
stimulus even as the rest of the government steps up its effort to stimulate the real economy. That
means more money for extended unemployment benefits; more aid to the states so that they can maintain
the most vital public services; and more money to expand mass transit, state college and university
systems, efficient energy production and basic scientific research. The economist Paul Krugman estimates
that for every dollar in extra debt that will be required to finance this fiscal stimulus, about
40 cents will be repaid almost immediately in the form of tax revenues from higher short-term economic
growth. And if the money is invested wisely in quality projects with high returns, the other 60 cents
could wind up being a boon to future generations, rather than a burden.
What would surely not be good policy, by the way, is to extend and expand the current tax break
for first-time home buyers that is set to expire at the end of the year, as many in Congress are
now advocating. Home buyers are already getting a huge benefit from the dramatic drop in house prices,
along with the lowest mortgage rates in a generation, thanks to massive government infusions into
Fannie and Freddie. For the government to go beyond those efforts and try to induce home sales that
otherwise wouldn't have happened -- at an estimated $75,000 a pop -- would surely be cheered by home
builders, real estate agents and the analysts at Goldman Sachs. But in truth it would be nothing
more than a misguided attempt to reinflate another bubble.
Lloyd C. Blankfein proved to be a very interesting guy: gambler remains the gambler no matter what.
He has been preaching the value of transparency... well... let their be light!
One element in the creation of bubble is people's willingness to believe that this time is different.
In the present case, this time was different because of financial innovation, better monetary policy,
better technology to manage shocks (e.g. digital technology reducing supply bottlenecks), and so
on leading to a (supposed) reduction in overall financial risk without a corresponding reduction
in returns.
But this time wasn't different, it was in many ways a rerun of the dot.com bubble, and Shane Greenstein
says people are finally starting to notice. In fact, according to the argument below, the effort
to address problems on Wall Street has passed the "Russ Roberts test":
Please forgive the irony in the title. But I just felt like expressing sarcasm because – Ha!
- many professional economists have begun to notice something is wrong with Wall Street.
Better late than never, I guess.
This recent essay/podcast from Russell Roberts is a good indication that just about everyone
has noticed that Wall Street has a tin ear for its public standing, which has sunk quite low due
to self-serving behavior.
In case you have not noticed what Roberts has noticed, then let me remind you. Just recently
the management at Goldman Sachs announced that the firm had a very profitable quarter, which,
of course, resulted in very high pay for their executives.
That is where it gets interesting. Roberts points out (correctly, IMHO) that had the government
not stepped in at AIG, etc., Goldman would have gone down with everyone else. Ergo, their executives
should recognize that they have a connection to taxpayer money as much as any other firm, and
they should, therefore, eschew blatantly selfish and observable behavior, such as paying themselves
high salaries.
Russ Roberts is normally a free market economist, but in his essay he sounds like an old fashioned
populist. When a firm does something to turn Russell Roberts into a populist then - perhaps -
something is actually amiss with attitudes on Wall Street.
Alright, then, so what? Well, take this observation another step or two…
What Roberts did not say
Here is what Roberts did not say, so I will. Goldman displayed a tin ear by not making any
gesture at the same time they announced their profitable earnings.
What do I mean by tin ear? Here is an example. They did not announce the hiring of many (otherwise)
laid off workers - as sort of a political gesture to address the need to do something about the
high unemployment rate around the country.
Here is another idea. Why stop with hiring a few more employees? How about making an unusually
big (I mean VERY BIG) donation to a soup kitchen - once again, as a gesture to suffering of others
in these hard time.
Hmmm, here is another idea. How about doing anything mildly publicly-spirited, like buying
a new fire truck for the New York city Fire Department, because the whole city is having a bad
budget year? Why the New York city Fire Department? Because nobody ever has anything bad to say
about firefighters in most cities, and certainly not in New York City after their sacrifice during
9/11.
Heck, once you start thinking this way, it is quite easy to find a way to spend a half billion
dollars in unexpectedly large profits. But if you have a tin ear for this sort of non-selfish
gesture, then the thought might never have surfaced.
And now to the point of this rant…
For those of us who live in the land of high tech, these type of observations are nothing new.
The self-serving and otherwise destructive behavior of some Wall Street managers is well known…
Look, I have been around the block enough to understand that sometimes financial managers have
something useful to say to high tech firms. But there is also something wrong. For example, the
short-termism of Wall Street managers is legendary among high tech managers who have a long term
vision for their firm but are asked to deliver revenue tomorrow. The self-serving decision making
of managers who give IPOs to friends is another well known behavior (and most young firms and
VCs would love to eliminate it). Another common complaint concerns the unwillingness of IPO managers
to change the system if it meant a loss of control. For example, remember this? Wall Street was
unwilling to conduct any IPO as an auction until Google insisted - insisted! - that the old system
would not apply to them.
Enough is enough. Even guys like Roberts can see that something is amiss.
Remember the dot com madness?
It is really nothing new. Really.
Back in the late 1990s - more than a decade ago - Wall Street cheered on one of the goofiest
investment bubbles I have ever seen in my lifetime (and hopefully I ever will see). It was called
the dot-com boom, and, frankly, it was nuts from any rational perspective.
Yes, there are lots of explanations for the boom. There was a social dimension: Plenty of observers
tried to say it was nuts. They were drowned out by crazy evangelists who ignored basic finance
and who argued that price earnings ratios could be way out of whack. And it sold copy: the business
media loves of a sensational story, and that did not help.
But that is why adult supervision is required in high tech. The financial professionals and
auditors of this country had a professional obligation to say sober things, to ask - perhaps,
insist! - that revenues align with expenses, and advise investors when such alignment has little
chance of appearing. And in the late 1990s, what did the professionals do? Well, it is complicated,
but, suffice to say, few of them said no to the nuttiness.
You may recall that Blodget was a wunderkindt cheer leader for dot coms. How did he get there?
Basically, he made a bold call, got himself some attention, and kept making more bold calls. His
bosses saw an opportunity and replaced someone else who had the good sense to point out that the
promises had considerably risk. Blodgett instead went full steam ahead because - he fully admits
it - he was hired to do just that.
I do not know this fellow, nor have we ever met. I have read some of his writing. As best I
can tell, Blodgett actually has a pretty smart head on his shoulders. He writes well and has the
capacity to make some intelligent and deep observations.
Anyway, Blodgett eventually got himself into trouble. While I understand how someone with those
sort of smarts can delude themselves enough to tempt fate for a short while - he is human, after
all - nonetheless, it is beyond my capacity as a psychologist to explain how someone can do it
for a long time. And he did. For several years. Until the dot com crashed, and a scandal broke,
and he got banned.
There is a deeper question behind that run of several years. How did his bosses allow Blodgett
to ply this trade for so long even though the wiser adults among them surely must have suspected/concluded/known
that much of it was a financial charade?
The answer, of course is quite simple: they made so much money during that time. Blodgett's
bosses had no reason to change anything.
Many years later Blodgett wrote about his time in
this essay.
He finds many reasons for explaining his own behavior. Blodget says he did it because if he did
not others would. He did it because his bosses wanted him to do it. He did because everyone was
making huge amounts of money from focusing on the short term benefits to their firm. All in all,
he did it because it seemed like a good idea at the time.
In economics-speak, all those explanations add up to the following. Henry and his bosses simply
ignored the consequences for the prudent investor or for the country as a whole - even though
it had occurred to them that there was a chance that something might have gone wrong.
Let's say this in general terms. Wall Street firms had no reason to internalize the issues
with systemic risk - that is, they each ignored the downside to the entire system from all of
them taking on too much risk, because each of them only contributed a small amount to it. Instead,
each of them pursued their own selfish interests, and made out well in the short run, sacrificing
system-wide long run stability.
Summing up
Those of us who live in high tech land noticed the odd behavior of Wall Street a while ago.
Finally, it seems, the macroeconomics policy crowd has started to notice the same issues, and
has started to argue that - perhaps - it is time to reign this in a bit. When a free market guy
like Roberts notices, you know that the sensible people are finally thinking this one through.
Like I said, better late than never.
Now, on to the serious conversation: what to do about it….I am not sure what the right answers
are, but limits on executive bonuses seems like a band-aid for a systemic issue. It is too much
to ask a manager who makes several million dollars a year to stop gaming the system, but it might
be reasonable to ask for better auditing, more transparency for investors, tighter capital requirements
for firms taking risky actions, and a few others unpleasant measures that might help us all avoid
these system-wide problems.
Oh yes… until then, the executives at Goldman might consider a public spirited gesture or two,
such as - I dunno' - donating a fraction of their recent profits to the New York Fire Department.
"Even guys like Roberts can see that something is amiss." So this time is different?
After quoting the Larry Summers' speech
["Roughly every three years for the last generation a financial system that was intended to manage,
distribute, and control risk has, in fact, been a source of risk – with devastating consequences
for workers, consumers, and taxpayers."
"Think about it. The last generation has seen:
The Latin American debt crisis
The 1987 stock market crash
The savings and loan debacle
The Mexican financial crisis
The Asian financial crisis
The collapse of LTCM
The bursting of the dot-com bubble
And now the financial crisis that began in 2007."
"One crisis every three years."
"Surely a system that produces this many accidents and accidents this severe is a system that
is in very much need of reform."]
Atrios quipped, "All those crises that no one could have predicted. Makes one wonder if it's a
feature, not a bug..."
AT the dawn of the progressive era early in the last century, muckrakers attacked the
first billionaire, John D. Rockefeller, for creating capitalism's most ruthless monster.
"The Octopus" was their nickname for Standard Oil, the trust that controlled nearly 90 percent
of American oil. But even in that primordial phase of the industrial era, Rockefeller was
mindful of his public image and eager to counter it. "His great brainstorm," writes his
biographer, Ron Chernow, "was undoubtedly his decision to dispense shiny souvenir dimes
to adults and nickels to children as he moved about." Who could hate an octopus tossing
glittering coins?
It was hard not to think of Rockefeller's old P.R. playbook while watching Goldman Sachs's behavior
when the Dow
hit 10,000 last week. As leader of the Wall Street pack, Goldman declared
surging profits,
keeping it
on track
to dispense a record $23 billion in bonuses for 2009. But most Americans know all too well that
only the intervention of billions of dollars in taxpayer bailout money saved Goldman from the dire
fate of its less well-connected competitors. The growing ranks of under-and-unemployed Americans,
meanwhile, are waiting with increasing desperation for a recovery of their own.
Goldman is this century's octopus - almost literally so. The most-quoted sentence in financial
journalism this year, by Matt Taibbi of Rolling Stone,
describes the company as a "great vampire squid wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like money." That's why Goldman's chief executive,
Lloyd Blankfein, recycled Rockefeller's stunt last week: The announcement of Goldman's spectacular
third-quarter earnings ($3.19 billion) was paired with the news that the company was donating $200
million to its own foundation, which promotes education. In Goldman dollars, that largess is roughly
comparable to the nickels John D. handed out to children a century ago. At least those kids could
spend the spare change on candy.
Teddy Roosevelt's trust-busting crusade ultimately broke up Standard Oil. Though Goldman did outlast
three of its four major rival firms during last fall's meltdown, it is not a monopoly. And there
is one other significant way that our 21st-century vampire squid differs from Rockefeller's 20th-century
octopus. Americans knew what oil was, and they understood how Standard Oil's manipulations directly
affected their pocketbooks. Even now many Americans don't know what Goldman's products are or how
it makes its money. The less we know, the easier it is for reckless gambling to return to capitalism's
casino, and for Washington to look the other way as a new financial bubble inflates.
As Wall Street was celebrating last week, Congress was having a big week of its own, arousing
itself to belatedly battle some of the corporate suspects that have helped drive America into its
fiscal ditch. The big action was at the Senate Finance Committee, which
finally produced
a health care bill that, however gingerly, bids to reform industries that have feasted on the
nation's Rube Goldberg medical system. At least health care, like oil, is palpable, so we will be
able to keep score of how reform fares - win, lose or draw. But the business of Wall Street, while
also at center stage in a Congressional committee last week, is so esoteric that the public is understandably
clueless as to what, if anything, the lawmakers were up to, if anyone even noticed at all.
The first stab at corrective legislation emerging from Barney Frank's Financial Services Committee
in the House is porous. While unregulated derivatives remain the biggest potential systemic threat
to the world's economy, Frank said that "the great majority" of businesses that use derivatives would
not be covered
under his committee's
much-amended bill. It's also an open question whether the administration's proposed consumer
agency to protect Americans from mortgage and credit-card outrages will survive the banking lobby's
attempts to eviscerate it. As that bill stands now,
more than 98
percent of America's banks - mainly community banks, representing 20 percent of deposits - would
be shielded from the new agency's supervision.
If it's too early to pronounce these embryonic efforts at financial reform a failure, it's hard
to muster great hope. As the economics commentator Jeff Madrick
points
out in The New York Review of Books, the American public is still owed "a clear account of the
financial events of the last two years and of who, if anyone, is seriously to blame." Without that,
there will be neither the comprehensive policy framework nor the political will to change anything.
The only investigation in town is a bipartisan Financial Crisis Inquiry Commission
created by Congress in May. It is still hiring staff. Its 10 members are dispersed throughout
the country, and, according to a spokeswoman, have contemplated only a half-dozen public sessions
over the next year. Such a panel, led by the former California state treasurer Phil Angelides, seems
highly unlikely to match Congress's Depression-era Pecora commission.
That investigation
was driven by a prosecutor whose relentless fact-finding riveted the country and gave birth to the
Securities and Exchange Commission, among other New Deal reforms. Last week, we learned that the
current S.E.C. has hired a former Goldman hand as the
chief
operating officer of its enforcement unit.
Even as we wait for Congress and its inquiry to produce results, the cultural toxins revealed
by our economic crisis remain unaddressed by the leaders in the private and public sectors who might
make a difference now. Blankfein may be giving $200 million to "education," but Goldman is back to
business as usual:
making
money by high-risk gambling, with all the advantages that the best connections, cheap loans from
the Fed and high-speed
trading algorithms can bring. As the Reuters columnist Rolfe Winkler
wrote last week, "Main Street still owns much of the risk while Wall Street gets all of the profit."
The idea of investing in the real economy - the one that might create jobs for Americans - remains
outré in this culture. Credit to small businesses remains tight. The holy capitalist grail is still
the speculative buying and selling of companies and the concoction of ever more esoteric financial
"instruments." The tragic tale of Simmons Bedding
recently
told in The Times is a role model. This successful 133-year-old manufacturing enterprise was
flipped seven times in two decades by private equity firms. Investors made more than $750 million
in profits even as the pile-up of debt pushed Simmons into bankruptcy, costing a quarter of its loyal
workers their jobs so far.
Most leaders in America are against this kind of ethos in principle. Last month the president
of Harvard, Drew Gilpin Faust, contributed
a stirring
essay to The Times regretting that educational institutions did not make stronger efforts to
assert the fundamental values of pure intellectual inquiry while "the world indulged in a bubble
of false prosperity and excessive materialism." She rued the rise of business as the most popular
undergraduate major, an implicit reference to the go-go atmosphere during the reign of her predecessor,
Lawrence Summers, now President Obama's chief economic adviser.
What went unsaid, of course, is that some of Harvard's most prominent alumni of the pre-Faust
era - Summers, Blankfein, Robert Rubin et al. - were major players during the last two bubbles. As
coincidence would have it, the same edition of The Times that published Faust's essay also included
an article
about how Harvard was scrounging for bucks by licensing a line of overpriced preppy clothing under
the brand Harvard Yard. This sop to excessive materialism will be a scant recompense for the
$11 billion Harvard's
endowment managers lost in their own bad gamble on interest-rate swaps.
In particular, the tone-deaf Treasury secretary, Timothy Geithner, never ceases to amaze. His
daily calendars reveal that most of his contacts with the financial sector in the first seven
months of 2009 were limited to the trinity of Goldman Sachs, Citigroup and JPMorgan. And
last week
Bloomberg News reported that his inner circle of "counselors" - key advisers who, conveniently
enough, do not require Senate confirmation - are largely drawn from the same club. It's hard to see
how any public official can challenge a culture that he is marinating in, night and day.
Those Obama fans who are disappointed keep looking for explanations. Is he too impressed by the
elite he met in Cambridge, too eager to split the difference between left and right, too willing
to compromise? As he pursues legislation, why does he keep deferring to others - whether to his party's
Congressional leaders or the Congressional Budget Office or to this month's acting president, Olympia
Snowe? Why doesn't he ever draw a line in the sand? "We know Obama has good values," Jeff Madrick
said to me last week, "but we don't know if he has convictions."
What we also know is that if Teddy Roosevelt palled around with John D. Rockefeller as today's
political class does with Wall Street's titans and lobbyists, the tentacles of the original octopus
would still be coiled tightly around America's neck.
I was trying to avoid mentioning
this, partially because I half-suspected it was deliberately over the top, and I'm not reading
tone well these days. After all:
Virtually every BHC has elected to become an FHC. Under
12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make "merchant banking investments" in nonfinancial
companies, on a principal or agency basis, through affiliated private equity funds or other invesment
funds. (Private equity affiliates are dealt with at length in
12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through
one of its private equity funds, GS Capital Partners VI Fund LP.
I find it very difficult to
believe that any serious bankers, no matter how "annoyed," wouldn't have known this. [links in
original]
is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.
Until today, when Brad DeLong made it ones of his
links of
the day. Because now we have to go into context and depth, and remember a year ago.
Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage
ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance
of sanity-Lehmann Brothers-dangled on the edge for a while and finally fell off, "murdered"
we're now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was
yet to come.
So the weekend was going to be a rocky one. And various plans in various stages were executed:
Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around
for a sucker, saw Ken Lewis, and locked in their bonuses.
Endangered IB #5, The Vampire Squid, called its buddies at Treasury.
Maybe it didn't go exactly like that, but by the end of the weekend, there was the declaration
that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full
access to lootsupport from the U.S. Treasury.
If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or
that it will divest itself shortly of activities not usually allowed (and with good reason) by
banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant
rules appear to be
here in general
and
here specifically; do tell me what I am missing.)
Increasingly, the issue of "too big to
regulate" in the public interest is being brought up – an issue that has historically attracted
the interest of the Department of Justice's Antitrust Division in sectors other than finance.
Should Goldman Sachs now be placed in this category? [italics mine; links, again, from the original]
The response appears to be that those regulations can be circumvented with impunity. Or, as Simon
unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.
But all that
does is beg the question: if a BHC can do everything that GS used to be able to do, what was the
actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for
the Fed to save face while letting the taps flow wide?
All things considered, Wall Street was taking the latest payroll figures in its stride on Friday.
For both the Dow and the S&P 500 at the opening, cash markets were showing roughly half the losses
predicted
earlier by their respective futures.
There was a good reason for that: the payroll figures actually came out on Thursday.
Do remember that, 24 hours before the formal release from the Labor Department, the consensus
forecast on job cuts in September stood at around 160,000. Then Jan Hatzius at Goldman Sachs suddenly
raised his
own forecast for the month from 200,000 to 250,000 - dragging the consensus up to 180,000.
The upshot is that Friday's
formal figure of 263,000 failed to shock. Evidence that the recovery is perhaps more faltering
than many had previously thought has spread smoothly into the equity market; any likelihood of the
payroll numbers triggering panic selling was averted.
It makes sense for the authorities to work at managing tricky news flow in this way, as long as
they don't start to think they can do it regularly or with any real precision.
And they'd better be subtle about it.
Of course, to suggest that someone from up-on-high tipped off Goldman Sachs would be absurd -
and an insult to Mr Hatzius directly.
"Sept. 30 (Bloomberg) -- Companies in the U.S. cut 254,000 jobs this month, more than forecast,
a private report based on payroll data showed today.
The estimated drop, which was the smallest since July 2008, compares with a revised 277,000
decline the prior month, figures from ADP Employer Services showed. The ADP report was forecast
to show a decline of 200,000 jobs, according to the median estimate of 33 economists in a Bloomberg
survey. Projections ranged from decreases of 300,000 to 133,000."
I not trying to protect the pond life, but it seems to me that if you want to keep your credibility,
and you're looking at being 60K wide of the mark when ADP comes in hot, then it makes sense to
bump your figures up.
I am not as negative toward naked short-selling as Matt Taibbi (feel free to convince me I'm wrong),
but his insights into the lobbying effort against financial reform are useful, and I share his concerns
about the distortions (e.g. regulatory capture) this brings to the reform process:
An Inside Look at How Goldman Sachs Lobbies the Senate, by Matt Taibbi: ...Later on this week
I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns
and Lehman Brothers collapses. The story ends up being more about naked short-selling and the
role it played in those incidents than I had originally planned..., but it turns out that there's
no way to talk about Bear and Lehman without going into the weeds of naked short-selling...
It's the conspicuousness ... that is the issue here, and the degree to which the SEC and the other
financial regulators have proven themselves completely incapable of addressing the issue seriously,
constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned
regulatory actions. There probably isn't a better example of "regulatory capture" ... than this
issue.
In that vein, starting tomorrow, the SEC is holding a public "round table" on the naked short-selling
issue. What's interesting about this round table is that virtually none of the invited speakers
represent shareholders or companies that might be targets of naked short-selling, or indeed any
activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees
are either banks, financial firms, or companies that sell stuff to the first two groups.
In particular, there are very few panelists - in fact only one, from what I understand - who are
in favor of a simple reform called "pre-borrowing." Pre-borrowing is what it sounds like; it forces
short-sellers to actually possess shares before they sell them.
It's been proven to work, as last summer the SEC, concerned about predatory naked short-selling
of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement...
The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care
round table last spring, when no single-payer advocates were invited. So who will get to speak?
Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the
occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.
In advance of this panel and in advance of proposed changes to the financial regulatory system,
these players have been stepping up their lobbying efforts... Goldman Sachs in particular has
been making its presence felt.
Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss's
office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed
out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately
thought to send it to me. When I went to actually get the document, though, the aide had had a
change of heart.
Which was weird, and I thought the matter had ended there. But the exact same situation then repeated
itself with another congressional staffer, who then actually passed me Goldman's fact
sheet.
Now, the mere fact that two different congressional aides were so disgusted by Goldman's performance
that they both called me on the same day - and I don't have a relationship with either of these
people - tells you how nauseated they were.
I would later hear that Senate aides between themselves had discussed Goldman's lobbying efforts
and concluded that it was one of the most shameless performances they'd ever seen from any group
of lobbyists, and that the "fact sheet" ... was, to quote one person familiar with the situation,
"disgraceful" and "hilarious." ...
The NY Post's John Crudele looks at a simple question:
So, is this how Goldman Sachs does it?
"It," of course, is making gobs of money even when nobody else on Wall Street can.
And those profits then go into outrageous bonuses to employees, which cause rancor on Capitol
Hill and on Main Street.
You've heard the old saying, "it's not what you know, but who you know."
Goldman Sachs knows lots of important people. That fact is indisputable, mainly because former
Goldman employees are scattered around the country, and the globe, in important, decision-making
financial positions.
But I'd like to make an addendum to that old saying, which I'll explore for you today: Who
you know is only important if you can get them on the phone anytime you want. It's also about
the unparalleled access that Goldman Sachs had to Treasury Secretary Hank Paulson."
I am not sure I buy into the full conspiracy theory, but it sure as hell seems like the CEO of
Goldman Sach's had pretty much unfettered acces to the Treasury Secretary - a former CEO of Goldman
Sach . . .
Source:
The secret to Goldman Sachs' good fortune
John Crudele
NY Post, September 29, 2009
http://www.nypost.com/p/news/business/the_secret_to_goldman_sachs_good_WBlKYEyLfH7GP4zT0vNrEP
8 Responses to "The Secret to Goldman's Success?"
1. Moss Says:
September 30th, 2009 at 7:00 am
I don't think it was a secret plot, it was fully planned and coordinated.
That it can be done with impunity; that is the conspiracy.
2. flipspiceland Says:
September 30th, 2009 at 7:12 am
Nobody else can?
Then what's Jamie Dimon doing on the cover of Newsweek, and has his own book out?
JPMorgan is twice the size of Goldman Sucks, Jamie is the "Last Man Standing", and he sleeps with
The Bamster
Someone overlooked the $1.3 Trillion under management at JPM.
3. VennData Says:
September 30th, 2009 at 7:31 am
… and the $3T at Blackrock.
4. Mark E Hoffer Says:
September 30th, 2009 at 8:05 am
con·spir·a·cy (kn-spîr-s)
n. pl. con·spir·a·cies
1. An agreement to perform together an illegal, wrongful, or subversive act.
2. A group of conspirators.
3. Law An agreement between two or more persons to commit a crime or accomplish a legal purpose through
illegal action.
4. A joining or acting together, as if by sinister design: a conspiracy of wind and tide that devastated
coastal areas.
--------------------------–
[Middle English conspiracie, from Anglo-Norman, probably alteration of Old French conspiration,
from Latin cnsprti, cnsprtin-, from cnsprtus, past participle of cnsprre, to conspire; see conspire.]
http://www.thefreedictionary.com/conspiracy
the word has been with us a long time, for a reason..
We should remember what We learned as children: "Stick and Stones may break our Bones, but…"
5. HEHEHE Says:
September 30th, 2009 at 8:05 am
Barry how can you be so naive? Look at the phone calls. Blankfein was at the AIG bailout meetings
for crying out loud. I'll go a step further and ask was there a quid pro quo between Paulson and
Warren Buffet as Buffet gave his "endorsement" preferred stock deal with Goldman for American Express'
access to TARP funds by having them switched to a Bank Holding Company with no questions asked; Buffet
was American Express' largest shareholder.
6. jc Says:
September 30th, 2009 at 8:41 am
Chuzpah cubed. They ran a conspiracy right in front of us and Paulson got carte blanche for his
illegal actions – on a never before imagined scale.
7. jc Says:
September 30th, 2009 at 8:47 am
There is a Sept 30 deadline on the Fed/Bloomberg appeal right? Talk about kicking the can down
the road…
8. mknowles Says:
September 30th, 2009 at 9:26 am
NEW YORK - On a clear day,
Lloyd Blankfein can look through the windows of his office on the 30th floor at the tip of
Manhattan and see the Linden housing project in the East
New York section of
Brooklyn. That's the rough neighborhood where he grew up, the son of a mail sorter at the local
post office.
As head of
Goldman Sachs(GS)
today, Blankfein has come a long way from the projects to becoming one of the highest-paid CEOs on
Wall Street. Perhaps he's come too far, because it's a place that many people who live in his
old neighborhood might find hard to comprehend. After all, Blankfein and his fellow executives make
eight-figure salaries running a company that devised and dabbled in the complex financial products
that many believe caused the near-collapse of the global economy last year.
No wonder Goldman's recent feats, which in any other environment would have drawn applause, this
year are attracting derision and suspicion. As the economy struggled to shake off the recession and
unemployment approached 10%, Goldman did some of the best investment banking of its 140-year history,
posting record quarterly revenue of $13.8 billion and 65% growth in profits.
Just months after many on Wall Street debated whether the investment banking industry it dominated
was dead, Goldman has proved the naysayers wrong. Shareholders have chalked up big gains from the
bank's banner performance in the first half of the year. Goldman's stock has doubled since January.
"Goldman's success lies in the culture of the firm - of stability, strength and focus. It's a
culture that you cannot build overnight," says Thomas Marsico, founder and CEO of Marsico Capital
Management, which manages $51 billion in assets and owns 13 million Goldman shares. "At a time when
Lehman and Bear (Stearns) were gone, Citi was dealing with its financial issues and Merrill (Lynch)
its new leadership, Goldman executed for its customers."
However, Goldman's profits stand in sharp contrast to what the rest of the country is facing,
hobbled with hundreds of thousands of job losses each month and hundreds of businesses shuttering
on Main Street. Goldman also set aside $11.4 billion in the first half of this year for compensation
and benefits for its employees, a 33% increase from last year. At a time when there has been intense
focus on bankers' compensation, including congressional hearings, Goldman's decision has been hard
to swallow on Main Street.
After all, the belief is that Goldman and some of the other Wall Street banks might not still
be around if they hadn't gotten government help. And the plight of taxpayers who are funding the
bailout of financial institutions stands in stark relief to bankers' stratospheric pay. CEO Blankfein,
for instance, earned in excess of $100 million in the past three years, even though he didn't take
a bonus last year.
Last fall, Goldman, along with eight large banks, was given billions in taxpayer dollars to boost
confidence in the financial system. This June, Goldman was one of the first firms to reimburse the
government in full, paying back its $10 billion plus interest.
But critics accuse the investment bank of greed and profiting from others' weak spots, and they
haven't been kind in characterizing Goldman. Nobel laureate economist
Joseph Stiglitz
at
Columbia University likens Goldman's business to gambling, because in the last two quarters the
largest growth came from its trading desks. In the second quarter, its revenue from trading and investing
in stocks, bonds and currencies nearly doubled to $10.8 billion.
"Goldman's activity is of negative social value. Its recent profits came from trading, which basically
amounts to profiting from insider information at the expense of others," says
Stiglitz.
Blankfein bristles at such characterization of the firm where he has worked for 27 years and emphasizes
his firm's vital role in the economy. "I believe in the high public purpose of what we do," he says
of the firm's role as a facilitator and funder of businesses. "Our activities are, if anything, more
important today than they were before." Other Goldman executives - managing directors James Esposito
of bonds and Paul Russo from equities among others - say Stiglitz's charges are false because 90%
of its trades are done for clients.
Goldman may be misunderstood on Main Street, and people have called the company different names.
A recent
Rolling Stone article called the firm a "great vampire squid wrapped around the face of humanity,
relentlessly jamming its blood funnel into anything that smells like money." And a 2007 New York Times
column likened its culture to the KGB, the former Soviet Union's secret police.
But in the capital markets, Goldman's prestige has rebounded quickly in recent months. Like all
financial institutions, Goldman profited from the housing bubble, but it pulled back before many
of its competitors did and started selling its riskiest mortgage securities as early as late 2007.
Despite a loss in the fourth quarter of 2008, Goldman was profitable for the year. Rivals Merrill
Lynch and Citigroup had annual losses of $27 billion each.
Emerging stronger from the crisis, without the distractions at many of its competitors, Goldman
was able to seize the opportunities that arose. For instance, President
Obama's economic stimulus package provides subsidies to states and local governments that want
to raise money via what's called Build America bonds to help promote jobs and revive local economies.
Goldman was among the first to move, helping California raise $5.2 billion in April, one of the largest
of these kind of bond issues.
Bill Lockyear, California's treasurer, says the state's well-known budget imbalances had shut
down several thousand public works projects, including construction of mass transit, public parks
and affordable housing. "This bond program allowed us to restart those projects," says Lockyear,
putting more than 90,000 people to work.
However, stimulus measures will not last forever, and some question how sustainable Goldman's
gains are, especially if the economy fails to rebound, which would dry up companies' need to raise
funds.
Buffett to the rescue
It's not as if Goldman escaped the financial crisis unscathed. There was a period of chaos last
year when Blankfein admits he was willing to consider any option to survive, including merging with
Citigroup, which by contrast is today considered one of the weakest financial institutions, 34%-owned
by the government.
However, eight days after Lehman failed and Blankfein was still figuring out a survival strategy,
billionaire investor
Warren Buffett called saying he would invest $5 billion in Goldman's preferred shares for a 10%
annual dividend. That same night, Goldman raised another $5 billion from the global markets by selling
shares.
Though that helped Goldman's capital position considerably, the market turmoil continued. A few
weeks later, Treasury Secretary
Henry Paulson called Blankfein along with eight other CEOs of the largest U.S. financial institutions
and asked them to take government money to shore up the system. Goldman was given $10 billion. "At
that point the country was facing a pretty chaotic situation," says Blankfein. "The message from
Paulson and (Federal
Reserve Chairman Ben)
Bernanke was clear. … Everyone was expected to participate in the program, because what was at
risk potentially threatened the system itself."
Focus on big pay
Along with taxpayer money came increased scrutiny, especially on Goldman's big pay packages. Blankfein,
along with its top six executives, decided to forgo any bonuses last year.
However, even today, though Goldman has returned the government money, there is no letup of pressure
on the firm. In the latest quarter, Goldman says in a public filing that regulators have raised questions
about its compensation policies. Goldman wouldn't elaborate.
Part of Goldman's big pay comes from its history of being created as a partnership and sharing
its profits with its employees. The company became a public company in 1999 and has continued its
partnership structure. Goldman points out that its compensation structure, which is close to 50%
of revenue, is not very different from its peers.
Still, Blankfein says, his firm is working harder to tie compensation to long-term performance.
In a speech at this year's annual shareholder meeting, Blankfein said rather than just individual
performance, compensation "should reflect the performance of the firm as a whole." He indicated that
compensation will be more closely linked to profits in the future by being tied to longer-term stock
incentives.
Despite his deep pockets and the fact that he leads one of New York's most prestigious firms,
Blankfein says he has not forgotten where he comes from and is keenly aware of his company's role
in the economy.
"I went to a fancy school. … But I grew up in a position to understand the stresses and strains
of the real economy," says Blankfein, who won a scholarship to
Harvard University after graduating from public high school at 16. His first job at 13 was selling
peanuts and popcorn at Yankee Stadium. Looking out of his windows in the direction of the playgrounds
of his childhood, he remembers just how far he has come, and how his family suffered, too.
Before Blankfein's father got his post office job, he drove a truck for a company that went out
of business. "He was unemployed for a while," he says.
John Kenneth Galbraith in his popular The Great Crash 1929 has a chapter dedicated to
Goldman Sachs. There is a pattern emerging dating back nearly a century:
"Goldman, Sachs and Company, an investment banking and brokerage partnership, came rather late
to the investment trust business. Not until December 4, 1928, less than a year before the stock market
crash, did it sponsor the Goldman Sachs Trading Corporation, its initial venture in the field."
Now you must remember the theories going around during the late 1920s about the roaring stock
market. One theory went that stocks held a "scarcity value" and the reason their prices were going
high was because of a lack of common stock. Therefore it was a fertile breeding ground for the investment
trust or company. The investment trust really didn't promote new enterprise. What it essentially
did was allow people to own stock in old companies through a new form. Goldman Sachs needed to join
the boom:
"The initial issue of stock in the Trading Corporation was a million shares, all of which was
bought by Goldman, Sachs and Company at $100 a share for a total of $100,000,000. Ninety per cent
was then sold to the public at $104. There were no bonds and no preferred stocks; leverage had not
yet been discovered by Goldman, Sachs, and Company. Control of the Goldman Sachs Trading Company
by virtue of a management contract and the presence of the partners of the company on the board of
the Trading Corporation."
Not a bad profit. A quick 4 percent bang on the initial offering. But this was only the beginning
of the game for Goldman Sachs. The argument being leveled on the organization today boils down to
this. Goldman Sachs made large profits on the mortgage backed securities market. When the party started
overheating, they had the vision to back out and time the market and hence use strategies such as
shorting to make a profit on the downside. Yet they couldn't get out of the way quickly enough. When
things really imploded, they called in their chips with the government (many former Goldman Sachs
employees like Henry Paulson were at the head of the
Treasury) offered generous assistance to the firm. The generosity was well timed for Q1 and Q2
of 2009 were the firm is making gigantic profits once again. People forget how tenuous things got
for the firm in 2008 culminating with the March low:
While the overall stock market is enjoying a
record breaking 50 percent rally in 5 months Goldman Sachs has seen a 350% increase in value
in this same time period. Now many are asking how is this firm profiting multiple times over the
entire stock market? They are still using massive leverage to garner outsized profits with implied
insurance from the U.S. Government. I don't think Americans are averse to profit. In fact, they aren't
pulled away by gigantic profit. Why don't you see massive outrage for Google, Oracle, or Dell for
example? What is at the core here is the corporate welfare that appears to be occurring. That is,
the recession with the
epic housing bubble, was aided by firms like Goldman Sachs and here they are taking taxpayer
money and gambling once again. Unlike a company like say Mervyns or Circuit City that failed because
they had bad management, here we have a company being rewarded.
But let us go back to what occurred during the Great Depression since the current behavior seems
to be something very familiar with the firm:
"In the two months after its formation, the new company sold some more stock to the public, and
on February 21 it merged with another investment trust, the Financial and Industrial Securities Corporation.
The assets of the resulting company were valued at $235 million, reflecting a gain of well over 100
per cent in under three months. By February 2, roughly three weeks before the merger, the stock for
which the original investors had paid $104 was selling for $136.50. Five days later, on February
7, it reached $222.50. At this latter figure it had a value approximately twice that of the current
total worth of the securities, cash, and other assets owned by the Trading Corporation."
Massive value increase even though tangible real value was much less. Incredible spikes seem to
follow the firm. Maybe they have the Midas touch?
"This remarkable premium was not the undiluted result of public enthusiasm for the financial genius
of Goldman, Sachs. Goldman, Sachs had considerable enthusiasm for itself, and the Trading Corporation
was buying heavily of its own securities. By March 14 it had bought 560,724 shares of its
own stock for a total outlay of $57,021,936. This, in turn, had boomed their value. However,
perhaps foreseeing the exiguous character of an investment company which had it investments all in
its own common stock, the Trading Corporation stopped buying itself in March. Then it resold part
of the stock to William Crapo Durant, who re-resold it to the public as opportunity allowed."
Goldman Sachs seems to have a pattern of passing the proverbial buck after they have rinsed all
profits from their venture and move out of the way before the train derails. In this case, the stock
was hyper-inflated because the firm was buying itself. The L.A. Times in November of 2008 talks about
this double sided betting:
"(L.A.
Times) Goldman, Sachs & Co. urged some of its big clients to place investment bets against California
bonds this year despite having collected millions of dollars in fees to help the state sell some
of those same bonds."
That is really looking out for the country especially with a
state in major distress. I'm sure the 38,000,000 residents of California appreciate this hedging
on the state.
But in a time with no SEC, virtually anything went on Wall Street during the Great Depression.
Of course, we all know how the story ended with the epic 1929 crash. Years later in Washington Mr.
Sachs had this to say to Senator Couzens:
"Senator Couzens: Did Goldman, Sachs and Company organize the Goldman Sachs Trading Corporation?
Mr. Sachs: Yes, sir.
Senator Couzens: And it sold its stock to the public?
Mr. Sachs: A portion of it. The firm invested originally in 10 per cent of the entire issue for
the sum of $10,000,000.
Senator Couzens: And the other 90 per cent was sold to the public?
Mr. Sachs: Yes, sir.
Senator Couzens: At what prices?
Mr. Sachs: At 104. That is the old stock…the stock was split two for one.
Senator Couzens: And what is the price of the stock now?
Developer sues Goldman Sachs for back rent (Crain's
NY):
On Wednesday, Mr. Monian sued Goldman-which had backed some of his deals in the past-for at least
$75 million, alleging that the investment bank broke the terms of its lease of his building at
180 Maiden Lane. Mr. Moinian's action followed a lawsuit that Goldman Sachs filed against him
last month alleging that he owed it at least $3.1 million.
Goldman leased the building from
Mr. Moinian in 1998 for 15 years. The bank alleges Mr. Moinain owes it $3 million because it didn't
exercise a termination option in the lease last year. Sources said the bank sought to use the
building as a sort of safety valve so it can stagger its move into the new headquarters it is
constructing downtown, which is slated to begin in the fourth quarter.
Instead, Goldman subleased the building to insurer AIG but retained the right to keep employees
in the building. According to Mr. Moinian's lawsuit, AIG is paying the rent for Goldman on the
space the investment bank has already left at 180 Maiden Lane. The suit claims the arrangement
means that Goldman is profiting from the sublease and that the lease terms require it to share
50% of any profit with Mr. Moinian. He alleges that Goldman has spared itself $150 million in
rents because of the arrangement with AIG.
"Goldman pushed Moinian too far-thinking he would not push back," said Stephen Meister, who
is representing Mr. Moinian. "Goldman's cozy deal with AIG will not withstand judicial scrutiny."
AIG declined to comment. Mr. Meister speculated that the troubled insurer would only agree
to pay Goldman's rent because the lease carries two five-year renewal options at below market
rates. AIG agreed to sell its headquarters and another building downtown earlier this year.
A Goldman spokeswoman said Mr. Moinian's suit had no merit.
Well, sure, Goldman spokeswoman, you may be right but to be entirely honest, Goldman itself has no
merit so I'm not sure you are entirely qualified to discuss things of which you are not familiar.
Now I haven't been able to determine this yet but I'm wondering if perhaps there is some hilarious
irony to be found in Goldman Sachs subletting AIG a property at
Maiden Lane that I'm missing because
I'm too outraged by the audacity of our friends from GS?
Flying home to New Jersey from Chicago after the first two days at his new job, Sergey Aleynikov
was prepared for the usual inconveniences: a bumpy ride, a late arrival.
He was not expecting Special Agent Michael G. McSwain of the
F.B.I.
At 9:20 p.m. on July 3, Mr. McSwain arrested Mr. Aleynikov, 39, at Newark Liberty Airport, accusing
him of stealing software code from
Goldman Sachs, his old employer. At a bail hearing three days later, a federal prosecutor asked
that Mr. Aleynikov be held without bond because the code could be used to "unfairly manipulate" stock
prices.
This case is still in its earliest stages, and some lawyers question whether Mr. Aleynikov should
be prosecuted criminally, or whether a civil suit may be more appropriate. But the charges, along
with civil cases in Chicago and New York involving other Wall Street firms, offer a glimpse into
the turbulent world of ultrafast computerized stock trading.
Little understood outside the securities industry, the business has suddenly become one of the
most competitive and controversial on Wall Street. At its heart are computer programs that take years
to develop and are treated as closely guarded secrets.
Mr. Aleynikov, who is free on $750,000 bond, is suspected of having taken pieces of Goldman software
that enables the buying and selling of shares in milliseconds. Banks and hedge funds use such programs
to profit from tiny price discrepancies among markets and in some instances leap in front of bigger
orders.
Defenders of the programs say they make trading more efficient. Critics say they are little more
than a tax on long-term investors and can even worsen market swings.
But no one disputes that
high-frequency trading is highly profitable.
The Tabb Group, a financial markets research firm, estimates that the
programs will make $8 billion this year for Wall Street firms. Bernard S. Donefer,
a distinguished lecturer at
Baruch College and the former head of markets systems at Fidelity Investments, says profits are
even higher.
"It is certainly growing," said Larry Tabb, founder of the Tabb Group. "There's more talent around,
and the technology is getting cheaper."
The profits have led to a gold rush, with hedge funds and investment banks dangling million-dollar
salaries at software engineers. In one lawsuit,
the Citadel Investment Group, a $12 billion hedge fund, revealed
that it had paid tens of millions to two top programmers in the last seven years.
"A geek who writes code - those guys are now the valuable guys," Mr. Donefer said.
The spate of lawsuits reflects the highly competitive nature of ultrafast trading, which is evolving
quickly, largely because of broader changes in stock trading, securities industry experts say.
Until the late 1990s, big investors bought and sold large blocks of shares through securities
firms like
Morgan Stanley. But in the last decade, the profits from making big trades have vanished, so
investment banks have become reluctant to take such risks.
Today, big investors divide large orders into smaller trades and parcel them to many exchanges,
where traders compete to make a penny or two a share on each order. Ultrafast
trading is an outgrowth of that strategy.
As Mr. Aleynikov and other programmers have discovered, investment banks do not take kindly to
their leaving, especially if the banks believe that the programmers are taking code - the engine
that drives trading - on their way out.
Mr. Aleynikov immigrated to the United States from Russia in 1991. In 1998, he joined
IDT, a telecommunications company, where he wrote software to route calls and data more efficiently.
In 2007, Goldman hired him as a vice president, paying him $400,000 a year, according to the federal
complaint against him.
He lived in the central New Jersey suburbs with his wife and three young daughters. This year,
the family moved to a $1.14 million mansion in North Caldwell, best known as Tony Soprano's hometown.
A video on
YouTube portrays Mr. Aleynikov as a disheveled workaholic who suffers through romantic misadventures
before finding love when he rubs a lamp and a genie fulfills his wish by granting him a wife. A friend,
Vladimir Itkin, says the Aleynikovs are devoted to their children and seem very close.
This spring, Mr. Aleynikov quit Goldman to join Teza Technologies, a new trading firm, tripling
his salary to about $1.2 million, according to the complaint. He left Goldman on June 5. In the days
before he left, he transferred code to a server in Germany that offers free data hosting.
At Mr. Aleynikov's bail hearing, Joseph Facciponti, the assistant United States attorney prosecuting
the case, said that Goldman discovered the transfer in late June. On July 1, the company told the
government about the suspected theft. Two days later, agents arrested Mr. Aleynikov at Newark.
After his arrest, Mr. Aleynikov was taken for interrogation to F.B.I. offices in Manhattan. Mr.
Aleynikov waived his rights against self-incrimination, and agreed to allow agents to search his
house.
He said that he had inadvertently downloaded a portion of Goldman's proprietary code while trying
to take files of open source software - programs that are not proprietary and can be used freely
by anyone. He said he had not used the Goldman code at his new job or distributed it to anyone else,
and the criminal complaint offers no evidence that he has.
Why he downloaded the open source software from Goldman, rather than getting it elsewhere, and
how he could at the same time have inadvertently downloaded some of the firm's most confidential
software, is not yet clear.
At Mr. Aleynikov's bail hearing, Mr. Facciponti said that simply by sending the code to the German
server, he had badly damaged Goldman.
"The bank itself stands to lose its entire investment in creating this software to begin with,
which is millions upon millions of dollars," Mr. Facciponti said.
Sabrina Shroff, a public defender who represents Mr. Aleynikov, responded that he had transferred
less than 32 megabytes of Goldman proprietary code, a small fraction of the overall program, which
is at least 1,224 megabytes. Kevin N. Fox, the magistrate judge, ordered Mr. Aleynikov released on
bond.
The United States attorney's office declined to comment and the F.B.I. did not return calls for
comment.
Harvey A. Silverglate, a criminal defense lawyer in Boston not involved in the case, said he was
troubled that the F.B.I. had arrested Mr. Aleynikov so quickly, without evidence that he had made
any effort to use or sell the code. Such disputes are generally resolved civilly rather than criminally,
Mr. Silverglate said.
"It is astonishing that the F.B.I. arrested this defendant at all," he said. Other firms have
also sued former employees recently over concern about high-frequency trading software, though two
similar cases are the subject of civil suits rather than criminal prosecution.
Six days after Mr. Aleynikov's arrest, Citadel, the hedge fund, sued Mr. Aleynikov's new employer,
Teza Technologies, which was founded in March by three former Citadel employees. While Teza is not
yet conducting any trading, Citadel claimed the former employees had violated a noncompete agreement
with Citadel and might even be trying to steal Citadel's code, causing "irreparable harm."
As part of the suit, Citadel detailed the extraordinary steps it takes to protect its software.
Besides encrypting its programs, the firm discourages employees from writing down details about them.
Its offices have cameras and guards, and there are secure rooms that require special codes to enter.
The precautions are necessary because Citadel has spent hundreds of millions
of dollars developing its software, the firm said.
In its response, Teza said that it had never stolen or tried to steal Citadel's software, did
not ask Mr. Aleynikov to take code from Goldman, and had never seen the code he took. A lawyer for
Teza did not return calls for comment.
Meanwhile, in March, the giant Swiss bank
UBS sued three former members of its high-speed trading group in New York state court. UBS contended
that the defendants had lied to the bank about their plans to work for Jefferies, another firm. Also,
one defendant sent some UBS code to a personal e-mail account.
Lance Gotko, a lawyer for the men, said that they had not used the code they took and that it
might not be valuable to Jefferies in any case. A lawyer for UBS referred calls to a bank spokeswoman,
who declined to comment. A spokesman for Jefferies declined to comment.
A separate but related sighting from Roger Ehrenberg, who makes a point that few commentators have
stressed: the "paying the TARP back" meme, which is somehow treated as a sign of government success,
is in fact an abject failure. The TARP support was badly underpriced. And he doesn't mean the dickering
over the warrants, either.
What we have is a return to business-as-usual. Except it's worse than that. The US taxpayer has
been systematically looted out of hundreds of billions of dollars, yet the press is focused on
Andy Hall and his $100 million payday. Whether this is too much pay for Mr. Hall misses the big
picture. Yes, the Wall Street pay model is messed up, and I recently provided an alternative approach.
But how about the fact that Goldman Sachs is posting record earnings and will invariably be preparing
to pay record bonuses, not nine months after the firm was in mortal danger? Whether anyone will
admit it or not, without the AIG (read: Wall Street and European bank) bail-out and the FDIC issuance
guarantees, neither Goldman nor any other bulge bracket firm lacking stable base of core deposits
would be alive and breathing today.
Goldman is a great firm with a stellar culture, and in most
circumstances it's risk management and funding practices have been second to none. Except when
the crisis hit. It stood with the rest of Wall Street as a firm with longer-dated, less liquid
assets funded with extremely short-dated liabilities....In exchange for giving the firm life (TARP,
FDIC guarantees, synthetic bail-out via AIG, etc.), the US Treasury (and the US taxpayer by extension)
got some warrants on $10 billion of TARP capital injected into the firm. While JP Morgan Chase
CEO Jamie Dimon prefers to poke a stick in the eye of the Treasury, seeking to negotiate down
the payment to buy back the TARP warrants, Lloyd Blankfein smartly paid the full $1.1 billion
requested. He looked like a hero for doing so, a true US patriot repaying the US Government in
full for its lifeline, thanking the US taxpayer in the process. $1.1 billion... $1.1 billion...Hmm...something
doesn't seem right. You know why it doesn't seem right? BECAUSE THE US TREASURY MIS-PRICED THE
FREAKING OPTION.
There is not a Wall Street derivatives trader on the planet that would have done the US Government
deal on an arms-length basis. Nothing remotely close. Goldman's equity could have done a digital,
dis-continuous move towards zero if it couldn't finance its balance sheet overnight. Remember
Bear Stearns? Lehman Brothers? These things happened. Goldman, though clearly a stronger institution,
was facing a crisis of confidence that pervaded the market. Lenders weren't discriminating back
in November 2008. If you didn't have term credit, you certainly weren't getting any new lines
or getting any rolls, either. So what is the cost of an option to insure a $1 trillion balance
sheet and hundreds of billions in off-balance sheet liabilities teetering on the brink? Let's
just say that it is a tad north of $1.1 billion in premium. And the $10 billion TARP figure? It's
a joke. Take into account the AIG payments, the FDIC guarantees and the value of the markets knowing
that the US Government won't let you go down under any circumstances. $1.1 billion in option premium?
How about 20x that, perhaps more. But no, this is not the way it went down....
Where we are left today, dear taxpayer, is a lot poorer. Unless you are a major shareholder
and/or bonusable employee of Goldman Sachs. Brains, ingenuity and value creation should be rewarded
in all fields, Wall Street included. But when value created is the direct result of the risks
borne by others for your benefit, the sharing of benefits needs to be re-allocated. This has not
and apparently will not be done, and we, dear taxpayer, are the worse for it. Further, such a
crisis could have provided the opportunity and the impetus for a re-look at capital markets risks,
getting CDS users to support a central credit derivatives exchange and revised capital rules to
incentivize better gap management. The banks lobby like hell against these changes, because it
cuts into their fees, notwithstanding the systemic benefits such changes could have on the global
financial markets. Banks now lobbying with US taxpayer dollars against changes that could protect
the US taxpayer from more harm in the future. Something is terribly wrong with this picture, yet
all anyone wants to talk about are executives getting paid too much. It's called missing the forest
for the trees, and it is a fixture of both those trying to sell newspapers (get clicks) and run
our Government, and it pisses me off.
...GS, through access to the system as a result of their special gov't perks, was/is
able to read the data on trades before it's committed, and place their own buys or
sells accordingly in that brief moment, thus allowing them to essentially steal buttloads of
money every day from the rest of the punters world.
Two things come out of this:
1. If true, this should be highly illegal, and would, in any sane country result in something
like what happened to Arthur Andersen...
(2. ... is way off point....)
God help Goldman (GS) if this
is true and the government goes after them. This would constitute massive unlawful
activity. Indeed, the allegation is that Goldman alone was given this access!
God help our capital markets if this is true and is ignored by our government
and regulatory agencies, or generates nothing more than a "handslap." Nobody in their right mind
would ever trade on our markets again if this occurred and does not result in severe criminal and
civil penalties.
There apparently is reason to believe that Sergey might have been involved in exactly this sort
of coding implementation. Specifically, look at the patent claims cited on DailyKos; his expertise
was in fact in this general area of knowledge in the telecommunications world......
This is precisely the sort of thing that a Unix machine, sitting on a network cable where it can
"see" traffic potentially not intended for it, could have an interface put into what is called "promiscuous
mode" and SILENTLY sniff that traffic!
ASSUMING THE TRAFFIC IS PASSING BY THE MACHINE ON THE WIRE THIS IS TRIVIALLY EASY FOR ANY NETWORK
PROGRAMMER OF REASONABLE SKILL TO DO. IF THAT TRAFFIC IS EITHER UNENCRYPTED OR IT IS EASY TO BREAK
THE ENCRYPTION.....
Folks, I have no way to know what the code in question does, but if there's anything
to this - anything at all - there is a major, as in biggest scam of the century
- scandal here - something much, much bigger than Madoff or Stanford.
What would this mean, if it was all to prove up?
It would mean that Goldman was able to "see" transaction order flow - bid, offer, and execute
messages - before they were committed in the transaction stream. Such a "SNIFF" would be COMPLETELY
UNDETECTABLE by the sender or recipient of the message.
The implication of this would be that they would be able to front-run any transaction where the
data was visible to them, thereby effectively "stealing pennies" from each transaction they were
able to front-run.
Again: I have absolutely nothing on the content of the allegedly-stolen code
nor can I validate the claim made that Goldman had "special network access." Nothing. All I have
to go on with regards to "market manipulation" (which such a program would be, writ large!) is the
statement of the US Attorney that I cited in my earlier Ticker.
This may be nothing more than a crazy conspiracy theory put out by someone at Daily Kos.
But consider the following:
The last few days the the market has traded "organically." I and many other market participants
have noted that prior to the week before July 4th the market had been acting "very odd" - normal
correlations between interest rate, foreign exchange the the stock markets had been on "tilt"
for the previous couple of months, with the amount of "tiltage" increasing dramatically in
the last three or four weeks. In fact, many of my usual indicators that I use for daytrading
had become completely useless. Suddenly, just before the July 4the weekend,
everything started correlating normally again. I have no explanation
for this "light-switch" change but it aligned almost exactly with the day the NYSE
had "computer problems" and extended trading by 15 minutes. Was there a configuration
change made to their networking infrastructure, one asks?
Zerohedge's information, if you believe it, seems to point toward some
sort of distortion. The cite above claims statistically "as likely as an asteroid hitting earth
it is not true" proof of distortion in the market. I have not analyzed the
data to independently validate that conclusion, but even if the odds of these "effects" in
the market being random chance are only as good as getting hit by a tornado this afternoon......
Every market participant deserves answers on this point. Specifically to the NYSE and
all other markets where collocation connections are made and allowed:
Was it possible for message traffic to be "seen" by computers on your network and collocated
into your infrastructure by other than the originator and recipient? That
is, was it physically possible for anyone to "sniff" messages to and from
other market participants.
If it was possible, is it no longer possible, and if so, when
was that change made?
I believe the SEC and FBI must direct a subpoena at all market exchanges
for an under-oath answer to question #1. If the answer to that question is "yes" then every
market participant who had or has equipment collocated on the NYSE infrastructure must be
immediately served with a subpoena for a true and complete copy of all software operating on every
machine connected to said infrastructure for immediate forensic investigation to ascertain if any
participants were indeed "sniffing" traffic and front-running orders.
The charge made on the pages of Daily Kos is incredibly serious. If
this happened it is a case of literal robbery of every market participant for the
entire duration of the time that the code in question was executing on the network, with losses to
market participants potentially running into the hundreds of billions of dollars.
Market participants deserve an answer to these questions.
The American economy remains in dire straits, with one worker in six unemployed or underemployed.
Yet Goldman Sachs just reported record quarterly profits - and it's preparing to hand out huge bonuses,
comparable to what it was paying before the crisis. What does this contrast tell us?
First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad
for America.
Second, it shows that Wall Street's bad habits - above all, the system of compensation that helped
cause the financial crisis - have not gone away.
Third, it shows that by rescuing the financial system without reforming it, Washington has done
nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.
Let's start by talking about how Goldman makes money.
Over the past generation - ever since the banking deregulation of the Reagan years - the U.S.
economy has been "financialized." The business of moving money around, of slicing, dicing and repackaging
financial claims, has soared in importance compared with the actual production of useful stuff. The
sector officially labeled "securities, commodity contracts and investments" has grown especially
fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.
Such growth would be fine if financialization really delivered on its promises - if financial
firms made money by directing capital to its most productive uses, by developing innovative ways
to spread and reduce risk. But can anyone, at this point, make those claims with a straight face?
Financial firms, we now know, directed vast quantities of capital into the construction of unsellable
houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk
rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible
consumers.
Goldman's role in the financialization of America was similar to that of other players, except
for one thing: Goldman didn't believe its own hype. Other banks invested heavily in the same toxic
waste they were selling to the public at large. Goldman, famously, made a lot of money selling securities
backed by subprime mortgages - then made a lot more money by selling mortgage-backed securities short,
just before their value crashed. All of this was perfectly legal, but the net effect was that Goldman
made profits by playing the rest of us for suckers.
And Wall Streeters have every incentive to keep playing that kind of game.
The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still
operating under a system of heads they win, tails other people lose. If you're a banker, and you
generate big short-term profits, you get lavishly rewarded - and you don't have to give the money
back if and when those profits turn out to have been a mirage. You have every reason, then, to steer
investors into taking risks they don't understand.
And the events of the past year have skewed those incentives even more, by putting taxpayers as
well as investors on the hook if things go wrong.
I won't try to parse the competing claims about how much direct benefit Goldman received from
recent financial bailouts, especially the government's assumption of A.I.G.'s liabilities. What's
clear is that Wall Street in general, Goldman very much included, benefited hugely from the government's
provision of a financial backstop - an assurance that it will rescue major financial players whenever
things go wrong.
You can argue that such rescues are necessary if we're to avoid a replay of the Great Depression.
In fact, I agree. But the result is that the financial system's liabilities are now backed by an
implicit government guarantee.
Now the last time there was a comparable expansion of the financial safety net, the creation of
federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure
that banks didn't abuse their privileges. This time, new regulations are still in the drawing-board
stage - and the finance lobby is already fighting against even the most basic protections for consumers.
If these lobbying efforts succeed, we'll have set the stage for an even bigger financial disaster
a few years down the road. The next crisis could look something like the savings-and-loan mess of
the 1980s, in which deregulated banks gambled with, or in some cases stole, taxpayers' money - except
that it would involve the financial industry as a whole.
The bottom line is that Goldman's blowout quarter is good news for Goldman and the people who
work there. It's good news for financial superstars in general, whose paychecks are rapidly climbing
back to precrisis levels. But it's bad news for almost everyone else.
Lately the topic of Goldman's VaR has taken on significant prominence, not least because as Zero
Hedge disclosed yesterday, it hit a record high. The implications for this were large enough that
even Bloomberg picked up on this story. Many readers raised questions of how is it even remotely
possible for the company to have a VaR in the low-mid $200 MM ballpark, yet to post a record number
of $100MM+ trading days in Q1; Zero Hedge is willing to wager that the upcoming 10-Q release will
demonstrate another record number of $100MM+ days in the just closed quarter as well.How is that
possible?
The clue may come from a February 5 letter by the Federal Reserve to Goldman CAO Sarah Smith.
The letter had come in response to GS requests for "temporary exemptions from the application of
certain aspects of the Board's Market Risk Rules for state member banks and bank holding companies
and the Board's general risk-based capital rules for bank holding companies." Basically through the
end of 2009 Goldman is basically using non-traditional. SEC approved VaR models as can be seen here:
GSGI has requested that (1) through December 31, 2009, GSGI and Bank be permitted to use certain
Value-at-Risk ("VaR") models approved by the SEC... to determine their capital requirements for
specific risk under the Market Risk Rules; (2) through December 31, 2009, GSGI and Bank be permitted
to use methods approved by the SEC to determine their capital requirements under the Market Risk
Rules for those trading assets, including distressed debt and restricted stock investments that
the SEC did not require to be included in the VaR-based models of GSGI and Bank; and (3) GSGI
be allowed to use methods approved by the SEC to calculate risk-based capital requirements for
its nonfinancial equity investments that are subject to the Board's Credit Risk Capital Rules.
The letter goes into detail explaining why a bank needs to follow a MRR VaR methodology. Yet what
is not made clear is i) why does Goldman need almost a full year of alternative VaR calculation and
MRR exemption and ii) what is the protocol for the SEC to enforce VaR compliance when Goldman's ultimate
regulator is the Federal Reserve. The exemption raises critical questions not only with regard to
the validity of the company's indicate VaR, but also downstreaming capital requirement reports. Zero
Hedge would be remiss to point out that a very close relationship between the most critical financial
company in the world and the most discredited regulator (SEC) does not bode well for confidence in
this critical risk indicator, which as many have pointed out, is clearly the main metric by which
to measure not only the performance, but the risk capacity of the world's largest government-backstopped
hedge fund. Mr. Canaday, Mr. Van Praag - the floor is, again, yours. In your absence, Zero Hedge
will, and encourages it readers to, contact Mr. Homer Hill at the Federal Reserve Bank Of New York
at (212) 720-2164 to provide additional clarity on the matter
" . . . a very close relationship between the most critical financial company in the world
and the most discredited regulator (SEC) does not bode well for confidence . . . "
How can the pretense that the SEC is rigorously evaluating GS requests be anything but a joke.
I laughed when I read it. They're just going through the motions, doing the paperwork for the
SEC to rubber stamp. God, that "request" for FED exemption is almost as pathetic as Goldman's
lament yesterday that completely infiltrating and controlling pretty much every institution, public
and private, that is related to their industry is more of a liability than an advantage.
Goldman Sachs Group Inc. announced record earnings Tuesday of $3.44 billion for the second
quarter of 2009.
Goldman's stock price leapt 77 percent for the first half of 2009, and closed Tuesday at $149.66
a share.
Without an ongoing series of front- and backdoor bailouts financed by U.S. taxpayers, most
of Goldman's record profits would not have been possible.
In April 2009, Goldman Sachs' CEO, Lloyd Blankfein, who received record salary and bonus compensation
of $68.5 million in 2007, said that bonus decisions made before the credit crisis looked "self-serving
and greedy in hindsight." Now, they look self-serving and greedy with foresight.
Goldman set aside $11.4 billion for employee compensation and benefits, up 33 percent from
last year. That's enough to pay each employee more than $390,000, just for the first six months
of this year.
In June, Goldman bought back its preferred shares, repaying $10 billion it received from the
government's Troubled Asset Relief Program, or TARP, and setting it free of limits on executive
compensation and dividends.
But pay is not the key issue. U.S. taxpayers deserve a large cut of the profits, not the chump
change -- less than a half-billion dollars -- they got from preferred shares in the company and
the relatively small amount they could get from warrants in its stock.
U.S. taxpayers should insist that a large part of Goldman's revenues and profits belong to
the American public. TARP money was just part of a series of bailouts and concessions that allowed
Goldman to prosper at the expense of a flawed regulatory system.
In March 2008, Goldman, a primary dealer in Treasury securities, was among the beneficiaries
of a massive backdoor bailout by the Federal Reserve Bank. At the time, Henry Paulson, former
CEO of Goldman Sachs, was treasury secretary.
In an unprecedented move, the Fed created a Term Securities Lending Facility, or TSLF, that
allowed primary dealers like Goldman to give non-government-guaranteed "triple-A" rated assets
to the Fed in exchange for loans. The trouble was that everyone knew the triple-A assets were
not the safe securities they were advertised to be. Many were backed by mortgage loans that were
failing at super speed.
The bailout of American International Group, or AIG, ballooned from $85 billion in September
2008 to $182.5 billion. Of that money, $90 billion was funneled as collateral payments to banks
that traded with AIG. American taxpayers may never see a dime of their bailout money again, but
Goldman saw plenty.
Goldman may be the largest indirect beneficiary of AIG's bailout, receiving $12.9 billion in
collateral, including securities lending transactions, from AIG after the government bailed out
the insurance company.
The key question is whether Goldman asked AIG to insure products that were as dodgy as the
doomed deal from Goldman Sachs Alternative Mortgage Products exposed by Fortune's Allan Sloan
in his October 16, 2007, Loeb Award-winning article: "Junk Mortgages Under the Microscope."
If the federal government had not intervened and if AIG had gone into bankruptcy, Goldman probably
would not have received its $12.9 billion from AIG. U.S. taxpayers and the American economy are
owed some of the bailout money passed directly through AIG to Goldman.
Wall Street firms also reaped trading windfalls when AIG needed to close out its derivative
transactions. This was the most lucrative windfall business in the history of the derivatives
markets. When AIG left money on the table, it was U.S. taxpayer money.
Goldman Sachs was granted bank holding company status in the fall of 2008. It already had the
temporary ability to borrow from the Fed through the TSLF, which would have expired in January
2009. Now it has permanent access to lending from the Fed.
Goldman can now compete with the largest U.S. banks and borrow money at interest rates pushed
as close to zero as possible by the Fed. Goldman gets a further benefit: favorable accounting
rule changes. In addition, Goldman issued $30 billion of debt with a valuable government guarantee
that remains outstanding.
Meanwhile, the American public faces a rising unemployment rate, falling housing prices, rising
unemployment, higher local taxes and a dismal economic outlook.
Interested men with reputations and fortunes at stake rode roughshod over public interest.
The American public is owed part of the profits Goldman was able to make because of the largesse
of our Congress.
Wall Street's "financial meth labs," including Goldman's, massively pumped out bad bonds and
credit derivatives that have melted down savings accounts, pension funds, the municipal bond market
and the American economy. Risky assets, leverage and fraud led to acute distress in the global
financial markets.
The biggest crime on the American economy may go unpunished with no consequences to the perpetrators.
The biggest crime was not predatory lending, but predatory securitizations, packages of loans
that did not deserve the ratings or prices at the time they were sold. They ballooned what should
have been a relatively small problem into a global crisis.
Wall Street owes the American public for its key role in bringing the global economy -- and
in particular, the U.S. economy -- to its knees. Goldman is not alone in owing the American public.
It is not the worst of all of the Wall Street firms. But among all of Wall Street's offenders,
it is the most well-connected, and Goldman was the firm that cleaned up the most as the result
of government bailouts.
The opinions expressed in this commentary are solely those of Janet Tavakoli.
Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides
consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20
years of experience in senior investment banking positions, trading, structuring and marketing
structured financial products. She is a former adjunct associate professor of derivatives at the
University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic
Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured
Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008), and
Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley, 2009).
This week, Wall Street superpower Goldman Sachs announced second quarter net profits of $3.44
billion, far exceeding expectations. Earnings per share also rose, to $4.93 from $4.58 a year ago.
This is a promising sign that the battered financial industry is on the mend, but it should be noted
that Goldman didn't do it alone. In fact, at least some of these profits were made possible by guarantees,
low-cost loans and other assistance from the federal government.
Goldman did pay off its $10 billion in TARP loans last month, along with a one-time preferred
dividend of about $426 million. The firm was able to do this by raising
$8.9 billion
in equity, debt and asset sales.
But the financial giant continues to benefit from several government programs aimed at loosening
up credit markets.
First,
$13
billion of the government's bailout of AIG went straight to Goldman, a 100% payoff of bets the
firm had placed with the insurer. While industry insiders say that this was done to ensure that legally-binding
contracts were upheld, others, including former New York AG Eliot Spitzer, argue that this was simply
"a way to hide an enormous second round
of cash to the same group that had received TARP money already." This $13 billion was delivered despite
Goldman's continued insistence that it
did not need government funding.
Goldman also benefited from artificially inexpensive debt thanks to the FDIC's
Temporary Liquidity
Guarantee Program (TLGP). This program put a federal guarantee behind bonds issued by Goldman
and other banks, including Bank of America and JP Morgan Chase, making them far more attractive to
investors. For example, when Goldman sold
$5 billion of 3.5 year bonds in November, it was able to attract buyers while offering a yield
only 200 basis points higher than ultra-safe Treasuries with similar maturities. Altogether, Goldman
issued $28
billion in debt using this program between November and April.
Mark Zandi, chief economist at Moody's Economy.com, called this bond-guarantee program
an infinite
subsidy whose value could not be calculated.
Finally, it should be noted that Goldman Sachs and other major financial players are benefiting
from a Federal Reserve program that allows them to borrow funds overnight for close to
zero
percent. Designed to catalyze economic activity and keep interest rates low for businesses and
consumers, the program has also boosted bank profits by
widening the spread between the cost of their incoming and outgoing capital.
Altogether, this government support essentially enabled Goldman to return to its traditional model
of business: accepting risk in order to magnify profits. Specifically, Goldman boosted its "value-at-risk"-the
estimated value of its trading activities on a given day under a worst-case scenario-to
$245 million this past quarter from $182 million in the same quarter last year.
Shrewd business decisions by Goldman traders (along with a reduced field of competitors) were
undoubtedly responsible for a good share of the profits being crowed about by the firm this week.
Notably, the firm cashed in on profit margins for commodity and foreign exchange trading that, according
to the Financial Times, now stand "between
two and eight times higher than before the height of the financial crisis."
Indeed, the profits announced this week by Goldman Sachs are an encouraging sign that the financial
markets are starting to return to normal. But they are by no means evidence of a full-fledged economic
recovery. In fact, without the support of the aforementioned government programs, Goldman's profits
would have been incalculably lower.
Buffett should ask for a refund??? What an incredibly dumb thing to say. For starters, Berkshire's
holding in Goldman common shares is zero. The entire $5 billion holding is in 43.4 million preferred
shares with a 5 year term, paying 10% interest. Each preferred share carries a warrant, to buy
a Goldman common share at $115. With Goldman common at $149.66, these warrants currently show
a paper profit of over $1.5 billion. Of course, if these warrants were on the market they would
be worth much more than that, with 4+ years of time premium remaining. Also importantly, the agreement
with Goldman restricts how many new common shares they can sell, so Berkshire is protected from
potential dilution. As for the 10% yield, aren't we supposed to be in a low interest rate environment?
The bottom line is that Buffett and Munger have more business savvy in one of their grey hairs,
than in all of Jimbo's big brain. To hear him questioning their investment prowess is laughable.
GS is a bank whose profits were greatly enhanced by the USG's TARP program, the taxpayers'
subsequent bailout of AIG (CDS) and who currently benefits nicely by being able to borrow from
the FED at 0% while making loans at 3.5%.
A failure at CIT could result in losses for Goldman Sachs and Wells
Fargo. Goldman last year agreed to a $3bn secured financing facility for CIT and Wells Fargo provided
$500m in secured financing.
So what is tax cheat timmy government sachs doing?
Despite the tough talk about CIT Group not being systemically important enough to be bailed
out by the government, it looks like the bailout is coming.
The panel, charged with determining whether taxpayers are receiving maximum benefit from the
TARP, conducted its own valuation of the warrants the Treasury holds. It found that the 11 banks
that have repurchased their warrants from the Treasury for a total amount that the panel estimates
to be only 66 percent of current market value, shortchanging taxpayers by $10 million.
Goldman Sachs Group Inc executives sold almost $700 million worth of stock since the collapse
of rival Lehman Brothers last year, the Financial Times said on Monday.
The newspaper said that most of the stock sales took place while the biggest U.S. investment
bank was bailed out by the government with $10 billion of taxpayer money, according to filings
with the Securities and Exchange Commission.
The events preceding Goldman Sachs' new "blowout profits"
Remember all of this -- the $700 billion bank bailout, the AIG scandal, dark and scary threats
of imminent global meltdown if there wasn't full-scale capitulation by the citizenry to the immense
transfer of public wealth to the private investment banking sector? Such distant, hazy memories:
so many exciting celebrity deaths and riveting celebrity resignations ago. If sequences of events
like these don't cause mass citizen outrage, then it's hard to imagine what will:
WASHINGTON - It was a room full of people who rarely hold their tongues. But as the Fed chairman,
Ben S. Bernanke, laid out the potentially devastating ramifications of the financial
crisis before congressional leaders on Thursday night, there was a stunned silence
at first.
Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening
visit to Capitol Hill, and they were gathered around a conference table in the offices of House
Speaker Nancy Pelosi.
"When you listened to him describe it you gulped," said Senator Charles E.
Schumer, Democrat of New York.
As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing
and Urban Affairs Committee, put it Friday morning on the ABC program "Good Morning America,"
the congressional leaders were told "that we're literally maybe days away from a complete
meltdown of our financial system, with all the implications here at home and globally."
Mr. Schumer added, "History was sort of hanging over it, like this was a moment."
When Mr. Schumer described the meeting as "somber," Mr. Dodd cut in. "Somber doesn't begin
to justify the words," he said. "We have never heard language like this."
"What you heard last evening," he added, "is one of those rare moments, certainly rare in my
experience here, is Democrats and Republicans deciding we need to work together quickly."
The embattled Goldman Sachs investment banking firm and its employees have spent more than
$43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence
in Washington, D.C. since 1989, according to an ABC News analysis of campaign finance records
compiled by the Center for Responsive Politics.
As a group, Goldman Sachs bankers have been the country's top political campaign contributors
this year and have given $29.5 million in contributions since 1989, according to the
Center.
"They are almost in a class by themselves," said Sheila Krumholz, the executive
director for the Center for Responsive Politics.
"Their top executives are in a class that is way above the clout and name-dropping that most
other American businesses can achieve," says Krumholz.
Two weeks ago, the nation's most powerful regulators and bankers huddled in the Lower Manhattan
fortress that is the Federal Reserve Bank of New York, desperately trying to stave off disaster.
As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered the collapse of one
of America's oldest investment banks, Lehman Brothers, a more dangerous threat emerged: American
International Group, the world's largest insurer, was teetering. A.I.G. needed billions of dollars
to right itself and had suddenly begged for help.
One of the Wall Street chief executives participating in the meeting was Lloyd C. Blankfein
of Goldman Sachs, Mr. Paulson's former firm. Mr. Blankfein had particular reason for
concern.
Although it was not widely known, Goldman, a Wall Street stalwart that had seemed immune to
its rivals' woes, was A.I.G.'s largest trading partner, according to six people close to the insurer
who requested anonymity because of confidentiality agreements. A collapse of the insurer
threatened to leave a hole of as much as $20 billion in Goldman's side, several of these
people said.
Days later, federal officials, who had let Lehman die and initially balked at tossing a lifeline
to A.I.G., ended up bailing out the insurer for $85 billion.
President Bush signed into law Friday a historic $700 billion bailout of the financial services
industry, promising to move swiftly to use his sweeping new authority to unlock frozen credit
markets to get the economy moving again. . . .
But Majority Leader Steny Hoyer, D-Md., said compromise was needed. He said that while he strongly
opposed the Senate's decision to pay for many of the tax breaks with debt, he could not forget
everyday Americans at home who were struggling. "For their sake, we must act," Hoyer said in a
floor speech.
Treasury Secretary Henry Paulson is expected to tap Neel Kashkari, a key adviser on whom he
has come to rely heavily during the financial crisis, to oversee Treasury's $700 billion
program to buy distressed assets from financial institutions, according to people familiar
with the matter.
Mr. Kashkari, 35 years old, a Treasury assistant secretary for international affairs and a
former Goldman Sachs Group Inc. banker, is expected to be named interim head
of Treasury's new Office of Financial Stability as early as Monday. The position confers
substantial power on Mr. Kashkari. . . .
Senator Schumer plays an unrivaled role in Washington as beneficiary, advocate and overseer
of an industry that is his hometown's most important business.
An exceptional fund raiser - a "jackhammer," someone who knows him says, for whom "'no' is
the first step to 'yes,'" -- Mr. Schumer led the Democratic Senatorial Campaign Committee for
the last four years, raising a record $240 million while increasing donations from Wall
Street by 50 percent. That money helped the Democrats gain power in Congress, elevated
Mr. Schumer's standing in his party and increased the industry's clout in the capital.
But in building support, he has embraced the industry's free-market, deregulatory agenda
more than almost any other Democrat in Congress, even backing some measures now blamed for contributing
to the financial crisis. . . . But Mr. Schumer, a member of the Banking and Finance Committees,
repeatedly took other steps to protect industry players from government oversight and tougher
rules, a review of his record shows. Over the years, he has also helped save financial institutions
billions of dollars in higher taxes or fees.
He succeeded in limiting efforts to regulate credit-rating agencies, for example,
sponsored legislation that cut fees paid by Wall Street firms to finance government oversight,
pushed to allow banks to have lower capital reserves and called for the revision of regulations
to make corporations' balance sheets more transparent.
WASHINGTON - Treasury Secretary Timothy Geithner picked a former Goldman Sachs lobbyist
as a top aide Tuesday, the same day he announced rules aimed at reducing the role of
lobbyists in agency decisions.
Mark Patterson will serve as Geithner's chief of staff at Treasury, which oversees the government's
$700 billion financial bailout program.
President Barack Obama's nominee to oversee U.S. futures markets, who has confessed he should
have done more to rein in exotic financial instruments that have battered global markets, was
approved by the Senate Agriculture Committee on Monday.
The approval of Gary Gensler, a former Goldman Sachs executive, clears the
way for a Senate vote putting him in charge of the Commodity Futures Trading Commission.
We've also learned that much of the 170 billion has been used by AIG to pay off AIG's putative
obligations to other Wall Street banks such as Goldman Sachs. Goldman has maintained that it got
no bailout money from the Treasury. But in fact it received some $13 billion through AIG.
More troubling is that the original plan to bail out AIG was concocted at a meeting held last
fall, run by then Treasury Secretary Hank Paulson who, before becoming Teasury Secretary, had
been CEO of Goldman Sachs. Also attending the meeting was Lloyd Blankenfein, the current
CEO of Goldman Sachs. Also at the meeting: Tim Geithner, then head of the New York Fed.
Decisions made during the final months of the Bush administration created an environment in
which the most politically connected investment banks, Goldman Sachs and Morgan Stanley,
not only flourished, but saw their competitors laid waste, with firms like Lehman in
bankruptcy, and others, like Merrill Lynch and Bank of America, forced to merge in desperate hope
of surviving.
BLACK: 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.
MOYERS: Even though Goldman Sachs had a big vested stake.
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.
MOYERS: Yeah, like a conflict of interest, it seems.
BLACK: Massive conflict of interests.
MOYERS: So, how did he get away with it?
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.
Lawrence H. Summers, one of President Obama's top economic advisers, collected roughly $5.2
million in compensation from hedge fund D.E. Shaw over the past year and was paid more than $2.7
million in speaking fees by several troubled Wall Street firms and other organizations. . . .
Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April
16 visit to Goldman Sachs, according to his disclosure form.
An examination of Mr. Geithner's five years as president of the New York Fed, an era of unbridled
and ultimately disastrous risk-taking by the financial industry, shows that he forged
unusually close relationships with executives of Wall Street's giant financial institutions.
His actions, as a regulator and later a bailout king, often aligned with the industry's
interests and desires, according to interviews with financiers, regulators and analysts
and a review of Federal Reserve records.
THE ATLANTIC: The crash has laid bare many unpleasant truths about the United
States. One of the most alarming, says a former chief economist of the International Monetary
Fund, is that the finance industry has effectively captured our government --
a state of affairs that more typically describes emerging markets, and is at the center of many
emerging-market crises. . . . .
JOHNSON: Squeezing the oligarchs, though, is seldom the strategy of choice
among emerging-market governments. Quite the contrary: at the outset of the crisis, the
oligarchs are usually among the first to get extra help from the government, such as
preferential access to foreign currency, or maybe a nice tax break, or-here's a classic Kremlin
bailout technique -- the assumption of private debt obligations by the government. Under duress,
generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze
someone, most emerging-market governments look first to ordinary working folk -- at least
until the riots grow too large. . . .
Any attempt to construct a narrative around all the former Goldmanites in influential positions
quickly becomes an absurd and pointless exercise, like trying to make a list of everything.
What you need to know is the big picture: If America is circling the drain, Goldman Sachs
has found a way to be that drain -- an extremely unfortunate loophole in the system of
Western democratic capitalism, which never foresaw that in a society governed passively by free
markets and free elections, organized greed always defeats disorganized democracy.
At this point, however, the acute crisis has given way to a much more insidious threat. Most
economic forecasters now expect gross domestic product to start growing soon, if it hasn't already.
But all the signs point to a "jobless recovery": on average, forecasters surveyed
by The Wall Street Journal believe that the unemployment rate will keep rising into next year,
and that it will be as high at the end of 2010 as it is now.
Now, it's bad enough to be jobless for a few weeks; it's much worse being unemployed for months
or years. Yet that's exactly what will happen to millions of Americans if the average
forecast is right -- which means that many of the unemployed will lose their savings, their homes
and more.
Most of Wall Street, and America, is still waiting for an economic recovery. Then there
is Goldman Sachs.
Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently
paid back its government bailout money, will report blowout profits from trading
on Tuesday.
Analysts predict the bank earned a profit of more than $2 billion in the March-June
period, because of its trading prowess across world markets. If they are right, the bank's rivals
will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have
rebounded so drastically only months after the nation's financial industry was shaken to its foundations.
. . .
Startling, too, is how much of its revenue Goldman is expected to share with its employees.
Analysts estimate that the bank will set aside enough money to pay a total of $18 billion
in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee.
Top producers stand to earn millions.
Other than those individuals whose life purpose is to
serve as reverent apologists and servile defenders for the most powerful financial elites, is
there anyone who would be willing to claim with a straight face that the last event is unrelated
to all the ones that preceded it? Add to that all the Serious consensus-talk about how the country
can't afford health care reform and how Social Security, Medicare and Medicaid must be cut because
they're too expensive, and the picture couldn't be clearer.
Read the above-excerpted paragraph from Simon Johnson describing how, in his experience, fundamentally
corrupt emerging-market nations respond to financial crises ("at the outset of the crisis, the oligarchs
are usually among the first to get extra help from the government. . . . Under duress, generosity
toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market
governments look first to ordinary working folk -- at least until the riots grow too large"). That
"until" provision never seems to be triggered, which is why, as Johnson points out, the behavior
continues unabated.
UPDATE:
Several
commenters add a crucial point: back in September, the Federal Reserve allowed Goldman (and a
few other surviving institutions) to convert from an investment bank into a bank holding company.
The Wall St.
Journal claimed at the time that the move meant the firm would "come under the close supervision
of national bank regulators, subjecting them to new capital requirements, additional oversight, and
far less profitability than they have historically enjoyed." A mere nine months
later, Goldman boasts of "blowout profits." So much for "less profitability." As for allegedly greater
regulations and capital restrictions, they
freely admitted
from the start: "'We don't believe we'll have to get out of any businesses,' says Lucas van Praag,
a Goldman spokesman. Adds Morgan Stanley's Mark Lake, 'There will not be much in terms of divestitures'."
But what the conversion did allow was access to lending from the Federal Reserve.
Since then, the Fed has increased its balance sheet by $2
trillion while
steadfastly
refusing to disclose the beneficiaries of that credit. Thus, even aside from the bailout money
it directly received and the billions in bailout money which it indirectly received (through AIG),
Goldman has had access to massive amounts of Fed lending in order to fuel its bulging profits. That
unimaginably enormous (though entirely secret) lending is, in part, what is behind the
Ron Paul-sponsored bill to audit the Fed -- a bill that is now
co-sponsored by a majority of House members from across the political spectrum
(progressive, conservative and everything in between), yet which
continues to be blocked by Congressional leaders from receiving a floor vote.
UPDATE II: I've been commenting on the Sotomayor
hearing on Twitter -- only because my sanity precludes my remaining silent as I watch this ludicrous
spectacle. Those interested can follow the feed, and read the commentaries from today,
here.
Up until about two weeks ago, Matt Taibbi's favorite Goldman Sachs' market observers, the folks
over at the Zero Hedge blog, had been
continually commenting over the past six-plus months about how Goldman had all but cornered the market
on program trading within the NY Stock Exchange. (Program trading is the automated stock trading
via computers by firms specially authorized by the NYSE to facilitate same.) Clearly, according to
Zero Hedge publisher Tyler Durden, something was up.
A couple of months ago, we also learned through Zero Hedge that Goldman had profited greatly from
a sweetheart deal with the federal government concerning a new program instituted by the Feds known
as "The Supplemental Liquidity Provider" Program ("SLP"), launched this past Thanksgiving, which
was supposed to provide "market liquidity" (i.e.: an ongoing, active market) for selected groups
of 500 different NYSE stocks per SLP participant. As Durden pointed out to all who were interested,
it certainly
appeared to him that Goldman was the only active participant in the program.
This past week,
according to Durden tonight, things starting going downright stranger than strange when Goldman's
name went completely missing from the NYSE's Weekly Program Trading report. The firm that, by far
and away (jn most instances accounting for anywhere from third to more than one-half of all
program trades throughout Wall Street), had maintained the top position in program trading on Wall
Street for practically every week for the past six-plus months, all of the sudden was nowhere in
sight.
...This week's NYSE Program Trading report was very odd: not only because program trading hit
48.6% of all NYSE trading, a record high at least since the NYSE keep tabs of this data, and a
data point which in itself was startling enough to cause some serious red flags as I jaunt from
village to village in what little is left of Europe's bison country, but what was shocking was
the disappearance of the #1 mainstay of complete trading domination (i.e., Goldman Sachs) from
not just the aforementioned #1 spot, but the entire complete list. In other words: Goldman went
from 1st to N/A in one week.
COLUMN A: A Goldman Trading Scandal?
By Matthew Goldstein
NEW YORK, July 5 (Reuters) - Did someone try to steal Goldman Sachs' secret sauce?
While most in the United States were celebrating the Fourth of July holiday, a Russian immigrant
living in New Jersey was being held on federal charges of stealing secret computer trading codes
from a major New York-based financial institution. Authorities did not identify the firm, but
sources say that institution is none other than Goldman Sachs.
The charges, if proven, are significant because the codes that the accused, Sergey Aleynikov,
tried to steal are the secret sauce to Goldman's automated stock and commodities trading business.
Federal authorities contend the computer codes and related-trading files that Aleynikov uploaded
to a German-based website help this major financial institution generate millions of dollars in
profits each year.
The platform is one of the things that gives Goldman an advantage over the competition when
it comes to the rapid-fire trading of stocks and commodities. Federal authorities say the platform
quickly processes rapid developments in the markets and using secret mathematical formulas, allows
the firm to make highly-profitable automated trades.
As we also learned from the article, the criminal case "...has the potential to shed a light on
the inner workings of an important profit center for Goldman..."
The case against Aleynikov may explain why the New York Stock Exchange moved quickly last week
to stop reporting program stock trading for its most active firms. Goldman was often at the top
of the chart -- far ahead of its competitors. It's possible Goldman had asked the NYSE to stop
reporting the number after it discovered that someone may have infiltrated the proprietary computer
codes it uses.
Here's a comment from the criminal complaint against Aleynikov:
"The Financial Institution has devoted substantial resources to developing and maintaining a computer
platform that allows the Financial Institution to engage in sophisticated high-speed, and high-volume
trades on various stock and commodities markets. Among other things, the platform is capable of
quickly obtaining and processing information regarding rapid developments in these markets."
As Zero Hedge and Reuters are quick to point out, the case has the potential to actually pull
the curtain aside for the public to take a look at the inner workings of Goldman's trading activities.
Speculation is running rampant throughout the blogosphere tonight regarding matters as diverse
as the fairly well-known fact that Goldman is at the heart of the government's
Plunge Protection Team,
a/k/a the "President's Working Group On Financial Markets," (thus making this a matter of so-called
national security, since the "PPT" group, created during the Reagan administration, is supposed to
step in and prevent our markets from crashing), to the possibility that Goldman could have easily
been "frontrunning" the rest of the market due to the implementation of their exceptionally fast
proprietary code, identifying others' market-making trades and strategies, then acting upon them
for Goldman's own benefit, executing in-house trades before the third-parties' trades were
even concluded.
Whatever happens as a byproduct of these latest, breaking events, as Robert Scheer told us awhile
back over at HuffPo, it's to the point where
we've become either numb, or resigned, or both, to the extent of corruption that occurs there.
Then again, Matt Taibbi just informed us last week that the folks over at Goldman are no less than
responsible for every market bubble that's occurred on Wall Street since the 1920's. (See:
"The Great American
Bubble Machine.")
Get your tinfoil hats on and go checkout
ZeroHedge's reader comments on this story, tonight. They're fascinating, running the gamut from
one conspiratorial option ('...Aleynikov is a patsy...') to another ('...the proprietary source code
for the government's Plunge Protection Team will be available for the public to view at any moment...').
They don't even make movies with scripts that are this good.
say a transaction must be no shorter in duration than 24 hours or the transaction is not legitimate.
You will hear screams but if that's the rule, and you know before you buy that you must hold the
share for a minimum of 24 hours before you sell - that's just part of the risk.
The GS model trades million of shares at a time - buy's and sells at a fraction of an increase
or decrease - that's not helping markerts or building tangible assets - that's simply skimming. They
skim because the law allows for it. Don't blame GS; blame our Government - they allow it.
The care of human life and happiness, and not their destruction, is the first and only legitimate
object of good government. - Thomas Jefferson
. . . sounds like online poker, and Goldman Sachs just happens to be the player with
the best "bots" running.
We need to find good ways to curtail the pure gambling aspects of the stock market. Having minimum
hold-times as you suggest might be a good start.
The idea behind financial markets was to allow investors liquidity - the ability to cash out of
what would otherwise be illiquid investments (shares in companies) by passing them along to another
investor. But the important thing was supposed to be the facilitation of investment in going concerns
that had real economic value, and the rewards to the investors were supposed to be in the form of
dividends - purchasing a stock bought you a (hopefully predictable) income stream. The price of a
stock was (supposed to be) predicated upon the future value of the income stream - not on how much
the next guy might be willing to pay for it 10 seconds from now.
Since the future cannot be known, investment is always something of a gamble, but the skimming
and churning of instant trading is only of value to the financial houses, not to the greater economy.
"Have nothing in your houses that you do not know to be useful or believe to be beautiful." -William
Morris
The full-flow systems got externally connected calculation machines -- originally analog computers,
not digitals -- and the whole system got vulnerable to Black Swan disasters.
We had a 500-point drop back then. 500 points in a tiny market.
All from runaway program trading.
Attempts at control and regulation are always half-hearted. The would-be regulators never have
computer savvy to anticipate what can happen.
If the trading companies have to pay to play -- taxed -- the craziest of these system have no
economic reason to exist. They end up being day-to-day losers.
Angry White Males + DSM IV Personality Disorder delusionals + sane Pro-Lifers =EQ= The Base
The logical follow up to Rosie's earlier CNBC appearance is the teaser from his "Snack With Dave"
email sent out to Gluskin Sheff clients. For the full body, we suggest readers apply for a
free subscription to all of
Rosie's musings.
We heard at the market lows in March 2009 that the stock market had sunk to Armageddon levels.
We have often thought about that because we can certainly understand that at the 2.0% lows on
the 10-year Treasury note yield, we had gone to a place we had not seen in over five decades.
Also, with Baa spreads north of 600bps, we could see that corporate bonds had moved to levels
not seen in seven decades as well.
But this notion that we had moved to Armageddon lows in equities
does not seem to hold water. After all, the forward P/E multiple on the S&P 500 at the lows was
11.7x. That was not a multi-decade low or some massive standard-deviation figure - we were actually
lower than that at the October 1990 lows when the multiple was 10.5x and frankly, coming off the
1987 collapse, the forward P/E had compressed to 9.8x. As it now stands, the multiple is back
very close to where it was at the October 2007 market high, when the multiple had expanded to
15.0x. The range on the forward P/E over the last quarter-century is between 9.8x and 21.8x (excluding
the tech bubble), so at 14.5x currently, it is hardly the case that this market can be viewed
as a bargain.
On a trailing earnings basis, the P/E multiple has actually widened, from 17.0x at the lows
to 23.3x currently, a huge multiple expansion. At this stage of the 2003 recovery, the multiple
hardly expanded at all, earnings were driving the rebound; coming off the October 1990 lows, the
multiple expansion four months into the rally was closer to 2x and the powerful surge in the post-1982
recovery saw a 3x multiple point expansion at this juncture - not 6x!
As an aside, with the U.S. government now putting its fingers into more than one-third of the
economy (health, finance, autos, energy, housing), one would expect that the fair-value multiple
in the future will be lower than it has been - given the implications for productivity and the
potential non-inflationary growth potential.
Also, Matt Taibbi is slowly emerging from the post article vacuum: his first written interview since
the GS piece, compliments of Wall St.
Cheat Sheet. Some excerpts:
Damien: The last word I wrote after I finished reading
"The Great American Bubble Machine" was 'Leviathan'. Since you've done some great research
covering Wall Street and Washington, do you know of policy tools we can use to dismember what
you affectionately called the "great vampire squid wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like money"?
Matt: I interviewed
a government regulator for my previous piece ["The
Big Takeover"] who said state regulators already have enormous power. The state banking commissions
or insurance agencies, SEC, or the Office of Thrift Supervision can simply write a letter to these
banks and say, "You won't exist tomorrow unless you …" or, "You're not going to get government
funding unless you do this."
So, they already have enough power to correct all the problems people are worried about. The
problem is getting the appropriate people to staff those bureaucracies. If enough people put pressure
on members of Congress and the President to appoint the appropriate people, then we should solve
most of these issues. I'm not sure what new policy initiatives would be needed. I just think we
need new people.
Damien: Do you believe the citizenry can put enough pressure on our legislators,
or are we the sheeple who are too confused, ignorant, or entertained to affect change?
Matt: The real problem is people aren't organized enough to make it worth
the while of politicians to pay attention to ordinary people. The disadvantage the average Joe
has against Goldman Sachs is Goldman can concentrate its campaign contributions in its favor.
The typical politician is not going to upset or alienate the five most powerful investment banks
because he knows realistically he will jeopardize 30% or 35% of his next election cycle's contributions.
On the other side, there isn't a way for the average person to organize and deny these politicians
the money they need to get reelected. So, until we solve the campaign contribution problem, we
won't have the legislative tool to rebalance the power.
Damien: So are we living in a Catch-22 where we have to choose between the
Goldman Leviathan sucking the world's wealth from loopholes or the omniscient eye at the top of
the governmental pyramid which becomes the one crown reigning over us all?
Matt: It's pick your poison. But before we can even worry about the international
government question, we have to start at home with our own country. We have to start by protecting
the citizens of our country. Even in the United States, Goldman is allowed to get away with things
they shouldn't be allowed to get away with. If we can tighten up and enforce the rules here, we
will be much better off before even looking at the international issue.
Damien: Most powerful institutions such as the Federal Reserve and Vatican
dismiss most criticisms as "fringe conspiracy theory." Why should the average citizen not dismiss
your claims against Goldman as fringe conspiracies about bankers or Jews?
Matt: That was the tactical criticism I got from Goldman who said to the media,
"Next thing you know he's going to blame us for the Kennedy assassination and say we faked the
moon landing." But if you pay attention to all the criticisms they are leveling, it's what we
call in this business a "non-denial denial." When people respond by calling names and changing
the subject, it means they don't have any issue with the factual allegations in the article. So,
in response to being called a conspiracy theorist, the fact is they are resorting to the rhetorical
non-denial denial shows they don't have any real basis to criticize the facts in the article.
The article speaks for itself and the fact they don't have substantive issues with the piece is
highly revealing. In fact, before the article went to print I was extremely nervous we had gotten
something wrong and Goldman would come out with a whole list of things they'd say we made mistakes
about. But the fact that they didn't come up with a single thing greatly emboldens me to think
we got it right.
We have talked extensively on our blog and in our white papers about the power
of high frequency trading and program trading. We have noted that these trading strategies can move
the market quickly during the trading day. We have always suspected that there have been certain
major players that can dominate this space. Now comes the case of the stolen proprietary trading
code from Goldman Sachs.
Most interesting in this Bloomberg article is the following statement by Assisitant U.S, Attorney
Joseph Facciponti:
"The bank has raised the possibility that there is a danger that somebody who knew how to
use this program could use it to manipulate markets in unfair ways," Facciponti said.
Is this an admission by Goldman Sachs that there is the possibility of manipulation in the market?
Does anyone think that this is the only program in the world that can "manipulate" markets? With
all the programmers in the world, we can only imagine how many more manipulative programs are out
there. Now here is the best part according to the assistant U.S. Attorney:
The proprietary code lets the firm do "sophisticated, high- speed and high-volume trades on various
stock and commodities markets," prosecutors said in court papers. The trades generate "many millions
of dollars" each year.
Markets are a zero sum game - somebody wins and somebody loses. Where do you think these "many
millions of dollars" are coming from? They are coming from you - the average retail investor
and the large institutional investor. These programs are taking advantage of real order flow and
are siphoning off small profits throughout the day that belong in the pockets of the retail investor
and the traditional money manager. [TD: highlight mine]
So, who is out there to protect you from these "machines" and their army of programmers? One would
think the SEC has your back. But what did they have to say about high frequency trading. According
to an article in the WSJ (http://online.wsj.com/article/BT-CO-20090618-707189.html
)
The Securities and Exchange Commission believes institutional money managers are "sophisticated"
enough to trade against the machines without further regulation.
"We don't want to curtail liquidity," said Gene Gohlke, associate director for the SEC. Gohlke
said it's up to the managers themselves to make sure other traders aren't manipulating their models.
This story is just at the beginning stages and we here at Themis Trading intend to keep a careful
watch on it.
Sphere: Related Content
Since I've argued that the enforcement of antitrust law hasn't been strict enough many times in the
past -- "the idea that markets 'self-police'" anti-competitive behavior always seemed much more of
a hope than a reality in my view of the evidence -- to me this is good news (but
it's not good news to everyone). It's not just the textbook economic effects of monopoly power
that are worrisome, it's also the ability of large and powerful firms to tilt regulation and legislation
in their favor:
The act's two main sections target vastly different types of behavior, though each may result
in both civil liability and criminal punishment.
Section 1 largely addresses situations involving anticompetitive behavior of two or more entities
working in concert. Cases involving price-fixing and market-division arrangements are typically brought
under Section 1.
Section 2 cases typically involve the behavior of one firm, acting alone. Section 2 cases generally
require a private party or the government -- either the Department of Justice or the Federal Trade
Commission -- to show that a firm with a significant market share has done something anticompetitive
in order to increase or maintain its monopoly. Monopolies, without evidence of anticompetitve behavior,
aren't necessarily illegal.
While Section 1 cases are fairly common, the bulk of the headline-grabbing antitrust cases have
been under Section 2... John D. Rockefeller's Standard Oil Co. ... AT&T... Microsoft ...
Enforcement of Section 2 went largely dormant under President George W. Bush. Toward the end of
his second term, the administration issued a report which codified its views on Section 2. It took
the position that the marketplace, not government regulators or courts, provides the ideal check
on anticompetitive business practices.
In May, Christine Varney, President Barack Obama's pick to run the Justice Department's antitrust
division, repudiated the Bush administration report, squarely placing some blame for the country's
economic problems on the Bush administration's laissez-faire regulatory policies.
"Americans have seen firms given room to run with the idea that markets 'self-police' and that
enforcement authorities should wait for the markets to 'self-correct,' " Ms. Varney said at the time.
"Ineffective government regulation, ill-considered deregulatory measures and inadequate antitrust
oversight contributed to the current conditions ... we cannot sit on the sidelines any longer."
Antitrust experts weren't surprised by Monday's news that with an initial review of conduct by
large U.S. telecom companies [such as AT&T and Verizon], the Justice Department had started dusting
off Section 2. ..
Comments
brian holt says...
great news!
Posted by: brian holt |
Link to comment | Jul 06, 2009 at 10:34 PM
There needs to be a competitive marketplace for "the market" to police. Competition is the mechanism
by which markets self-correct. Free market capitalism cannot function without competition and so
all attempts must be made to ensure that there is enough competition for the marketplace to work.
"2. It took the position that the marketplace, not government regulators or courts, provides the
ideal check on anticompetitive business practices."
I don't understand the logic used by the Bush Administration. How can a marketplace without competition
provide a check on anticompetitive business practices? Where would competitive behavior come from
in a monopolistic marketplace? Can a monopoly compete with itself?
There is a good reason for believing that the marketplace will provide the best solution, but
that assumes it is a competitive market. The importance of competition cannot be stressed enough,
any government claiming adherence to free market principles MUST have a functioning competitive market
as their top priority. There can be no free markets without competition!
Merkel in her WSJ article pretty much says Obama has given the public option plan away. Now it's
up to the Democrats to push it further if they can without Presidential support.
This goes to the trust article above. We have a slew of Oligopolies and trust busting, or threats
of trust busting, can help keep them in check. But unless the legislative side of government focuses
on either insuring competition, or providing a public alternative (such as with health care), then
the Oligopolies and all their inefficiencies will remain.
Obama's reported abandonment on a public option is deeply disappointing politically and will probably
have little net positive effect on health care delivery, or cost, in the US. We're headed for tough
times because this collapse insures that Medicare will become the public option by default while
all of the underlying anti-competitive structures now in place will remain and cause costs to balloon.
Which means the trillion dollar deficit will not only remain but increase. The CBO scoring making
the deficit less includes a public option and the savings that would accrue as a result. Now Obama's
given that up! Incredible.
If the current dysfuncional health care system is to remain intact, at least the administration
can establish "benchmarks" about efficacy.
There's plenty of other systems where the benchmarks to use are available. The administration
could set, as an example, a ceiling on per capita medical care costs and then use France's per capita
costs as a benchmark. Or use a European composite benchmark. Take one and use it.
Another benchmark should be how many citizens actually end up with affordable health care. The
administration could set a 95% benchmark, as an example. There's many many useable health care metrics
that can be set as benchmarks. They are fully quantified and vetted elsewhere. Use them and then
require that the existing system meet the benchmarks.
The benchmarks should be imposed with a public option available, of course. But if the administration
is going to cave there, at least use some measurable triggers which can be used when, inevitably,
the current system fails to perform. As it must because it's horriby inefficient and will remain
that way in health care.
I'm sitting in the middle of nowhere, and a with a quick check I can get various types of phone
services from at least 15 different companies.
Why Verizon and ATT?
What I cannot do easily is buy a PC with anything but Windows, now there is a target for the feds.
Again.
Posted by: save_the_rustbelt |
Link to comment | Jul 07, 2009 at 05:41 AM
Paul E. Merrell, J.D. (Marbux) says...
Re Prof. Mankiw's linked article:
My primary objection to such opinions is that they selectively present only the facts that favor
the position, taking as their unspoken premise that no relevant market artificialities already exist.
Case on point, the Microsoft antitrust prosecution Mankiw criticizes so thoroughly. I think it
fair to observe that but for the government-created market artificialities of patents, copyrights,
and trade secrets, the Microsoft proprietary software business model would never have evolved as
it did.
Such "intellectual property rights" would not exist in a free market economy and the unfettered
right to copy software without paying Microsoft for it would. I suspect that in a free market, the
Microsoft business would have been far more service- than product-oriented. That is, assuming there
even would have been a Microsoft in a free market.
Intellectual property rights are government-created monopolies artificially imposing scarcity
of the monopolized products. So we have a case of multiple government-created monopolies being leveraged
into another.
Moreover, we also have a case of one government-created legal fiction market artificiality (intellectual
property rights) stacked atop other government-created market artificialities. E.g., Chief Justice
John Marshall told us clear back in the 1819 Dartmouth College case that "[a] corporation is an artificial
being, invisible, intangible, and existing only in contemplation of law." Had government not created
the legal fiction of corporations, there would be no such thing as a Microsoft Corp.
And of course, the greatest legal fiction of all is Law itself. I never met one, hugged one, kissed
one, or changed its diaper, but Law itself is both government-created and, one could reasonably argue,
the Mother of All Market Artificialities.
But by blinking past such distracting realities, Mankiw, et ilk miss that we do not deal with
markets undistorted by prior government intervention, then attempt to hoist the Libertarian banner
of government intrusion in a free market.
But it is a straw man argument and rather profoundly anti-Libertarian because, so to speak, the
argument only dons a few Libertarian leaves to hide its genitals. In the unspoken premise, government
intrusion in the market is welcomed in the form of the layer upon layer of legal fictions that caused
the Microsoft monopoly mess.
Such straw man arguments against monopoly regulation can make a superficially attractive sound
bite. But far more difficult questions to answer for Prof. Mankiw and those like-minded might include:
1. Do you contest that government creation of intellectual property rights and the corporate form
of business organization were market artificialities necessary to the emergence of the Microsoft
Windows monopoly?
2. Accepting that the Microsoft monopoly resulted from government-created market artificialities
still in effect, why should government be denied the authority to clean up its own mess?
Posted by: ken melvin |
Link to comment | Jul 07, 2009 at 05:59 AM
Richard H. Serlin says...
"It's not just the textbook economic effects of monopoly power that are worrisome, it's also the
ability of large and powerful firms to tilt regulation and legislation in their favor"
This is an important point that does not get enough attention in economics.
We have a large GovMedicalEd sector over the geography. That sector likes to purchase using economies
of scale. We saw this in the Prescription Drug debates. That sector needs monopoly producers because
monopoly producers and monopoly buyers remove some middle stages off production.
This seems some strong contradiction in policy with respect to anti-trust.
I thought tilting legislation and regulation was standard procedure in Washington? Why else the
thousands of lobbyists and all those briefcases of money (aka campaign contributions)?
Why if you stop that something that's never happened before might occur ... honesty and integrity.
Posted by: TigerPaw |
Link to comment | Jul 07, 2009 at 10:09 AM
Johnson says...
"Accepting that the Microsoft monopoly resulted from government-created market artificialities
still in effect, why should government be denied the authority to clean up its own mess?"
Are you kidding me? It isn't the governments fault, it is the capitalists fault. Listen Merril,
get over your free market intellectual fantansies. They do either go through the government or over
the government. They don't need the government to have "copyrights" "patents" "secrets" or any other
type of monopolized fetters. In the 19th century, we saw the result of it. Going through the government
was much more politically stable and they switched, while giving "concessions" to old industrial
workers.
Your "unfettered" free market would monopolize quickly without any benefit to the native peoples(as
such the strained agreement is now). Eventually laying rules down as how society would compete. Then
leading toward internationalism and the destruction of folk people and countries.
It is amazing how a typical hollywood liberal like John Carpenter could get it, but "They Live"
is dead right to the future of "America" or it is just another developing country for business to
rape right?
[Jul 2, 2009] Goldman again by Tracy Alloway
Jul 01
Matt Taibbi's Rolling Stone
article on Goldman Sachs has been making tidal-sized waves in the blogosphere for the
past week.
That's unsurprising given that it begins with the following unnerving paragraph:
The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most
powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly
jamming its blood funnel into anything that smells like money.
It then goes on to accuse GS of helping to inflate no less than four asset bubbles - 1920s equities,
internet stocks, mortgages and oil - with their alumni permeating regulatory and federal halls of
power to turn America into one "giant pump and dump scam".
Unsurprisingly, Goldman was none too pleased with the coverage.
Here for instance, is GS spokesman Lucas van Praag, refuting some of the claims via
Felix Salmon earlier this week:
. . . Taibbi's article is a compilation of just about every conspiracy theory ever dreamed
up about Goldman Sachs, but what real substance is there to support the theories? We reject the
assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious
of the importance of being a force for good. . . .
Now, Taibbi has shot back. You can read his full response
here, but he's essentially refuting the claim that his article was biased and that Goldman was
not given the chance to tell its side of the story. From a journalistic point of view, we find the
following section from Taibbi's retort particularly interesting:
. . . Actually I did contact Goldman and gave the bank every opportunity to respond to the factual
issues in the article [by sending them a list of questions]. I'm bringing this up because their decision
not to comment on any of those questions was actually pretty interesting. . . . I intentionally put
a lot of yes/no questions on that list. If the underlying thinking behind any of those questions
was faulty, it would have been easy enough for them to say so and to educate us as to the truth.
Instead, here is the response that we got:
"Your questions are couched in such a way that presupposes the conclusions and suggests
the people you spoke with have an agenda or do not fully understand the issues."
You have to have swallowed half a lifetime of carefully-worded p.r. statements to see the message
written between the lines here. That this is a non-denial denial is obvious, but what's more notable
here is that they didn't stop with just a flat "no comment," which they easily could have done. No,
they had to go a little further than that and - and this is pure Goldman, just outstanding stuff
- make it clear that both I and my sources are simply not as smart as they are and don't understand
what we're talking about. So the rough translation here is, "No comment, but if you were as smart
as us, you wouldn't be asking these questions." .
Goldman is the proud recipient of $12.9bn in payments from AIG and AIGFP. (Specifically, $2.5bn
from CDS collateral postings, $5.6bn from Maiden Lane III payments for CDS positions, and $4.8bn
in payments related to securities lending. The Maiden Lane III portfolio was, of course, created
in December specifically help reduce the burden of CDS collateral postings facing AIGFP proper -
it bought the underlying CDO tranches from the CDS counterparties)
For the record then, it certainly was not the NYT that was "seriously misleading".
We wonder whether things might yet get uncomfortable for Goldman. After all, they're in rather
an awkward position: on the one hand, according to their above PR line,
they didn't need AIG's money at all (it was, to paraphrase, immaterial whether AIG went under or
not). And yet, on the other hand Goldman is - gosh - the largest recipient, via AIG,
of taxpayers' money.
Finally. Such a great post. I guess it is finally getting out into the wider media world.
Even the WSJ has picked it up : ) Unfortunately, "evil financial people getting big bonuses"
is just so much hotter than "Ambac novates contracts at 40; Government pays face." That protection
Goldman so had so sagely bought: what exactly did they think it was going to be worth? We had
a couple of examples last year of financial institions failing and I think Lehman ended up
being about 10c and the Icelandics about 1-2c. So they needed to be pretty sure about their
counterparties. There's a little hubris going on.
And is it such a coincidence that the US Treasury was headed by ex-Goldman CEO Henry Paulson?
Or that a number of ex-Goldman executives continue to work at Treasury? Is it fair to say the
Mr. Paulson was also seriously misleading in his ideas to bail out firms instead of taking
them over outright, letting management go, and selling the firms' assets back to the private
sector?
Finally somebody is bringing this matter to the open. If GS's hedges against AIG losses
were "immaterial" to GS, then GS should return to the US taxpayer immediately the $12B in counter-party
payments that they received from the AIG bail-out. It is pathetic that there has not been a
word from Washington on this matter. Likewise the media is barely covering this important story
that well demonstrates how the US taxpayer has been manipulated into saving the GS aristocracy.
I'm with you Singapore Don. I still find it staggering that nobody went harder after GS.
The dramatic switch to a financial holding company (FHC) was utter bunkum, but everybody accepted
it would miraculously put the company on a rock solid footing (it does nothing of the sort).
It was pure media manipulation, in fact. (Same goes for MS). They definitely benefit from a
halo effect, even though they were up to their necks in principal investing and classic high
leverage HF activities.
Outstanding work. At this point, I'd be shocked if Paulson and his GS cronies didn't save
AIG for the sole purpose of saving GS. As an American taxpayer, I can't tell you how excited
I am about the opportunity to pay this off.
excuse me joachim, as someone around in the russia 98 crisis, if I am owed 10bn from AIG
& they do not pay.. I am out the cash. Perhaps If I have securitized collateral or some such
opaque GS b&*^sh(t but I think it is very self evident how AIG had to be saved to save GS.
At least if they were anyway humble
sounds like GS were insuring some of their other credit risks
with AIG and clearly that insurance would have been ineffective without the bailout. Additionally GS would have had trades with AIG as a counterparty but where GS would
have held collateral which may or may not have retained its value.
Finally GS may have had insurance against the AIG credit exposure. It does not follow that
the GS exposure to AIG was the whole of the $12.9bn as this attributes no value to collateral
and hedges. But the payments to GS and others confirm that AIG
was a huge counterparty and that was why it had to be rescued. No surprise here.
Definition of a hedge fund, be long -be short, but never hedged -- thats called arbitrage.
Please name a hedge fund that hedges itself -- that went out the window when they discovered
50:1 leverage by placing bets in one direction!
Much more profitable. All student S of the markets understand
that Wall Street is a Ponzi scheme, and the biggest players are JPM,GS and AIG.
And when everyone is insolvent, whats the value of a hedge? The only hedge fund out there is
you and me-but we're called taxpayers!
The Federal Reserve Bank of New York shaped Washington's response to the financial crisis late
last year, which buoyed
Goldman
Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank
holding company in September and a $10 billion capital injection soon after.
Patrick McMullan
During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had
a large holding in Goldman stock, which because of Goldman's new status as a bank holding company
was a violation of Federal Reserve policy.
The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was
weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They've since risen
$1.7 million in value.
Mr. Friedman also was overseeing the search for a new president of the New York Fed, an officer
who has a critical role in setting monetary policy at the Federal Reserve. The choice was a former
Goldman executive.
The case illustrates what a tangle of overlapping interests can arise at a hybrid institution
like the New York Federal Reserve Bank, especially as the U.S. government, in addressing the financial
and economic turmoil, grows ever more deeply enmeshed in American business and banking.
Mr. Friedman, who once ran Goldman, says none of these events involved any conflicts. He says
his job as chairman of the New York Fed isn't a policy-making one, that he didn't consider his purchases
of more Goldman shares to conflict with Fed policy, and bought shares because they were very cheap.
When Goldman Sachs became a bank holding company late last year, New York Fed official Stephen
Friedman inadvertently found himself in violation of charter rules. Kate Kelly reports on his efforts
to receive a waiver and potential conflicts of interests.
Last week, following questions from The Wall Street Journal, Mr. Friedman, 71 years old, disclosed
he would step down from the New York Fed at year end. In an interview, he said he made the decision
because the waiver letting him own Goldman stock and be a Goldman director expires at the end of
the year. He added: "I see no conflict whatsoever in owning shares."
Jerry Jordan, a former president of the Fed bank in Cleveland, says Mr. Friedman should have stepped
down once Goldman became a bank holding company in September and thus fell under the Fed policy barring
stock ownership by certain directors of Fed banks. "Any kind of financial transaction at all by any
of the directors is always a problem," Mr. Jordan said. "He should have resigned."
New York Fed officials disagree. Last fall, then-New York Fed President
Timothy Geithner
was President-elect Barack Obama's choice to head the Treasury, and New York Fed officials say that
to have forced Mr. Friedman off the board while it sought a Geithner successor would have deprived
it of two leaders at a crucial time.
"Steve Friedman is a very capable chairman," said Tom Baxter, the New York Fed's general counsel,
"and was the kind of person who we needed to head the search" for someone to succeed Mr. Geithner.
In Washington, the Fed's general counsel, Scott Alvarez, also says Mr. Friedman was needed during
the New York Fed's transition. He adds that Mr. Friedman was in compliance with the Fed's rules when
he first joined the New York Fed board and was put in violation of the rules by events "outside of
his control."
Because he was wasn't allowed to own the stock he had, the Fed doesn't consider his additional
December purchase to be at odds with its rules at the time. The Fed had no policy requiring directors
to inform it of new stock purchases, and Mr. Friedman didn't. The Federal Reserve Board is now in
the process of rewriting its rules for handling situations like Mr. Friedman's.
The 12 regional Fed banks, contrary to a common impression, aren't
government agencies. Nor are they private banks: They're a hybrid. Each is owned by member commercial
banks, which collect a 6% dividend and control six of nine board seats.
The Fed banks also have quasi-governmental roles. They conduct bank examinations, under the direction
of the Federal Reserve Board. Their presidents participate in discussions of Fed monetary policy
and vote on it, on a rotating basis.
The New York Fed has a strong regulatory role. Its president has a permanent vote on Fed interest-rate
policy and is vice chairman of the Fed's policy-making committee. The New York Fed has historically
been deeply involved in addressing financial crises, from hedge fund Long Term Capital Management
in 1998 to today's upheaval.
There've long been tensions at the New York Fed between the interests of member banks and those
of the rest of the economy. The aggressive federal intervention in the economy is heightening worries
about conflicts.
The regional banks' presidents aren't subject to congressional confirmation, a feature of the
1913 Federal Reserve Act intended to give the Fed some independence from politicians.
"The Federal Reserve system was designed to be a bunch of special
interests that would duel to a draw," says Anil Kashyap, a former Fed economist who is a University
of Chicago business professor and member of an advisory board to the New York Fed.
Mr. Friedman ran Goldman in the early 1990s, leaving in 1994. He joined the Bush White House in
2002 to oversee economic policy. The move required him to sell his Goldman shares and many other
investments. Doing so "was very costly and a difficult thing to manage," he recalls.
He left the White House in 2004 and later reinvested in Goldman shares, joining its board. He
got involved in private-equity firm Stone Point Capital in Greenwich, Conn., where he is now chairman.
In January 2008, he became a member of the New York Fed board and its chairman. In that role, he
worked closely with Mr. Geithner.
The economists and directors of Fed regional banks share their views with the banks' presidents,
helping shape the ideas the presidents express in meetings with the Federal Reserve. It's one way
the Fed in Washington gets input from around the country to help it set policy. Mr. Friedman says
the board has a strictly advisory role: "We don't get involved in decisions related to supervisory
issues or issues related to particular companies."
Charles Wait, another director, says Mr. Geithner "informed us in many instances, and we informed
him in others, in quite important ways." Mr. Wait describes Mr. Friedman as a consensus-seeking chairman
who encourages give-and-take and "is a listener. He solicits opinions more than gives them." Mr.
Wait is chief executive of Adirondack Trust Co. in Saratoga, N.Y.
Mr. Geithner declined to discuss his interaction with the New York Fed board or Mr. Friedman.
Amid the crisis, Goldman has been a lightning rod for criticism because a number of its executives
hold or have held powerful government positions, including ex-Treasury secretary
Henry Paulson, who
like Mr. Friedman once led Goldman.
Goldman was one of nine big banks the Treasury aided with capital injections in early October.
The prior month, the government decided, partly at the urging of New York Fed officials, to bail
out insurer
American
International Group Inc. The initial $85 billion provided to AIG enabled it to pay a portion
of $8.1 billion it owed to Goldman, stemming from past trading agreements. By the end of the year,
Goldman had gotten all of the $8.1 billion as AIG received more government aid.
Mr. Friedman says that although directors were briefed occasionally on the actions the New York
Fed took regarding AIG, that was just a courtesy. "The New York Fed board was not involved in the
decisions to take any actions related to AIG," he said.
As Goldman's stock slid last fall and some wondered if the remaining big investment banks would
survive, the Fed, in close consultation with Mr. Geithner, hurriedly approved applications from Goldman
and Morgan Stanley to be commercial banks instead of investment banks. The goal was to show investors
the institutions were under the closer watch of a national regulator, had access to emergency loans
and could broaden their funding by taking deposits. Goldman and Morgan Stanley converted to bank
holding companies.
Mr. Friedman says Goldman's regulatory-status change was "certainly not something that was brought
to the [New York Fed] board for consideration."
The change created a problem. The Federal Reserve Act bars directors representing the public interest
from owning bank stocks or being bank directors or officers. Because Goldman had always been an investment
bank, Mr. Friedman's board membership there and his ownership of about 46,000 Goldman shares, at
that time, hadn't run afoul of this rule. Now it did.
The regional Fed banks have three classes of directors: Class A, elected by member banks and representing
them; Class B, elected by banks but representing the public; and Class C, representing the public
but picked by the Fed. Under law, directors in Class C, including Mr. Friedman, and Class B can't
be officers or directors of banks, and Class C directors like Mr. Friedman also can't own shares
of banks. This means not of bank holding companies, either, by the Fed's interpretation of the 1913
law.
Mr. Baxter, the New York Fed general counsel, realized that the bank's chairman was now in violation
of the Fed rules. But the institution had just lost another director,
Richard Fuld Jr.,
a few days before the September collapse of the firm he led, Lehman Brothers Holdings Inc. So on
Oct. 6, at the urging of New York Fed lawyers, Mr. Geithner asked the Federal Reserve Board for a
waiver enabling Mr. Friedman to continue owning Goldman stock and serving on Goldman's board.
While Fed officials in Washington weighed the request, Mr. Baxter stayed in touch with a senior
lawyer there, pushing for a decision, says a New York Fed official. This official says that in conversations
with Mr. Friedman, who began voicing concern about the delays in December, Mr. Baxter suggested that
the Fed policy should be considered to be in abeyance until the waiver came through.
Mr. Friedman's role grew more prominent in November after Mr. Geithner became the pick for Treasury
secretary. Mr. Friedman got the board started seeking a successor. There were two leading candidates:
Federal Reserve Board member Kevin Warsh, who had worked with Mr. Friedman at the White House, and
William Dudley,
a former Goldman economist who ran the New York Fed's markets desk.
Mr. Friedman saw that Goldman's battered stock was trading below book value, or assets minus liabilities.
On Dec. 17, he bought 37,300 Goldman shares at an average price of $80.78, a $3 million purchase,
according to regulatory filings.
He says he checked with a Goldman lawyer to make sure there was no timing issue with such a purchase.
He says he didn't check with the Fed. New York Fed lawyers say they didn't learn about his share
purchases until the Journal raised questions about them in April.
By mid-January, the New York Fed board had settled the Geithner-succession question, picking Mr.
Dudley. On Jan. 21, Fed Vice Chairman Donald Kohn granted a waiver, until the end of 2009, of the
rule barring Mr. Friedman from being a Goldman stockholder or director.
The next day, Mr. Friedman purchased 15,300 more Goldman shares in two slugs, at average prices
of $66.19 and $67.12, according to regulatory filings. That million-dollar purchase brought his holdings
to 98,600 shares, according to filings.
Class C directors from a handful of other regional Fed banks have also sought waivers of Fed policy
on stock ownership in recent months. As the Fed reviews its policy on the matter, one revision under
consideration would bar directors from adding to or reducing their positions when they get temporary
waivers.
Meanwhile, Goldman's stock has rallied strongly. Investors liked the bank's announcement in early
February that it hoped to repay its $10 billion federal capital injection, freeing it from pay and
other restrictions. Then, after a surprisingly strong first-quarter earnings report in mid-April,
Goldman raised about $5 billion in a public offering.
Mr. Friedman has benefited from those events. On Friday, Goldman stock closed late in New York
Stock Exchange trading at $127.08 a share. Mr. Friedman's December and January stock purchases now
are showing accrued gains of $2.7 million.
For six months, as the credit crisis deepened, billionaire investor Warren Buffett turned away a
string of Wall Street firms that came hat in hand looking for help.
On Tuesday, Mr. Buffett says,
he was sitting with his feet on his desk in Omaha, drinking a Cherry Coke and munching on mixed nuts,
when he got an unusually candid call from a Goldman Sachs Group Inc. investment banker. Tell us what
kind of investment you'd consider making in Goldman, the banker urged him, and the firm would try
to hammer out a deal.
That midday call from Goldman's Byron Trott, ...
UPDATE: US Rep Says Probe Uncovers Oil Market Manipulation
(Updates with additional quotes, detail and background information.)
By Ian Talley
Of DOW JONES NEWSWIRES
WASHINGTON -(Dow Jones)- The chairman of a Congressional energy panel said Thursday that oil and
products markets were being "manipulated" by the biggest trading houses in the futures markets, though
he said a probe hasn't uncovered illegal activity.
Bart Stupak, D-Mich., named Goldman Sachs (GS) and Morgan Stanley (MS) as two of the trading houses.
He said the U.S. House Energy Oversight Committee hasn't subpoenaed the banks and is basing its findings
on data from the Commodity Futures Trading Commission.
Stupak said initial results of his committee's investigation into skyrocketing oil and product
prices had found loopholes in current laws were allowing the biggest traders in the futures market
to "game the system." He said the committee would hold a hearing to announce full results of the
investigation on June 23.
"As our investigation goes further, we are really starting to unravel quite a web of - I am trying
to say collusion, but I wouldn't quite go that far - but you can certainly see manipulation of the
price in places we've never seen before," he said.
Asked if the biggest trading houses were Morgan Stanley and Goldman Sachs, Stupak said: "Yes,
it's them," again stressing the lack of any evidence of illegal behavior.
"It's not that they are doing anything criminally illegal...they are taking advantage where no
one has ever looked before and when someone does take a look, there may be something illegal."
Spokespeople at Goldman Sachs and Morgan Stanley couldn't immediately be reached for comment.
Stupak said current laws allowed excessive speculation that created artificial prices in energy
futures markets.
"My subcommittee will continue to identify the driving forces causing excessive speculation in
oil markets which has inflated prices to a point where they are no longer tied to the underlying
supply and demand theories," Stupak said.
The lawmaker made the revelations at a press conference, where he and other congressmen unveiled
legislation to curtail speculation in the energy markets.
Though many analysts see considerable fundamental support for high oil prices, regulators and
legislators alike are increasingly placing the blame for crude's scorching run above $100 a barrel
on what they perceive may be excessive financial speculation - a charge that's hard to prove.
Unlike stock markets, where trading on information unavailable to
the broader market is illegal, commodities markets often turn on proprietary information known to
a limited number people. An oil company can take advantage of inside information about
its own production outlook when it makes trades. However, if traders intentionally create an artificial
price and use it to make money, market manipulation charges may arise.
Crude futures have fallen more than $10 from their highs above $135 a barrel, but prices are still
dramatically above levels around $66 a barrel a year ago and are up over 30% since the beginning
of the year. Crude oil's ascent and gasoline's jump towards $4 a gallon in the U.S. has sparked a
chorus of complaints on Capitol Hill and a slew of legislative proposals. At the same time, the CFTC
has moved to raise its own profile in overseeing energy markets, increasing reporting requirements
from traders and investors and disclosing a broad investigation into crude-oil markets.
Congressional aides say any deeper review of the large traders in the energy markets will involve
a closer look at the investment banks.
Goldman Sachs and Morgan Stanley are major players in the world of
commodities, which range from trading to hedging and even owning electricity plants and oil barges.
In the first quarter, Morgan Stanley calculated that it took more risks in commodities on a daily
basis than in stocks.
Stupak said he and other congressman plan to file legislation next week that will target speculation
through swap deals, foreign exchanges such as IntercontinentalExchange (ICE), and over-the-counter
trades.
-By Ian Talley, Dow Jones Newswires; 202 862-9285; [email protected]
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jake chase says:
Thomas Barton, JD says:
jjohannson says:
Mogden says:
chicago mike says:
Jesse says:
Tom Hickey says:
nowhereman says:
Hugh says:
HereWeGoAgain says:
Yves Smith says:
carol says:
attempter says:
NYT says:
![[GSAIG_D]](http://s.wsj.net/public/resources/images/OB-FB791_GSAIG__D_20091211225906.jpg)
![[New York Fed Chairman's Ties to Goldman Raise Questions]](http://s.wsj.net/public/resources/images/P1-AP761B_FEDti_NS_20090503230833.gif)
![[GSAIG_D]](http://online.wsj.com/public/resources/documents/info-enlargePic07.html?project=imageShell07&bigImage=wsj_GSAIG091211.gif&h=377&w=959&title=WSJ.COM&thePubDate=20080826)
