Trying not to let sleazy dogs lie

By Al LewisDow Jones Newswires
Posted: 01/25/2009 12:30:00 AM MST


People with no conscience can do well in business — at least until their schemes unravel.
Barry Minkow was one of those people.
"We could walk into a meeting . . . and I could tell a community of Wall Street investors that my company was profitable when I knew it was not — and not blink," he said. "I was a thief and a liar and a crook."
Today, he's different.
"Today, if my wife asked me if I emptied the trash, and I forgot and I say, 'Yes, I did,' I'll run and empty the trash and then feel guilty, and confess that I lied."
He still lies. But now it bothers him.
"Just because I'm not committing securities fraud or perpetrating a Ponzi scheme does not mean that my life is not in dire need of constant improvement," he said.
Minkow now claims to have a conscience, a still-small voice that empathizes, chooses right over wrong, and discerns truth from delusion and deception.
I find it improbable that a renegade businessman can grow a conscience like a salamander grows a lost appendage. But some things about Minkow are improbable.
At age 16, he started a carpet-cleaning outfit called ZZZZ Best Co. in his parents' garage in Inglewood, Calif.
Despite his youth and the low profit margins that such companies are known to generate, Minkow was able to take ZZZZ Best through an initial public stock offering in just a few years.
He claimed a net worth of $90 million, drove a red Ferrari with a "ZZZZ BEST" license plate and appeared on Oprah's show as a Wall Street whiz kid.
As it turned out, though, Minkow booked as revenue the money he had borrowed from the mob, so he could borrow millions more from banks and investors. He forged thousands of documents and leased buildings that he staged as work sites when auditors wanted to check his work.
By age 23, he had been convicted of 57 counts of fraud involving securities, credit cards and the U.S. mail. A memorandum prepared by prosecutors for his 1989 sentencing described him as remorseless.
"You're dangerous because you have this gift of gab, this ability to communicate," U.S. District Judge Dikran Tevrizian told Minkow. "You don't have a conscience."
Minkow told me he didn't have a conscience because he "didn't know the Lord." A Jew, he found Jesus in prison.
After nearly eight years behind bars, he went on to Jerry Falwell's Liberty University, where he earned a master's degree in divinity. He then became pastor of Community Bible Church in San Diego.
In 12 years, he said, his flock has grown from 135 to more than 1,500. "The whole theme of the Bible," said Minkow, now 42, "is that people can change."
In 2001, he started the Fraud Discovery Institute, where he profits by ratting out white-collar miscreants. Sometimes he shorts the stocks of companies he targets. Other times, people hire him for a fee.
This business model may seem ethically challenged to some, but news reports over the years credit him with uncovering about $1.8 billion worth of fraud, many of it in multimillion-dollar Ponzi schemes. He has even received applause from the FBI.
Several executives of publicly traded companies have had to resign after Minkow uncovered fabrications on their resumes, including MGM Mirage's former chief executive, J. Terrence Lanni, who stepped down in November.
"He has done some good things," Tevrizian told CBS's "60 Minutes" in 2005. "He's uncovered several hundreds of millions of dollars' worth of frauds. And I give him credit for that."
Now, Minkow is gunning for Lennar Corp.
On Jan. 9, Minkow started a website, lenn-ron.com, and he has made a YouTube video likening Lennar to Enron and alleged Ponzi-schemer Bernard Madoff.
Immediately after Minkow claimed that Lennar was "a financial crime in progress," Lennar's stock plunged as much as 28 percent. Lennar responded by denying Minkow's claims and filing a lawsuit accusing him of defamation and extortion.
A California developer named Nicolas Marsch III, who has sued Lennar over his partnerships with the homebuilder, is reportedly paying Minkow as much as $100,000.
Lennar said in its lawsuit that Marsch "threatened to air (Lennar's) dirty little secrets if Lennar did not make an immediate payment of $39 million."
Minkow said it's not true, and he claims Lennar's lawsuit will only lead more people to suspect his claims are true.
"Why else would anybody care about what Barry Minkow has to say?" he said.
So far, Lennar stock has yet to recover.
On Wednesday, a San Diego court rejected Lennar's motion for a restraining order and injunction against Minkow's disparaging website.
Whether Minkow has grown a conscience is a matter of faith. But for Lennar, one thing is certain: He's still in business.

Obama Inauguration: Slide on Wall Street. Where have all the Creditors Gone?...

"When Will We Ever Learn?" By Michel Chossudovsky

Global Research.ca dotconnectoruk.blogspot.com January 20, 2009

Across the land, an atmosphere of hope and optimism prevails. The Bush regime has gone. A new president is in the White House. While America had its eyes riveted on the live TV broadcast of Barack Obama's presidential inauguration, financial markets were sliding. A major "market correction" had occurred. Removed from the public eye, virtually unnoticed, a new stage of the financial crisis has unfolded. Immediately following the inauguration, the Dow Jones plummeted, largely affecting the share prices of major financial institutions. The quoted stock values of major Wall Street banks plummeted. Citigroup fell by 20 percent, Bank of America by 29 percent and JP Morgan Chase by 20 percent. The Royal Bank of Scotland fell by 69 percent in New York trading. Related Quotes Symbol Price Change BAC 5.10 -2.08 BK 19.00 -3.96 C 2.80 -0.70 FITB 4.22 -1.21 JPM 18.09 -4.73 Source: Yahoo The difficulties and book value losses of major banks were known well in advance of the inauguration of President Obama. So why now? The inauguration of a president Obama was expected to provide confidence to financial markets. Exactly the opposite occurred. There was nothing spontaneous and accidental in this collapse of the stock values of amjor financial institutions. Obama's speech outside the Capitol, had been drafted well in advance. Its contents was carefully prepared. President Obama made explicit reference to the global economy's woes, while emphasizing that: "without a watchful eye, the market can spin out of control." "Obama warned the economic recovery would be difficult and that the nation must choose "hope over fear, unity of purpose over conflict and discord" to overcome the worst economic crisis since the Great Depression." (Associated Press, January 20, 2009) There were "high expectations" on Wall Street. Many Wall Street brokers, who were not privy to the contents of Obama's speech, were "betting" President Obama's statements would help stabilize financial markets. Those who drafted Obama's speech were fully aware of its possible financial repercussions. "High expectations for details on how the new administration would address the growing banking crisis and faltering economy were dampened after the inauguration speech."(Reuters, Jan 20, 2009) Coincidentally, the chairman of the Securities and Exchange Commission, Christopher Cox, appointed by Bush in 2005, resigned on the very same day of the presidential inauguration, leading to vacuum in the adoption of crucial financial regulatory decisions. His successor, Mary Shapiro, will only take office following lengthy Senate confirmation hearings. Those who had advanced knowledge and/or inside information regarding the text of Obama's speech and who had the ability to "move the market" at the right time and the right place, stood to gain in the conduct of major speculative transactions on stock markets and currency exchanges. Were these speculative transactions planned in advance of January 20th? (See Video) Was there a concerted and deliberate effort to "short the market" on the very same day as the presidential inauguration? On currency markets, the movement was in reverse, the US dollar was rising, the Euro, the British Pound and the Canadian dollar were plummeting. Canada's Central Bank Governor chose the date of the presidential inauguration to announce a cut in the interest rate in an apparent "bid to stimulate the economy and boost lending to consumers and businesses". The impact: the Canadian dollar declined dramatically in relation to Greenback. Were have All the Creditors Gone? The largest financial institutions are said to be in troubled waters, indebted to unnamed creditors. Since the onslaught of the financial meltdown, the identity of the creditors remains a mystery. Over the years, the financial establishment has set up private hedge funds invariably registered in the name of wealthy individuals. Large amounts of wealth have been transferred from the large financial institutions to these privately owned hedge funds, which largely escape government regulation. Why are the banks indebted? To whom? Are they the victims or the recipients? Are they the debtors or the creditors? America's largest banks have, over the years, sifted off part of their surplus profits to various proxy financial outfits, hedge funds, accounts registered in tropical offshore banking havens, etc. While these billion dollar transfers are conducted electronically from one financial entity to another, the identity of the creditors is never mentioned. Who is collecting these multibillion debts which are in large part the consequence of financial manipulation? The collapse in bank stock market values was in all likelihood known in advance. The banks had already moved their loot to a safe financial haven. The banks are in troubled water after having received hundred of billions of dollars of bailout money. Where is the bailout money going? Who is cashing in on the multibillion dollar government bailout money? This process is contributing to an unprecedented concentration of private wealth. The financial press acknowledges the existence of billions of dollars of "inter bank debt". But not a word is mentioned about the creditors. For every debtor, there is a creditor. Is this not money which the financial elites owe to themselves? Whoever holds these trillions will eventually pick up the pieces. They will transform their enormous paper wealth into the acquisition of real assets. Waking up the Day After And the day after the hopes and promises of the presidential inauguration, Middle Class Americans who had invested in "safe" bank shares, will come to realize that part of their lifelong savings have once again been confiscated.

SEC charges missing money manager Nadel with fraud

By MARCY GORDON, AP Business Writer Marcy Gordon,
Ap Business Writer 1 hr 27 mins ago

WASHINGTON – Federal regulators on Wednesday charged a missing hedge fund manager with fraud, saying he misled investors and overstated the value of investments in the six funds by about $300 million.

The Securities and Exchange Commission won a court order freezing the assets of Arthur G. Nadel, of Sarasota, Fla., and other defendants in the case.
Nadel owed investors a $50 million payout, told his wife in a note he felt guilty and threatened to kill himself, according to the Sarasota County Sheriff's Office. The authorities believe that Nadel, 76, planned his Jan. 14 disappearance.

In a lawsuit filed in federal court in Tampa, the SEC said Nadel recently transferred at least $1.25 million from two of the funds to secret bank accounts that he controlled.
Two investment companies co-owned by Nadel, Scoop Capital and Scoop Management, agreed in a settlement with the SEC to injunctions and an asset freeze. They neither admitted nor denied wrongdoing.

According to Scoop Management's internal accountant, there are between 500 and 600 investors nationwide. Last week, many were told that the funds were empty. Sarasota police have been fielding inquiries from around the country and as far away as France.
Robert Wilkes, a 76-year-old retiree in Vero Beach, Fla., who worked in commercial banking, said the SEC's charges against Nadel didn't surprise him.

"He should be charged with fraud," Wilkes told The Associated Press. He wouldn't disclose how much he'd invested with Nadel, but said, "We're going to have to completely revamp our style of living. We're going to have to cut back."
The SEC also is seeking unspecified restitution plus interest from several so-called relief defendants: investment advisers Valhalla Management and Viking Management, and hedge funds Scoop Real Estate, Valhalla Investment Partners, Victory IRA Fund, Victory Fund, Viking IRA Fund and Viking Fund.

Those defendants consented to an asset freeze, also without admitting or denying the allegations. Nadel provided false and misleading information to those companies to be distributed to investors through account statements and other materials, according to the SEC suit.

The agency said Nadel's funds appeared to have assets totaling less than $1 million — while he claimed in sales materials for three of the funds that they had about $342 million in assets as of Nov. 30. The materials also boasted of monthly returns of 11 to 12 percent for several of the funds last year, when they actually had negative results.

An investor in one fund received an account statement for November indicating that her investment was worth almost $420,000. In reality, the entire fund had less than $100,000, according to the SEC.
"Investors should be able to rely on the truthfulness of an account statement and offering materials," David Nelson, director of the SEC's regional office in Miami, said in a statement. "Mr. Nadel's alleged actions deceived investors, and we are seeking to hold him accountable for that misconduct."

Wilkes already has his Florida home on the market and now plans to put his second home in Vermont up for sale.
"It's just been a very traumatic event for us," he said. "Like a bad dream that when you wake up, you find it's not a dream. It's a nightmare."
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Wall Street Woes Drive Oppenheimer Trust Co. To Become A Bank

Wall Street Woes Drive Oppenheimer Trust Co. To Become A Bank
www.njbiz.com

1/19/2009In the wake of a $56 million fraud investigation against its parent, a Florham Park financial services company is moving forward with its bid to become a bank and tap into a federal bailout program.

Oppenheimer Trust Co.’s application to become a bank and change its name to the Oppenheimer Bank and Trust Co. has been accepted by the New Jersey Department of Banking and Insurance, according to an announcement by the New Jersey Bankers Association.

Oppenheimer Trust also wants to sell a chunk of its stock to the federal government under the Troubled Assets Relief Program.
Oppenheimer Trust currently offers investment and other financial services to high-net-worth individuals and families, and not-for-profit and other organizations, according to the company Web site.

In November, following the meltdown of the volatile auction rate securities, or ARS, debt market, the Massachusetts Securities Division filed a fraud complaint against Oppenheimer’s New York parent, Oppenheimer & Co. Inc., and some top executives. Oppenheimer & Co. steered clients to risky ARS, resulting in losses of $56 million, even as the executives unloaded their own holdings, alleged the Massachusetts Securities Division.

Oppenheimer denied the charges, but said it was “reviewing the availability of the TARP program, and other programs recently announced by the federal government, to provide a solution to this serious issue for its clients.”

The New York parent also said that prior to the filing of the Massachusetts complaint, Oppenheimer Trust was preparing an application to the Federal Deposit Insurance Corp. for deposit insurance, and had filed an application to participate in the TARP stock purchase program.

Wall Street's Taxpayer Funded Bail-Out Scam Will Help PAY for Obama Inauguration...

Submitted by SadInAmerica on 2009,
January 18 - 9:19pm.

President-elect Barack Obama has spoken a lot about setting a new standard for ethics and transparency, and he issued an edict that his inaugural committee would bar contributions from corporations, political action committees, lobbyists, labor unions and foreigners.

But as always seems to happen, big financial interests find a way to weigh in with a pile of cash.
The watchdog group Public Citizen says nearly 80 percent of the $35.3 million raised by the Presidential Inaugural Committee to date has come from 211 wealthy donors, including a number from Wall Street firms benefiting from the mushrooming federal bailout.

Louis Sussman, vice chairman of Citigroup Corporate and Investment Banking, is among at least 32 fundraisers, known as "bundlers" who have raised $300,000 — the maximum allowed by the inaugural committee. Sussman ponied up the maximum, $50,000 in an individual donation. Citigroup, now attempting to survive by downsizing, has already received $25 billion in bailout money, the most of any bank.

In addition, the watchdog group notes, that:
-- Senior executive Mark Gilbert of Lehman Brothers, which got some federal assistance but collapsed before the $700 billion bailout was approved, raised $185,000.
-- Chairman Robert Wolf of UBS Americas raised $100,000.
-- Jennifer Scully, vice president for private wealth management at Goldman Sachs, raised $100,000.
-- Bruce Heyman, managing director of Goldman’s Private Wealth Management Group’s Midwest Region, came up with $50,000.

-- Kobi Brinson, senior vice president and assistant general counsel for Wachovia (recently merged with Wells Fargo), raised $35,000.
Also among the bundlers are executives of hedge funds and private equity funds that have invested in some of the ailing Wall Street giants.
David Arkush, director of Public Citizen's Congress Watch, says "it's no wonder that Wall Street is pouring so much money into this inauguration. The executive branch has given bailouts worth trillions of dollars to Wall Street firms and is considering trillions more. Wall Street has a lot at stake."
Greg Gordon - January 14, 2009 - source McClatchy
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Report: Over 8 in 10 corporations have tax havens

By KEN THOMAS, Associated Press Writer
Fri Jan 16, 6:28 pm ET

WASHINGTON – Eighty-three of the nation's 100 largest corporations, including Citigroup, Bank of America and News Corp., had subsidiaries in offshore tax havens in 2007, and some of the companies received federal bailout funding, a government watchdog said Friday.
The Government Accountability Office released a report that said Bank of America Inc., Citigroup Inc. and Morgan Stanley all had more than 100 units in countries that maintain low or no taxes. The three financial institutions were included in the $700 billion financial bailout approved by Congress.

Insurance giant American International Group Inc., which has received about $150 billion in bailout money, had 18 subsidiaries. JPMorgan Chase & Co. had 50 units and Wells Fargo & Co. had 18; both financial institutions received government bailout money.
Sens. Carl Levin, D-Mich., and Byron Dorgan, D-N.D., who requested the report, have pushed for tougher laws to fight offshore tax havens around the globe. Levin, who leads the Senate Permanent Subcommittee on Investigations, has estimated abusive tax havens and offshore accounts cost the U.S. government at least $100 billion a year in lost taxes.
"I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that," Dorgan said.

General Motors Corp., which received $13.4 billion from the federal rescue package, had 11 offshore subsidiaries while GM's financing arm, GMAC LLC, had two offshore units. GMAC, whose majority owner is private equity firm Cerberus Capital Management LP, received $5 billion from the Treasury Department in late December.

Citigroup said in a statement that it has more than 4,000 subsidiaries around the globe "which enables us to serve hundreds of millions of individuals and institutions in more than 100 countries." A News Corp. spokeswoman declined comment. Messages were left with several of the companies identified in the report.
Separately, the GAO said 63 of the 100 largest federal contractors maintain subsidiaries in 50 tax havens.
Levin noted that many competitors use the tax havens to varying degrees. PepsiCo Inc. has 70 subsidiaries while the Coca-Cola Co. has eight units. Caterpillar Inc. had 49 while Deere & Co. had three.
"We need to put an end to the use of offshore secrecy jurisdictions as tax havens," Levin said.
The GAO said the subsidiaries could be established in the countries "for a variety of nontax business reasons" and said having a business unit in one of the countries "does not signify that a corporation or federal contractor established that subsidiary for the purpose of reducing its tax burden."

Citigroup had 427 units in 23 countries, including 91 subsidiaries in Luxembourg and 90 in the Cayman Islands. Morgan Stanley had 273 units, News Corp. had 152 and Bank of America had 115. Procter & Gamble Co. had 83 subsidiaries and Pfizer Inc. had 80 in the jurisdictions.
Several major corporations have announced plans to leave Bermuda, a leading offshore business center, amid the global financial crisis and fears of tighter tax rules. Tyco Electronics Ltd., which makes electronic components, and Foster Wheeler Ltd., an engineering and construction company, are reincorporating in Switzerland — which has a tax treaty with the U.S. — for tax and other reasons. Covidien Ltd., a health care products company, is heading to Ireland.
___
On the Net:
U.S. Government Accountability Office: http://www.gao.gov/

Jews, money and image

Posted on Sun, Jan. 11, 2009
By Stacey Burling
Inquirer Staff Writer

The scholars approached their topic with considerable nervousness, and that was before the Wall Street meltdown, before Bernard L. Madoff.

Would a series of lectures at a premier business school on the history of Jews making money feed negative stereotypes?

In the end, the Wharton School and the Herbert D. Katz Center for Advanced Judaic Studies decided to go ahead and tackle a topic that has gotten short shrift from academics until recently.
The goal, said the center's director, David Ruderman, is to understand Jewish economic history "more profoundly, which is what a university does."

The center and Wharton, which both are part of the University of Pennsylvania, are sponsoring three lectures at Wharton's Huntsman Hall titled "Jews in Business: Between Myth and Reality." The first is Jan. 20.

The presentations grew from a yearlong postdoctoral study program at the Katz Center, which has its own series of speeches on the topic in the community. Each year, 20 fellows from around the world come to the center to study a particular issue. This year, it is Jews, commerce and culture.

"We don't want to be intimidated by the perceptions of Jewish economic life," said Jonathan Karp, a fellow at the Katz Center who teaches Jewish history at Binghamton University and will be the first speaker for the Wharton lectures.

Michael Gibbons, a deputy dean who approved Wharton's role in the lectures, did not respond to repeated requests for comment.
Karp and other visiting scholars at the center said many Jews had indeed done well in modern business and finance. They trace the financial success of Jews in the Western world to a cultural emphasis on education coupled with centuries of persecution that forced Jews to disperse around the world - creating the foundation for global trade networks - and discrimination that shut Jews out of the most prestigious jobs. That honed a talent for spotting opportunity on the fringes of the economic world. Jews were among the first, for example, to see the mass-audience potential in movies and recorded music by black artists, Karp said.

The downside of economic success throughout much of Jewish history was that it fueled resentment and harsh treatment from competing groups, the scholars said.

"If you wanted to criticize Jewish society, you would use their . . . economic success as a stick to beat them with," said Adam Teller, a University of Haifa historian who with Karp and Derek Penslar, of the University of Toronto, proposed devoting this year at the Katz Center to economic history.

Jonathan Sarna, a professor of American Jewish history at Brandeis University who is not involved with the lecture series, said the history of Jews in business was indeed understudied. Historians in general have been less interested in economic than in social history for much of the last century, he said, but Jewish historians have had the extra concern that "their writing would be used against them."

Historians at the center said they had seen little evidence that the current economic crisis or Madoff's audacious alleged fraud have led to an upswing in anti-Semitism. That is a sign that Americans can handle this subject, they said.

"It is a measure of Jews' growing security in America that we feel the topic isn't off-limits," Sarna agreed.

The belief that Jews are good with money cuts both ways, the historians said. There's the dark side of Shakespeare's Shylock and Dickens' Fagin, which bolstered the negative stereotype that Jews were greedy and unsavory. The Protocols of the Elders of Zion, which have been discredited as a forgery, took anti-Semitism to the extreme, contending that Jews conspired to use their wealth to control the world. On the plus side, Jews have been seen as a group whose business acumen could bring communities prosperity.

Whether Jews are disproportionately successful was a matter of contention among the fellows, but they pointed out that there were plenty of examples of Jewish business failures. And there are Jews on all sides of the Wall Street meltdown, from Madoff and his recently alleged $50 billion Ponzi scheme to people who are policing financial abuse and trying to rebuild the economy.

The historians said they had found nothing inherent in Judaism that would lead to financial success or a predisposition to entrepreneurship. In fact, commerce and religion have largely been kept separate in Jewish cultural life, they said.

The one exception is that the Jewish emphasis on education gave Jews an early advantage: literacy and familiarity with numbers.

Jews gravitated toward finance and trade centuries ago, when more highly valued roles in agrarian societies - land owner and warrior - were denied to them. Early Christians were banned from loaning money at interest to fellow Christians, but they needed loans and Jews took on that role.

Over time, the historians said, Jews were seen as trusted middlemen and people who could manage the wealth of powerful landowners. Their lack of a country or land of their own made them less threatening to nobles.

"They empowered themselves with their economic activity," Teller said.
Jews' outsider status also freed them from the more rigid roles of noble, burgher and peasant, which were assigned to European countries' primary populations. They became the "utility infielders" and the business "B-team of premodern society," Karp said. Those roles came with flexibility that helped Jews exploit business opportunities better than some other groups.
Penslar said Jews in the 1500s could never have guessed it, but the competitive, restrictive nature of their lives would leave future generations better positioned for modern capitalism. "The Jews were historically urban and mobile people," he said. They were also entrepreneurial and accustomed to finding opportunity where others had missed it.

"The Jews were excluded for most of the history of Europe from accepted fields of economic activity," Teller said. "They were always looking for different niches."

For more information about the Wharton lectures, contact the Katz Center for Advanced Judaic Studies at 215-238-1290, Ext. 406.

Financial scoundrels have little to fear from the law

If experience is any guide, the titans behind the system's meltdown, and the regulators who watched it take shape, won't pay for their irresponsibility.

Michael Hiltzik
January 12, 2009

"Justice? You get justice in the next world, in this world you have the law."

That opening line of one of my favorite novels, William Gaddis' 1994 legal satire "A Frolic of His Own," comes back to me every time I hear someone call for packing the rich malefactors behind the great financial meltdown of 2008 off to jail.

Having watched 40% of our 401(k)s go up in smoke and jobs vanish by the millions, it's natural to want to see the guilty subjected to divine justice. There's no dearth of suspects.

There are heads of banks and mortgage companies who invested their capital and made loans without the most cursory due diligence -- Angelo Mozilo of Countrywide Financial and Charles Prince of Citigroup come to mind. Richard Fuld and James Cayne, the bosses of Lehman Bros. and Bear Stearns, who presided over the extinction of their fine old firms. Maurice R. “Hank” Greenberg of AIG, whom I saw last year on CNBC saying that a government bailout of that irresponsible company ($150 billion at last count) was in the "national interest."

These execs collected otherworldly salaries and bonuses for years on the grounds that their institutions could scarcely survive a week absent their wisdom and judgment. We know better now, but they haven't given the money back.

Is America's legal system up to the task of delivering the justice they deserve? Experience suggests we're bound to be disappointed. "Before you can punish anybody, you have to determine if there's a crime, and I'm not sure much of this activity is criminal," Clifford Hyatt, a former SEC enforcement lawyer now at Pillsbury Winthrop Shaw Pittman in Los Angeles, told me.

As Gaddis understood, the law (in this world) is preoccupied with discrete misdeeds more than with elemental depravity. Kenneth Lay perpetrated the Enron scheme, but he was indicted for such mundane felonies as lying to employees about the firm's health. Criminal cases involving what's often excused as bad "business judgment" are notoriously difficult and complex, and who wants to see a guilty CEO skate on a technicality?

Let's not forget that much of what passes for justice in the public arena is theater. No one appreciates a good perp walk more than I do (except maybe Nancy Grace). Yet the first frisson of excitement never produces lasting nourishment.

No. 1 on the perp walk hit parade of 1987, for instance, was the arrest of three Wall Street traders allegedly involved in the big insider trading scandal of the moment. As news cameras rolled, one was led tearfully from his trading floor and handcuffed by agents of Rudolph Giuliani, then the federal prosecutor in Manhattan.

The charges against all three were dropped four months later. Who was the net beneficiary of this stunt? Only Giuliani, who gained a political platform that enabled him to infest our national politics for the next 20 years.

And what about those who don't lie or commit outright fraud, but set the stage for disaster? Consider former SEC Chairman Arthur Levitt, who lately has been swanking around lecturing congressmen and the media about the need for rigorous regulation.

Levitt deserves credit for his activism at the SEC on behalf of shareholders. But he led a regulatory hit squad in 1998 that killed an effort to reel in credit default swaps and other derivatives. These fancy unregulated instruments helped bring the international financial system to its knees 10 years later. By the way, Levitt was SEC chief from 1993 to 2001, when Bernard Madoff's alleged fraud was almost certainly already in full cry, and his agency never laid a finger on the man.

How should we punish him for his dereliction of duty? Indict? Stop giving him airtime? Bill him for his SEC salary?

It's hard to find a provision of the penal law that would cover Levitt, former Federal Reserve Chairman Alan Greenspan or former Treasury secretaries Lawrence Summers and Robert Rubin, each of whom played an important role in cooking up the financial meringue that has cost America, and the world, so much. Rubin resigned Friday as an executive of Citigroup, but Summers has been nominated as head of the National Economic Council in the Obama White House.



They all portray the meltdown as something they couldn't have foreseen. "I'm astounded that no one has said, 'I'm sorry,' " said Tamar Frankel, a law professor at Boston University who writes extensively on business morality. She says expressions of shame, guilt and empathy with the victims would go far to restore public confidence in the markets.

But Depression history does give us a template for a public shaming: the so-called Pecora hearings into the 1929 stock market crash. (They were named after the Senate Banking Committee's indefatigable chief counsel, Ferdinand Pecora.)

Pecora had no patience for bankers and financiers such as J.P. Morgan, who swore they'd had only the public's interest at heart when they inflated the stock market bubble. He laid out for the world how America's financial institutions, which had stood for "safety, strength, prudence, and high-mindedness" and were supposedly led by men "possessing almost mythical business genius and foresight" had relied instead on "legal technicians and the complaisance of governmental authorities" to cheat the average investor and foment the Great Crash. (The quotations are from his impassioned 1939 book, "Wall Street Under Oath.")

Pecora's chief target was Charles E. Mitchell, chairman of the National City Bank -- precursor of Citigroup, one of the least prudent banks in the current mess. Mitchell was never criminally indicted for his role in the crash, but Pecora made sure his reputation for probity was exposed as a complete sham. National City fired him shortly after the hearings.

An inquisition such as Pecora's is the minimum we should have, short of indictment and trial.

It will be said that many big financial perps are getting their comeuppance today via the destruction of their personal fortunes, as though being pared back to a seven-digit net from nine digits is tougher on them than three to five in San Quentin would be to a kid from the projects.

Does anyone buy that? The notion brings to mind a quote from Willa Cather's 1922 novel "One of Ours": "Even the wicked get worse than they deserve," she wrote. But Cather lived in more indulgent times.

Michael Hiltzik's column runs every Monday and Thursday. You can reach him at michael.hiltzik@latimes.com, and read his archived columns at latimes.com/hiltzik.

New papers filed in Madoff case

By LARRY NEUMEISTER, Associated Press Writer Larry Neumeister,
wednesday,07,20092 hrs 19 mins ago

NEW YORK – Disgraced financier Bernard Madoff and his wife sent at least 16 watches, a jade necklace and a diamond bracelet to family and relatives, proving he will continue to dissipate what little is left from his $50 billion fraud, a prosecutor told a judge in arguing that Madoff be jailed.
Assistant U.S. Attorney Marc Litt said in a letter released Wednesday that Madoff violated a court order barring him from dissipating, concealing or disposing of any assets when he and his wife sent the items to close relatives and two friends.
"The need for detention in this case is clear," Litt wrote in a letter to Magistrate Judge Ronald L. Ellis. "The continued release of the defendant presents a danger to the community of additional harm and further obstruction of justice."
Madoff was arrested Dec. 11 on a securities fraud charge after the FBI said he confessed to swindling investors. Authorities say he told his sons he ran a $50 billion Ponzi scheme and had only a few hundred million dollars left.
Although he has been freed on $10 million bail, he has been confined to his $7 million Manhattan penthouse with an electronic bracelet and 24-hour guard.
During a bail hearing Monday, Ellis asked Litt and defense lawyer Ira Sorkin to file documents explaining their positions after Litt said Madoff should lose his freedom. Sorkin's filing was due later Wednesday.
"Our comments will be contained in our filing with the court," Sorkin said.
A criminal complaint against Madoff said the former Nasdaq chairman had offered to distribute between $200 million and $300 million that remained in his company's accounts to close relatives and friends before he surrendered to authorities.
The bail battle continued as Securities Investor Protection Corp. President Stephen Harbeck said through a spokeswoman that investors who lost money with Madoff could begin recovering some of their funds within two months if their accounts are easy to trace.
In his six-page letter sent to Ellis Tuesday night and publicly filed Wednesday, Litt said Madoff violated his promise not to touch his assets when he and his wife sent multiple package on Dec. 24 to relatives and friends.
The prosecutor said one package contained 13 watches, one diamond necklace, an emerald ring, and two sets of cufflinks, items estimated to be worth more than $1 million.
He said two other packages contained a diamond bracelet, a gold watch, a diamond Cartier watch, a diamond Tiffany watch, four diamond brooches, a jade necklace and other assorted jewelry and were sent to relatives.
Litt said the contents of those packages have been recovered, but prosecutors have not yet learned the contents of two additional packages sent to Madoff's brother and an unidentified couple in Florida.
The prosecutor wrote that there was also a serious risk that Madoff would flee because he has "admitted to having perpetrated one of the largest frauds in history — a giant Ponzi scheme that likely involves losses in the tens of billions of dollars."
At Monday's bail hearing, Sorkin argued that Madoff's wife sent the expensive jewelry when she was not under a court order barring her from doing so, and Madoff did not do anything that showed him to be a threat to the community.
"If he was found to be selling narcotics, if it's found that he threatened somebody, if it's found that he was fleeing the community, then I think your honor should consider new bail conditions," Sorkin told the judge Monday. "But that's not the case here."
Attorney Jerry Reisman, representing 13 Madoff investors, said he believes Madoff should be sent to jail. He said his clients are "astounded" and "infuriated" that Madoff remains out on bail and suspect he still will try to hide assets.

In other developments related to the Madoff scandal:
_A former executive of the Securities and Exchange Commission's New York branch told the New York Post she was upset that she was singled out by a Madoff whistleblower as someone who should have detected the alleged fraud. "Why are you taking a midlevel staff person and making me responsible for the failure of the American economy?" Meaghan Cheung said.

_New York University received continuation of a restraining order against the fund run by GMAC Chairman Ezra Merkin, through which the university says it has lost as much as $94 million, the Post reported.

German mogul kills self over financial meltdown

By GEIR MOULSON,
Associated Press Writer Geir Moulson, Associated Press Writer,Tuesday 05,2009 1 hr 50 mins ago

BERLIN – German billionaire Adolf Merckle has committed suicide after his business empire, which included interests ranging from pharmaceuticals to cement, ran into trouble in the global financial crisis, his family said Tuesday.

The 74-year-old's body was found Monday night on railway tracks at Blaubeuren in southwestern Germany, prosecutors in nearby Ulm said in a statement. They described the death as a "railway accident" and said there was no evidence that anyone else was to blame.
His family, which had reported Merckle missing after he failed to return home Monday, issued a brief statement saying he took his own life. A person close to the investigation, who requested anonymity because he was not authorized to speak with the media, said Merckle left a suicide note. Its contents were not divulged.
Merckle's holding company, VEM Vermoegensverwaltung, recently had been in talks with banks to secure credit after its business interests ran up high levels of debt, and also lost value amid the global financial crisis.
The company declined to say how much it needed, or to comment on German media reports that it might have to sell some of its interests.
In addition, the holding company recently said it had suffered heavy losses on shares of automaker Volkswagen AG, which fluctuated wildly last fall as fellow car maker Porsche SE moved to increase its stake in the company.
"Adolf Merckle lived and worked for his family and his firms," the family statement said.
"The distress to his firms caused by the financial crisis and the related uncertainties of recent weeks, along with the helplessness of no longer being able to act, broke the passionate family businessman, and he ended his life," it said.
Merckle's business interests included generic drug maker Ratiopharm International GmbH and cement maker HeidelbergCement AG.
Merckle helped turn his grandfather's chemical wholesale company into one of Germany's biggest pharmaceutical wholesalers, Phoenix Pharmahandel, in which he held a 57 percent stake.
He used his wealth, estimated by Forbes last year to be $9.2 billion, to take stakes in HeidelbergCement and Ratiopharm. HeidelbergCement shares were down 5.8 percent at euro31.39 ($43.18) in Frankfurt trading after news broke of Merckle's death.
Merckle also owned stakes in companies that made a wide array of goods from all-terrain vehicles, software to textiles.
The governor of Merckle's home state of Baden-Wuerttemberg, Guenther Oettinger, said the region had lost a "great entrepreneurial personality" who built up a "business of European significance."
Merckle was awarded Germany's highest decoration, the Bundesverdienstkreuz, in 2005.
Despite his wealth and prominence in corporate Germany, Merckle mostly avoided publicity. He is survived by his wife, Ruth, and four children.
____
Associated Press Writer Oliver Schmale contributed to this report from Stuttgart, Germany.

The Wall Street Ponzi Scheme called Fractional Reserve Banking

The Wall Street Ponzi Scheme called Fractional Reserve Banking

mintdollar.com

Borrowing from Peter to Pay Paul


Cartoon in the New Yorker: A gun-toting man with large dark glasses, large hat pulled down, stands in front of a bank teller, who is reading a demand note. It says, “Give me all the money in my account.”Bernie Madoff showed us how it was done: you induce many investors to invest their money, promising steady above-market returns; and you deliver – at least on paper. When your clients check their accounts, they see that their investments have indeed increased by the promised amount. Anyone who opts to pull out of the game is paid promptly and in full. You can afford to pay because most players stay in, and new players are constantly coming in to replace those who drop out. The players who drop out are simply paid with the money coming in from new recruits. The scheme works until the market turns and many players want their money back at once. Then it’s game over: you have to admit that you don’t have the funds, and you are probably looking at jail time.
A Ponzi scheme is a form of pyramid scheme in which earlier investors are paid with the money of later investors rather than from real profits. The perpetuation of the scheme requires an ever-increasing flow of money from investors in order to keep it going. Charles Ponzi was an engaging Boston ex-convict who defrauded investors out of $6 million in the 1920s by promising them a 400 percent return on redeemed postal reply coupons. When he finally could not pay, the scam earned him ten years in jail; and Bernie Madoff is likely to wind up there as well.
Most people are not involved in illegal Ponzi schemes, but we do keep our money in accounts that are tallied on computer screens rather than in stacks of coins or paper bills. How do we know that when we demand our money from our bank or broker that the funds will be there? The fact that banks are subject to “runs” (recall Northern Rock, Indymac and Washington Mutual) suggests that all may not be as it seems on our online screens. Banks themselves are involved in a sort of Ponzi scheme, one that has been perpetuated for hundreds of years. What distinguishes the legal scheme known as “fractional reserve” lending from the illegal schemes of Bernie Madoff and his ilk is that the bankers’ scheme is protected by government charter and backstopped with government funds. At last count, the Federal Reserve and the U.S. Treasury had committed $8.5 trillion to bailing out the banks from their follies.1 By comparison, M2, the largest measure of the money supply now reported by the Federal Reserve, was just under $8 trillion in December 2008.2 The sheer size of the bailout efforts indicates that the banking scheme has reached its mathematical limits and needs to be superseded by something more sustainable.Penetrating the Bankers’ Ponzi Scheme
What fractional reserve lending is and how it works is summed up in Wikipedia as follows:
“Fractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other liquid assets) with the choice of lending out the remainder, while maintaining the simultaneous obligation to redeem all deposits immediately upon demand. This practice is universal in modern banking. . . .The nature of fractional-reserve banking is that there is only a fraction of cash reserves available at the bank needed to repay all of the demand deposits and banknotes issued. . . . When Fractional-reserve banking works, it works because:
“1. Over any typical period of time, redemption demands are largely or wholly offset by new deposits or issues of notes. The bank thus needs only to satisfy the excess amount of redemptions.“2. Only a minority of people will actually choose to withdraw their demand deposits or present their notes for payment at any given time.“3. People usually keep their funds in the bank for a prolonged period of time.“4. There are usually enough cash reserves in the bank to handle net redemptions.
“If the net redemption demands are unusually large, the bank will run low on reserves and will be forced to raise new funds from additional borrowings (e.g. by borrowing from the money market or using lines of credit held with other banks), and/or sell assets, to avoid running out of reserves and defaulting on its obligations. If creditors are afraid that the bank is running out of cash, they have an incentive to redeem their deposits as soon as possible, triggering a bank run.”
Like in other Ponzi schemes, bank runs result because the bank does not actually have the funds necessary to meet all its obligations. Peter’s money has been lent to Paul, with the interest income going to the bank.
As Elgin Groseclose, Director of the Institute for International Monetary Research, wryly observed in 1934:
“A warehouseman, taking goods deposited with him and devoting them to his own profit, either by use or by loan to another, is guilty of a tort, a conversion of goods for which he is liable in civil, if not in criminal, law. By a casuistry which is now elevated into an economic principle, but which has no defenders outside the realm of banking, a warehouseman who deals in money is subject to a diviner law: the banker is free to use for his private interest and profit the money left in trust. . . . He may even go further. He may create fictitious deposits on his books, which shall rank equally and ratably with actual deposits in any division of assets in case of liquidation.”3
How did the perpetrators of this scheme come to acquire government protection for what might otherwise have landed them in jail? A short history of the evolution of modern-day banking may be instructive.
The Evolution of a Government-Sanctioned Ponzi Scheme
What came to be known as fractional reserve lending dates back to the seventeenth century, when trade was conducted primarily in gold and silver coins. How it evolved was described by the Chicago Federal Reserve in a revealing booklet called “Modern Money Mechanics” like this:
“It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their “deposit receipts” whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.
“Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment.
“Transaction deposits are the modern counterpart of bank notes. It was a small step from printing notes to making book entries crediting deposits of borrowers, which the borrowers in turn could ‘spend’ by writing checks, thereby ‘printing’ their own money.”
If a landlord had rented the same house to five people at one time and pocketed the money, he would quickly have been jailed for fraud. But the bankers had devised a system in which they traded, not things of value, but paper receipts for them. It was called “fractional reserve” lending because the gold held in reserve was a mere fraction of the banknotes it supported. The scheme worked as long as only a few people came for their gold at one time; but investors would periodically get suspicious and all demand their gold back at once. There would then be a run on the bank and it would have to close its doors. This cycle of booms and busts went on throughout the nineteenth century, culminating in a particularly bad bank panic in 1907. The public became convinced that the country needed a central banking system to stop future panics, overcoming strong congressional opposition to any bill allowing the nation’s money to be issued by a private central bank controlled by Wall Street. The Federal Reserve Act creating such a “bankers’ bank” was passed in 1913. Robert Owens, a co-author of the Act, later testified before Congress that the banking industry had conspired to create a series of financial panics in order to rouse the people to demand “reforms” that served the interests of the financiers.4
Despite this powerful official backstop, however, the greatest bank run in history occurred only twenty years later, in 1933. President Roosevelt then took the dollar off the gold standard domestically, and Federal Reserve officials resolved to prevent further bank runs after that by flooding the banking system with “liquidity” (money created as debt to banks) whenever the banking Ponzi scheme came up short.
“Too Big to Fail”: The Government Provides the Ultimate Backstop
When these steps too proved insufficient to keep the banking scheme going, the government itself stepped up to the plate, providing bailout money directly from the taxpayers. The concept that some banks were “too big to fail” came in at the end of the 1980s, when the Savings and Loans collapsed and Citibank lost 50 percent of its share price. Negotiations were conducted behind closed doors, and “too big to fail” became standard policy. Bank risk was effectively nationalized: banks were now protected by the government from loss regardless of risk-taking or bad management.
There are limits, however, to the amount of support even the government’s deep pocket can provide. In the past two decades, the bankers’ lending scheme has been kept going by an even more speculative scheme known as “derivatives.” This is a complex subject that has been explored in other articles, but the bottom line is that more dollars are now owed in the derivatives casino than exist on the planet. (See Ellen Brown, “It’s the Derivatives, Stupid!” and “Credit Default Swaps: Derivative Disaster Du Jour,” www.webofdebt.com/articles.)
Attempting to fill the derivatives black hole with taxpayer money must inevitably be at the expense of other essential programs, such as Social Security and Medicare. Interestingly, Social Security and Medicare themselves are in some sense Ponzi schemes, since earlier retirees collect their benefits from the contributions of later workers. These programs, too, may soon be facing bankruptcy, in this case because their mathematical models failed to account for a huge wave of Baby Boomers who would linger longer than previous generations and demand expensive drugs and care through their senior years, and because the fund money has have been drawn on by the government for other purposes. The question here is, should the government be backstopping private banks that have mismanaged their investment portfolios at the expense of workers contractually entitled to a decent retirement from a fund they have paid into all their working lives? The answer, of course, is no; but there may be a way that the government could do both. If it were to nationalize the banking system completely – if the government were to assume not just the banks’ losses but their profits, oversight and control – it might have the funds both to maintain Social Security and Medicare and to provide a sustainable credit mechanism for the whole economy.
Replacing Private with Public Credit
Readily available credit has made America “the land of opportunity” ever since the days of the American colonists. What has transformed this credit system into a Ponzi scheme that must continually be propped up with bailout money is that the credit power has been turned over to private parties who always require more money back than they create in the first place. Benjamin Franklin reportedly explained this defect in the eighteenth century. When the directors of the Bank of England asked what was responsible for the booming economy of the young colonies, Franklin explained that the colonial governments issued their own money, which they both lent and spent into the economy:
“In the Colonies, we issue our own paper money. It is called ‘Colonial Scrip.’ We issue it in proper proportion to make the goods pass easily from the producers to the consumers. In this manner, creating ourselves our own paper money, we control its purchasing power and we have no interest to pay to no one. You see, a legitimate government can both spend and lend money into circulation, while banks can only lend significant amounts of their promissory bank notes, for they can neither give away nor spend but a tiny fraction of the money the people need. Thus, when your bankers here in England place money in circulation, there is always a debt principal to be returned and usury to be paid. The result is that you have always too little credit in circulation to give the workers full employment. You do not have too many workers, you have too little money in circulation, and that which circulates, all bears the endless burden of unpayable debt and usury.”
In an article titled “A Monetary System for the New Millennium,” Canadian money reform advocate Roger Langrick explains his concept in contemporary terms. He begins by illustrating the mathematical impossibility inherent in a system of bank-created money lent at interest:
“[I]magine the first bank which prints and lends out $100. For its efforts it asks for the borrower to return $110 in one year; that is it asks for 10% interest. Unwittingly, or maybe wittingly, the bank has created a mathematically impossible situation. The only way in which the borrower can return 110 of the bank’s notes is if the bank prints, and lends, $10 more at 10% interest . . . . The result of creating 100 and demanding 110 in return, is that the collective borrowers of a nation are forever chasing a phantom which can never be caught; the mythical $10 that were never created. The debt in fact is unrepayable. Each time $100 is created for the nation, the nation’s overall indebtedness to the system is increased by $110. The only solution at present is increased borrowing to cover the principal plus the interest of what has been borrowed.”
The better solution, says Langrick, is to allow the government to issue enough new debt-free dollars to cover the interest charges not created by the banks as loans:“Instead of taxes, government would be empowered to create money for its own expenses up to the balance of the debt shortfall. Thus, if the banking industry created $100 in a year, the government would create $10 which it would use for its own expenses. Abraham Lincoln used this successfully when he created $500 million of ‘greenbacks’ to fight the Civil War.”
National Credit from a Truly National Banking System
In Langrick’s example, a private banking industry pockets the interest, which must be replaced every year by a 10 percent issue of new Greenbacks; but there is another possibility. The loans could be advanced by the government itself. The interest would then return to the government and could be spent back into the economy in a circular flow, without the need to continually issue more money to cover the interest shortfall.
The fractional reserve Ponzi scheme is bankrupt, and the banks engaged in it, rather than being bailed out by its victims, need to be put into a bankruptcy reorganization under the FDIC. The FDIC then has the recognized option of wiping their books clean and taking the banks’ stock in return for getting them up and running again. This would make them truly “national” banks, which could dispense “the full faith and credit of the United States” as a public utility. A truly national banking system could revive the economy with the sort of money only governments can issue – debt-free legal tender. The money would be debt-free to the government, while for the private sector, it would be freely available for borrowing at a modest interest by qualified applicants. A government-owned bank would not need to rob from Peter to advance credit to Paul. “Credit” is just an accounting tool – an advance against future profits, or the “monetization” (turning into cash) of the borrower’s promise to repay. As British commentator Ron Morrison observed in a provocative 2004 article titled “Keynes Without Debt”:
“[Today] bank credit supplies virtually all our everyday means of exchange, and this brings into sharp focus the simple fact that modern money is no longer constrained by outmoded intrinsic values. It is pure fiat [enforced by law] and simply a glorified accounting system. . . . Modern monetary reform is about displacing the current economic paradigm of ‘what can be afforded’ with ‘what we have the capacity to undertake.’”5
The objection to government-issued money has always been that it would be inflationary, but today some “reflating” of the economy could be a good thing. Just in the last year, more than $7 trillion in purchasing power has disappeared from the money supply, including wealth destruction in real estate, stocks, mutual fund shares, life insurance and pension fund reserves.6 Money is evaporating because old loans are defaulting and new loans are not being made to replace them.Fortunately, as Martin Wolf noted in the December 16 Financial Times, “Curing deflation is child’s play in a ‘fiat money’ – a man-made money – system.” The central banks just need to get money flowing into the economy again. Among other ways they could do this, says Wolf, is that “they might finance the government on any scale they think necessary.”7
Rather than throwing money at a failed private banking system, public credit could be redirected into infrastructure and other projects that would get the wheels of production turning again. The Ponzi scheme in which debt is just shuffled around, borrowing from one player to pay another without actually producing anything of real value, could be replaced by a system in which the national credit card became an engine for true productivity and growth. Increased “demand” (money) would come from earned wages and salaries that would increase “supply” (goods and services) rather than merely servicing a perpetually increasing debt. When supply keeps up with demand, the money supply can be increased without inflating prices. In this way the paradigm of “what we can afford” could indeed be superseded by “what we have the capacity to undertake.”
Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt, her latest book, she turns those skills to an analysis of the Federal Reserve and “the money trust.” She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her earlier books focused on the pharmaceutical cartel that gets its power from “the money trust.” Her eleven books include Forbidden Medicine, Nature’s Pharmacy (co-authored with Dr. Lynne Walker), and The Key to Ultimate Health (co-authored with Dr. Richard Hansen). Her websites are www.webofdebt.com and www.ellenbrown.com.


Notes
1. Kathleen Pender, “Government Bailout Hits $8.5 Trillion,” San Francisco Chronicle (November 26, 2008).2. “Federal Reserve Statistical Release H.6, Money Stock Measures,” www.federalreserve.gov (December 18, 2008).3. Robert de Fremery, “Arguments Are Fallacious for World Central Bank,” The Commercial and Financial Chronicle (September 26, 1963), citing E. Groseclose, Money: The Human Conflict, pages 178-79.4. Robert Owen, The Federal Reserve Act (1919); “Who Was Philander Knox?”, www.worldnewsstand.net/history/PhilanderKnox.htm. (1999).5. Ron Morrison, “Keynes Without Debt,” www.prosperityuk.com/prosperity/articles/keynes.html (April 2004).6. Martin Weiss, “Biggest Sea Change of Our Lifetime,” Money and Markets (December 22, 2008).7. Martin Wolf, “‘Helicopter Ben’ Confronts the Challenge of a Lifetime,” Financial Times (December 16, 2008).

How to Repair a Broken Financial World

January 4, 2009
Op-Ed Contributors

How to Repair a Broken Financial World

By MICHAEL LEWIS and DAVID EINHORN



Mr. Paulson must have had some reason for doing what he did. No doubt he still believes that without all this frantic activity we’d be far worse off than we are now. All we know for sure, however, is that the Treasury’s heroic deal-making has had little effect on what it claims is the problem at hand: the collapse of confidence in the companies atop our financial system.
Weeks after receiving its first $25 billion taxpayer investment, Citigroup returned to the Treasury to confess that — lo! — the markets still didn’t trust Citigroup to survive. In response, on Nov. 24, the Treasury handed Citigroup another $20 billion from the Troubled Assets Relief Program, and then simply guaranteed $306 billion of Citigroup’s assets. The Treasury didn’t ask for its fair share of the action, or management changes, or for that matter anything much at all beyond a teaspoon of warrants and a sliver of preferred stock. The $306 billion guarantee was an undisguised gift. The Treasury didn’t even bother to explain what the crisis was, just that the action was taken in response to Citigroup’s “declining stock price.”
Three hundred billion dollars is still a lot of money. It’s almost 2 percent of gross domestic product, and about what we spend annually on the departments of Agriculture, Education, Energy, Homeland Security, Housing and Urban Development and Transportation combined. Had Mr. Paulson executed his initial plan, and bought Citigroup’s pile of troubled assets at market prices, there would have been a limit to our exposure, as the money would have counted against the $700 billion Mr. Paulson had been given to dispense. Instead, he in effect granted himself the power to dispense unlimited sums of money without Congressional oversight. Now we don’t even know the nature of the assets that the Treasury is standing behind. Under TARP, these would have been disclosed.
THERE are other things the Treasury might do when a major financial firm assumed to be “too big to fail” comes knocking, asking for free money. Here’s one: Let it fail.
Not as chaotically as Lehman Brothers was allowed to fail. If a failing firm is deemed “too big” for that honor, then it should be explicitly nationalized, both to limit its effect on other firms and to protect the guts of the system. Its shareholders should be wiped out, and its management replaced. Its valuable parts should be sold off as functioning businesses to the highest bidders — perhaps to some bank that was not swept up in the credit bubble. The rest should be liquidated, in calm markets. Do this and, for everyone except the firms that invented the mess, the pain will likely subside.
This is more plausible than it may sound. Sweden, of all places, did it successfully in 1992. And remember, the Federal Reserve and the Treasury have already accepted, on behalf of the taxpayer, just about all of the downside risk of owning the bigger financial firms. The Treasury and the Federal Reserve would both no doubt argue that if you don’t prop up these banks you risk an enormous credit contraction — if they aren’t in business who will be left to lend money? But something like the reverse seems more true: propping up failed banks and extending them huge amounts of credit has made business more difficult for the people and companies that had nothing to do with creating the mess. Perfectly solvent companies are being squeezed out of business by their creditors precisely because they are not in the Treasury’s fold. With so much lending effectively federally guaranteed, lenders are fleeing anything that is not.
Rather than tackle the source of the problem, the people running the bailout desperately want to reinflate the credit bubble, prop up the stock market and head off a recession. Their efforts are clearly failing: 2008 was a historically bad year for the stock market, and we’ll be in recession for some time to come. Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.”
In its latest push to compel confidence, for instance, the authorities are placing enormous pressure on the Financial Accounting Standards Board to suspend “mark-to-market” accounting. Basically, this means that the banks will not have to account for the actual value of the assets on their books but can claim instead that they are worth whatever they paid for them.
This will have the double effect of reducing transparency and increasing self-delusion (gorge yourself for months, but refuse to step on a scale, and maybe no one will realize you gained weight). And it will fool no one. When you shout at people “be confident,” you shouldn’t expect them to be anything but terrified.
If we are going to spend trillions of dollars of taxpayer money, it makes more sense to focus less on the failed institutions at the top of the financial system and more on the individuals at the bottom. Instead of buying dodgy assets and guaranteeing deals that should never have been made in the first place, we should use our money to A) repair the social safety net, now badly rent in ways that cause perfectly rational people to be terrified; and B) transform the bailout of the banks into a rescue of homeowners.
We should begin by breaking the cycle of deteriorating housing values and resulting foreclosures. Many homeowners realize that it doesn’t make sense to make payments on a mortgage that exceeds the value of their house. As many as 20 million families face the decision of whether to make the payments or turn in the keys. Congress seems to have understood this problem, which is why last year it created a program under the Federal Housing Authority to issue homeowners new government loans based on the current appraised value of their homes.
And yet the program, called Hope Now, seems to have become one more excellent example of the unhappy political influence of Wall Street. As it now stands, banks must initiate any new loan; and they are loath to do so because it requires them to recognize an immediate loss. They prefer to “work with borrowers” through loan modifications and payment plans that present fewer accounting and earnings problems but fail to resolve and, thereby, prolong the underlying issues. It appears that the banking lobby also somehow inserted into the law the dubious requirement that troubled homeowners repay all home equity loans before qualifying. The result: very few loans will be issued through this program.
THIS could be fixed. Congress might grant qualifying homeowners the ability to get new government loans based on the current appraised values without requiring their bank’s consent. When a corporation gets into trouble, its lenders often accept a partial payment in return for some share in any future recovery. Similarly, homeowners should be permitted to satisfy current first mortgages with a combination of the proceeds of the new government loan and a share in any future recovery from the future sale or refinancing of their homes. Lenders who issued second mortgages should be forced to release their claims on property. The important point is that homeowners, not lenders, be granted the right to obtain new government loans. To work, the program needs to be universal and should not require homeowners to file for bankruptcy.
There are also a handful of other perfectly obvious changes in the financial system to be made, to prevent some version of what has happened from happening all over again. A short list:
Stop making big regulatory decisions with long-term consequences based on their short-term effect on stock prices. Stock prices go up and down: let them. An absurd number of the official crises have been negotiated and resolved over weekends so that they may be presented as a fait accompli “before the Asian markets open.” The hasty crisis-to-crisis policy decision-making lacks coherence for the obvious reason that it is more or less driven by a desire to please the stock market. The Treasury, the Federal Reserve and the S.E.C. all seem to view propping up stock prices as a critical part of their mission — indeed, the Federal Reserve sometimes seems more concerned than the average Wall Street trader with the market’s day-to-day movements. If the policies are sound, the stock market will eventually learn to take care of itself.
End the official status of the rating agencies. Given their performance it’s hard to believe credit rating agencies are still around. There’s no question that the world is worse off for the existence of companies like Moody’s and Standard & Poor’s. There should be a rule against issuers paying for ratings. Either investors should pay for them privately or, if public ratings are deemed essential, they should be publicly provided.
Regulate credit-default swaps. There are now tens of trillions of dollars in these contracts between big financial firms. An awful lot of the bad stuff that has happened to our financial system has happened because it was never explained in plain, simple language. Financial innovators were able to create new products and markets without anyone thinking too much about their broader financial consequences — and without regulators knowing very much about them at all. It doesn’t matter how transparent financial markets are if no one can understand what’s inside them. Until very recently, companies haven’t had to provide even cursory disclosure of credit-default swaps in their financial statements.
Credit-default swaps may not be Exhibit No. 1 in the case against financial complexity, but they are useful evidence. Whatever credit defaults are in theory, in practice they have become mainly side bets on whether some company, or some subprime mortgage-backed bond, some municipality, or even the United States government will go bust. In the extreme case, subprime mortgage bonds were created so that smart investors, using credit-default swaps, could bet against them. Call it insurance if you like, but it’s not the insurance most people know. It’s more like buying fire insurance on your neighbor’s house, possibly for many times the value of that house — from a company that probably doesn’t have any real ability to pay you if someone sets fire to the whole neighborhood. The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.
Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.
Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.
Close the revolving door between the S.E.C. and Wall Street. At every turn we keep coming back to an enormous barrier to reform: Wall Street’s political influence. Its influence over the S.E.C. is further compromised by its ability to enrich the people who work for it. Realistically, there is only so much that can be done to fix the problem, but one measure is obvious: forbid regulators, for some meaningful amount of time after they have left the S.E.C., from accepting high-paying jobs with Wall Street firms.
But keep the door open the other way. If the S.E.C. is to restore its credibility as an investor protection agency, it should have some experienced, respected investors (which is not the same thing as investment bankers) as commissioners. President-elect Barack Obama should nominate at least one with a notable career investing capital, and another with experience uncovering corporate misconduct. As it happens, the most critical job, chief of enforcement, now has a perfect candidate, a civic-minded former investor with firsthand experience of the S.E.C.’s ineptitude: Harry Markopolos.
The funny thing is, there’s nothing all that radical about most of these changes. A disinterested person would probably wonder why many of them had not been made long ago. A committee of people whose financial interests are somehow bound up with Wall Street is a different matter.

The End of the Financial World as We Know It

January 4, 2009
Op-Ed Contributors
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.
This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?
Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?
To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.
In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.
In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.
Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.
What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.
The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.
A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.
Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.
OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.
The credit-rating agencies, for instance.
Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.
Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”
The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.
These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.
This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.
By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.
Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)
At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)
The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.
But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.
Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)
The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.
IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.
At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.
In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.
Continued at "How to Repair a Broken Financial World."