Why Do We Need the SEC?

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Why Do We Need the SEC?
by Jim Powell, May 19, 2009

FDR established the Securities & Exchange Commission to protect people in securities markets. Yet there already were plenty of laws against theft and fraud, crimes that are seldom exposed by government regulators.

Consider the succession of big Wall Street scandals since the late 1990s. It’s hard to find a single case that was exposed by the SEC. Typically, Wall Street scandals seem to be exposed by savvy investors, disgruntled employees, financial analysts, internal auditors, or investigative reporters. The SEC tends to arrive on the scene only after a story is out and investors have suffered losses. For example:


In 1998, Cendent disclosed that the income of one of its component companies had been over-stated by $500 million during the previous decade. Presumably the purpose was to inflate the value of the stock of founder Walter Forbes. He denied knowledge of the fraud even though he had been paid $100 million a year as chairman and CEO. In 2007, he was sentenced to 12 years in prison. Where was the SEC?


In May 2000, Xerox announced that it discovered accounting irregularities in its Mexican subsidiary. The company conducted an investigation, fired 13 managers, and announced a $120 million write-off for 2000. Xerox’ assistant treasurer James Bingham insisted this wasn’t the whole story, and he was fired. He subsequently sued the company. The SEC heard about the lawsuit and became involved in the case. Xerox turned out to have over-stated income by $3 billion and earnings by $1.5 billion.


In 1997, Gary Winnick established Global Crossing, a telecommunications company. He raised large sums of money and went on an acquisition spree. By 2000, the stock peaked at $61. But investors became increasingly concerned about all the debt. They began to unload the stock, and it fell to $5. The company filed for bankruptcy in January 2002. Although the SEC conducted an investigation, all they did was levy $100,000 of fines on three top executives. Winnick got off, in part, because of campaign contributions to both Republicans and Democrats.


During the mid-1990s, Houston-based Enron adopted increasingly risky strategies for which it borrowed more and more money. But when their bets backfired, executives tried to hide the losses by cooking the books. Fortune magazine raised serious questions about the company in March 2001. Investors became suspicious, and the stock declined. On August 14, President Jeffrey Skilling resigned mysteriously. A $618 million loss was reported for the third quarter of 2001. The SEC opened an investigation not long before the company collapsed.


Over the course of 15 years, Bernard Ebbers acquired 65 communications companies with $60 billion of borrowed money and made WorldCom a high-flying stock. But he wasn’t very good at integrating all those companies, and he was a reckless spender. The company spun out of control. In March 2002, WorldCom internal auditor Cynthia Cooper began to investigate the company’s accounting practices. Some $11 billion of accounting fraud was discovered. The stock plunged. Ebbers was sentenced to 25 years in prison.


Dennis Kozlowski became Tyco CEO in 1992, and he launched an aggressive acquisition program. By 1999, Tyco’s market value was greater than General Motors and Ford combined. Investors became increasingly uneasy, however, about his free-spending ways. In October, investment manager David W. Tice challenged the accuracy of Tyco’s financial reports. The stock dropped about a third. The SEC investigated but didn’t find anything. Nonetheless, in June 2005 Kozlowski was convicted of looting $150 million from Tyco. The Manhattan judge said: “the heart of the case is basic larceny.”


During the stock market boom of the 1990s, John Rigas and his sons Timothy and Michael launched an aggressive expansion program for Adelphia, their family-held cable TV company. They nearly quadrupled their debt. But they couldn’t manage what they had put together. Many investors became wary. On March 27, 2002, the company disclosed that their debt was $2.2 billion greater than had been previously reported. The stock lost two-thirds of its value. The company filed for bankruptcy. Investigations by the SEC and others revealed fraud.


For nine years, accountant Harry Markopolos sent the SEC evidence suggesting that investment advisor Bernard Madoff might be a fraud. Madoff was socially well-connected to the former chairman of NASDAQ. The SEC didn’t do anything. In 2001, Barron’s ran an article about Madoff’s suspicious secrecy and unusually high returns. The following year, a whistle-blower claimed there were irregularities at Madoff’s firm. The SEC intervened only after December 11, 2008 when Madoff’s sons reported that he had confessed to a Ponzi scheme.

Would we be safer if the SEC had more power? Doubtful, because even in Nazi-controlled Europe, there were plenty of smugglers, document forgers, resistance fighters, black markets, safe houses. and escape networks. The Gestapo couldn’t keep up with them all.

It’s a mistake to imagine that the SEC will protect us. As investors, we must take responsibility for due diligence to protect ourselves. In which case, what do we really need the SEC for?

Jim Powell is policy advisor to the Future of Freedom Foundation and a senior fellow at the Cato Institute. He is the author of FDR’s Folly, Bully Boy, Wilson’s War, Greatest Emancipations, The Triumph of Liberty and other books.

The Strange Death of American Capitalism

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The Strange Death of American Capitalism

May 17, 2009
Source:http://www.crossingwallstreet.com/archives/2009/05/the_strange_dea_1.html

Book Review of Bailout Nation by Barry Ritholtz

In The Strange Death of Liberal England, George Dangerfield famously described how the British Liberal Party—and by extension, England’s once-unshakable faith in liberalism—suddenly and unexpectedly vanished. Despite its outward appearance of solidity, once liberalism was challenged, it crumbled to dust. How could a faith that was so dominant for so long, suddenly disappear; not only die quickly—indeed with a whimper—but do so without putting up any resistance?

These are similar questions future historians will have when they look back at the first decade of twenty-first century America. At the dawn of the new millennium, America’s faith in capitalism was also unshakable. Yet, within a few short weeks in 2008, the entire edifice came crashing down. Even voting didn’t seem to matter. First under a Republican administration and then under a Democratic one, large sectors of the economy received unprecedented amounts of government support. A staggering $15 trillion of taxpayer money has been put on the line.

The American economy reached its humiliating nadir at Davos earlier this year when our fiscal profligacy was criticized by the Wen Jiabao, the premier of what was once-called Red China. Worst of all, he was right.

What Happened?
In Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, Barry Ritholtz takes on that question with gusto and the result is a wonderfully engaging book. Bailout Nation describes not only what happened and what went wrong, but also why. Don’t worry, you don’t need an advanced degree in economics to follow the story. Bailout Nation manages to be both comprehensive and easy to read.

Ritholtz is already known to countless investors through his invaluable blog, The Big Picture. (Full disclose: He’s been a supporter of CWS from its earliest days.) I have to confess to having some initial reservations about Ritholtz’s book. What makes him a great blogger, I feared, might not transfer well to a 300-page sustained argument. Let’s just say that Ritholtz isn’t exactly a “shades of gray” kind of guy. When a rapier is needed, Ritholtz is fully willing to use a cluster bomb. If you don’t think it’s possible to get a true sense of moral outrage over, say, the latest BLS report, well...you haven’t read The Big Picture.

Fortunately, my fears were unfounded. Ritholtz does very well in book form. His editor, Aaron Task, served him well; the prose is compact and well-organized, though I’m fairly certain of the sentences where Ritholtz shook off all editorial changes. Where Ritholtz truly shines is in drawing connections between seemingly dispirit events; the fall of Bear Stearns, oleaginous mortgage brokers, the repeal of Glass-Steagall, the growth of credit default swaps, even the effects of reforming the Consumer Price Index, all play a role in this complex mess of unintended consequences, vicious cycles, ideological blindness and abject stupidity. I can't remember that last time I had so much fun reading about the Apocalypse

There are, however, a few minor errors. The Jefferson quote, “Banking establishments are more dangerous than standing armies” (page 15) is probably bogus. Also, on page 96, Ritholtz writes, “the psychological impact that feeling financially flush has on spending cannot be underestimated.” He surely means overestimated. These errors are minor of course, and it may be a reflection of covering events in real time.

Even before its release, Bailout Nation itself became a news story. In February, McGraw-Hill, the originally publisher, announced that it was ditching the project. Ritholtz claimed it was due to his criticisms of the Wall Street ratings agencies (McGraw-Hill owns Standard & Poor’s). McGraw-Hill denied this although curiously, the editor Ritholtz had been working with, resigned one week later. Fortunately, John Willey & Sons picked up the project and brought it to life (or, if you prefer, bailed it out).

Lockheed Was the Original Sin
So how did we end up were we are? Ritholtz persuasively makes the case that we didn’t suddenly abandon our capitalist faith. Instead, he argues that our fondness for bailouts isn’t new. Ritholtz pinpoints our original sin in the 1971 bailout of Lockheed. By today’s standard, that bailout was laughably small—just $250 million.

The important point is that a new standard had been established, and the government and Corporate America responded accordingly. Soon, bailouts became like a narcotic. Our fixes could only be satiated by steadily larger rescues. Soon Penn Central received a bailout, followed by Chrysler a few years later, then Continental Illinois (which ironically found itself in the hands of Bank of America).

Ritholtz agues that the bailouts, even when successful in the short-term, do considerable long-term damage. After the Chrysler bailout, for example, the already somnolent auto industry grew even more complacent. Ritholtz considers an alternative history: What if Chrysler had been allowed to fail? Might Detroit have reformed itself? We’ll never know because as the public became slowly inured to these bailouts, they were free to grow larger.

Ritholtz expands his argument by adding the machinations of the Federal Reserve to the growing bailout trend. This is a crucial point because too few observers see the motives behind the central bank. Any good story needs a top-notch villain and in Bailout Nation, it’s a certain Randian jazz musician named Alan Greenspan.

The Mess That Greenspan Made
Ritholtz doesn’t suffer fools gladly and Greenspan gets a well-deserved skewering.
Ritholtz tracks how Greenspan purposely and quite clearly altered the Fed’s mandate to include supporting asset prices. The facts Ritholtz presents are strong. The Fed-orchestrated bailout of LTCM had a profound effect on Wall Street’s risk-taking mentality. Whenever the market tumbled, Greenspan jumped in to cut rates. Bubbles, however, in tech stocks and later in housing were allowed to grow unchecked.

According to Ritholtz, it was Dr. Greenpan’s tonic of absurdly low interest rates that led to an historic housing bubble and all the unpleasantness that followed. The effect was far more damaging than easy money.

Ritholtz stresses that the Fed’s policies changed the rules of the game. For example, the bond market was now forced into a reckless “scramble for yields.” This in turn fed the practice of securitization which, in turned, fueled the disgraceful behavior of the ratings agencies. When yields were low, mischievous behavior flourished. At each juncture, the dots connect back to Greenspan who even disregarded his fellow members of the Federal Open Market Committee.

Incidentally, the section on ratings agencies (pages 111 to 113) is hardly controversial. Ritholtz simply states what’s widely known, that the ratings practiced a form of payola. There’s no other way to say it—the agencies abandoned their professional and moral obligations.

Real Capitalists Nationalize
As for the debt crisis, Ritholtz writes, “From 1 million B.C. up until the present day, the ability to repay the debt has always been the dominant factor—except, however, for a brief five-year period starting around 2002.” It’s sadly true. One strawberry picker in California got a $720,000 loan despite his annual income of $14,000. The system morphed into capitalism without capital.

Technically, the bubble wasn’t in housing, it was in credit. The numbers are staggering. At one point, close to half of all the new jobs created were tied to real estate. Between 2003 and 2006, 75% of GDP growth was solely due to mortgage equity withdrawals. From December 2006 to December 2007, the notional amounts outstanding of credit fault swaps more than quadrupled from $14 trillion to $58 trillion.

Bailout Nation is quick-paced and Ritholtz sprinkles the test with illuminating charts and eye-catching statistics (i.e., Bear Stearns’ liquidity pool dropped by 90% in three days). He wryly notes that it you want to play the bailout game, make sure you do it first and do it big. Ritholtz also has a novel theory for the explosion in executive compensation on Wall Street, but I won’t spoil it for you here.

Characteristicly, Ritholtz isn’t shy about naming names. In Chapter 19, he lists the folks most at fault for the credit mess. It won’t surprise you that Greenspan tops the list. Personally, I think the "savings glut" deserves more attention. Chapter 20 is an interesting take-down of the phony causes of our troubles, like naked shorting and the Community Reinvestment Act.

I should add that Ritholtz is an equal opportunity critic. Many liberals won’t be pleased by his criticisms of bailouts and his dismal of systemic risk (or more accurately, the threat of systemic risk). Parts of the book could have been written by Milton Friedman. Ritholtz even repeats Friedman’s famous mantra, “there is no free lunch.” Plus, any book with a chapter titled, “The Virtues of Foreclosure,” isn’t about to win a Bleeding Heart of the Year award.

Conservative will certainly take issue with Ritholtz’s criticisms of financial deregulation and his call for therapeutic nationalization. What I find most disturbing is how much of the government’s behavior was simply arbitrary. Ritholtz makes it clear: They were just making it up as they went along.

Ritholtz favors temporarily nationalizing insolvent banks. Mind you, this ain’t exactly Pol Pot. Ritholtz merely wants bad banks taken out, cleaned up and restored to health. He believes it’s the solution that will cause the least damage (“real capitalists nationalize”). I think he’s on sound footing here. It’s odd that we can watch Citigroup fall from $57 to 97 cents, yet bringing it that last bit to $0 is somehow unacceptable. Ritholtz concludes, "Real capitalists nationalize; faux capitalists look for the free lunch."

At the beginning of The Strange Death of Liberal England, Dangerfield wrote of the Liberal’s final triumph, “From that victory they never recovered.” Let’s hope American capitalism doesn’t share their fate.

Posted by edelfenbein at May 17, 2009 2:54 PM

Who’s to Blame for the Collapse of the Financial Markets?

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Who’s to Blame for the Collapse of the Financial Markets?

By editor|May 17, 2009|10:27 PM
Source:http://wallstreetpit.com/4350-whos-to-blame-for-the-collapse-of-the-financial-markets

British newspaper Sunday Times has published a very interesting article on the international insurer AIG. The piece elaborates extensively about the firm’s underwriting methods and creation of the multi-sector CDS portfolio - which seem to have had no correlation between fees paid and the risk assumed. According to Christopher Whalen, managing director of Institutional Risk Analytics, “AIG’s foray into CDS was really the grand finale….Towards the end, it looked much like a Ponzi scheme, yet the Obama administration still thinks of AIG as a real company that simply took excessive risks. In other words, there was never a chance AIG would honor its contracts: its income was nowhere near enough to cover the payouts.”

The article also touches on the firm’s furore over bonuses - calling it “a convenient distraction from the real causes of the crisis.”

The article also argues that while until now the economic crisis has been seen as a giant intellectual errors, the dishonesty in the collapse of the global economy and the financial markets is on a scale that is almost too vast to comprehend.”There are conflicts of interest in American finance and politics that make our own, dear House of Lords look like beginners” the article said. “There are frauds so large, and so long-standing, that it can be hard to see them for what they are. And all these things were allowed to thrive in an intellectual atmosphere that tolerated no dissent.”

From Sunday Times: “Why did no-one see it coming?” asked Queen [Elisabeth] last November, on a visit to the London School of Economics. Well, they did, ma’am. Charles Bowsher, head of the US government’s General Accounting Office, testified as long ago as 1994 that “the sudden failure or abrupt withdrawal from trading” of large dealers in derivatives “could cause liquidity problems in the markets and could also pose risks to others, including… the financial system as a whole”. It took another 13 years, but that is exactly what happened.

One regulator tried to act on Bowsher’s warning, but she was silenced. Brooksley Born, who monitored the futures markets, tried to extend her remit to unregulated derivatives. Alan Greenspan and Robert Rubin, the then Treasury secretary, persuaded Congress to freeze her already limited power, forcing her departure. Rubin had come into government from Goldman Sachs; when he left he went back to banking, and pushed for Citigroup to step up its trading of risky, mortgage-related investments. For his advice, he earned over $126m (£84m) and then, as Citigroup collapsed, became an adviser to Barack Obama. After Greenspan stepped down from the US central bank in 2006, he became a consultant to Pimco, the world’s biggest bond fund, where his insights have been praised by his boss. “He’s made and saved billions of dollars for Pimco already,” said Bill Gross last year. Greenspan is also an adviser to Paulson & Co, a hedge-fund group that has made billions from the collapse in American housing.

The lightness of touch reached a level that defies belief. America has an Office of Risk Assessment, set up in 2004 to co-ordinate risk management for the main regulator, the Securities and Exchange Commission (SEC). Jonathan Sokobin, its director, says it is charged with “understanding how financial markets are changing, to identify potential and existing risks at regulated and unregulated entities”…. By early 2008, this office was reduced to a staff of one…We had gotten down to just one person at the SEC responsible for identifying the risk at all the institutions. The $596-trillion market in unregulated derivatives, including $58 trillion in credit-default swaps, was being watched by one person. That’s when he wasn’t looking at the rest of the corporate world, of course.
…
“From 1973 to 1985,” says Simon Johnson, a former chief economist at the IMF, “the financial sector never earned more than 16% of [US] corporate profits. In the 1990s, it oscillated between 21% and 30%, higher than it had ever been in the post-war period. This decade, it reached 41%.” The whole point of financial companies is to allocate your savings to those who can use the money best. If they are taking 41% of the profit in an economy, something is out of balance. These figures reveal an enormous transfer of wealth.

When the world steps out of a sixty-year old referential framework

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GEAB N°35 is available! Global systemic crisis: June 2009 - When the world steps out of a sixty-year old referential framework


- Public announcement GEAB N°35 (May 16, 2009) -
Source:http://www.leap2020.eu/GEAB-N-35-



The financial surrealism which has been at the heart of stock market trends, financial indicators and political commentaries in the past two months, is in fact the swan song of the referential framework within which the world has lived since 1945.

Just as in January 2007, the 11th edition of the GEAB described that the turn of the year 2006/07 was wrapped in a « statistical fog » typical of an entry into recession and designed to raise doubts among passengers that the Titanic was really sinking (1), our team today believes that the end of Spring 2009is characterized by the world’s final stepping out of the referential framework used for sixty years by global economic, financial and political players in making their decisions, in particular of its “simplified” version massively used since the fall of the communist bloc in 1989 (when the referential framework became exclusively US-centric). In practical terms, this means that the indicators that everyone is accustomed to use for investment decisions, profitability, location, partnership, etc ... have become obsolete and that it is now necessary to find new relevant indicators to avoid making disastrous decisions.

This process of obsolescence has increased dramatically over the past few months under pressure from two trends:

. first, the desperate attempts to rescue the global financial system, particularly the American and British systems, have de facto "broken navigational instruments" as a result of all the manipulation exerted by financial institutions themselves and by concerned governments and central banks. Among those panic-stricken and panic-striking indicators, stock markets are a perfect case as we shall see in further detail in this issue of the GEAB. Meanwhile, the two charts below brilliantly illustrate how these desperate efforts failed to prevent the world’s bank ranking from experiencing a major seism (it is mostly in 2007 that the end of the American-British domination in this ranking was triggered).

. secondly, astronomical amounts of liquidity injected in one year into the global financial system, particularly in the U.S. financial system, led all financial and political players to a total loss of touch with reality. Indeed, at this stage, they all seem to suffer from a syndrome of diver’s nitrogen narcosis – impairing those affected and leading them to dive deeper instead of surfacing. Financial nitrogen narcosis has the same effects than its aquatic counterpart.

Destroyed or perverted sensors, loss of orientation among political and financial leaders, these are the two key factors that accelerate the international system’s stepping out of the referential framework of the past few decades.

Of course, it is a feature of any systemic crisis and easy to establish that, in the international system we are used to, a growing number of events or trends have started popping out of this century-old framework, demonstrating how this crisis is of a kind unique in modern history. The only way to measure the magnitude of the changes under way is to step back several centuries. Examining statistical data gathered over the last few decades only enables one to see the details of this global systemic crisis; not the overall view.

Here are three examples showing that we live in a time of change that occurs only once every two or three centuries:

1. In 2009, the Bank of England official interest rate has reached its lowest level (0.5 percent) since the creation of this venerable institution, i.e. since 1694 (in 315 years).



Bank of England official interest rate since its creation in 1694 - Source: Bank of England, 05/2009
2. In 2008, the Caisse des Dépôts et Consignations, the French government’s financial arm since 1816 under all France’s successive regimes (kingdom, empire, republic…), experienced its first yearly loss ever (in 193 years) (2).

3. In April 2009, China became Brazil’s leading trade partner, an event which has always announced major changes in global leadership. This is only the second time that this has happened since the UK put an end to three centuries of Portuguese hegemony two hundred years ago. The US then supplanted UK as Brazil’s leading trade partner at the beginning of the 1930s (3).

It is not worth reviewing the many specifically US trends popping out of the national referential framework compared to the past century (there is no relevant referential framework older than that in the US): loss in value of the Dollar, public deficits, cumulated public debt, cumulated trade deficits, real estate market collapse, losses of financial institutions… (4)

But of course, in the country at the heart of the global systemic crisis, examples of this kind are numerous and they have already been widely discussed in the various issues of the GEAB since 2006. In fact, it is the number of countries and areas concerned, which is symptomatic of the world’s stepping out of the current referential framework. If there was only one country or one sector affected, it would simply indicate that this country/sector is going through an unusual time; but today, many countries, at the heart of the international system, and a multitude of economic and financial sectors are being simultaneously affected by this move away from a “century-old road”.



Stock market trends – adjusted for inflation – during the last four major economic crises (grey: 1929, red: 1973, green: 2000, and blue: current crisis) - Source: Dshort/Commerzbank, 17/04/2009
Thus, to conclude this historical perspective, we want to emphasize that the stepping out of the century-old reference system is graphically visible in the form of a curve simply popping out of the frame which allowed ongoing trends and values to be represented for centuries. This popping out of traditional referential frameworks is speeding up, affecting increasing numbers of sectors and countries, enhancing the loss of meaning of indicators used daily or monthly by stock markets, governments, or official sources of statistics, and accelerating the widespread awareness that "the usual indicators" can no longer give any insight, or even represent the current world developments. The world will thus reach summer 2009 without any reliable references available.

Of course, everyone is free to think that a few points’ monthly variation of a particular economic or financial indicator, itself largely affected by the multiple interventions of public authorities and banks, carries much more value on the evolution of the current crisis than those stepping out of century-old referential frameworks. Everyone is also free to believe that those who anticipated neither the crisis nor its intensity are now in a position to know the precise date when it will end.

Our team advises them to go see (or see again) the movie Matrix (5) and to think about the consequences of manipulating the sensors and indicators of one’s perception of given environment. Indeed, as we will examine in detail in our special summer 2009 GEAB (N°36), the coming months could be entitled « Crisis Reloaded » (6).

In this 35th issue of the GEAB, we also express our advice on which indicators, in this period of transition between two referential frameworks, are able to provide dependable information on the evolution of the crisis and the economic and financial environment.

The two other major themes addressed in this May 2009 issue of the GEAB are, first, the programmed failure of the two major economic stimulus plans: namely the Chinese and American plans, and, secondly, the United Kingdom’s appeal to the IMF for financial assistance by the end of summer 2009.

In terms of recommendations, in this issue, our team anticipates the evolution of the worlds’ largest real estate and treasuries markets.


-----------
Notes:

(1) At that time, our team added « Just like always when change occurs, the passage by zero is characterized by a «fog of statistics» where indicators point in opposite directions and measurements provide contradictory results, with margins of error sometimes wider than the measurement itself. Regarding our planet in 2007, the on-going wreck is that of the US, that LEAP/E2020 has decided to call the « Very Great Depression », firstly because the « Great Depression » already refers to the 1929 crisis and the years after; and secondly because, according to our researchers, the nature and scope of the upcoming events are very different ». Source: GEAB N°11, 01/15/2007

(2) Source: France24, 04/16/2009

(3) Source: TheLatinAmericanist, 05/06/2009

(4) Political leaders and experts insist on comparing the current crisis to the 1929 crisis, as if the latter were a binding reference. However, in the US in particular, current trends in many fields have moved beyond the events which characterized the « Great Depression ». LEAP/E2020 already reminded in GEAB N°31 that relevant references were to be found in the 1873-1896 global crisis, i.e. more than a century back.

(5) In the Matrix series of movies, reality perceived by humans is created by computers. They think they live a comfortable life when in fact they live in squalor, but all their senses (sight, hearing, taste, touch, smell) are manipulated.

(6)The title of the second in this series of movies: « Matrix reloaded ».

OTHER VOICES: Wall Street greed brought down Detroit

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8:00 pm, May 17, 2009


OTHER VOICES: Wall Street greed brought down Detroit

Source:http://www.crainsdetroit.com/article/20090517/FREE/305179964/1079


By John Mogk

Detroit has been vanquished by Wall Street greed. The auto companies might have better designed models for market needs, but cars are not selling principally because credit has been frozen, consumer wealth has been obliterated and a large number of jobs were lost nationwide after the banking industry collapse.

The crisis was caused by faulty unregulated financial schemes concocted by a few greedy Wall Street financial houses.

After Sept. 11, the U.S. Treasury flooded the economy with federal funds to dramatically increase national spending to avoid a recession. Enormous sums became available to finance home purchases. Banks lowered credit standards to bring tens of thousands of new subprime buyers into the housing market. These actions greatly increased nationwide housing demand, elevated prices to unsustainable levels and eventually caused the collapse of the housing market, the banking industry, Detroit's auto industry and its local economy.

The working poor were aggressively solicited to buy homes with little or nothing down. Lenders salivated over the fees and interest subprime buyers were required to pay because they were poor credit risks. Those fees often left the subprime buyer little or no equity at closing.

The real estate industry sold the view that housing values would continue to increase, allowing borrowers who defaulted to refinance or sell their homes at a profit. Any refinancing would result in even more exorbitant fees.

At first, Wall Street was left out of collecting large subprime mortgage fees, but beginning in 2002, a handful of firms began to sweep up prime and subprime mortgages and bundle them into unregulated mortgage-backed securities, known as “derivatives.” Respected rating agencies gave these risky derivatives their highest rating and they were sold around the world.

Selling derivatives generated large fees for financial firms and injected a large amount of additional capital into the mortgage market. Some derivative investors would purchase them only with protection against potential defaults by mortgage borrowers. So for yet another fee, a select group of financial and insurance firms, like AIG, issued “credit default swaps” that allowed investors to collect on bets that their derivatives would not be repaid.

One purpose of the Sept. 11 attacks was reportedly to destroy the American economy. The cruel irony is that al-Qaeda received unexpected help from a small group of greedy Wall Street leaders and firms.

With trillions of taxpayer dollars bailing out the banking industry, Americans must be assured that never again will Wall Street be allowed to manipulate American capitalism to the destruction of our working-class families.

John Mogk is a professor of law at Wayne State University.

General Motors Leaves U.S. Workers by the Wayside as it Accelerates Operations in China

General Motors Leaves U.S. Workers by the Wayside as it Accelerates Operations in China

By Jason SimpkinsManaging
EditorMoney Morning
Source:http://www.moneymorning.com/2009/05/18/general-motors-china/

For decades, General Motors Corp. (NYSE: GM) was an icon of American industry. But over the past decade its sales in China have steadily increased, while dwindling sales at home have turned the company into a relic.

Now facing bankruptcy, GM has an opportunity to shift its operations to China, its fastest growing and most profitable market. The company is already attempting to move its manufacturing operations to the Asian powerhouse, and that has given rise to speculation that it will move its headquarters as well.

Of course, if GM – which has already received $15.4 in government loans – were to pick up stakes, the political fallout would be epic. What could be more “un-American” than a 101 year-old American automotive company that’s being propped up by taxpayer dollars moving to a communist nation?
But the reality is that American consumers aren’t buying GM vehicles and Chinese consumers are. That means if the company is going to remain viable, China, not America, is GM’s land of opportunity.

GM CEO: Bankruptcy ‘Probable’
GM still has two weeks before the government imposed deadline to demonstrate sustainable viability expires on June 1. But even GM Chief Executive Officer Fritz Henderson has admitted that bankruptcy is “probable” at this point. And in the minds of analysts, it’s almost certain.
“[Bankruptcy] is looking like a real high probability,” Brett D. Hoselton, an analyst with KeyBanc Captial Markets, told the New York Times. “Chrysler is the best indicator at this point of where we’re heading with GM.”

GM reported a first-quarter net loss of $5.98 billion, compared to a loss of $3.3 billion a year earlier. Revenue fell to $22.4 billion, a 47% drop from 2008. The company burned through $10.2 billion in cash in just three months. GM has now lost $88 billion since 2004.
Last year, GM lost its crown as the world’s largest carmaker to Japan’s Toyota Motor Corp. (NYSE ADR: TM). And a company that 40 years ago produced one out of every two vehicles sold in the United States, has seen its U.S. market share slide to just 19%.
On Friday, GM notified 1,100 of its 6,000 U.S. dealerships that it is terminating their contracts, and it plans to cut its network down to 3,600 dealers by next year.

“This company is sick,” Charles Ballard, an economics professor at Michigan State University told Michigan NBC television affiliate WILX 10, “they’re likely going to file for bankruptcy.”
Investors are equally pessimistic. GM stock has plunged 70% since the Obama administration announced it would give the company 60 days to restructure outside of bankruptcy court. GM has lost 94% of its equity value in the past year.
Is China the Right Cure for GM?

So if GM is sick, what then is the medicine? Many analysts believe it’s a healthy dose of China.
While its U.S. sales have plunged, sales in China continue to grow exponentially. In fact, GM sold more vehicles in Asia in the first quarter than it did in the United States. Only 26% of GM’s first-quarter sales came from the U.S., a 36% decline from a year ago.
And while global car sales continue to plunge, auto sales in China are expected to grow between 8% and 9% this year. China actually overtook the United States as the world’s largest auto market for the first time in history in the first quarter.
And unlike the United States, there is actually a strong demand for GM model cars. In China, where the company is neck and neck with Volkswagen for the market-share lead, GM set a monthly sales record of 151,084 vehicles in April. That’s a 50% increase from its April 2008 results.

“Within 10 years, this will be our largest market in the world,” Kevin Wale, president of GM China, told TIME magazine.
GM has been so successful in China it is reportedly negotiating plans with U.S. lawmakers that will send the carmaker’s production overseas, the U.K.’s Telegraph reported.
GM will start shipping cars to the United States from Shanghai in 2011. The company plans to export slightly more than 17,000 vehicles in the first year before ramping up to 50,000 by 2014.
Backlash from GM’s China Plan
While many carmakers import components from China to save on labor costs, GM would be the first company to import whole cars from the Mainland.
Of course the plan doesn’t sit well with unions.

“GM should not be taking taxpayers’ money simply to finance the outsourcing of jobs to other countries,” Alan Reuther, a Washington lobbyist for the United Auto Workers (UAW) union wrote in a letter to U.S. lawmakers.

Indeed, the UAW and others argue that the whole point of bailing out the U.S. auto industry was to save American jobs and help prop up the sagging economy.
Two weeks ago, GM CEO Henderson said his company would cut an additional 21,000 factory jobs, close 13 plants, eliminate about 2,600 dealerships and close its Pontiac division. GM aims to shed 23,000 jobs – 38% of its workforce – by 2011.
But the company expects to open a new factory in mainland China within the next few years and continues to build upon its 21,000 Chinese employees.
“I think that’s wrong,” Keith Pokrefky, a Michigan autoworker, told NBC’s WILX. “I think that’s wrong for America. I think it’s wrong for American jobs. It’s un-American.”
On the other hand, GM argues that it is only logical to produce cars where they’re going to be sold.

“GM’s philosophy has always been to build where we sell, and we continue to believe that is the best strategy for long-term success, both from a product development and business planning standpoint,” GM’s China office said in a written statement to the Associated Press.
Plus, GM already imports cars from other countries, just not China. The Chevrolet Aveo and Pontiac G3 come from South Korea. The Pontiac G8 comes from Australia. The Saturn Astra comes from Belgium, and the Vue from Mexico.

Harvard Business School professor Clayton Christenson – who was also a consultant to Richard Wagoner, the architect of GM’s China strategy – told TIME that inexpensive, Chinese-made Chevys, exported to the United States could be the “disruptive” force the company needs to resuscitate North American sales.
“It’s exactly the right thing for them to do,” Christenson said.
While China keeps its data on labor costs under lock and key, analysts estimate that wages and benefit payments per factory worker are less than a tenth of what they are in North America, TIME reported.

MSU professor Charles Ballard says that while the notion of outsourcing more jobs to China may not be pleasing, it is also in GM’s best interest.
“I think everyone needs to keep in mind that if this company fails, that’s the worst case scenario," Ballard said. "It would be really good for the people of Michigan and for Lansing for GM to become a viable company. Right now, it’s not."

And perhaps that’s the root of the issue. There was a time when what was good for GM was good for America. But somewhere along the line, the interests of the two diverged. Now, they’re too far entangled for there to be an amicable solution to this problem, and the Obama administration is left with a political powder keg.

The government stepped in to fire former GM chief Richard Wagoner, but it doesn’t want to be too heavy-handed in its treatment of the private sector. It has already spent months sidestepping questions about whether or not it would nationalize U.S. banks.
“We didn’t think in America that the President could fire the CEO of a private company,” one Chinese executive told TIME. “For us Chinese it was very confusing.”

But if the Obama administration lets GM move ahead with its plans, it must confront the unpleasant reality that it is subsidizing the outsourcing of U.S. jobs with taxpayer money.
“Production location is a corporate decision, but when it’s on the taxpayer dime, there are different sensitivities, so the notion of billions for a rescue package and offshore production, I think, could be politically combustible," Harley Shaiken, a professor at the University of California at Berkley who specializes in labor issues, told the AP.

Cuomo discusses Wall Street culpability, responsibility

Andrew Cuomo: Culpability and Comeuppance on Wall Street

Maria Bartiromo talks to New York Attorney General Andrew Cuomo

By Maria Bartiromo

05/06/2009

As the global financial crisis drags on, there is increasing talk of culpability. And asking the hard questions about Wall Street accountability and the bailout is New York Attorney General Andrew Cuomo. His office has investigated the bonuses at Merrill Lynch (BAC) that led to the ouster of John Thain. And in a letter to Congress on Apr. 23, Cuomo laid out evidence that Bank of America (BAC) CEO Ken Lewis was pressured by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke to complete the purchase of Merrill and didn't fully disclose its condition to BofA shareholders. What that letter revealed was partly behind the ouster of Lewis as chairman on Apr. 29 (he remains CEO). Beyond that, Cuomo's SWAT team is still probing the New York pay-to-play scandal in which middlemen are said to have collected multimillion-dollar fees to steer state pension investments to certain firms. Among the private-equity firms allegedly paying to play were Carlyle Group and Quadrangle Group, where Steve Rattner was a principal before President Obama appointed him car czar. Although Cuomo is a Democrat with deep connections, the AG is aggressively going after members of his own party. In addition, Cuomo has filed civil fraud charges against Ezra Merkin, whose Gabriel Capital controlled hedge funds that allegedly fed into Bernard Madoff's Ponzi scheme. (Merkin's lawyer has said his client will fight those charges.) All of that has raised Cuomo's profile, and there's chatter that he will challenge David Paterson for the Democratic gubernatorial nomination in 2010. I talked with Cuomo on Apr. 29 by phone and e-mail.

MARIA BARTIROMO

What's the most important investigation you're conducting right now?

ANDREW CUOMO

I don't want to characterize any one investigation as most important. I can say that we currently have two main areas that are dominating our agenda: corporate fraud and government corruption. The bulk of my time is being spent on our pension investigations relating to pay-to-play allegations at the New York State common retirement fund and on the Wall Street cases we are pursuing.

Recent stories in the Financial Times and elsewhere suggest that your so-called crusade against Wall Street is in part politically motivated, that it will help you become governor. Are politics involved?
Of course not. Our cases are based on the facts and the law and nothing else. I don't think anyone would argue with the notion that there have been serious abuses on Wall Street. All we are doing is following the facts in our investigations.

Last week you revealed testimony that suggests Paulson and Bernanke pressured Lewis to complete the acquisition of Merrill even though it might not have been in the best interest of shareholders. Why reveal this?
That is an ongoing investigation, so I cannot comment on it at length. As we said in the letter [to Congress and regulators], our investigation involves the conduct of federal agencies and high-ranking federal officials charged with managing the TARP program, and we therefore thought it was important to inform the relevant federal bodies of our findings to date.

The letter also said the SEC was excluded from the talks with BofA. Why was the SEC excluded, and was Tim Geithner, then New York Fed president and now Treasury Secretary, included in those talks? How come no mention of Geithner exerting pressure?
Our letter lays out what we have found thus far.

Some might say that even if Paulson and Bernanke did pressure Lewis, they were taking extraordinary measures to save the financial system at a moment of crisis. What is gained by Monday-morning quarterbacking that move and making it seem nefarious?
We did not make those facts seem nefarious in any way. Certainly we recognize that all parties were operating in unprecedented times and somewhat uncharted waters.

Do you worry that politicians and the media have been fanning the flames of class warfare? The bonuses outrage and "business is bad" theory seem to be obscuring other perhaps more important issues, like fixing the financial system and getting credit moving again.
That is a fair point. People are rightfully upset about Wall Street abuses and excess. And we need to address those issues. But we also need to be very careful and not let that anger become counterproductive and a distraction. I also think Wall Street should be taking a long hard look at the philosophy of incentive compensation. I don't think bonuses are always bad. The question for Wall Street is, can it design incentives that promote the long-term health of the firms as opposed to just hitting short-term numbers?

There are stories saying the pay-to-play scandal may be expanding beyond New York State, and Democrats elsewhere may be involved. Are you feeling any heat from within the Democratic Party to back off?
No. To be clear ... no one is above the law.

One firm mentioned in the scandal is the Carlyle Group. An article in The New York Times last week asked why Carlyle, "one of the biggest and best-performing private equity firms in the world," would need to use a placement agent to pull in investments. Is that a question you have asked?
I cannot comment on Carlyle specifically. I will say that my office is working on a code of conduct that would ban the use of third-party placement agents with respect to state and city pension fund business. Carlyle has agreed to accept such a ban, and that is a positive step in my opinion.

Do you expect to bring criminal charges against Ezra Merkin?
I can't comment on an ongoing investigation.

Will you challenge David Paterson for the Democratic nomination for governor?
I love being Attorney General, and...I am planning to run for reelection as Attorney General next year.

Maria Bartiromo is the anchor of CNBC's Closing Bell.

Reserve Fund founder charged with fraud

Reserve Fund founder charged with fraud

By Aaron Elstein

Published: May 5, 2009 - 3:27 pm

The Securities and Exchange Commission filed fraud charges Tuesday against the father and son team who ran Reserve Management Co., the money-market fund company that rocked the financial world last September when it “broke the buck” on its flagship fund.

The SEC charges represent the latest in a series of heavy blows to Reserve, a Manhattan-based firm that pioneered money-market funds in the early 1970s and invested some $125 billion of clients’ money in low-yielding, ultra-safe assets, such as certificates of deposit or short-term government and corporate debt. Founder and Chairman Bruce Bent, 71, liked to say the point of money-market funds was “to provide safety of principal, liquidity and a reasonable rate of return all the while boring investors into a sound sleep.”

Mr. Bent’s decades of work came undone last September, when his firm revealed that the net asset value of its $62 billion Primary Fund had fallen below the sacrosanct $1 a share, the result of $785 million of investments in Lehman Brothers turning worthless after that investment bank filed for bankruptcy. In other words, Reserve’s Primary Fund “broke the buck”—only the second time such a thing had ever happened to a money-market fund.

As Mr. Bent and his son, Reserve President Bruce Bent II, grasped the depth of disaster they faced, the SEC says they failed to provide key material information to customers, board members and ratings agencies after Lehman collapsed. Reserve and the Bents misrepresented that they would provide the support necessary to protect the $1-per-share asset value of their fund when in fact there was no such intention, the SEC contends. The SEC also charges that Reserve officials significantly understated how many investors were racing to yank their money out after the Lehman bankruptcy hit.

“The fund’s managers turned a blind eye to investors and the reality of the situation at hand,” SEC Chairman Mary Schapiro said in a statement.

A Reserve spokeswoman didn’t immediately respond to a request for comment.

Reserve froze withdrawals after breaking the buck and the fund is now being liquidated. It has set aside $3.5 billion of client money to cover legal expenses anticipated due to suits brought by angry investors.

Reserve began to drift into riskier investments, such as short-term debt issued by Lehman and Merrill Lynch, in 2007, the SEC says. Those investments generated higher returns, helping Reserve attract more customers—and boost its management fees. Unlike other money-market outfits owned by larger institutions, Reserve lacked the resources to shore up its fund when large numbers of investors demanded their money back at once.

The SEC charges are similar to allegations made in January by Massachusetts regulators. According to court documents in the Massachusetts case, Reserve officials sought a federal bailout hours before they disclosed on Sept. 16 that the Primary fund had broken the buck. Mr. Bent II phoned Timothy Geithner, then president of the Federal Reserve Bank of New York, to beg for urgent assistance. The New York Fed declined.

Three days later on Sept. 19, the U.S. Treasury said it would provide $50 billion to offset any losses incurred by investors in money-market funds.

SEC charges money market fund with fraud

Operators of Reserve Primary Fund charged with misleading investors about its vulnerability in wake of Lehman Brothers collapse.

By Tami Luhby, CNNMoney.com senior writer

Last Updated: May 5, 2009: 6:08 PM ET

NEW YORK (CNNMoney.com) -- The Securities and Exchange Commission has filed fraud charges against the operators of the Reserve Primary Fund for failing to provide important information to investors and trustees about the fund's exposure to Lehman Brothers.

By bringing the case, the agency is trying to get the company to release the $3.5 billion it is withholding from shareholders until all lawsuits against the company are resolved.

The money market fund "broke the buck" on Sept. 16, the day after Lehman Brothers filed for bankruptcy, meaning its net asset value fell below $1 a share. Investors seek out money market funds as conservative investments because they are designed to maintain their $1 per share value. Companies also rely on them to purchase short-term corporate debt.

The Primary Fund, however, held $785 million in Lehman-issued securities, which lost most of their worth in the bankruptcy, the SEC said. This dragged down the fund's net asset value.

The agency says that the Reserve Management Company Inc., its chairman Bruce Bent Sr., vice chairman and president Bruce Bent II and Resrv Partners Inc. misled investors and "significantly understated" the volume of redemption requests. They also failed to provide trustees with accurate information about the value of the Lehman securities.

Reserve also said it would provide the money needed to maintain the fund's share value when it "had no such intention," according to regulators.

"Fund managers have serious obligations to keep their trustees and investors informed in both good times and bad, and cannot choose to reveal only favorable facts," said James Clarkson, acting director of the SEC's New York regional office.

The company said in a statement that it intends to defend itself vigorously.

"Since we created the money fund in 1970 we have operated and grown our business by putting our shareholders' interests first," said Bruce Bent Sr. "The Lehman Brothers Bankruptcy filing created an unforeseeable and out-of-control condition for many parties and the results were serious...We remain confident that we acted in the best interest of our shareholders."

There are at least 29 different lawsuits pending against the company, according to the SEC. The agency hopes to bring all claimants together in this case and have it settled together.

The Primary Fund is currently being liquidated. Last month, the company said about $46.1 billion, or approximately 90% of fund assets as of Sept. 15, 2008, has been returned to investors. Approximately $4.5 billion remains in the fund, which once had a value of $60 billion.

The fund's independent trustees, who oversee its operations, said in a statement that they would work with the agency.

"The trustees will continue to fully cooperate with the Securities and Exchange Commission to expedite the distribution of the remaining assets to shareholders and to ensure that all decisions are made in the shareholders' best interest," the trustees said.

The meltdown

The fund's troubles added to the turmoil that roiled Wall Street that week. Not only did Lehman Brothers collapse on Sept. 15, but the federal government stepped in to save AIG (AIG, Fortune 500) with an $85 billion injection and then announced a $700 billion rescue of the American financial industry.

Executives at Reserve, which pioneered the money market fund, hid the fact that Lehman Brother's bankruptcy had pulled the Primary Fund's net asset value below $1 that day, according to the SEC. Already spooked by Wall Street's gyrations, investors rushed to pull out $24.6 billion from the fund, but Reserve only had the money to cover $10.7 billion.

It wasn't until 4 p.m. the next day that the company announced that the fund's value was 97 cents per share.

The Primary Fund's problems led to a run on money market funds in general, forcing the federal government to step in by week's end. The Treasury said it would insure up to $50 billion in money-market fund investments at financial companies that pay a fee to participate in the program. The initiative guarantees that the funds' value does not fall below the standard $1 a share. At the same time, the Fed took steps to stabilize the debt products in which money-market funds invest.

The exodus ended about two weeks later, though investors shifted to more conservative money market funds that invest in government debt, rather than the short-term corporate debt that Primary Fund had in its portfolio. Assets of government money market funds increased in 2008 by more than $700 billion or 90%, while assets of prime funds, which invest in corporate commercial paper, declined by $55 billion or 3%, according to the SEC.

Still, the crisis has led the SEC to reconsider its regulation of the industry.

"In light of the events of last fall, it is essential that the SEC comprehensively re-examine the money market fund regulatory regime, said SEC Chairman Mary Schapiro in a speech to mutual fund directors Monday. "We should do so with a view toward enabling money market funds to afford investors the relatively safe and liquid investment that they expect from an SEC-registered money market fund."

First Published: May 5, 2009: 3:35 PM ET

Moyers Journal: Maddoff Was A Piker -- America's Big Banks Are a Far Larger Fraudulent Ponzi Scheme

By Bill Moyers, Bill Moyers JournalPosted on April 6, 2009, Printed on April 6,

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

Black: These numbers as large as they are, vastly understate the problem of fraud.

Moyers: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black. The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating -- after whom the senate's so-called "Keating Five" were named -- he sent a memo that read, in part, "get Black -- kill him dead." Metaphorically, of course. Of course. Now Black is focused on an even greater scandal, and he spares no one -- not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters." Bill Black, welcome to the Journal.

William K. Black: Thank you.

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

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

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

Black: Absolutely.

Moyers: How did they do it? What do you mean?

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

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

Black: Yes.

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

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

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

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

Moyers: Yeah. Liars' loans--

Black: Liars' loans.

Moyers: Why did they call them liars' loans?

Black: Because they were liars' loans.

Moyers: And they knew it?

Black: They knew it. They knew that they were frauds.

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

Moyers: You think they really said that to borrowers?

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

Moyers: Ninja?

Black: Yeah, because no income verification, no job verification, no asset verification.

Moyers: You're talking about significant American companies.

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

Moyers: Which company?

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

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

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

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

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

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

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

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

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

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

Black: Our system…

Moyers: Our financial system…

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

Moyers: Is there a law against liars' loans?

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

Moyers: Because…

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

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

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

Moyers: Who did?

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

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

Black: Well, they succeeded. And in that picture, by the way, the other -- three of the other guys with pruning shears are the…

Moyers: That's right.

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

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

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

Moyers: What did AIG contribute? What did they do wrong?

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

Moyers: And why…

Black: How mad is this?

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

Black: Well, that, especially after what's just happened at G.M., that's… it's scandalous.

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

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

Moyers: The cover up?

Black: Sure. The cover up.

Moyers: That's a serious charge.

Black: Of course.

Moyers: Who's covering up?

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

Moyers: What do you mean?

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

Moyers: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this. TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation. Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.

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

Moyers: As?

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

Moyers: How is this happening? I mean why is it happening?

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

Moyers: What facts?

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

Moyers: You--

Black: Taking away people's bonuses?

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

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

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

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

Moyers: And that's a law?

Black: That's the law.

Moyers: So, Paulson could have done this? Geithner could do this?

Black: Not could. Was mandated--

Moyers: By the law.

Black: By the law.

Moyers: This law, you're talking about.

Black: Yes.

Moyers: What the reason they give for not doing it?

Black: They ignore it. And nobody calls them on it.

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

Black: Well, where's the Pecora investigation?

Moyers: The what?

Black: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation? What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.

Moyers: What do you mean?

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

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

Black: Absolutely.

Moyers: You are.

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

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

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

Moyers: A.I.G. did?

Black: What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG. Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

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.

Moyers: Who's going to get the facts?

Black: We need some chairmen or chairwomen--

Moyers: In Congress.

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

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

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

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

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

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

Black: Yes.

Moyers: Why?

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

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

Black: Right.

Moyers: It was relatively a handful of people.

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

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

Black: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere." Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system. So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

Bill Moyers is president of the Schumann Center for Media and Democracy.

The sum of all fears

February 24th, 2009
The Sum of All Fears
Many argue that U.S. banks need to be nationalized, perhaps temporarily, pointing to Sweden’s success in fixing its banking sector. But a growing group of experts is raising alarms, saying that any nationalization cure would be far worse than the banking crisis disease.
In today’s Wall Street Journal, William Isaac, who was chairman of the FDIC from 1981-1985, argues forcefully that nationalizing the biggest U.S. banks is not a viable option. He points out that Sweden is tiny compared with the United States and that the total nationalization effort there involved one bank that had already collapsed. He says that the problems at Citi, Bank of America and perhaps others are too big and difficult to be dealt with through drastic government intervention, particularly one labeled “nationalization.”
Dick Bove, a veteran bank analyst, also thinks government management is a mistake. Nationalized banks would not be dynamic enough to aid the economy in recovery, according to Bove. He also argues that the damage to shareholders would be catastrophic, though certainly in the case of Citigroup, shareholders have already taken most of the hit.
If voices of wisdom aren’t enough for skeptics, the example of AIG may be. AIG is not a bank, but it faces a lot of the same problems that banks do. And nationalization has done little to help the insurer, which has been losing bailout dollars with dizzying speed, and is seeking more cash from the U.S.
The United States’ efforts to fix AIG have done nothing to improve the government’s standing on Wall Street. But then again, continually applying new band-aids to the financial system doesn’t appear to be stopping the bleeding. If nothing else, we now know that both sides of the nationalization argument have a whole lot more evidence of what doesn’t work than what does.
Deals of the Day:
* Roche will likely have to up its bid for the 44 percent of Genentech it does not already own, analysts said after the U.S. biotech group urged shareholders to reject the offer.
* American International Group received bids from MetLife and Axa SA for its American Life Insurance Co unit, Bloomberg reported, citing people familiar with the situation.
* Lehman Brothers Holdings will spin off its venture capital arm into an independent firm, the latest move by the bankrupt securities firm to shed assets and raise cash.
* Commodities trading house Noble Group, the biggest shareholder in Gloucester Coal, has concerns about Gloucester’s proposed merger with fellow Australian miner Whitehaven Coal, Noble said in a statement.
* Spain’s Santander and utility Union Fenosa have renewed talks to sell their 36 percent stake in oil group Cepsa to Abu Dhabi fund IPIC, Expansion reported, citing unnamed energy- sector sources.
* French retailer Carrefour is seeking to buy Seventh Continent in a deal that would make it the first foreign company to enter the Russian retail market since the credit crunch hit local firms
* Privately held mobile email provider Visto has agreed to buy rival Good Technology from struggling Motorola to expand its offering and grow scale in a market dominated by Research in Motion.
* Billionaire investor Carl Icahn raised his stake in independent film and television studio Lions Gate Entertainment Corp to 14.28 percent and may add or oust directors from the company’s board, according to a securities filing made on Monday.
* Boyd Gaming said it was interested in exploring an acquisition of struggling casino operator Station Casinos, which has said it may file for bankruptcy protection.
* Liquidators Hilco Merchant Resources LLC and Gordon Brothers Retail Partners were named as the lead bidder in a bankruptcy auction for U.S. luxury retailer Fortunoff Holdings LLC, according to a person with knowledge of the auction.
* Semiconductor company Exar Corp said it agreed to buy Hifn Inc, a provider of data compression and encryption technology, in a deal valued at about $59 million.
* The Chinese government aims to cut the number of major auto-making groups through mergers to 10 at most from 14, an official newspaper reported, as the global economic crisis adds urgency to restructuring the fragmented sector.
* State-run Life Insurance Corp of India has raised its stake in ICICI Bank by 2.04 percent to 9.38 percent through market purchases, a filing by India’s second largest bank to the stock exchange showed.
* The board of fraud-hit Satyam Computer Services hopes to seek expression of interest from potential bidders by the end of this week, its chairman said.