Wall Street Financial Watch

2010-08-15T10:52:00.000-07:00

Sunday, August 15, 2010

How to Thwart the Assassins of the American Dream

By Janet Tavakoli

Arianna Huffington's new book, Third World America: How Our Politicians are Abandoning the Middle Class and Betraying the American Dream, paints a grim picture of the State of the Union:
"Every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials such as food, housing, and medical care -- the costs of which continue to escalate. But, as their debt rises, they find it harder to keep up with their payments. When they don't, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties..."
Third World America, (P. 77)

Our mediocre grammar school and high school educational system continues its downward slide. The Great Recession is squeezing school budgets. We are failing our children, our most important resource of all.

In 2009, the American Society of Civil Engineers gave the nation's infrastructure a near failing D rating:

"Flip on a light switch, and you are tapping into a seriously overtaxed electrical grid. Go to the sink, and your tap water may be coming to you through pipes built during the Civil War. Take a drive, and pass over pothole-filled roads and cross-if-you-dare bridges. The evidence of decay is all around us." (P. 95)

The over-hyped American Recovery and Reinvestment Act of 2009 earmarked only $72 billion of the $787 billion appropriation of taxpayer dollars to projects to improve the country's infrastructure.

Meanwhile, multi-national corporations avoid taxes, sheltering $700 billion in foreign earnings to end up with a measly $16 billion (2.3%) tax bill. GM is among those companies, yet it took almost a half billion dollars in bailout loans. Boeing and KBR Halliburton are among the defense contractors that avoid taxes, while enjoying government contracts worth tens of billions.

Banks (not Fannie and Freddie) Crippled the Housing Market

Fannie and Freddie do not make loans. They purchase mortgage loans and earn fees for guaranteeing payments on the loans. According to the Mortgage Bankers Association, in 2006, Fannie and Freddie accounted for 33% of total mortgage backed securities issuance. In the first half of 2010, they accounted for around 64% of new issuance. They were forced to pick up the slack and buy more when Wall Street's private label securitization Ponzi scheme blew up.

Fannie and Freddie are Wall Street's dumping ground. They would have had problems on their own, but their problems would not have been close to their current scale, and they did not create the housing bubble.

Congress twisted arms to make Fannie and Freddie buy more than $300 billion of phony "AAA" rated mortgage-backed securities from banks, not counting loans that didn't meet their stated requirements. Today Fannie and Freddie want banks to repurchase tens of billions of these loans, since they fail to meet representations and warranties, and the banks are fighting this obligation.

Top subprime lenders included Wells Fargo; Countrywide, purchased by Bank of America); Washington Mutual, now part of JPMorgan Chase; CitiMortgage, part of Citigroup; First Franklin (now closed), purchased by Merrill Lynch, which was purchased by Bank of America; ChaseHome Finance, JPMorgan Chase; Ownit, partly owned by Merrill Lynch, which was later purchased by Bank of America; and EMC, part of Bear Stearns, which was purchased by JPMorgan Chase. Most of the rest depended on massive loans from Wall Street. Many of these lenders were sued by states for fraud and paid billions in settlements.

According to Inside Mortgage Finance, the top mortgage backed securities underwriters during 2005-2006, only two of the subprime abuse years, included now defunct Lehman Brothers ($106 billion); RBS Greenwich Capital ($99 billion); Countrywide Securities, which is now part of Bank of America ($74 billion), Morgan Stanley ($74 billion), Credit Suisse First Boston ($73 billion); Merrill Lynch ($67 billion), Bear Stearns, which is now part of JPMorgan Chase ($61 billion), and Goldman Sachs ($53 billion).

The above doesn't even include the credit derivatives, collateralized debt obligations (CDOs), and structured investment vehicles (SIVs) that amplified losses. Yet, Arianna notes how America imploded while bankers soared:

"Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how 'markets have an inherent and inevitable tendency -- probably rooted in human nature -- to go to excess, both on the upside and the downside.' This from the man who, as Bill Clinton's Treasury secretary, was vociferous in opposing the regulation of derivatives -- a key factor in the current economic crisis -- and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron -- a debtor of Citigroup." (P. 150)

Robert Rubin operated an economic wrecking-ball from prestigious positions of influence including: former co-chairman of Goldman Sachs, director of the National Economic Council, former Treasury Secretary under President Bill Clinton, board member and senior "risk wizard" counselor at Citigroup, member of the President's Advisory Committee for Trade Negotiations, and member of the SEC's Oversight and Financial Services Advisory Committee, unofficial econmic adviser to President Obama, and co-chairman of the Council on Foreign Relations.

Rubin is just one example of the many bankers, who helped destroy the economy while creating a connected financial oligarchy.

Hide Billions of Losses, Take Bailouts, Collect Billions, Skip Jail

Instead of apologizing for screwing up, the banks demanded the Great Bailout. At the start of the meltdown, the IMF and the U.S. administration estimated losses of $2 to $2.5 trillion. Unemployment and the losses are now shockingly worse. What was merely a recession escalated into the Great Recession.

How big are the actual losses? No one knows.

After destroying the value of major banks, culprits used their enormous political influence -- funded with taxpayer dollars -- to get Congress to force the accounting board to change accounting rules (as of April 2009) so banks don't have to recognize losses until they sell the assets.

According to William K. Black, after the much tinier S&L crisis, there were over 1,000 successful felony prosecutions, several thousand successful enforcement actions, and roughly 1,000 successful civil actions.

This time Congress gave us the Great Cover-up. Bank officers dodged jail time and collected billions in bonuses. As one of my South American friends observes, he's witnessed this third-world corruption before, and this time it's in English.

Banks Stall the Recovery and Prolong the Great Recession

Unemployment marched upward, delinquencies soared, and banks stalled foreclosures. The longer banks delay foreclosures and sales, the longer they can avoid acknowledging losses. Phony accounting and zero cost funding from taxpayers created an illusion of recovery.

Stalling helps banks while they pressure Congress to bail out failed mortgages with taxpayer dollars. Instead of working out mortgages with homeowners, they can wait for a government program to buyout or subsidize their failing loans. The markets aren't recovering, because banks own colossal chunks of mystery-meat assets.

It's a black hole of debt. If banks were forced to price these assets at market values and sell them, the market would clear, and the market would make a faster recovery. When Japan did this, it stalled its economy for twenty years, and it still hasn't recovered.

Voters Must Demand the Solution

Voters must demand that Congress uncovers and publicizes facts and prosecutes the financial system's massive multi-year frauds. This will mean thousands of felony prosecutions, enforcement actions, and civil actions.

Congress completely failed in genuine regulation and enforcement. It must start over on financial reform, regulate derivatives, commodities trading, update Glass-Steagall, and more. It will have to break-up the Too Big to Fail financial institutions.

CEOs of our Systemically Dangerous Institutions (SDI's) fail to manage them, because no one is capable of doing it. Like a morbidly obese junk food addict, banks won't even get on a scale. Our banks refuse to properly measure (account for) the problem.

Third World America elegantly summarizes the way forward. Arianna Huffington names the culprits and gives a roadmap for solutions. The rest is up to us. We deserve better than a third world economy divided by ultra-rich on one side and debt-ridden middle class and dirt poor citizens on the other. Citizens must demand a clean-up of corruption and a foundation for healthy growth.

2010-06-06T17:10:00.000-07:00

Wall Street Lies, Main Street Dies, Washington Yawns
century 21
06.06.2010

Wall Street was reeling in the aftermath of that fateful day in September of 2001 and all of America joined together and lent support of every kind, to help with the financial and psychological recovery. What did the Wall Street wizards do to repay the kindness of their fellow citizens? They created financial products that have destroyed many families and businesses, and put America at great risk. They did this by grabbing almost every person they could find and putting pens in their hands. They then convinced people to buy houses and real estate at prices they would normally never have considered paying. Why not? Because common sense told them they couldn’t afford them.

But the Wall Street snake-oil salesmen convinced them that “new rules” of the 21st century made common sense obsolete. The Street’s new 21st century rules were also “Amended” by the “Maestro”, Fed Chairman Alan Greenspan and Congress. Wall Street then took the mortgages and by a process called “financial re-engineering”, turned the mortgages and other loans into financial time bombs. When they went off, they caused more destruction in every corner of America than the most determined terrorist group could ever hope to accomplish. In some places entire subdivisions went vacant as foreclosures swept through them.

At the same time, Wall Street continued encouraging companies to lower cost by sending American jobs overseas so they could make Wall Street’s “numbers.” Why could they not see the ultimate results of these practices? Guess you need an Ivy League MBA to answer that question. What does a hardworking, tax paying member of the “mere citizen” class know, compared to the financial gods of Mt.Wall Street. Or more likely, they just do not care what happens to us.

Now here we are, the “green shoots” are brown, foreclosures at Depression-era levels, companies having laid off employees by the thousands and bank failures a norm. Families are under severe stress from job losses and debt encouraged by the money merchants. Companies considered rock solid are no longer in existence and politicians that looked the other way became wealthy while the riches of the false prosperity flowed their way.

But don’t fear, every politician keeps reminding us of that great American spirit that has seen us through so much. Yes it has, but after September 2001, hurricanes Katrina and Ike, foreign wars, deadly tornadoes and floods, and now people losing houses, pensions and jobs, the American spirit has been severely damaged. To add further to the loss of hope, like the moment in the Wizard of Oz, when the curtain is pulled back to reveal just an ordinary man using gimmickry to appear larger than life, the curtain has been pulled back on our political and corporate elites. What is revealed is a group of mostly greedy, egotistical people who’s every decision and action seems first and foremost to enrich themselves and boost their egos. While we, the “masses” get the crumbs.

The travesty of it all, the financial problems and the human tragedies they have spawned, were man-made, born in the USA by the rich, greedy, “I know what is best for you” Wall Street crowd. This never had to be. To see how “repentant” the Wall Street financial world is, just watch financial television during market hours. Listen to the giddiness as they applaud another company taking the ‘bold’ step of announcing more layoffs. Reminding us high unemployment keeps wages down, which keeps prices low, making Wall Street’s money go even farther.

Recently we got a lesson on what passes for ‘economic’ wisdom in Washington and on Wall Street. When the unemployment rate rose from 9.7% to 9.9%, we were told that is a good thing and a sign of economic recovery. Well gee, wait until it hit’s 13%, then we can pop the cork and let the champagne flow.

This economy has been really tough on many of you. The green shoots are withering and the double dip is still just picking up steam as our dreams of those once “secure” jobs evaporate before our eyes. If you would like to break free from the insecurity of relying on a job, that may or may not be around next week, here is a simple home based business involving Gold and Silver that may just be your answer

2010-05-31T16:25:00.000-07:00

Foreclosures- The End Game of Wall Street’s Fraud, Lies and Deceit

Source:Matt Weidner Blog
May 9th, 2010 · 9 Comments · Foreclosure

One of the many problems those who are fighting foreclosures have to deal with is the fact that some judges and most people on the “outside” of the mortgage meltdown don’t understand that the Fat Cats set the mortgages up to fail from the very beginning–because mortgages that were “bad” paid the Fat Cats much more at the outset. Now this is wild and insane stuff….how can mortgages given to people that have no hope of ever paying them (even if the economy didn’t crash)? The answer lies in the lies, greed, fraud and arrogance that dominated Wall Street when these loans were created–a culture that continues to victimize normal Americans today.

If you really want to go insane watch this CBS News report here which details how Goldman Sachs was making millions of dollars by selling “shitty” deals to their institutional investors. It just makes me furious to hear these guys gloating over making millions while at the same time refusing to admit to even the slightest amount of wrongdoing. The homeowners really were on the lowest end of the “dupes” totem pole, but they were not the only ones taken.

The book Chain of Blame details the unholy alliances that were formed between the subprime lenders and Wall Street and how the subprime lenders and Wall Street kept competing with one another to create “shittier” and “shitter” deals. The bottom line is in order to keep making more insane profits, the bad actors had to keep making loans that were increasingly less likely to be paid in the long term because loans that performed would not provide the bigger payouts that came from the bets they made on the back end that the portfolio of loans would fail.

The national media is starting to pick up on this. The quotes below are from a story in today’s St. Petersburg Times.

A central part of Lehman’s business was making and selling “liar’s loans” under its Aurora subsidiary. It was a suicidal enterprise. These kinds of loans, where borrowers have an incentive to inflate income or assets, are set up to fail. Black estimates that every dollar lent on a liar’s loan loses 50 to 85 cents.

In the short term, making these loans produces significant apparent but fictional income — and correspondingly huge bonuses for executives. Only later do the loans create real catastrophic losses for those holding them.

Lehman was the world leader in originating these loans. In the first six months of 2007, Aurora was lending more than $3 billion a month of subprime and liar’s loans. This guaranteed senior management extraordinary paydays. Even as the fall was becoming evident, the firm’s CEO and chairman, Richard Fuld, was awarded $40 million in total compensation for 2007. (Much of it in stock that later became worthless.)

Undoubtedly, the firm’s top executives knew that making fraudulent loans was its primary source of income. But Lehman assiduously attempted to hide that fact, classifying its liar’s loans as “prime” loans in disclosures, Black says. Had Lehman disclosed the true nature of the loans it was selling, no one would buy them and the firm would have been found out as insolvent.

To various degrees this kind of deceit was the business model of every player in the subprime mortgage lending and securities market: every bank that loaned money without documenting a borrower’s credit worthiness, every firm that securitized loans without examining the lender’s loan files, every accounting and law firm that helped fudge disclosures, and every credit rating agency that rated a mortgage-related security as safe without sampling the underlying loans.

So what’s all this got to do with the little ‘ole homeowner sitting in foreclosure today?

One of the most important things we’ve all got to understand, and a key point we’ve got to make sure our judges start to understand, is that the very same lies, fraud, greed and unethical conduct that is now being exposed on such a massive scale in Wall Street and in Washington has migrated into our courtrooms.

Many judges and attorneys still cling to a naive and antiquated professional worldview wherein attorneys, as officers of the court, remembered that they are officers of the court and do not make false statements or engage in misleading practices before the court. The problem is the entire foreclosure system is now functioning based on fabricated documents, forged documents, false and misleading statements and gross violations of the most basic ethical standards. Two documents that are part of nearly every foreclosure file illustrate this point.

1)The affidavits of amounts due and owing that are filed in nearly every case do not meet the most basic evidentiary standards and they cannot be relied upon as evidence to grant foreclosure.

2)The assignments of mortgages or endorsements that are filed in nearly every case are either outright improper on their face (such as when the assignment post-dates filing of the suit) or questionable such as endorsements that “appear” on documents from failed or defunct subprime lenders that ceased functioning years ago.

Advocates and judges have only recently become aware of just how failed this whole system is. Some judges are just covering their eyes, holding their noses and continuing to grant foreclosures despite the growing body of evidence that the law firms and the clients they represent are engaged in such widespread and systemic improper practices. This will all come back to haunt every American for decades to come. The biggest problem is this represents a fundamental breakdown in the rule of law. Courtrooms and judges are no longer owed respect and honor and fear…the pressures placed on our courts have turned them into fast food flop houses operating in servitude to the Millionaire Foreclosure Mills. The only real objective is to plow through these hundreds of thousands of foreclosures as quickly as possible so that the foreclosure mills and their clients can continue to make millions.

Ignore long established rules of evidence

Ignore new rules of the Supreme Court of Florida

Ignore blatant and not so blatant fraud

Ignore expectations of professionalism and respect for judges and the courts by Millionaire Foreclosure Mills that have decided their profits are more important than treating the courts with respect.

There is one thing missing from this whole calculus and that is the fact that these practices and procedures are producing failed titles to property. In the rush to plow through all these foreclosures, we’re creating a nightmarish scene of destruction where title to real property will be thrown into chaos for decades to come. Some judges get it (do a google search for New York Judge Schack) and many, many more will get it in the decades to come when we title lawyers come back before them to vacate judgments of foreclosure that were improperly granted. That’s enough for this morning, but obviously much more of this to come.

2010-05-28T15:05:00.000-07:00

By Marcella Mroczkowski is a lawyer, activist and Huffington Post Citizen Journalist.
Posted: May 28, 2010 04:39 PM

Wall Street's War on the Middle Class: My Response to Hedge Fund President David Einhorn

Regarding your New York Times op-ed, "Easy Money, Hard Truths," your figures comparing federal civilian salaries with private sector wages are bogus.

First, federal employees are heavily weighted toward the highly educated and the highly skilled - lawyers, scientists, engineers, economists, physicians, educators and accounting professionals. There is just not that much call in the federal government for retail clerks, dishwashers, shampooers, day laborers, and restaurant wait staff.

Comparing them as a lump like you did is highly misleading.

It is much more accurate to compare federal and private employees by profession, and there the difference all but vanishes. Assistant Attorney Generals in Washington DC may have job security and benefits, but their salaries are several thousand dollars less than the earnings of their classmates toiling as contract attorneys, the lowest paid paeans in private sector law firms.

Do some research job by job and city by city and the pattern emerges; salary levels in the public sector are lower but balanced by better benefit packages and greater job security. Balancing lower salaries with higher benefits makes abundant economic sense. Given its size relative to most private entities, the Federal government can offer benefits more economically. Competing this way with the private sector for the top talent makes economic sense and actually saves the taxpayer money.

There are also good reasons why there is more job security. The federal government is not as vulnerable to the volatility of the business world. Whether it's Tyson, Perdue or any other competitor provisioning the nation's supermarkets, the nation's overall appetite for chicken and therefore the need for USDA, FDA and OSHA regulatory personnel is steadier than the market for any individual competitor's product.

But the greater natural volatility of the private sector has been greatly and unnecessarily exacerbated by the recklessness of our prevailing business culture. Thousands of jobs are eliminated or outsourced with the keystroke of an executive email. The constant firing and re-hiring of personnel is hugely wasteful and cruelly disruptive, but it pays off today's generation of executives in a cowed and fearful workforce and the relentless erosion of middle class pay and benefits, leaving more money for lavish pay and perks at the top.

Private sector employees in the middle and lower ranges have seen their earnings steadily diminish in the Reagan and Bush administrations, with some growth in the Clinton years. Trickle-down, a centerpiece of Reaganomics, has proven to be a fraud.

I'll believe your pious calls for Federal fiscal restraint, Mr. Einhorn, when you and your fellows put some serious money on the table. You can start by giving up declaring ordinary income to be capital gains because it's paid from clients' capital gains. That "death tax" nonsense? Give it up or give up stepped-up basis. Why should we subsidize you?

Instead you play the rest of us for fools, with ploys to con and cheat us, dividing us up, whipping up hate and resentment and setting us against each other. This is a racket, Mr. Einhorn, as contemptible as it is contemptuous.

And don't think we haven't noticed that attacking federal employees' salaries and benefits is a backdoor way of attacking regulation.

Hedge funds and their allied banks use an enormous amount of the nation's credit leveraging your financial plays to multiply your profits, crowding out of the credit markets the main street businesses that actually create jobs and wealth and local tax bases for the rest of us.
Much more insidious are the kind of "dumb money" deals revealed by the Goldman-Paulson affair - the targeting of less favored investors to take the losing end of deals deliberately designed to fail, creating a windfall for the player shorting the deal. Wall Street is currently smacking its lips over one of their favorite forms of "dumb money" - middle class retirement savings. With these unregulated deals, investors like you can effectively confiscate the lifetime retirement savings of thousands of middle class people in one fell swoop, by placing their funds in deals designed to fail for them and enrich wealthy insiders at their expense.

A neighbor recently confided how he paid into his retirement fund for over forty years through hard work and savings. Because of recent market events this retirement fund was decimated. If Wall Street gets their way many millions more middle class Americans will find themselves in this position. Union funds are fat, juicy targets and government employee pension funds are the fattest targets of all.

Whipping up hate like this means people may not notice when these funds are robbed and eviscerated by Wall Street tricks.

When it comes to protecting Middle Class America's hard-earned savings from financial shenanigans, I want the best regulators money can buy.

Federal employees are not overpaid, Mr. Einhorn.

You are.

2010-05-26T07:10:00.000-07:00

Factbox: Key Washington players in Wall Street reform fight

Mon May 24, 2010 12:48pm EDT

(Reuters) - The broadest overhaul of financial regulations since the 1930s is entering the final stage on Capitol Hill now that both the U.S. House of Representatives and the Senate have passed legislation.

Lawmakers from both chambers will be named to a conference committee to hammer out a compromise bill. Democrats, who control both chambers of Congress, will likewise hold a majority on the negotiating committee.

Representative Barney Frank, who is overseeing the effort in the House, and his Senate counterpart Christopher Dodd have said they expect to produce a final bill by July 4 that President Barack Obama can sign into law.

Following are snapshots of key players in the struggle over tightening bank and capital market rules:

CHRISTOPHER DODD, SENATE BANKING COMMITTEE CHAIRMAN

The silver-tongued, snowy-haired Connecticut Democrat caps his legislative career with a big victory after shepherding the bill through the minefield of the Senate, book-ending his role in passing healthcare reform.

The battle is not yet over, however, as he now has to help forge a compromise bill that can win support in both the House and Senate.

The son of a senator, Dodd, 66, first won election to the House of Representatives in 1974. He moved to the Senate in 1980 and was reelected four times. The past two years have been tough, however, as he has had to answer questions about a sweetheart mortgage deal and whether he neglected his Senate duties while he pursued a presidential bid.

He decided not to seek reelection in January.

BARNEY FRANK, HOUSE FINANCIAL SERVICES COMMITTEE CHAIRMAN

The Massachusetts Democrat last year emerged as the House's chief architect of Wall Street reform and a key ally of President Barack Obama, who has made an overhaul of financial rules a top administration priority.

Frank's short temper and sharp tongue win him few friends on Capitol Hill, but he is both widely feared and respected for his ability as a lawyer, legislator and debater.

He pushed a bill through the House in December that achieved much of the administration's original reform agenda.

Frank, 70, will play a central part in merging his bill with the Senate version. He has said the two are more alike than different and is looking to push for a quick agreement.

RICHARD SHELBY, SENATE BANKING COMMITTEE'S TOP REPUBLICAN

The patient, cool-headed senior senator from Alabama -- often the tallest man in the room -- held immense sway over the reform debate, but his efforts to weaken the bill largely failed amid widespread public support for tougher regulations.

In the end, he voted against the legislation. While he will likely be named to the conference committee, Shelby's influence is diminished given his opposition to the bills on the table.

A lawyer with a distinctive Southern drawl, Shelby, 76, was first elected to the House in 1978 as a Democrat. He moved to the Senate in 1986 and switched parties in 1994.

BLANCHE LINCOLN, SENATE AGRICULTURE COMMITTEE CHAIRMAN

The senior senator from Arkansas, Lincoln added a hard-hitting measure that would require banks to separate their swap-trading desks from their core businesses.

Dodd tried to kill her swaps provision, but then backed off after Lincoln vowed she would fight to defend it.

Lincoln, 49, is facing a tough reelection challenge from the left and will be eager to show voters she is tough on Wall Street ahead of the June 8 runoff election.

If she is named to the conference committee, look for her to push hard to make sure her provision -- a main target for financial industry lobbyists -- is in the final bill.

A self-styled "farmer's daughter" and former House aide, she was elected to the House in 1992 and the Senate in 1998.

COLLIN PETERSON, HOUSE AGRICULTURE COMMITTEE CHAIRMAN

A straight-talking Minnesotan, Peterson moved quickly on legislation to regulate over-the-counter derivatives. His committee approved a bill that requires standardized swaps to go through clearinghouses in most cases. Transactions that involve "end users," such as manufacturers, processors, utilities and airlines, would be exempt from clearing.

Peterson is a skeptic of the Federal Reserve as a regulator and says there should be no bailouts of clearinghouses. He supported the exemption for end users with the argument they did not cause the 2008 financial crisis.

HARRY REID, SENATE DEMOCRATIC LEADER

Facing a tough reelection challenge at home in Nevada, Reid, 70, has nevertheless prodded the Senate to pass top Obama priorities such as the Wall Street bill, a massive economic stimulus package and landmark healthcare legislation.

When the conference bill is completed, Reid will once again have to ensure that it has enough support to pass the Senate.

A former boxer and Capitol Police officer, Reid practiced law in his home state before winning election to the state assembly and then becoming lieutenant governor. He was elected to the House in 1982 and the Senate in 1986.

MITCH MCCONNELL, SENATE REPUBLICAN LEADER

The patrician senior senator from Kentucky is widely admired for his tactical skill and mastery of Senate procedure. Though he has not managed to defeat top Democratic initiatives, his ability to keep Republicans united in opposition has slowed their progress and ratcheted up their political cost.

Expect McConnell to lead opposition to the conference bill when it comes back to the Senate for approval.

McConnell, 68, is a career politician and lawyer. He recently suffered a stinging defeat in his home state when his favored candidate to join him in the Senate lost in the Republican primary to a Tea Party outsider, Rand Paul.

BARACK OBAMA, PRESIDENT

The charismatic U.S. president wants to rein in the financial sector and end decades of deregulation, rising banker bonuses and reckless Wall Street risk-taking blamed for the 2008-09 financial crisis that rocked economies worldwide.

Obama, 48, unveiled a comprehensive set of reform proposals in mid-2009 and administration officials have been active on Capitol Hill during the legislative process. Administration officials will continue to work behind the scenes to broker a compromise and Obama himself could continue to weigh in publicly to keep up pressure.

PAUL VOLCKER, WHITE HOUSE ECONOMIC ADVISER

At 82, the former Federal Reserve chairman is a legend in his own time. Known for vanquishing stagflation during the Carter and Reagan administrations, the 6-foot-7-inch Volcker commands deep bipartisan respect in financial circles.

Obama brought Volcker into the White House as an economic adviser. The two stunned markets in January with a three-part proposal to limit banks' proprietary trading, get them out of the hedge fund business and limit their future growth.

The proposals became known as "the Volcker rule," and were included in the Senate bill. They could be toughened further during negotiations between the two chambers.

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN

The stoic, bearded U.S. central bank chief survived sharp criticism in January of the Fed's failures ahead of the crisis, and won Senate confirmation to a second four-year term.

Since then, the 56-year-old former Princeton University professor has had much success in restoring the Fed's image in Congress, fending off efforts to strip its bank supervision and consumer protection authorities.

Fed officials will likely continue to play a behind-the-scenes role as negotiations move forward. In particular, they would like lawmakers to drop a House provision that would open up monetary policy decisions to audits, in favor of a milder audit plan contained in the Senate bill.

TIMOTHY GEITHNER, TREASURY SECRETARY

As President Obama's point man on financial reform, the youthful-looking Treasury secretary dominated the headlines from early to mid-2009, but Congress is now center stage.

Still, Geithner, 48, and his deputies at Treasury are important emissaries for Obama in helping to push a deal.

Once the reform bill is signed into law by Obama, Geithner, and other regulators will play key roles in implementing it.

SHEILA BAIR, FEDERAL DEPOSIT INSURANCE CORP CHAIRMAN

Popular in Congress, the outspoken, unflappable FDIC chairman is an advocate for tough financial reform and a fierce defender of her agency's turf as a bank supervisor.

She is a self-described moderate Republican, appointed by Bush. Her term expires in 2011. Like Bernanke, Bair, 56, was formerly an academic, having also worked at the Treasury Department, the New York Stock Exchange and on Capitol Hill.

GARY GENSLER, COMMODITY FUTURES TRADING COMMISSION

CHAIRMAN

A former Treasury undersecretary, Gensler, 51, has tried to push Congress, with limited success, toward a firm crackdown on the $615 trillion over-the-counter derivatives market that includes compulsory clearing of over-the-counter derivative contracts.

(Reporting by Kevin Drawbaugh, Andy Sullivan, Rachelle Younglai and Charles Abbott; Editing by James Dalgleish)

2010-05-26T07:06:00.000-07:00

Wednesday May 26, 2010

Bloomberg

Wall Street Rules May Fall Short of Glass-Steagall

(Update1)
May 26, 2010, 2:30 AM EDT

(Adds creation of Citigroup in eighth paragraph.)

By Robert Schmidt and Jesse Westbrook

May 26 (Bloomberg) -- It’s been almost 80 years since the U.S. government has reached as deeply into the financial markets as it will do when the regulatory overhaul being crafted in Congress becomes law.

Few historians, market participants or former regulators say they expect the current bill to put an end to financial crises any more than the post-Depression rules did. In one major area the new legislation is weaker because it departs from a central goal of 1930s lawmakers -- to control the size and scope of the largest financial institutions.

The Glass-Steagall Act, which separated commercial and investment banking in 1933, “was the most effective antitrust law we’ve ever had,” said Charles Geisst, a finance professor at Manhattan College in New York, who has written about Wall Street’s history.

Glass-Steagall was as much about breaking up companies as ensuring customer deposits wouldn’t be used for risky practices, Geisst said. Today’s Congress may live to regret that they’ve done almost nothing to shrink firms such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc., he said.

In the current debate, people are buying the lobbyists’ argument that “you just can’t live without a series of powerful banks that are all too big to fail,” Geisst said.

One-Stop Shopping

Government regulation of Wall Street began in earnest after the 1929 stock market crash, when Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC, required investment banks to disclose material information about securities they peddled and prohibited brokers from deceiving clients. The laws responded to abuses that were rampant in the 1920s, such as banks selling stocks and bonds in companies that were already bankrupt.

Congress repealed Glass-Steagall in 1999, contributing to mergers and the growth one-stop-shopping financial services companies.

The repeal helped pave the way for the formation of Citigroup by the $46 billion merger of Citicorp and Travelers Group Inc. It also made it possible for Goldman Sachs and Morgan Stanley, the two biggest U.S. securities firms, to convert into bank holding companies, enabling them to get cheap funding from the Federal Reserve during the financial crisis. If the law hadn’t been repealed, Bank of America Corp. wouldn’t have been allowed to acquire Merrill Lynch & Co.

Savings-and-Loan

Under Glass-Steagall, the financial system didn’t approach a meltdown. The law also didn’t prevent government rescues when banks failed. The biggest collapse before the 2008 crisis occurred in 1984, when Continental Illinois National Bank and Trust became insolvent, prompting the Federal Deposit Insurance Corp. to buy $4.5 billion of its bad loans. The savings-and-loan crisis of the 1980s and 1990s cost the taxpayers about $124 billion.

The legislation approved by the Senate last week and the measure adopted by the House in December arose amid public outrage over the $700 billion federal bailout of the financial markets in 2008. The bills emphasize the role of regulators and rules in constraining abusive practices.

Among other things the bills would create a new agency to oversee consumer financial products, establish a council to monitor systemic risk and increase regulation of derivatives, mortgage brokers, credit-rating companies and hedge funds.

Derivatives Contracts

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather.

Although it is unlikely to prevent future crises, the congressional bill, with all its weaknesses and loopholes, probably will mitigate the impact of the next blow-up, said Harvey Goldschmid, a former SEC commissioner who is a professor at Columbia Law School.

“Undoubtedly there will be further problems, it’s just the nature of business and the financial business in particular,” Goldschmid said. “But this will avoid some significant problems and limit the impact of others.”

Goldschmid, who sat on the SEC as it implemented an overhaul of corporate accounting in 2002 and 2003, the Sarbanes- Oxley Act, said the new bill will have a large impact on the way Wall Street works, increasing scrutiny of the biggest banks.

“You’re going to create oversight in areas where we just haven’t had it and in areas that have been part of the problem,” he said. “Will it make it perfect? Of course not. Will it make it better? Definitely.”

Credit Impact

Others, particularly banks and their lobbyists, see a historical over-reaching by Congress that has the potential to stifle the economy for years to come.

“We’re beginning to see people price in the impact on this on the entire financial system, on the availability of credit,” said David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “There are estimates that range up to $2 trillion of credit that would be sucked out of the economy.”

William Sweet, a former attorney at the Federal Reserve Board, disagrees. Assuming that some of the measure’s more contentious aspects get changed in a House-Senate conference, including a requirement that banks wall off their swaps-trading desks and another that directs higher capital requirements, the legislation isn’t likely to be as disruptive as the 1930s changes, said Sweet, a partner at Skadden, Arps, Slate, Meagher & Flom in Washington.

‘More Vigilant’

“This gives the regulators more authority to be more vigilant, it gives them new tools and powers, but doesn’t do anything like Glass-Steagall,” said Sweet. “While this is a political response to a similar situation, it avoids doing too much damage.”

Another issue of concern in the current legislation is that it may lead to unintended consequences, which has happened before when lawmakers have tried to rein in U.S. corporations. The risk is higher, opponents argue, in complex areas such as financial regulation.

For example, Congress in 1993 tried to curb excessive pay by prohibiting tax deductions on annual salaries that exceeded $1 million. Companies could continue deducting pay that they didn’t dole out as salary, such as stock options.

As a result, businesses issued a flood of options to their employees. Some companies then began abusing options by backdating grants to periods when stock prices were lower to ensure big payouts to executives -- prompting more than two dozen enforcement actions by the SEC.

Bond Market

During the legislative debate over the past year, firms have argued that the overhaul would unintentionally push derivatives trading overseas, for example. Mutual funds have fought another provision that would allow the FDIC to pay some creditors more than others after a big bank fails, saying it could disrupt the bond market.

“There is nobody who knows everything that is in” the Senate’s financial overhaul bill, said former SEC Chairman Harvey Pitt, who was appointed by President George W. Bush. “We run a big risk of feeling the love of unintended consequences and feeling it in all its unleashed fury.”

Pitt, who headed the SEC during the Sarbanes-Oxley era, said the broader problem with the new legislation is that it leads investors to believe the political rhetoric that a law can solve all the problems that created the mess. The 2002 law he helped implement was born out of the massive accounting frauds at Enron Corp. and WorldCom Inc. It required corporate executives to attest to the accuracy of their books and put new strictures on the accounting industry.

“We needed a bill that demonstrated that this country wouldn’t tolerate financial shenanigans, but it got sold to the American public as the solution for everything that went wrong,” he said. “If Sarbanes-Oxley had really been all that good, would we have had what we’ve seen in the financial meltdown? I think the answer to that is no.”

--With reporting by Phil Mattingly in Washington. Editors: Lawrence Roberts, Gregory Mo

2010-05-26T07:02:00.000-07:00

May 25, 2010...5:26 PM

The second Bernanke crash
By Martin Hutchinson
PrudentBear.com.
May 26, 2010

The turbulence in financial markets in the last couple of weeks has been ascribed by reporters to doubts about the long-term stability of the euro, and concern over the finances of southern European countries. This is over-optimistic. Whether or not the current market downdraft proves temporary, monetary and fiscal policies in the United States and worldwide have been excessively stimulative since the September 2008 market meltdown. Thus we are at some point in the near future going to suffer the second Bernanke crash.

As I have frequently discussed, there were a number of causes of the 2008 crash, some of them rooted as far back in the past as financial theories devised in the 1950s and housing regulation designed in the 1960s. Nevertheless, if one single cause has to be assigned, it would be the excessive money creation in the United States after 1995 and worldwide after 2002. This caused a massive asset bubble, initially in stocks and later in housing. Once the bubble had inflated, a commensurate crash was inevitable.

Had monetary policy returned to sanity after September 2008 (and fiscal policy not itself relapsed into madness) that would have been the end of it. Banks would have been provided with unlimited funding, as Walter Bagehot recommended in his 1873 Lombard Street, but at high interest rates. The global economy would have undergone a sharp recession, steep because of the deflation of value that had become necessary, but by the middle of last year would have begun a healthy and sustained recovery.

Apart from the direct bailouts of the basket cases Citigroup and AIG and the “stimulus” packages, the important difference between what happened in 2008 and what should have happened lies in the interest rate charged for the liquidity supplied in the crisis. A great deal of capital had been destroyed in the subprime mortgage meltdown, and risk premiums had gone sky high. Accordingly, while capital should have been made available by the world’s central banks to their banking systems, it should have been available only at penalty rates. Rates of 8%, even 10% would have been appropriate levels for the federal funds rate and the rate for Fed “quantitative easing”.

There would in that case have been no banks borrowing money from the Fed at ultra-low interest rates and investing it in Treasury bonds or government guaranteed mortgage bonds. Conversely, since money at high interest rates was readily available, high-yield uses for that money, such as lending to small business, would have remained quite attractive to the banking system.

A high interest rate in 2008 would have balanced the limited available supply of funds (other than at penalty rates) with the demand for them, balancing financial markets naturally. Instead, we have seen another explosion of leverage, as banks and above all hedge funds have borrowed money at current exceptionally low interest rates to invest in whatever seemed attractive that week. That explosion of leverage has been made worse by the Fed’s persistence in keeping ultra-low interest rates for at least a year after the excuse for them had vanished. With the US economy bottoming out around May 2009 and the “stress tests” of that date showing that the banking system was now in decent shape, ultra-low interest rates should have been raised quickly and short-term rates should now be at normal levels, at a minimum in the 3-4% range.

As in 2002-03, ultra-low interest rates caused the stock market to bottom out excessively rapidly at a level well above its natural floor and to engage in an explosive rally that rapidly pushed stock prices above their sustainable level to a point at which equities once again represented poor value.

This has caused two problems. First, the US savings rate, which had shown encouraging signs in the downturn of returning to 8-10%, a level at which consumers have some chance of saving for their retirement and the economy some chance of financing itself, quickly dropped back to below 3%. With overvalued stocks (which both look expensive and make investment portfolios look fatter) and interest rates below inflation, it’s surprising anybody saves at all.

Second, the excessive leverage that caused such problems in 2006-08 has returned. Risk premiums on lower-tier corporate and emerging markets debt have declined artificially towards the levels of 2007, at which they were clearly inadequate to compensate for the risks involved in holding those assets.

An additional hidden but connected problem is the further intensification of Wall Street’s trading culture, exemplified by the explosion in “fast trading” volume, now three quarters of the trading volume on the New York Stock Exchange. This trading simply exploits the benefits of insider knowledge of money flows; in aggregate it subtracts value from the economy. Its participation in the recent “flash crash” in which over US$1 trillion was wiped off the value of US equities in 15 minutes is symptomatic of the problem – with “fast trading” computers in control, doing thousands of trades a minute there seems no reason why that loss should not have been $10 trillion or even more.

Maybe the theory that advanced galactic civilizations don’t exist because they wiped themselves out with super-atomic weapons before developing interstellar travel is wrong. Maybe they simply invented computerized fast trading and reduced their civilizations to impoverished rubble that way.

With excessive leverage and inadequate saving, the US capital base is not being renewed as it would normally be after a speculative blowout. In the financial sector, this brings additional risk of a meltdown such as occurred in 2008. In the rest of the economy, it means in the long run that the US will no longer have sufficient capital supporting the skills of its workforce. If the US comes to have capital per head equivalent to that of China, and its education system is no better, why should it enjoy higher living standards?

Only those of us in the media, who live on reporting and analyzing excitement and chaos, can rejoice that the monetary policies of Federal Reserve chairman Ben Bernanke are unlikely to produce gradual, civilized decline to the living standards of China. Instead, because of the leverage and speculation they generate, they are much more likely to produce a gigantic bursting bubble, with major financial institution bankruptcies. The destruction of wealth will be greater than that of a slow decline, but the impoverished masses will be able to blame the evil private sector bankers instead of the public sector follies of the Fed.

It seems increasingly likely that the generator of the second Bernanke crash will lie in the global public sector. Budget deficits of 10% of gross domestic product (GDP) are not a normal response to economic downturns, and so we have very little idea what pathological market behavior they will produce. Currently, long-term US dollar interest rates are falling rather than rising, as crazed investors “fly to safety” into the bonds of a polity whose current fiscal policies are unsustainable and which under the current administration is showing no significant sign of reforming them. That seems very unlikely to last for long.

Should investor enthusiasm for US Treasuries disappear quickly, as it did for Greek government bonds, the crash in the Treasury market will doubtless be dismissed by Wall Street’s risk managers as another “25-standard-deviation event” – or even, this time, a 50-standard-deviation event if the bang is big enough.

The justification for bailout at taxpayer expense will again be trotted out that the crash should not have happened in the lifetime of a billion universes, according to Wall Street’s best risk models. The government will look for excuses to get round the new banking legislation and institute those bailouts. However, the one disadvantage for Wall Street of a financial calamity caused by a crash in the Treasury bond market is that taxpayers will not be available to fund bailouts through additional state borrowing. Thus bailouts will have to be funded by direct Fed money printing, making the experience more unpleasant for Wall Street and a lot more unpleasant for the rest of us.

The result of the second Bernanke crash, particularly if it is indeed centered on the Treasury bond market, must therefore be high inflation. I can’t see how it can be avoided. Only by robbing the nation’s savers of a large portion of their remaining savings through rampant inflation will the government be able to achieve its twin aims, of reducing the value of government’s outstanding obligations and reducing the living standards of Americans to a level at which they are once more competitive, given the country’s diminished capital base.

For investors, the only safe haven is of course gold. I have written elsewhere how I expect the gold price at some point to enter a “spike” like that of 1978-80 in which it soars to $5,000 – given the monetary expansion since 1980 that price, not the mere $2,400 given by an inflation calculation, is the equivalent of 1980′s peak of $875.

Before gold bugs go into their victory dance, however, I would point out that when gold gets to that level, $5,000 may not buy very much.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005)

2010-05-26T06:59:00.000-07:00

Tuesday, May 25, 2010

Global Crisis

The Global Economic Crisis,

The Great Depression of the XXI Century

Global Research, May 25, 2010

The following text is the Preface of The Global Economic Crisis. The Great Depression of the XXI Century, Michel Chossudovsky and Andrew Gavin Marshall (Editors), Montreal, Global Research, 2010, which is to be launched in late May.

Each of the authors in this timely collection digs beneath the gilded surface to reveal a complex web of deceit and media distortion which serves to conceal the workings of the global economic system and its devastating impacts on people's lives.

The complex causes as well as the devastating consequences of the economic crisis are carefully scrutinized with contributions from Ellen Brown, Tom Burghardt, Michel Chossudovsky, Richard C. Cook, Shamus Cooke, John Bellamy Foster, Michael Hudson, Tanya Cariina Hsu, Fred Magdoff, Andrew Gavin Marshall, James Petras, Peter Phillips, Peter Dale Scott, Bill Van Auken, Claudia von Werlhof and Mike Whitney.

Despite the diversity of viewpoints and perspectives presented within this volume, all of the contributors ultimately come to the same conclusion: humanity is at the crossroads of the most serious economic and social crisis in modern history.

In all major regions of the world, the economic recession is deep-seated, resulting in mass unemployment, the collapse of state social programs and the impoverishment of millions of people. The economic crisis is accompanied by a worldwide process of militarization, a "war without borders" led by the United States of America and its NATO allies. The conduct of the Pentagon’s "long war" is intimately related to the restructuring of the global economy.

We are not dealing with a narrowly defined economic crisis or recession. The global financial architecture sustains strategic and national security objectives. In turn, the U.S.-NATO military agenda serves to endorse a powerful business elite which relentlessly overshadows and undermines the functions of civilian government.

This book takes the reader through the corridors of the Federal Reserve and the Council on Foreign Relations, behind closed doors at the Bank for International Settlements, into the plush corporate boardrooms on Wall Street where far-reaching financial transactions are routinely undertaken from computer terminals linked up to major stock markets, at the touch of a mouse button.

Each of the authors in this collection digs beneath the gilded surface to reveal a complex web of deceit and media distortion which serves to conceal the workings of the global economic system and its devastating impacts on people’s lives. Our analysis focuses on the role of powerful economic and political actors in an environment wrought by corruption, financial manipulation and fraud.

Despite the diversity of viewpoints and perspectives presented within this volume, all of the contributors ultimately come to the same conclusion: humanity is at the crossroads of the most serious economic and social crisis in modern history.

The meltdown of financial markets in 2008-2009 was the result of institutionalized fraud and financial manipulation. The "bank bailouts" were implemented on the instructions of Wall Street, leading to the largest transfer of money wealth in recorded history, while simultaneously creating an insurmountable public debt.

With the worldwide deterioration of living standards and plummeting consumer spending, the entire structure of international commodity trade is potentially in jeopardy. The payments system of money transactions is in disarray. Following the collapse of employment, the payment of wages is disrupted, which in turn triggers a downfall in expenditures on necessary consumer goods and services. This dramatic plunge in purchasing power backfires on the productive system, resulting in a string of layoffs, plant closures and bankruptcies. Exacerbated by the freeze on credit, the decline in consumer demand contributes to the demobilization of human and material resources.

This process of economic decline is cumulative. All categories of the labor force are affected. Payments of wages are no longer implemented, credit is disrupted and capital investments are at a standstill. Meanwhile, in Western countries, the "social safety net" inherited from the welfare state, which protects the unemployed during an economic downturn, is also in jeopardy.

The Myth of Economic Recovery

The existence of a "Great Depression" on the scale of the 1930s, while often acknowledged, is overshadowed by an unbending consensus: "The economy is on the road to recovery".

While there is talk of an economic renewal, Wall Street commentators have persistently and intentionally overlooked the fact that the financial meltdown is not simply composed of one bubble – the housing real estate bubble – which has already burst. In fact, the crisis has many bubbles, all of which dwarf the housing bubble burst of 2008.

Although there is no fundamental disagreement among mainstream analysts on the occurrence of an economic recovery, there is heated debate as to when it will occur, whether in the next quarter, or in the third quarter of next year, etc. Already in early 2010, the "recovery" of the U.S. economy had been predicted and confirmed through a carefully worded barrage of media disinformation. Meanwhile, the social plight of increased unemployment in America has been scrupulously camouflaged. Economists view bankruptcy as a microeconomic phenomenon.

The media reports on bankruptcies, while revealing local-level realities affecting one or more factories, fail to provide an overall picture of what is happening at the national and international levels. When all these simultaneous plant closures in towns and cities across the land are added together, a very different picture emerges: entire sectors of a national economy are closing down.

Public opinion continues to be misled as to the causes and consequences of the economic crisis, not to mention the policy solutions. People are led to believe that the economy has a logic of its own which depends on the free interplay of market forces, and that powerful financial actors, who pull the strings in the corporate boardrooms, could not, under any circumstances, have willfully influenced the course of economic events.

The relentless and fraudulent appropriation of wealth is upheld as an integral part of "the American dream", as a means to spreading the benefits of economic growth. As conveyed by Michael Hudson, the myth becomes entrenched that "without wealth at the top, there would be nothing to trickle down." Such flawed logic of the business cycle overshadows an understanding of the structural and historical origins of the global economic crisis.

Financial Fraud

Media disinformation largely serves the interests of a handful of global banks and institutional speculators which use their command over financial and commodity markets to amass vast amounts of money wealth. The corridors of the state are controlled by the corporate establishment including the speculators. Meanwhile, the "bank bailouts", presented to the public as a requisite for economic recovery, have facilitated and legitimized a further process of appropriation of wealth.

Vast amounts of money wealth are acquired through market manipulation. Often referred to as "deregulation", the financial apparatus has developed sophisticated instruments of outright manipulation and deceit. With inside information and foreknowledge, major financial actors, using the instruments of speculative trade, have the ability to fiddle and rig market movements to their advantage, precipitate the collapse of a competitor and wreck havoc in the economies of developing countries. These tools of manipulation have become an integral part of the financial architecture; they are embedded in the system.

The Failure of Mainstream Economics

The economics profession, particularly in the universities, rarely addresses the actual "real world" functioning of markets. Theoretical constructs centered on mathematical models serve to represent an abstract, fictional world in which individuals are equal. There is no theoretical distinction between workers, consumers or corporations, all of which are referred to as "individual traders". No single individual has the power or ability to influence the market, nor can there be any conflict between workers and capitalists within this abstract world.

By failing to examine the interplay of powerful economic actors in the "real life" economy, the processes of market rigging, financial manipulation and fraud are overlooked. The concentration and centralization of economic decision-making, the role of the financial elites, the economic thinks tanks, the corporate boardrooms: none of these issues are examined in the universities’ economics programs. The theoretical construct is dysfunctional; it cannot be used to provide an understanding of the economic crisis.

Economic science is an ideological construct which serves to camouflage and justify the New World Order. A set of dogmatic postulates serves to uphold free market capitalism by denying the existence of social inequality and the profit-driven nature of the system is denied. The role of powerful economic actors and how these actors are able to influence the workings of financial and commodity markets is not a matter of concern for the discipline’s theoreticians. The powers of market manipulation which serve to appropriate vast amounts of money wealth are rarely addressed. And when they are acknowledged, they are considered to belong to the realm of sociology or political science.

This means that the policy and institutional framework behind this global economic system, which has been shaped in the course of the last thirty years, is rarely analyzed by mainstream economists. It follows that economics as a discipline, with some exceptions, has not provided the analysis required to comprehend the economic crisis. In fact, its main free market postulates deny the existence of a crisis. The focus of neoclassical economics is on equilibrium, disequilibrium and "market correction" or "adjustment" through the market mechanism, as a means to putting the economy back "onto the path of self-sustained growth".

Poverty and Social Inequality

The global political economy is a system that enriches the very few at the expense of the vast majority. The global economic crisis has contributed to widening social inequalities both within and between countries. Under global capitalism, mounting poverty is not the result of a scarcity or a lack of human and material resources. Quite the opposite holds true: the economic depression is marked by a process of disengagement of human resources and physical capital. People’s lives are destroyed. The economic crisis is deep-seated.

The structures of social inequality have, quite deliberately, been reinforced, leading not only to a generalized process of impoverishment but also to the demise of the middle and upper middle income groups.

Middle class consumerism, on which this unruly model of capitalist development is based, is also threatened. Bankruptcies have hit several of the most vibrant sectors of the consumer economy. The middle classes in the West have, for several decades, been subjected to the erosion of their material wealth. While the middle class exists in theory, it is a class built and sustained by household debt.

The wealthy rather than the middle class are rapidly becoming the consuming class, leading to the relentless growth of the luxury goods economy. Moreover, with the drying up of the middle class markets for manufactured goods, a central and decisive shift in the structure of economic growth has occurred. With the demise of the civilian economy, the development of America’s war economy, supported by a whopping near-trillion dollar defense budget, has reached new heights. As stock markets tumble and the recession unfolds, the advanced weapons industries, the military and national security contractors and the up-and-coming mercenary companies (among others) have experienced a thriving and booming growth of their various activities.

War and the Economic Crisis

War is inextricably linked to the impoverishment of people at home and around the world. Militarization and the economic crisis are intimately related. The provision of essential goods and services to meet basic human needs has been replaced by a profit-driven "killing machine" in support of America’s "Global War on Terror". The poor are made to fight the poor. Yet war enriches the upper class, which controls industry, the military, oil and banking. In a war economy, death is good for business, poverty is good for society, and power is good for politics. Western nations, particularly the United States, spend hundreds of billions of dollars a year to murder innocent people in far-away impoverished nations, while the people at home suffer the disparities of poverty, class, gender and racial divides.

An outright "economic war" resulting in unemployment, poverty and disease is carried out through the free market. People’s lives are in a freefall and their purchasing power is destroyed. In a very real sense, the last twenty years of global "free market" economy have resulted, through poverty and social destitution, in the lives of millions of people.

Rather than addressing an impending social catastrophe, Western governments, which serve the interests of the economic elites, have installed a "Big Brother" police state, with a mandate to confront and repress all forms of opposition and social dissent.

The economic and social crisis has by no means reached its climax and entire countries, including Greece and Iceland, are at risk. One need only look at the escalation of the Middle East Central Asian war and the U.S.-NATO threats to China, Russia and Iran to witness how war and the economy are intimately related.

Our Analysis in this Book

The contributors to this book reveal the intricacies of global banking and its insidious relationship to the military industrial complex and the oil conglomerates. The book presents an inter- disciplinary and multi-faceted approach, while also conveying an understanding of the historical and institutional dimensions. The complex relations of the economic crisis to war, empire and worldwide poverty are highlighted. This crisis has a truly global reach and repercussions that reverberate throughout all nations, across all societies.

In Part I, the overall causes of the global economic crisis as well as the failures of mainstream economics are laid out. Michel Chossudovsky focuses on the history of financial deregulation and speculation. Tanya Cariina Hsu analyzes the role of the American Empire and its relationship to the economic crisis. John Bellamy Foster and Fred Magdoff undertake a comprehensive review of the political economy of the crisis, explaining the central role of monetary policy. James Petras and Claudia von Werlhof provide a detailed review and critique of neoliberalism, focusing on the economic, political and social repercussions of the "free market" reforms. Shamus Cooke examines the central role of debt, both public and private.

Part II, which includes chapters by Michel Chossudovsky and Peter Phillips, analyzes the rising tide of poverty and social inequality resulting from the Great Depression.

With contributions by Michel Chossudovsky, Peter Dale Scott, Michael Hudson, Bill Van Auken, Tom Burghardt and Andrew Gavin Marshall, Part III examines the relationship between the economic crisis, National Security, the U.S.-NATO led war and world government. In this context, as conveyed by Peter Dale Scott, the economic crisis creates social conditions which favor the instatement of martial law.

The focus in Part IV is on the global monetary system, its evolution and its changing role. Andrew Gavin Marshall examines the history of central banking as well as various initiatives to create regional and global currency systems. Ellen Brown focuses on the creation of a global central bank and global currency through the Bank for International Settlements (BIS). Richard C. Cook examines the debt-based monetary system as a system of control and provides a framework for democratizing the monetary system.

Part V focuses on the working of the Shadow Banking System, which triggered the 2008 meltdown of financial markets. The chapters by Mike Whitney and Ellen Brown describe in detail how Wall Street’s Ponzi scheme was used to manipulate the market and transfer billions of dollars into the pockets of the banksters.

We are indebted to the authors for their carefully documented research, incisive analysis, and, foremost, for their unbending commitment to the truth: Tom Burghardt, Ellen Brown, Richard C. Cook, Shamus Cooke, John Bellamy Foster, Michael Hudson, Tanya Cariina Hsu, Fred Magdoff, James Petras, Peter Phillips, Peter Dale Scott, Mike Whitney, Bill Van Auken and Claudia von Werlhof, have provided, with utmost clarity, an understanding of the diverse and complex economic, social and political processes which are affecting the lives of millions of people around the world.

We owe a debt of gratitude to Maja Romano of Global Research Publishers, who relentlessly oversaw and coordinated the editing and production of this book, including the creative front page concept. We wish to thank Andréa Joseph for the careful typesetting of the manuscript and front page graphics. We also extend our thanks and appreciation to Isabelle Goulet, Julie Lévesque and Drew McKevitt for their support in the revision and copyediting of the manuscript.

2010-05-25T15:25:00.000-07:00

Tuesday, May 25, 2010

Overseas Madoff investors get 100 cents on the dollar back

MADRID — About 720,000 investors outside the United States who lost money to the convicted swindler Bernard L. Madoff have settled with their banks, receiving about $15.5 billion in all, according to law firms representing those victims of the fraud.

The settlements cover about 80 percent of the clients represented by the firms, said Javier Cremades, founder of Cremades & Calvo-Sotelo, a Madrid law firm, who helped organize the global alliance of 60 firms a year ago.

The $15.5 billion figure represents, in theory, 100 percent of the amount clients had invested, Mr. Cremades said, but excludes in almost all cases the bogus paper gains that were listed on investor statements.

Looks like the oversea banks didn't want any discovery on their boo

2010-05-25T15:20:00.000-07:00

Originally published May 25, 2010 at 10:58 AM | Page modified May 25, 2010 at 11:13 AM
Written by Jon Talton

Sound Economy:What's causing stock market volatility

Beyond primal greed and fear, the movements of the stock market are often a mystery, whatever comic-book explanation may be given by commentators in the moment. The real causes are usually cloaked by millions of individual investor decisions.

Beyond primal greed and fear, the movements of the stock market are often a mystery, whatever comic-book explanation may be given by commentators in the moment. The real causes are usually cloaked by millions of individual investor decisions.

With Tuesday's swoon on Wall Street, following a worldwide sell-off and days of volatility, fear is definitely in command. What else? Lets run through the suspects.

• North Korea. Definitely. The rogue nation is the crazy uncle in the attic, armed with at least rudimentary nuclear weapons and apparently locked in a power struggle as Kim Jong-il fades. Anything could happen. Worse, this unpredictable and dangerous state is located in the heart of the rising world economy.

• European sovereign debt. Not exactly. Europe has long had what Americans would consider lavish welfare states, big government, outlandishly superb infrastructure, etc. The issue is more complicated. First, the euro is a currency experiment that may not survive the Great Disruption — it's a common monetary policy without a common fiscal or political system. Weak nations (Greece) have the potential to drag down strong ones (Germany). Many investors diversified into the euro and now regret it. Second, the exposure of major banks to complex, opaque bets made on the debt could become subprime redux. Some players are no doubt driving down the euro by profitably betting against it. The global financial system's hyper-interconnectivity is once again akin to the malevolent Skynet in the Terminator movies.

• Flash trading: Yes. The so-called flash crash of May 6, caused or worsened by the computerized trading operation, is still spooking markets. Regulators still don't know the extent of flash trading's role, adding to uncertainty. The Securities and Exchange Commission is investigating whether market makers backed away during the crash, eliminating a crucial backstop to a market plunge. Is this yet another way casino capitalism is pulling swindles?

• Financial reform. Nah. The pending bills have been so watered down that Wall Street has little to fear, which means average Americans have much over which to fret. The too-big-to-fail banks remain. Derivatives rules have been fatally weakened. The shadow banking system, the little-regulated laboratory of crashes and fraud, remains in the shadows. A new Glass-Steagall Act to separate risky investment banking from taxpayer-insured commercial banking was dead on arrival. None of this is to say the big Wall Street institutions wouldn't use the market decline to demonize any attempt at enacting new rules.

• Leverage. Oh, yeah. Unlike classic downs in the business cycle, the Great Recession failed to clean up most of the imbalances that helped cause it. This is especially true of heavy debt loads. Australia is now facing a housing collapse fed by debt that is spreading to its banking system. Sound familiar? America's private and corporate debt loads remain very high by historical standards.

• Rally fatigue. Yes. The fuel for the past year's market rise is largely spent. This includes the hot money using dollars and cheap credit to buy equities, low interest rates, bargain stocks, and the bailout and stimulus. Now the market is overvalued and the real economy is recovering too slowly.

The result: We're uncomfortably close to a double-dip recession. Meanwhile, many average Americans burned in the stock market during the 2000s, might be asking themselves why they rushed back to the casino. Those in deficit panic attack might consider where the world still sees a safe haven: U.S. Treasury securities.

2010-05-25T15:12:00.000-07:00

Posted by Moss M.Jacques

Regulation vs. Structural Change

Written by James Kwak

Co-author of The Baseline Scenario and of 13 Bankers
Posted: May 25, 2010 11:01 AM

Robert Reich discusses a theme that I think I've discussed before (and first heard expressed by Ezra Klein):

"The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week -- now on he way to being reconciled with the House bill -- is that it's regulatory. It does nothing to change the structure of Wall Street."

Reich's post weirdly cuts off in the middle on his site, but Mark Thoma has a longer excerpt. In that excerpt, Reich concludes this way:

"The only way to have a lasting effect on industries as large and intransigent as banking and health care is to alter their structure. That was the approach taken to finance by Franklin D. Roosevelt in the 1930s, and by Lyndon Johnson to health care (Medicare) in the 1960s.

"So why has Obama consistently chosen regulation over restructuring? Because restructuring Wall Street or health care would surely elicit firestorms from these industries. Both are politically powerful, and Obama did not want to take them on directly."

I would add that Obama is also a political pragmatist with a strong belief that getting something done is better than nothing. I think that on health care he and the administration probably did the best they could. Remember, they barely got a majority in the House, then barely got sixty votes in the Senate, then barely got a majority in the House again (to pass the revised bill), and public opinion was very divided.

But on financial reform I think they could have gotten more done. First of all, public opinion wanted more; and second, the administration lobbied against some of the most far-reaching changes, such as Kaufman-Brown and Blanche Lincoln's derivatives spinout provision, and Merkley-Levin never got a vote. The whole theater of the administration trying to put the bill into stone before it got much stronger should have been embarrassing to them, but they decided they could take the hit.

I think the explanation for this is some combination of (a) the economic policy guys really think that the financial system we have today is basically fine and just needs a little better oversight and (b) Obama just doesn't care that much and wants to save his political capital (and his support from the financial sector) for other issues, like (hopefully) jobs and climate change.

Here's Thoma's conclusion:

"Structural change is harder than imposing new regulations. The fact that legislators are shying away from the harder to impose types of change out of fear of losing reelection support from the financial industry points to the political power the industry still has, and to the need for structural change to reduce this political (and economic) power. If we cannot muster the political will to make such changes in light of the most devastating financial collapse since the Great Depression, that does not bode well for the future."

2010-05-24T07:05:00.000-07:00

One false move in Europe could set off global chain reaction

By Howard Schneider and Neil Irwin
Washington Post Staff Writer
Monday, May 24, 2010; A01

If the trouble starts -- and it remains an "if" -- the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland's economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

"If what happened in Greece were to happen in a large country, it could fundamentally mark our times," Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.

That local economic development boards are sponsoring panels on government debt in Greece is perhaps proof enough that Europe's problems are the world's. That the dominoes can tumble fast was shown Thursday when a new and narrowly drawn stock-trading policy in Germany helped trigger a sell-off on Wall Street.

It marks a change, Barclays Capital chief European economist Julian Callow wrote in a Friday analysis, from a situation in which the bonds of European countries were considered to carry virtually zero risk to a "brave new world" where sovereign default in one of the world's core economic areas is a tangible threat. Bank holdings of European debt are now being studied with the same focus given to holdings of U.S. mortgage-backed securities as the global financial crisis unfolded in 2008 -- and with the same suspicion that problems in one part of the world could wreck others.

The most vulnerable European countries -- Greece, Spain, Portugal and Ireland -- may represent only about 4 percent of world economic activity, but "the debt crisis and its ripple effects are bad news for all corners of the world," said Cornell University economist Eswar Prasad.

The risk of a worst-case scenario is still considered remote. European countries have pledged hundreds of billions of dollars to aid indebted neighbors that run into trouble, and they say they are committed to fixing the continent's larger economic problems. The euro and U.S. markets were both higher Friday after the German Parliament approved a key piece of that support program. A renewed effort by the U.S. Federal Reserve to ensure that European banks have adequate access to dollars has generated little demand -- a sign that a feared shortage of cash is not in the offing.

U.S. banks are not heavily exposed to the weaker European countries, Fed governor Daniel K. Tarullo said in testimony on Capitol Hill last week. Banks are in better shape overall, after fresh infusions of capital. Meanwhile, the U.S. economic recovery has been strengthening through the year, with jobs added in five of the last six months, and recent consumer spending and industrial output stronger than most forecasts.

But the fallout from Europe could still be widely felt. U.S. trade officials, hoping the country can dramatically boost its exports, are dismayed at the steep drop in the value of the euro -- which is around $1.25, down from more than $1.50 in November. The decline makes American goods more expensive compared with those produced in Europe. The slide in the common European currency could also change the way China and a host of Asian countries approach their currency policies, possibly making them less likely to agree with U.S. demands to raise the value of their money. If they raised it, Asian goods would become more expensive in world markets, making it easier for U.S. products to compete.

The connections are being closely watched. Analysts are studying how the involvement of Greek financial institutions in Eastern Europe, or Spanish banks in Latin America, could affect those economies. The International Monetary Fund and E.U. officials are doing biweekly checks on Greece's progress to ensure its economic reform program stays on track, according to Vassilis Kaskarelis, Greece's ambassador to the United States.

Inside the euro zone, banks are intimately linked, with a web of investments and cross-country bond holdings that could be a main vector for financial "contagion," with a default in one country weakening banks elsewhere.

There are some positive impacts in all this for the United States.

For one, uncertainty about European government debt has driven global investors toward U.S. government bonds, which in turn is pushing down long-term interest rates. The 10-year Treasury bond had a rate of 3.2 percent Friday compared with nearly 4 percent last month. Those lower rates should flow through to private borrowing, helping Americans getting mortgages or businesses looking to grow.

The European panic is also lowering the price of oil and other commodities on global markets, potentially making it cheaper for Americans to fuel their cars and heat their homes. A barrel of oil went for about $70 on Friday, down from almost $87 on April 6.

A final positive for the U.S. economy is that the stronger dollar will help keep inflation in check by reducing the cost of imports. That, combined with renewed worry about the strength of the recovery, is likely to give the Fed some leeway to delay raising interest rates above their current extremely low levels longer than it would have otherwise.

The most precise comparison is to the East Asian financial crisis that enveloped Thailand, Indonesia, South Korea and other nations in 1997 and 1998. There were widespread fears that the crisis would damage the U.S. economy, including through a financial contagion effect. The Fed even cut interest rates in the fall of 1998 to try to forestall a weakening in U.S. growth.

But there was little obvious impact on the U.S. economy, which grew 4.5 percent in 1997, 4.4 percent in 1998, and 4.8 percent in 1999.

2010-05-24T06:46:00.000-07:00

Posted by Moss M.Jacques

Wall Street crash exposes world of stock market electronic trading

Published on 05-12-2010

In 10 bone-shaking minutes on Thursday the Dow Jones Industrial Average - representing the 30 most venerable US firms - briefly lost almost a tenth of its value.

Open-jawed investors blanched as the pensions and savings of millions of Americans were decimated, along with the livelihoods of countless more.

Days and a partial recovery later, the most fundamental question has still not been answered: What happened?

Concerns about Europe's debt crisis no doubt contributed, but few analysts believed worries about Greece's fiscal malfeasance - as serious as it may be - would cause US equities markets to go through a near-death experience.

The Securities and Exchange Commission, the New York Stock Exchange and even President Barack Obama have vowed to uncover the causes of the fall.

In the meantime, homespun theories have been shot down one-by-one.

The major US stock markets said a glitch on their trading platforms was not to blame.

Citigroup angrily brushed aside the notion that one of its traders had mistakenly hit the billion rather than million button on a sale.

Some bolder television commentators speculated that cyber-terrorism may be to blame, although evidence appeared to be lacking.

Whatever the trigger, blame for the severity of the crash is now aimed squarely at algorithmic trades.

At their simplest, "algos" are used to buy or sell shares at a certain trigger point, to limit losses or seek new profits.

They are responsible for anywhere between 60 and 90 per cent of trading on a normal day.

In a market that is driven by endless reams of data, algorithms are able to spot and act on opportunities at a speed investors could not hope to match.

"One program can trade thousands of stocks in milliseconds," explained Terrence Hendershott, a professor of finance at the University of California, Berkeley.

New figures for consumer spending or one stock's deviation from the broader price trend can trigger a rash of buying and selling while a human trader is off getting coffee.

But when the flow of data is disrupted or unusual, the effects can be dramatic.

Hendershott speculated that Thursday crash could have been caused by a badly programmed algorithm, or a trader's mistake.

That could have sparked automated selling that forced stock prices down and triggered a cascade of other automated sales. This domino effect could have occurred at such a pace that humans had no idea what was happening.

It is a scenario that proponents of algorithmic trading, like Hendershott, had thought improbable, until Thursday.

"What computers are particularly good at is processing the same information in the same ways and optimizing that very, very quickly," he said.

"What they might not be so good at is dealing with some new situations that have never occurred before."

The response from regulators and Congress has been swift. "A temporary one trillion drop in market value is an unacceptable consequence of a software glitch," said Senators Ted Kaufman and Mark Warner in a letter a colleagues.

A Congressional hearing is planned for Tuesday and calls are growing for regulation.

The Securities and Exchange Commission is urging exchanges to put better "speed bumps" in place that would slow down trade, turning more decisions back to human brokers.

Many on Wall Street see resolving the quandary as crucial to restoring the trust of ordinary investors.

"America's confidence in Wall Street was already low. It is now eroded even more than before," worried David Kotok of Cumberland Advisors - a financial firm.

But according to Hendershott, algorithms have also made markets more efficient, better able to assess the true value of an asset.

They were also responsible for the equally rapid recovery seen in stock markets on Thursday, he said, as programs spotted ultra-low prices for some stocks.

"It was bad that it went down so fast, but there was no way the humans were reacting fast enough to make it come back."

Thanks to algorithms, 10 minutes is now a very long time in the stock market.

Source: London Telegraph

2010-05-23T19:02:00.000-07:00

Posted by Moss M.Jacques

Washington reins in Wall Street:

What happens next?

Stefanie Fogel Date last updated: 5/23/2010 8:36:43 PM

written By Paul Davidson, USA TODAY

The sweeping overhaul of financial regulations passed the Senate last week after a sometimes-acrimonious debate. Now, another battle begins: reconciling differences between House and Senate versions of the 1,500-page bill in conference.

While the two bills are largely similar, there are key differences whose resolution could determine how tightly the reins on Wall Street will be pulled and how many safeguards are provided to consumers.

For example, the Senate bill requires banks to divest their derivatives trading units and encourages regulators to prohibit banks from using their own capital for high-risk investments. The House bill doesn't.

FINANCIAL REGULATION: House and Senate differences

The Senate places a new consumer watchdog agency within the Federal Reserve. The House measure calls for a stand-alone entity but exempts car dealers - which lawmakers say sometimes steer buyers into bad loans - from agency oversight.

The Senate bill provides for the orderly liquidation of failing financial firms but doesn't set aside a specific amount of money to pay for it. The House calls for a $150 billion fund, paid by assessments on financial institutions.

"We expect (the conference) to be contentious," says Steve Adamske, spokesman for the House Financial Services Committee.

Committee Chairman Barney Frank, D-Mass., will chair the conference committee, which will also feature Senate Banking Committee Chairman Chris Dodd, D-Conn., chief author of the Senate bill, and other members of committees with roles in financial regulation.

All told, about 20 lawmakers from each of the chambers and both parties will participate, though the makeup will reflect the Democrats' majority. The conference is expected to begin after Memorial Day and last about two weeks.

The legislation that emerges must then be passed again by the House and Senate.

Frank and Dodd said Friday that they expect to present a final bill to President Obama by July 4.

Frank also said he would like the conference to be televised, though that will be decided by the entire committee.

Frank "wants to give the people the confidence that we are working to resolve the issues that led to taxpayer bailouts of the financial industry," Adamske says.

Typically, the House passes stricter regulatory bills. But the Senate overhaul was toughened as public outrage boiled after the government filed fraud charges against Goldman Sachs last month. The House measure passed in December.

As a result, Joe Lieber of Washington Analysis believes the final product "is likely to look more like the Senate bill. It's likely to be less moderated."

Key parts of the Senate financial overhaul bill and how they differ from the House bill passed in December.
Main issues	What Senate bill does	How House bill is different

Consumer protection

Consumers have not been adequately protected against predatory mortgages, credit cards and other financial products. Regulators such as the Federal Reserve and Federal Deposit Insurance Corp. are focused mainly on safeguarding the safety and soundness of the institutions they regulate, not looking out for consumers.	It would create an independent Consumer Financial Protection Bureau in the Federal Reserve that would write rules and oversee a range of financial products offered by myriad providers, including banks, mortgage brokers and payday lenders. A new oversight council could veto its regulations with a two-thirds vote. The bill helps consumers by: ? Making it easier for merchants to give discounts for paying cash. ? Capping fees merchants pay for debit transactions, savings that could be passed to consumers. ? Requiring that consumers get their credit scores free when they're denied credit.	Consumer bureau would be stand-alone agency, rather than in the Fed. Unlike the Senate bill, its rules would not be subject to a possible veto by the oversight council. However, some small businesses such as auto dealers, which Democrats say sometimes steer buyers into deceptive or high-cost loans, would be exempt from oversight by the agency.

Ending "too big to fail"

During the financial crisis, the government had no way to wind down large non-bank financial companies such as Bear Stearns and AIG without threatening the entire economy, because institutions are so closely interconnected. The firms took big risks, knowing taxpayers would foot the bill. The government had to spend hundreds of billions of dollars to bail them out.	The firms would face tighter regulation, such as having to keep higher capital reserves. If they failed, certain creditors would be made whole to protect the financial system, but shareholders and unsecured creditors would bear losses and pay the costs of winding them down.	It would create a $150 billion fund financed by large financial companies to pay for the dissolution of failing companies. The Senate version originally included a $50 billion fund, but that was removed after critics said it would encourage bailouts and possibly limit the government's ability to assess more fees on firms.

Executive pay

Big Wall Street bonuses rewarded short-term profits over the long-term health of the firms. That gave executives incentives to take big risks with high leverage as the housing bubble formed and stick taxpayers with the bill when their bets fizzled.	The bill would give shareholders a non-binding vote on executive pay and require public companies to claw back compensation based on inaccurate financial statements that don't comply with accounting standards. It would require directors to win by a majority vote in uncontested elections.	The House bill would require financial institutions with more than $1 billion in assets to disclose compensation structures that include any incentive-based elements.

Derivatives

Derivatives, which are bets on the price movement of a stock, commodity or other security, were squarely behind the collapse of AIG, the most expensive government bailout in U.S. history. Because they are often private agreements between parties, they are hard to value. The volume of outstanding derivatives worsened some firms' financial troubles as the mortgage market spiraled down.	The bill would require most derivatives to be traded on exchanges to increase transparency and to be cleared through third parties to ensure there's collateral behind the deals. A controversial provision would require Wall Street banks to spin off their derivatives trading units, which are very lucrative for them.	Many industry players such as farmers and utilities which purchase derivatives to hedge the risk of price changes for their products would be exempt. Also, the bill would not require banks to spin off their derivatives units.

Oversight powers

No federal agency is in charge of monitoring the stability of the entire financial system. A large interconnected company, such as insurance giant AIG, whose failure would have had wide ripple effects, might have been stopped from placing big bets on the mortgage market if such an entity existed.	Bill would create a nine-member council of regulators including officials from the Fed, the SEC and FDIC to identify risks posed by large financial firms. It can recommend to the Fed that such a firm increase capital reserves and even approve, with a two-thirds vote, a Fed decision forcing the firm to divest some holdings if it poses a grave threat to the economy.	It would create a council to monitor risks to the system and make recommendations but would leave it to various relevant agencies to implement them rather than the Fed exclusively.

Credit-rating agencies

Agencies such as Standard & Poor's and Moody's gave misleadingly high ratings to bad securities during the crisis. A big reason, critics say, is that the agencies are paid by the financial firms issuing the debt, such as mortgage-backed securities.	A new independent board would randomly select the agency providing the initial rating to a security. Agencies also would have to disclose more information about how they assign ratings.	Ratings agencies would have to register with the Securities and Exchange Commission. There's no stipulation for how an agency is selected.

2010-05-23T18:53:00.000-07:00

Posted By Moss M.Jacques


Senators shrug off 'flaws' in financial reform bill Harkin and Grassley are less than giddy about watered-down overhaul package, but cast votes in its favor. Written BY COURTNEY BLANCHARD TH STAFF WRITER Sunday, May 23, 2010


Pass a massive bill these days and it's hard to come by a completely glowing critique. even many of those who voted for it said the financial reform bill was only a "step in the right direction." After the late Thursday passage of the financial reform package, lawmakers issued a barrage of press releases decrying or celebrating the bill, often with the same message -- it doesn't go far enough. Republican opponents said the bill would put too much power in the hands of the government. Those who voted for it, including both Iowa senators, said it was a good start, but they would like to see more reforms.

Pass a massive bill these days and it's hard to come by a completely glowing critique.

even many of those who voted for it said the financial reform bill was only a "step in the right direction." After the late Thursday passage of the financial reform package, lawmakers issued a barrage of press releases decrying or celebrating the bill, often with the same message -- it doesn't go far enough. Republican opponents said the bill would put too much power in the hands of the government. Those who voted for it, including both Iowa senators, said it was a good start, but they would like to see more reforms.

"I voted for this measure because it is a step in the right direction," U.S. Sen. Tom Harkin, D-Iowa, said. "This bill will create a strong consumer financial protection bureau that will put a stop to a whole range of predatory financial practices targeting ordinary Americans."

The bill would strengthen the role of the inspectors general to fight fraud and mismanagement at the major federal financial agencies, including the Securities and Exchange Commission and the Federal Reserve. A "financial stability oversight council" would work to find risks in the financial system. Hedge funds would be subject to registration with the SEC. Banks would have to spin off their derivatives trading into new subsidiaries. The bill also strives to prevent another massive bailout at taxpayer expense.

Two area senators crossed party lines in the vote -- U.S. Sen. Russ Feingold, D-Wis., broke with Democrats to vote against the bill, and Sen. Chuck Grassley, R-Iowa, was among four Republicans to vote for the measure.

"The bill does not eliminate the risk to our economy posed by 'too big to fail' financial firms," said Feingold in a statement. "Nor does it restore the proven safeguards established after the Great Depression, which separated Main Street banks from big Wall Street firms and are essential to preventing another economic meltdown."

Before the vote, Grassley told reporters that the adoption of an amendment strengthening the role of inspectors general to oversee financial agencies pushed him closer to supporting the bill. The other Republicans to support of the bill were Sen. Scott Brown, of Massachusetts, and the two senators from Maine, Olympia Snowe and Susan Collins.

"There's no question this bill has flaws, but a message needs to be sent to Wall Street that business-as-usual is over," Grassley said in a statement. "This bill takes a step in the direction of trying to fix things. It starts to open up the Fed. It puts the massive derivatives market in the light of day. Other reform is needed, too, starting with Fannie and Freddie. It's a matter of transparency and accountability."

Grassley has advocated reform for the two federally subsidized mortgage lenders, Fannie Mae and Freddie Mac, but the bill doesn't address that. Harkin supported a measure to limit ATM fees, but that amendment never came up for a vote.

Most Senate Republicans didn't buy the "step in the right direction" argument and opted to vote against the bill.

"The federal government has doubled in size over the past decade," said Republican Senate leader Mitch McConnell, of Kentucky. "And yet every day this administration devises some new way to make it bigger, costlier and more intrusive."

The bill must now be reconciled with a House version that passed in December.

2010-05-23T15:19:00.000-07:00

Posted by Moss M.Jacques

When Washington Took On Wall Street

By Alan Brinkley

Vanity Fair written for June 2010

Nearly 80 years ago, on Capitol Hill, Ferdinand Pecora forced J. P. Morgan Jr. and other “banksters” to reveal the corruption that had fueled the Great Depression—bringing shame on the financial industry and resulting in new laws to curb abuses. Today, with Republicans having threatened to block reform and Goldman Sachs fighting fraud charges, the author looks back at the Pecora Commission hearings, which riveted America, and asks why there is no comparable investigation now.

J.P. Morgan Jr. was terrified. He was the most famous and arguably the most powerful banker in the United States, and also among the most secretive. But in May 1933, in the aftermath of the greatest financial crisis in the history of the United States, he was being called to testify before the Senate Committee on Banking and Currency to explain how the catastrophe had occurred. Morgan dreaded the prospect, in part because it was a painful reminder of his famous father’s unhappy experience testifying before the 1912 Pujo Committee, which had investigated the “money trust” (and was partly responsible for the creation of the Federal Reserve Board). The elder Morgan, mercilessly interrogated, had died shortly after the hearings. Many of his associates, not least his son, had blamed his death on his public humiliation.

Now it was the younger Morgan’s turn. Known to friends and associates as Jack, he was 65 years old and semi-retired. He feared that he might not be able to answer the committee’s questions, and he was even more afraid that he might lose his temper. His partners rehearsed Jack Morgan for days, peppering him with hostile and insulting questions. In the meantime, the Morgan bank’s powerful lawyer, John W. Davis, tried to keep the committee at bay. A onetime Democratic presidential nominee, Davis had helped pass a New York law barring any investigation of private bankers, and he argued in court that the Morgan bank was therefore entitled to privacy. But the U.S. Senate passed a resolution requiring the bank to open its books. The bank reluctantly complied and agreed to let Morgan testify.

He was to be questioned by Ferdinand Pecora, a former prosecutor who was now the special counsel to the committee. Pecora was known to be tough and unrelenting, and the prospect of his cross-examination attracted enormous publicity. There was front-page coverage on newspapers across the country. A large and eager crowd swarmed the Senate Office Building. “They thronged about the door and packed the corridor nearing the committee room,” The New York Times reported, “so that in the morning those who had business inside had to fight their way through. Only a large detail of policemen and a rope prevented a similar scene in the afternoon, and even motorcycle policemen wearing cartridge belts and revolvers were called to police the room.”

Pecora cross-examined some of the most powerful bankers in America. His goal was to lift the veil on a clubby, secretive world.

Pecora’s questioning of Morgan was only partly an effort to tease out information about the bank’s internal practices. Pecora knew that the enigmatic quality of the Morgan bank had given rise to myriad conspiracy theories and a broad popular belief that the bank exercised a malign and hidden global power—as Goldman Sachs and other banks are seen by some to exercise today. Pecora also hoped to stoke the public’s wrath toward the financiers, whom most Americans held responsible for the Wall Street crash. And he knew how to deploy both menace and ridicule. But Morgan swallowed his fear and marched into the packed room, “massive and dignified, but less grimly masterful than his father, in a manner which could not fail to be impressive,” the Times noted.

“I state without hesitation,” Morgan said at the conclusion of his carefully written opening statement, “that I consider the private banker a national asset and not a national danger.” Pecora had an impeccable sense of timing. He almost immediately asked Morgan a single question: “What is your business or profession?” When Morgan replied, “Private banker,” the audience burst into laughter. His humiliation was only just beginning.
Modern Parallels

The Pecora Commission, as the Senate investigation came to be known, was a spectacular event in the darkest days of the Great Depression. It had a lasting impact on the public’s image of the financial world, and it helped make possible new laws and regulations aimed at preventing a Depression-size calamity from befalling the country again. What few anticipated was how fragile those laws and regulations would eventually prove to be—and how, in time, the tide would turn. The abuses highlighted by the Pecora Commission have clear parallels with the abuses that led to the financial meltdown of the past two years. Where the parallel breaks down is in comparison with the Pecora Commission itself. Congress has been remarkably decorous about investigating what went wrong. No Wall Street executives have been questioned for days at a time by a skilled interrogator. The Obama administration’s financial-reform bill—which would establish new procedures for seizing and dismantling failed banks, and also diminish the prospect of taxpayer-funded bailouts—faces strong, perhaps unanimous, Republican opposition. Even if the bill passes, it would represent a relatively modest response to the existing range of problems. In April, the Securities and Exchange Commission agreed (on a split vote) to file civil charges against Goldman Sachs, alleging that the firm defrauded some of its investors by selling them a portfolio of highly risky mortgage-related securities. The S.E.C. further charged that Goldman did not inform clients that the securities they were purchasing had been selected with the help of an investor who was expecting to profit from their decline in value. So far, the charges do not name any figures in Goldman’s senior management.
Pugnacious Prosecutor

J. P. Morgan was definitely senior management—he was a third-generation scion of a great banking family. Ferdinand Pecora was decidedly not. He had been born in Sicily in 1882, one of seven children of a struggling cobbler. In 1887, the Pecoras moved to New York, where they lived in a cold-water apartment in Chelsea. Like many immigrant children, Ferdinand went to work at a young age (delivering milk and newspapers). But he also conscientiously attended the local public schools, graduated from high school as class valedictorian, considered (and then rejected) a career in the Episcopal ministry, and finally applied to New York Law School, having already clerked for a law firm across Wall Street from the august Morgan bank, an institution so secretive that its imposing building carried no sign or name, only the number 23 on the door. (When asked in front of the Senate committee how clients found their way to his bank, Morgan said smugly, “Most of them know the address.”) Pecora was admitted to the bar in 1911, the previous year he got married, had a son, moved to an apartment on Riverside Drive, and began to involve himself in politics. He campaigned for Theodore Roosevelt’s Progressive Party in 1912. By 1916 he was an admirer of Woodrow Wilson’s, and a Democrat. And in 1918, through connections at Tammany Hall, the Democratic political machine of New York, he was appointed an assistant district attorney.

Pecora was a natural litigator—tall, strong-jawed, with bountiful, wavy black hair and a penchant for cigars, which he often brandished to dramatic effect during cross-examinations. He was strikingly energetic and pugnacious (if mostly soft-spoken). Early in his career as a prosecutor, he specialized in, among other things, investigating the bottom end of the brokerage business, what were known at the time as bucket shops—sellers of fraudulent securities. Among his early achievements was sending the state superintendent of banks to jail for taking bribes. Pecora was, and remained, not just a Wilsonian but a Brandeisian—sharing Justice Louis Brandeis’s belief that “bigness” in corporations and banks was the enemy of democracy. In 1929, Pecora was a prominent Democratic candidate for district attorney, but to his great disappointment he was nudged aside for a Tammany favorite. By early 1930, he was settled in private practice and ostensibly out of politics. His withdrawal from public life lasted only three years.
Setting the Traps

The months between the election of Franklin Roosevelt to the presidency, in November 1932, and his inauguration, in March 1933, were among the most turbulent and frightening in American history. By the end of 1932, unemployment had reached 25 percent. More dangerous, the banking system seemed to be unraveling with remarkable speed, a victim—as many individuals had been—of the stock-market crash, which wiped out more than 80 percent of the value of securities. Across the nation, small banks were failing at an accelerating rate, thereby helping to bring down larger banks. With a lame-duck and much-reviled president, and a Congress soon to be replaced, the government seemed paralyzed.

But in the final months of Herbert Hoover’s repudiated Republican administration, Peter Norbeck, a senator from South Dakota and the chair of the Senate Banking Committee, proposed an investigation into the very banks that his committee had championed (and coddled) for years. Norbeck understood the depth of the crisis, and he made earnest efforts to attract a progressive and weighty figure to serve as special counsel for his investigation. The people he tried to recruit included Harold Ickes (soon to become Roosevelt’s secretary of the interior), Samuel Untermyer (a major figure on the Pujo Committee), and Samuel Seabury (a lawyer who had spearheaded the effort to remove the corrupt and discredited Jimmy Walker from the mayoralty of New York). So unpromising did the investigation seem that all three men declined the position. Irving Ben Cooper, a rising lawyer known for his dogged prosecution of fraud, finally accepted the job—but resigned within just a few days, complaining that Senator Norbeck was not giving him enough authority.

Meanwhile, Norbeck was hearing from former New York district attorney Joab Banton about another candidate: Ferdinand Pecora, whom Banton called “the best-qualified lawyer” in the country for a job like this. Bainbridge Colby, a former Bull Moose stalwart and briefly Woodrow Wilson’s secretary of state, made the same suggestion, describing Pecora as “the most brilliant cross-examiner in New York.” In late January, six weeks before Roosevelt’s inauguration, Pecora signed on as special counsel to the banking committee. He assembled a talented group of attorneys and financial experts and quickly plunged into the hearings.

Within weeks of his appointment, Pecora became the unquestioned star of the investigation. The press started calling it the Pecora Commission, which became its quasi-official and enduring name. Pecora’s staff burrowed into the vast archives of the major banks and collected a staggering amount of information on almost every aspect of American finance, much of it never before seen outside the closed doors of the banking world. The records of the commission, now in the National Archives, comprise tens of thousands of pages of documents. All this digging aided Pecora’s cross-examinations and proved to be of enormous importance to subsequent legislation. But what made the investigation so powerful was not so much the data (for which Pecora had a phenomenal memory). Its greater importance was in the theater of the event, something of which Pecora was brilliantly aware. His cross-examinations produced enormous press attention for months on end. Pecora’s dogged, determined, and almost always calm approach to questioning—much enhanced by the generous use of subpoenas—was, as he certainly intended, remarkably dramatic and highly popular.

In the course of over a year of public investigations, Pecora cross-examined some of the most powerful and famous bankers and businessmen in America. He used his subpoena power to put people on the stand for day after day. He cross-examined Samuel Insull, the utilities mogul, who fled the country a year later; Richard Whitney, the president of the New York Stock Exchange and a man with close ties to Morgan, who surprised many in the audience by confirming what most lawyers knew but many citizens did not—that “no public agency … exercises any regulatory power over [the stock exchange]”—and who within a few years would wind up in jail; Thomas W. Lamont, Morgan’s most important partner; and many others.

Pecora’s goal was to lift the veil on the clubby, secretive world of banking, a world to which he believed no one—government, investors, press—had adequate access. He bored into what he considered the corrupt (if not necessarily illegal) practices of the great banks, asking seemingly mundane questions that drew his targets into his traps. Albert Wiggin, president of the Chase National Bank, who resigned in disgrace after it was revealed that he had been short-selling his own bank’s stock, was one such victim. But short selling was only a part of Wiggin’s extra-curricular profitmaking.

Even as Wiggin ran one of the nation’s largest banks, he served as a director or trustee of 59 corporations, some of which he himself quietly came to control or were controlled by Chase or its “independent” investment arm, the Chase Securities Corporation. “Many of these corporations from which Mr. Wiggin received … helpful additions to his regular earnings,” Pecora acidly recalled, “received large loans from the Chase National Bank”—large loans at presumably very favorable terms. The arrangement fell somewhere between back-scratching and extortion. One such company, Metpotan, which Wiggin controlled, announced a total profit of a mere $159,000 in the years between 1928 and 1932; in the same period, Wiggin took out profits from Metpotan totaling more than $10.4 million. He was frequently offered stock from customers of the bank at a reduced price, in return for unspecified considerations. When Pecora asked him why the Alleghany Corporation sold the company’s stock to him at almost half the market value, Wiggin responded, “I assumed it was a favor and I was very glad to take it.” Other companies provided similar favors. Pecora asked Wiggin why he had indulged in such practices:

Wiggin: “Just to be helpful to the key men of the institution.”

Pecora: “Helpful to key men?”

Wiggin: “Of the institution; yes, sir … ”

Did the companies, Pecora asked, “have anything to do with the Chase Securities Corporation?”

Wiggin: “No, but I was very much interested in having the men in Chase Securities Corporation make money.”

John G. Townsend, senator from Delaware, jumped into the questioning: “What actual service did they render to you that they should receive such participation?”

Wiggin: “None.”

Pecora: “You wanted them to make money outside of their salaries?”

Wiggin: “Yes.”

The commission called the practice “inimical to the interest of the banking institution.”

But what made the commission the sensation it became was Pecora’s questioning of perhaps the two greatest figures in American finance: Charles E. Mitchell and J. P. Morgan.
Worthless Bonds

‘Sunshine Charley” Mitchell, as he was often, and somewhat incongruously, called, was the imperious chairman of National City Bank (decades later renamed Citibank). He became its president in 1921 and expanded it into the largest bank in the nation. But not content with ordinary, conservative commercial banking, Mitchell created what was ostensibly an independent investment bank that would allow City to sell securities—a step that led to much the same kind of disaster that many banks experienced after their massive losses in the securities markets in 2008–9. The independence of City’s investment bank was almost entirely fictional—“a masterpiece of legal humor,” the popular historian Frederick Lewis Allen observed at the time. The boards of the commercial bank and the investment bank were virtually identical, funds from the commercial bank helped finance the investment bank, and investors could buy stock in both companies simultaneously.

Mitchell had turned the new investment bank into the largest such institution in America, with almost 2,000 employees and offices around the world. “Instead of waiting for investors to come,” one business analyst noted at the time, “he took young men and women, gave them a course of training … and sent them out to find the investors.” This practice, the analyst added, was “revolutionary.” Mitchell was extraordinarily aggressive in pushing his young salesmen, and by the mid-1920s City was facilitating sales by providing large loans to investors who counted on rising stock prices to allow them to pay back their debts. Mitchell soon moved well beyond the reckless credit mechanisms that were becoming common on Wall Street. He not only hunted for investors; he searched for new securities his bank could peddle, no matter how risky they might be.

In 1927, he had begun selling Peruvian bonds. Pecora called Hugh Baker, president of the investment company, to the stand and read into the record a 1923 memo from the bank’s foreign desk, which reported to Victor Schoepperle, City’s vice president in charge of South America. The memo warned that, “Peru has been careless in the fulfillment of contractual obligations” and cited material from the London Times that accused the teetering country of “broken pledges” and “flagrant disregard of guarantees.”

Pecora: “On the whole, Mr. Schoepperle’s report … was against financing any Peruvian credits, wasn’t it? … It was considered a bad risk; isn’t that so?”

Baker [squirming]: “I assume that must have been his reason there.”

Pecora: “Do you know whether the memorandum was considered by the executive officers of your company?”

Baker [evasive]: “I am quite sure that that was discussed, although … the specific memorandum I do not recall.”

Pecora: “Well, now, if this memorandum was discussed there was nothing in it, was there, that encouraged the officers in floating this loan?”

Baker [defeated]: “Certainly not at that particular time.”

Despite the fears of City’s own agents in New York and Peru that the securities were likely to be virtually worthless, the bank ignored the warnings and sold the Peruvian bonds to customers for $90 million before their value collapsed. Undeterred, Mitchell soon moved on to equally risky Brazilian, Cuban, and Chilean bonds—a practice similar to the heedless way in which mortgage markets ignored the risks of moving into shaky real estate properties in the years leading up to the 2008 collapse. By the end of 1927, City had pushed its stock price up to almost $3,000 a share. Two years later, it had fallen to just over $100, and by the end of the 1932 the bank itself was on the brink of collapse.
“A Beaten Man”

Mitchell’s National City Bank was far from the only reckless and imperiled bank in the early 1930s to be pilloried by the Pecora Commission. Public hostility to bankers generally was broad and deep. “The best way to restore confidence in our banks,” Senator Burton Wheeler, of Montana, angrily declared, making few distinctions among the institutions, “is to take these crooked presidents out of the banks and treat them the same as [we] treated Al Capone.” It was not just populist firebrands who proposed retribution. The Roosevelt administration conveyed to Pecora that “the prosecution of an outstanding violator of the banking law would be the most salutary action that could be taken at this time. The feeling is that if the people become convinced that the big violators are to be punished, it will be helpful in restoring confidence.”

Pecora chose his targets carefully, bringing to the stand bankers whose personality and behavior he thought would outrage what Time magazine called “that inchoate multitude, the U.S. people.” Almost no one could attract attention like Charley Mitchell. He was, Edmund Wilson wrote somewhat sardonically in 1933, “the banker of bankers… Like an emperor, sat Mitchell, dynamic, optimistic and insolent, sending out salesmen in all directions as he preached to them, bullied them, bribed them.”

Mitchell’s power and arrogance were on full view when Pecora began his questioning. Mitchell assumed, Pecora later recalled, “the loftiest moral tone, no matter how questionable the transactions were with respect to which he was interrogated.” He responded to questions vaguely but also with a false and grating modesty. When asked if City was the largest investment company in the world, Mitchell replied, “I would not want to make any boast about that, Mr. Pecora.” Mitchell himself did not disclose very much. But Pecora deposed investors who had bought City’s offerings largely with borrowed money, sometimes amounting to 90 percent of the cost, assured by the company that rising prices would soon cover the outlay. One investor who had sunk his savings into Peruvian bonds, and lost everything, testified that he had complained to the bank and had received the response “Well, that is your fault for insisting upon bonds. Why don’t you let me sell you some stock?” Such testimony aroused visible anger in the hearing room.

Later, Pecora homed in on Mitchell’s compensation and income taxes. For the last three years of the stock-market boom, Mitchell had received bonuses of more than $1 million a year. Pecora revealed that Mitchell had paid no taxes in 1929, in part because of a loss created by the sale of 18,300 shares of diminished City stock. “By the way,” Pecora asked, as if it was an afterthought, “that sale of this bank stock … in 1929 was made to a member of your family, wasn’t it?” It soon became public that Mitchell had sold the shares to his wife. The loss had been completely phony. Not long after, Mitchell resigned from his bank. (Pecora later described watching him walk alone from the Senate Office Building to Union Station, “carrying his own suitcase—a beaten man.”) Shortly afterward, Mitchell was indicted for tax evasion (and later acquited), and ended up paying a $1 million civil fine. Senator Carter Glass, of Virginia, a member of the commission and himself a banking expert, said at the time that “Mitchell more than any 50 men is responsible for this stock crash.”
Titan vs. Showman

Only J. P. Morgan could overshadow Mitchell’s dramatic appearance before the commission. It created the greatest publicity of the year-long investigation. The Richmond Times-Dispatch called Morgan “the twentieth-century embodiment of Croesus, Lorenzo the Magnificent, Rothschild; the lordly Mr. Morgan, financier and patron of the arts; the unreachable Mr. Morgan, with his impregnable castle at Broad and Wall Streets and his private army of armed guards; the austere Mr. Morgan, to whose presence only the mighty are admitted.” Now, the reporter noted, he was “in a committee room and upon his bare brow the gaze of the ‘peepul.’”

The hearings were moved from the committee’s normal chamber to the large and ornate Senate Caucus Room, which was flooded with lights and filled with reporters and microphones. The audience was restive and often noisy. Senator Glass, angry at lesser bankers but awed by Morgan, called it “a circus, and the only things lacking now are peanuts and colored lemonade.”

Pecora had made relatively little headway against Morgan’s surprisingly amiable testimony—the coaching had apparently paid off. He knew that the Morgan bank had abandoned its fabled conservatism and had, instead, helped create giant holding companies to increase the value of securities. When Pecora asked what “useful public purpose” these new corporations served, the Morgan bankers had no answer beyond the fact that the corporations diversified investor opportunities. Even so, Pecora could not identify any specific activities by Morgan that were in fact illegal. But several days into the questioning, he revealed that Morgan had paid no income tax at all in the years 1930, 1931, and 1932. The nonpayment of taxes was not in fact a dodge; it was a result of the enormous investment losses sustained after 1929. But Pecora, not averse to pushing a few hot buttons if he thought it might help, used the revelation to inspire lurid headlines about “tax evasion.”

Morgan, outraged, privately described Pecora as a “dirty little wop” and a “sharp little criminal lawyer.” Other Morgan partners described him as a cheap demagogue and a crass showman. Thomas Lamont, Morgan’s senior partner, declared that no one would take this sideshow seriously. But nothing could have been further from the truth. The Morgan hearings dominated the newspapers for days. In the midst of the hearings, Pecora himself appeared on the cover of Time magazine (which, in its mostly positive coverage, described him as “swarthy,” “kinky-haired,” and “olive-skinned”).

The most bizarre event of the Morgan hearings was a stunt inspired by Carter Glass’s use of the word “circus.” While the senators were out of the room, in executive session, a press agent took advantage of their absence to create publicity for Ringling Bros.—a breach of security that would be unthinkable today. The press agent marched a 21-inch woman named Lya Graf into the Caucus Room, shouting, “Gangway … The smallest lady in the world wants to meet the richest man in the world.” He placed the tiny Graf on Morgan’s lap, in front of dozens of photographers. Morgan blustered gamely. “Why I’ve got a grandson bigger than you,” he said. “But I’m older,” Lya replied. There was a short argument over whether she was 20, as Lya claimed, or 32, as her press agent announced. “Where do you live?,” Morgan asked her. “In a tent, sir.” she replied. When the press agent asked Lya to take off her hat, Morgan complimented her on it. Several chroniclers of the exchange wrote that in a strange way the encounter—which was widely reported—seemed to have humanized Morgan. That was small comfort to Morgan himself, whose façade of power—faceless, remote, unutterably private—had been repeatedly punctured.
Pecora’s Prediction

The Pecora Commission continued its work for another eleven months, deposing many more bankers and financiers. It came to an end in the spring of 1934. The hearings themselves created a cyclone of outrage and generated broad popular support for Roosevelt’s financial agenda. The final Senate report, released in June, lauded the creation of the Securities and Exchange Commission and predicted that it would “materially abate, if not eradicate, abuses that caused much economic distress.” The report also endorsed the Glass-Steagall Act, which for the first time required a strict separation of commercial and investment banks. (Charley Mitchell’s ill-fated investment company, and others like it, would henceforth be illegal.) “The magnitude of a corporation,” the report warned, “is no justification for its existence or propagation.” But the most important result of the Pecora Commission was not its specific recommendations. In the aftermath of the hearings, many Americans came to consider the notion of bankers as wise guardians of the public trust to be archaic, even absurd. The term “banksters” became a common description of the lords of finance. (Some 75 years later, when Lloyd Blankfein described Goldman Sachs as “doing God’s work,” the ridicule of “banksters” emerged briefly again.)

Pecora had hoped to chair the new S.E.C. Instead, to the dismay of many observers, Roosevelt appointed Joseph P. Kennedy. The attorney Jerome Frank described the appointment as “like setting a wolf to guard a flock of sheep.” But Pecora agreed to serve on the commission and quickly developed a good working relationship with Kennedy—who turned out to be a much better leader of the S.E.C. than his critics had expected. Pecora eventually accepted an appointment as a New York State Supreme Court justice, a position he held until his retirement, in 1969, at the age of 87. He died two years later.

The Senate report on the Pecora Commission expressed optimism that the new legislation might help create “the undivided cooperation of industrialist, financier, and investor, with a mutual recognition of their reciprocal rights and duties.” Pecora himself was more skeptical—he possessed a grim faith in the buoyancy of financial malfeasance. In 1939, six years after he had begun his inquiry, he published a decidedly earnest book, Wall Street Under Oath, recounting his experiences and reflecting on the commission that bore his name. “Under the surface of the governmental regulation,” he wrote, “the same forces that produced the riotous speculative excesses of the ‘wild bull market’ of 1929 still give evidences of their existence and influence… It cannot be doubted that, given a suitable opportunity, they would spring back into pernicious activity.”

Pecora did not live to see the truth of his predictions borne out. Deregulation, which had begun to gather momentum in the 1970s, made enormous progress over later decades. In 1999 the Glass-Steagall Act was repealed—opening the door to the Mitchell-style fusion of commercial and investment banking (and with similar consequences). The S.E.C. in the early 2000s was significantly weakened. Inevitably, the financial crisis that began to unfold in 2008 would bring the Pecora Commission back into public visibility. It has been cited frequently as a model for exploring and confronting the financial woes of our own time, but the response of contemporary congressional investigations has been almost invisible. The current congressional inquiry into the banking industry, chaired by former California state treasurer Phil Angelides, calls itself the “Angelides Commission” in obvious homage to the Pecora Commission. So far, at least, it is an anemic copy, lacking anything like the tenacity and impact of Pecora’s investigation; instead, showboating and modestly informed members of Congress berate witnesses without eliciting any useful disclosures—only self-serving apologies. where is our ferdinand pecora? asked a headline on the New York Times op-ed page in 2009. There has as yet been no good answer

2010-05-23T15:10:00.000-07:00

Posted by Moss M.Jacques

The Unbelievably Rampant Corruption On Wall Street

May 22, 2010

Written By Michael Snyder

In order for a financial system to be able to function properly, it is absolutely essential that the general population has faith in it. After all, who is going to want to invest in the stock market or entrust their money to big financial institutions if there is not at least the perception of honesty and fairness in the financial marketplace? For decades, the American people did have faith in Wall Street. But now that faith is being shattered by a string of recent revelations. It seems as though the rampant corruption on Wall Street is seeping up almost everywhere now. In fact, some of the things that have come out recently have been absolutely jaw-dropping. The truth is that the corruption on Wall Street is much deeper and much more systemic than most of us ever dared to imagine. As the general public digests these recent scandals, it is going to result in a tremendous loss of faith in the U.S. financial system. Once faith in a financial system is lost, it can take years or even decades to get back. So how is the U.S. financial system supposed to work properly when large numbers of people simply do not believe in it anymore?

Just consider some of the recent revelations of Wall Street corruption that have come out recently….

*Bloomberg is reporting that a massive network of big banks and financial institutions have been involved in blatant bid-rigging fraud that cost taxpayers across the U.S. billions of dollars. The U.S. Justice Department is charging that financial advisers to municipalities colluded with Bank of America, Citigroup, JPMorgan Chase, Lehman Brothers, Wachovia and 11 other banks in a conspiracy to rig bids on municipal financial instruments. Apparently what was going on was that it was decided in advance who would win the auctions of guaranteed investment contracts, which public entities purchase with the proceeds from municipal bond sales, and then other intentionally losing bids were submitted in order to make the process look competitive. The U.S. Justice Department claims that this fraud has been industry-wide and has been going on for years. In fact, at least four financial professionals have already pleaded guilty in this case.

*An industry insider has come forward with “smoking gun” evidence that some of the biggest banks have been openly and blatantly manipulating the price of gold and silver. For a time it looked like the federal government was just going to ignore all of this fraud, but after substantial public uproar some action is indeed being taken. In fact, it has been reported that federal agents have launched parallel criminal and civil probes of JPMorgan Chase and its trading activity in the precious metals markets.
*New York attorney general Andrew Cuomo is investigating whether eight major Wall Street banks purposely misled the big credit ratings agencies so that they would give their mortgage-backed securities AAA ratings that they did not deserve.

*There has been a ton of legal action surrounding mortgage-backed securities lately. For example, the Justice Department and the Securities and Exchange Commission are now investigating Morgan Stanley as part of a probe into whether Wall Street firms deliberately misled investors regarding the sale of mortgage-related securities.

*Goldman Sachs is getting most of the press about fraud in the mortgage-backed securities market these days. Of course Goldman is strenuously denying that it “bet against its clients” when it changed its position in the housing market in 2007. But we all know the truth at this point. The truth is that Goldman Sachs clearly bet against its clients and was involved in a whole lot of things that were even worse than that. Many did not think the U.S. government would dare go after Goldman, but that is what we are starting to see. U.S. federal prosecutors have opened a criminal investigation into whether Goldman Sachs or its employees committed securities fraud in connection with its trading of mortgage-backed securities, and it will be very interesting to see if anything comes of that investigation.

*But not everyone is being held accountable for their actions. The guy who helped bring down AIG is going to get off scott-free and is going to be able to keep the millions in profits that he made in the process.

*Entire U.S. cities have been victims of this rampant Wall Street fraud. In fact, it is now being alleged that the biggest banks on Wall Street are ripping off some of the largest American cities with the same kind of predatory deals that brought down the financial system in Greece.

*The really sad thing is that fraud is very, very lucrative. Executives at many of the big banks that received large amounts of money during the Wall Street bailouts are being lavished with record bonuses as millions of other average Americans continue to suffer economically. Even the CEOs of bailed-out regional banks are getting big raises. It must be really nice to be them.

So does all of this make you more likely or less likely to invest in the stock market?

Do you think that the American people can see all of this and still believe that the financial system is “fair” and “honest”?

The truth is that Wall Street is full of rip-off artists and fraudsters who don’t even try to hide their greed anymore.

It is as if a thousand junior Gordon Gekkos have been unleashed and they are all trying to be masters of the universe at any cost.

But what they are doing is ripping the heart out of the U.S. financial system.

If people lose faith in the system the system will ultimately fail.

A financial system that allows open fraud and manipulation is operating on borrowed time.

So will the rampant corruption on Wall Street now be cleaned up?

Only time will tell.

But one thing is for certain.

The American people will be watching.

2010-05-23T14:51:00.000-07:00

Posted by Moss M.Jacques

Wall Street's dirty, rotten scoundrels
By Roger Ebert on May 23, 2010 1:19 AM )
Roger Ebert's Journal

I am but a naive outsider. I don't fully understand the working of the "derivatives" and "credit swaps" that we have heard so much about in recent months. I'm not alone. But I'm learning. I gather that these are ingenious computer-driven trading schemes in which good money can be earned from bad debt, and Wall Street's Masters of the Universe pocket untold millions at the same time they bankrupt their investors and their own companies.
This process is explained in a shocking documentary named "Inside Job," which was just named the best single film at Cannes 2010. It wasn't in competition. The voters in the poll were a group of 19 movie critics polled by IndieWire. (I wasn't one of them.) It was the only film to earn an A average. It is a very angry, very carefully argued, brutally clear documentary about how the American financial industry set out deliberately to defraud the ordinary American investor. It was directed by Charles Ferguson (below), whose academic, business and government backgrounds make him unusually well-qualified for this subject. The remorseless narration is by Matt Damon.

Here is the argument of the film, in four sentences. From Roosevelt until Reagan, the American economy enjoyed 40 years of stability, prosperity and growth. Beginning with Reagan's moves against financial regulation, that sound base has been progressively eroded. The crucial federal error (in administrations of both parties) was to allow financial institutions to trade on their own behalf. Today many large trading banks are betting against their own customers.

Here is how it works in the real estate market. Banks aggressively promote mortgages to people who cannot afford to pay them--who are bad credit risks. These mortgages are assembled with many similar packages. The packages are fragmented. They are carried on the books as tangible assets, when they are worthless. The institutions assembling them can hedge their bets by betting against them. Thus, when the mortgages fail, as they must, the profits are made despite and because of their failure.

A Chicago group named Magnetar was particularly successful in creating such poisoned instruments for the sole purpose of hedging against them. Its story is told in the current best-seller, The Big Short: Inside the Doomsday Machine," by Michael Lewis. Magnetar's clients included Merrill Lynch, Citigroup, UBS, JP Morgan Chase, and others. They knew exactly what the "Magnetar Trade," was, and welcomed it, because it protected them against the risk of selling bad mortgages. The more mortgages that failed, the more money they made.

These investments banks, and most of the other big Wall Street players, including Lehman and Bear, Stearns, continued to sell the bad mortgages to their clients as good investments. I have a link below to a famous exchange seen on C-SPAN as Sen. Carl Levin grilled Daniel Sparks, head of the Goldman, Sachs Mortgages Department, on why the company aggressively sold investments its own traders described to each other as "shitty." It is entertaining to watch Sparks maintain a facade of studious probity as Levin socks him with the word "shitty" again and again.

This Wall Street climate meant the financial institutions were betting on their own clients to fail, and making money when they did. It helps to explain one session of Senate testimony I have been fascinated by for months: How Richard Fuld, CEO of Lehman Brothers (photo at top) was able to defend the $484 million bonus he received after leading his firm into bankruptcy. Yes, the firm failed. But it failed because of poisoned investments it hedged against, and paid its executives bonuses on the profits from those hedges.

"Inside Job" is devastating as it reports on the gilded worlds of the Masters of the Universe, that prophetic term coined by Tom Wolfe. Lawrence MacDonald, who wrote a book on Lehman's collapse, said on the PBS NewsHour: "Richard Fuld, he had a private elevator. His driver would call Lehman Brothers and the front desk attendant would press a button, and one of the elevators in the southeast corner of the building would become frozen. A security guard would come over and hold it until Mr. Fuld arrived in the back door. There's only 15 feet where King Richard Fuld is exposed to the rabble, I guess you'd call us."

Some may say, well, he was the boss. I say, who the hell did he think he was? I've waited for elevators with my bosses, including Marshall Field and Rupert Murdoch. They seemed content enough that there was an elevator, although to be sure another of my bosses during the dark days of Hollinger at the Sun-Times turned off the escalators to save on the electricity bill.

Wall Street became a world driven by executive bonuses, not customer benefit. Firms existed for the profit of their leaders, not their customers. They sold us the shit, and made money off the Shinola. This is as clear as day. It was also perfectly legal.

One of the most fascinating aspects of "Inside Job" involves the chatty on-camera insights of Kristin Davis (below), a Wall Street madam, who says the Street operated in a climate of abundant sex and cocaine for valued clients and the traders themselves. She's not talking about a few naughty boys. She says it was an accepted part of the corporate culture, that hookers at $1,000 an hour and up, up, up were kept on retainer, that cocaine was the fuel, and that she and her girls didn't understand how some traders could even function on the trading floor after most nights.

Did the currency of prostitution and drugs extend even to the executive level? "To the top," she says. "To the very top."

That leads me to the matter of Financial Reform. We need it. We need to return to an era of transparency. We need to restore a market of investments that are what they seem to be. We need to deprive investment banks of the right to trade on behalf of their own accounts. We need to require them to work on behalf of their customers, not against their customers on behalf of themselves.

The evidence of this is made graphic by the collapse of the housing market. Untold thousands of American homeowners are homeless and bankrupt because of something called, with a certain poetry, "predatory lending." In some circles, they are blamed for their own misfortune. Jim Cramer screamed on CNBC that the financial collapse was the fault of "shiftless homeowners" who bought mortgages they couldn't afford. It didn't occur to him that banks should not have been encouraging the sale of those mortgages. In the days before deregulation, it was very hard to get a mortgage from a bank that didn't believe you could make the payments. It recent years it was hard not to get one.

The bad mortgages were wrapped up and sliced and diced into so many Derivatives that the banks themselves had no idea exactly what paper they were holding. Perhaps a computer somewhere did. In one of the more refreshing moments during the housing meltdown, Rep. Matcy Kaptur of Ohio advised her constituents: "If a bank forecloses on you, don't move, and demand they produce a copy of your mortgage. In many cases, they can't."

Right now financial reform is being considered by Congress. Some pitiful measures have been passed. I would like to say the Obama Administration is in the forefront of these reforms, but it is not. There seems to be an unholy bipartisan alliance in favor of Wall Street greed.

It is easy to say Republicans oppose financial reform, because they do. But too easy to say Democrats support it, because they hold back from meaningful reform. Their measures amount to pissing on a forest fire. All current financial reform measures are taking place within a world infested with Wall Street lobbyists--four lobbyists to every member of Congress. It is amusing to hear the Tea Party describe Obama as a radical. In the area of financial reform, he is no more radical than Clinton and the two Bushes.

Gene Siskel, who was a wise man, once gave me the best investment advice I've ever received. "You can never outsmart the market, if that's what you're trying to do," he said. "Find something you love, for reasons you understand, that not everyone agrees with you about, and put your money in it."

That seemed to make sense. I bought Steak n Shake, Apple, Wholesome and Hearty Foods, and Google. Faithful readers will know why I bought Steak n Shake. I was a Macintosh fan from the late 1980s, and that's when I started buying. After becoming obsessed with low-fat vegetarian eating, I bought W&H, which made the Gardenburger. I liked Google when it was first introduced, and bought shares the day it went public. I had absolutely no investment advice except Siskel's. Reader, if only I had invested every penny I had in those stocks, today I would be a Master of the Universe.

The homes not for sale above are described on web sites as two of the five homes of Richard Fuld.

NYC judge blasts Wall Street greed at sentencing

2010-05-22T15:06:00.000-07:00

NYC judge blasts Wall Street greed at sentencing

The largest hedge fund insider trading case in history

By LARRY NEUMEISTER (AP) – 1 day ago

NEW YORK — A former top executive at a $1 billion hedge fund investment firm was sentenced to more than two years in prison Friday in the first sentencing to result from what prosecutors have called the largest hedge fund insider trading case in history.

Mark Kurland, 61, of Mount Kisco, N.Y., was sentenced Friday to two years and three months in prison and ordered to forfeit the $900,000 he made through illegal trades by a judge who blamed the attitudes of people like Kurland on the country's financial collapse two years ago.

U.S. District Judge Victor Marrero said Kurland, a co-founder of New Castle Partners hedge fund in Manhattan, "frankly should have known better" than to join an inside trading scheme that led to the arrests of top executives including one-time billionaire Raj Rajaratnam.

"He had a choice as a leader of the financial industry. He could have led by example. Instead, he chose to follow. He became a joiner, surrendering to the spree of the financial market's virtual mob mentality that nearly brought down this country's financial industry in the quest for ever bigger and faster gains," Marrero said.

Kurland, who had pleaded guilty to conspiracy to commit securities fraud and securities fraud, was among 11 people who have pleaded guilty in the case. Many of the others had agreed to cooperate with the government, a step which delays their sentencing.

Rajaratnam, the portfolio manager for the Galleon Group hedge fund, has pleaded not guilty and disputed government claims that he pocketed as much as $50 million through a network of cheating executives at financial firms and companies privy to inside information.

The judge criticized pleas for leniency on Kurland's behalf on the grounds that he had a minimal role, that he did not benefit much financially, that others were more at fault and that there was no real harm to the markets.

"To some extent, this country's financial meltdown was fueled precisely by the attitudes manifested by Mr. Kurland in this proceeding, and repeated by defendants in other related cases," the judge said.

"Mr. Kurland's actions, stemming from a recognized leader of the industry, compromised the financial market's integrity at a time of financial crises and widespread concern about corruption, rampant recklessness, and arrogant greed at the highest levels of the industry," he added.

Before he was sentenced, Kurland said his crime had "destroyed my reputation and everything I have worked hard for my entire life."

He said he was "heartbroken and profoundly ashamed" and conceded that he should have known better.

"The void left by the sudden end of my career will never end," he said.

Kurland said his torment was "unimaginable and very painful."

At his plea, Kurland admitted engaging in insider trading between August 2008 and January 2009, after receiving tips about confidential information involving three companies.

New Castle Partners operated as the equity hedge fund group of Bear Stearns Asset Management Inc. until its parent company was acquired in March 2008 by JPMorgan Chase & Co. In January 2009, New Castle Partners ended its affiliation with JPMorgan and formed a new hedge fund, New Castle Partners LP.

Seven worries for Wall Street, and what's next

2010-05-22T14:51:00.000-07:00

Jon Markman's Speculations

May 22, 2010, 1:35 p.m. EDT

Seven worries for Wall Street, and what's next

Commentary: Global margin call sends stock investors scurrying

By Jon Markman

SEATTLE (MarketWatch) -- Stocks traded over the past week with all the panache of the drunk uncle at a shotgun wedding, stumbling through four and a half weak-kneed sessions before snapping to attention at last call in the final half hour.

The concept of a random walk doesn't really do the week justice, as the selling virus that started in China and Greece last month suddenly developed into a worldwide pandemic that saw the major developed markets lose more than 7% and emerging markets lose 10%-plus.

The multidecade bull market could have a classic last phase with a rush into gold in a "paper-chase trade," according to Damien and Derek Hoffman of the finance blog Wall St. Cheat Sheet. David Weidner reports.

It was a global margin call, and no risky asset classes were spared a scrape with the capital-eroding bug. The weird thing, though, is that there really weren't any especially nasty headlines this week. The U.S. economic news wasn't red-hot, but markets have blithely cold-shouldered much worse in the past 12 months. So what's really going on? A few thoughts spring to mind:
1. Worse times ahead

Remember how last year stocks rose and rose out of the March low even though the economy looked terrible? At that time, a lot of experts were saying it was just a bear-market rally and that the public should not get involved. Then it turned out that stocks were rising because they were anticipating an improved economy in six months.

Well now the opposite is occurring. Stocks fell even though the economy looks great. And the inverse of the prior explanation might be a legit reason: Investors are anticipating a worse economy in the next 12 months. If you think about how much taxpayer money is going to service interest payments now instead of creating productive assets, this is not an unreasonable concern.

2. Unilateral action

Remember how last year the G20 leadership huddled in London and came up with a firm plan to attack the financial crisis in a coordinated fashion? And then they stuck to their scripts, all flooding their countries with fiscal spending and ultra-low interest rates. I said many times last year that the unanimity was amazing and unprecedented, like cats and dogs sleeping together.

Well now again we have the opposite. German finance officials declare an end to short-selling of bonds and credit default swaps without telling the rest of their European Union partners. And then we learn that the British, Italian and U.S. finance officials plan no such move -- and moreover U.K. officials essentially say that if you want to short German bonds you are welcome to do so in London.

And of course we have never gotten a straight answer out of the euro zone as to which countries support the $1 trillion rescue package for Greece, or exactly how it will be financed. And don't forget that while interest rates are still scraping along at 300-year lows in the United States and the U.K., China and Australia are either raising rates or increasing bank reserve requirements.

In short we've gone from total global lockstep approach to battling the global financial crisis to every man for himself. One minute it's all "kumbaya" and the next minute it's all chaos theory.

The importance of this is that the variation in approaches have allowed the credit bears to worm their way into the chinks in the governments' armor and arbitrage the differences. You could even go so far as to say that we're seeing a revival of the "manipulated short sale" first invented by the likes of Daniel Drew in the 1830s America, where bears spread lies and fear in such a way that their enemies start accusing each other of wrongdoing instead of focusing on their jobs.

3. Risk repricing

The repricing of expected risk and expected return is occurring in a step-wise fashion rather than in a long, slow glidepath.

That is to say, rather than price/earnings multiples for the likes of IBM and Boeing declining over many months to account for tighter business opportunities in a slowed-down Europe, now the global financial system decides to get it done all at once. One day you're priced for certain 15% growth and the next day you're priced for a more uncertain 12% growth. Big drug makers like Pfizer have been stuck in this devaluation trend for 10 years.
4. Prowling bears

Fourth, the credit bears really are out there making trouble via their favorite instrument, which is credit default swaps on both government and corporate debt.

Basically the bears exploit the fact that CDS prices are a large part of the formula used to price credit. When CDS goes up in value because bears are trying to make it look like the company or country is in trouble, a series of calculations are triggered that can force the bond rating agencies to lower the organization's credit rating. When that negative announcement is made, the equity market freaks out and dumps stock -- which in turn also makes the credit even look worse. That boosts the value of the CDS further, emboldening the bears. Rinse and repeat.

This is why banning the "naked" buying and selling of CDS is a great idea, because there is no legitimate economic reason to buy or sell CDS unless you actually own bonds whose value you want to hedge. CDS was supposed to be insurance for bond holders but has instead turned into a highly leveraged form of off-track betting in which you get paid for scaring people into thinking a horse is dead. I have nothing against the shorting of stocks and bonds, but the use of CDS for this purpose has become a sick and destructive joke and it ought to be stopped.
5. Negative 'mojo'

The worse people feel about a security the more that negative "mojo" can leak over to other people with that security, who may then sell it without even really knowing why. This sort of thing is really what I mean by "contagion." The meme of "stock hate" gets in the air and is ingested around the world at the speed of a CNBC or Twitter broadcast, much as "stock love" did only a month before.

I'll bet if you ask people who sold Procter & Gamble down 2.5% last week why they did so, they could not give a coherent answer. The herd mentality to do what everyone else is doing is one of the things that makes us a mammal, and is very hard to explain or avoid. Hopefully you can just recognize it when it's happening and try to avoid or exploit it.
6. Death by taxes

This was a truly rotten, no-good week in the greater China complex, as the Australian and Brazilian markets have gapped down twice. Moreover major individual stocks in Brazil and Australia closed well under their flash-crash-day lows on Wednesday, including big steel maker Gerdau (NYSE:GGB) , giant forestry products firm Fibria Celulose (NYSE:FBR) , miner Vale do Rio Doce (NYSE:VALE) and Aussie bank Westpac Banking (NYSE:WBK)

This is a graphic example of the unwinding of the U.S. dollar carry-trade. Every time the dollar ticks higher in reaction to the decline of the euro, it forces fund managers out of their cheaply funded bets on commodities and commodity-producing countries.

But another reason for these declines is fascinating, frightening and emblematic of what world markets face now: Australia plans a massive 40% tax on mining companies' profits to defray the cost of all the borrowing the country did to rescue its financial system last year.

This tax is expected to severely reduce earnings forecasts for mining giants BHP Billiton (NYSE:BHP) and Rio Tinto Plc (NYSE:RTP) , which make up a large percentage of the Australian stock market's total market value.

The worst part is that other countries will consider this a great idea. And that's why Brazilian giant VALE is sinking. Tom Price, commodities analyst at UBS in Sydney, told Bloomberg it could create a "tax contagion" worldwide in which miners in Brazil, Peru, Chile, Canada, South Africa and the United States could face the same fate.

Moody's has estimated that mining companies' earnings could be cut by a third in Australia in 2012 when the tax kicks in, and markets have wasted no time in pricing that into the companies' shares and bonds.

The tax has already boomeranged on the Australian economy, as the country's currency has dived almost 8% since the tax was announced earlier in the month and Fortescue Metals Group, the third-largest iron ore miner in Australia, has already put $15 billion in projects on hold, according to Bloomberg. Think about the rippling effect that will have on machinery makers, individual miners, the transportation subsector and the like. This is the kind of government intervention that could stifle investment around the world.

Government intervention in financial markets is having similarly troublesome effects in Europe. The sudden German ban on naked short selling of stocks, bond and credit default swaps this week was a perfect example. It is becoming clear that Germany decided to launch this plan unilaterally without first consulting its partners in France, the United States or the United Kingdom, catching both investment bankers and other EU policymakers off guard.

As I have mentioned before, the best way that politicians can shrink the impact of speculators is to enact more credible fiscal and monetary policies. It's a classic mistake of trying to kill the messenger rather than to fix the message.
7. Normal reaction

Maybe this is all just a typical reaction to a currency and sovereign debt crisis. Consider the Nasdaq 100 in 1998, when the dot-com boom shot the market up a rockin' 50% by mid-year. But then the Clinton presidency started to unravel at the same time that the Russian ruble came unglued and it looked like Moscow would default on sovereign debt.

The Nasdaq plunged 22%, culminating in the wipeout of the famed hedge fund Long Term Capital Management. Once Russia did default, the market got back in gear and the Nasdaq 100 swiftly rose 60%, in part fueled by a rapid series of coordinated global interest rate cuts.

It would not surprise me to see the same scenario play out. A 22% decline in the Standard & Poor's 500 Index (MARKET:SPX) from the April high would put it at 950, which also happens to be its 50% Fibonacci retracement zone as well as the July breakout level. If the crisis were to come to a head in some fashion, then a big rally could certainly take place, most likely even taking the market to a new high.
Bounce house

Stocks will almost certainly rebound continue to rally in some fashion in the next few days, perhaps as high as 1,175 on the S&P 500 Index, and the character of that advance will give us a chance to assess the path of the next few months.

If the rally shows weak buying intensity on low volume, then active investors should fully exit from equities and put on some inverse ETFs to prepare for a new leg down. A reasonable target would be the 940-950 area of the S&P 500.

If the rally shows strong buying intensity and good volume, then get fully long again only once some simple criteria are met: A rise in the S&P 500 over its 10- and 20-day averages, and a cross of the 10-day over the 20-day. That can happen pretty fast if buyers are serious about coming back into the game; in both July 2009 and February this year it took less than a week after the rebound began.

I think the weak advance followed by a stunning decline is the more likely scenario, as disunity among world governments gives credit bears the opportunity to wreak havoc for a while. Yet the strong breadth witnessed at the April top promises that even an early summer collapse could be reversed by autumn, and stocks may surprisingly have a shot at making new highs by winter. And then we'll look back at these days and wonder what all the fuss was about. That happened in 1998, as well as 1999, and 2004, and it could very well happen again.

Jon Markman is a money manager and investment adviser in Seattle. For more ideas, try a two-week trial to Markman's newsletter, Strategic Advantage , published in partnership with MarketWatch.

2010-05-22T14:21:00.000-07:00

Posted by mossmjac

Inside the skins of the Wall Street crisis players

Written by Andrew Ross Sorkin & Eric Lam, Financial Post

Since Lehman Brothers went kaput in September 2008, hundreds of books have popped up trying to analyze, deconstruct and explain just what happened during the financial crisis. But one of those books, Too Big to Fail, is decidedly different.

Instead of writing a dry, academic analysis, author Andrew Ross Sorkin, a New York Times business columnist, set out to write a page-turner focused on the characters at the centre of all the drama: their quirks, their foibles, their humanity.

"There are all of these different components [to the crisis] and what connects them are not the institutions and money, but the people," Mr. Sorkin said in an interview this week at a downtown Toronto hotel.

"When you get inside the room, your field of vision changes, and I thought this would help us understand the crisis better."

That message extends to the book's title, which his publisher disliked. However, the phrase has since become a catchphrase for the arrogance of Wall Street, fitting for a book about hubris more than anything else.

"We have created institutions that truly are too big to fail. But more importantly, we've created a generation of people -- and this is what I think led to the crisis more than anything else -- who thought they were too big to fail," he said.

Mr. Sorkin signed his book deal at the height of the financial crisis in October 2008, while many critical events were still playing out. He plans to add some new information and analysis for the paperback edition in the fall, but argues even now there is not enough breathing space to figure out the true place of the crisis in history.

"Here we are a year-and-a-half later, it's really hard to argue that anyone has the proper perspective to truly evaluate what took place," he said. "There are plenty of people who've already written books and articles with specific judgments, and they will either be wrong or extremely lucky to be right."

Letting the reader come to his or her own conclusions was a guiding principle while writing the book. He wanted readers to approach central characters such as Lehman chief executive Richard Fuld or U.S. Treasury Secretary Henry Paulson without any preconceived notions or "good and bad guy" labels.

He learned that lesson researching Mr. Paulson, who can appear stiff and awkward on television.

Mr. Sorkin worried about framing the book around such an important, but possibly dull character. Instead, he found the former Goldman Sachs chief executive to be a fascinating and complex subject. A staunch capitalist and a Republican on the one hand, Mr. Paulson is also an ardent environmentalist who drives a Prius and married a Democrat. His mother reportedly cried when she found out he was going to work for the Bush administration.

"I think in the end, history will judge him more favour-ably than it has thus far," Mr. Sorkin said. "He's somebody who unfortunately helped lead us to the brink, but he also led us away from the brink. By the time he took the job, were the seeds for this debacle already sown?"

Some, such as Erin Callan, the former chief financial officer for Lehman, were guilty of being in the wrong place at the wrong time. But Mr. Sorkin's opinion of her boss, Mr. Fuld, is harsher.

"He was somebody who really loved the firm, but he almost loved it blindly. He had loyalties to people he shouldn't have had. This was a situation he created, and he struggled to let go at the end," he said.

Mr. Sorkin, who has sparred with comedian Jon Stewart on the Daily Show, said public anger has really swelled as surviving companies such as Goldman return to profit.

This is important, as long as the anger results in meaningful reform instead of satisfying the need to "tar and feather" the bigwigs on Wall Street, he said.

What really frustrated Mr. Sorkin was the habit of many of his subjects, at least initially, to refuse to accept responsibility.

"Many of them felt they were in the same boat, it was a perfect storm, everyone's to blame but not me," he said. "They would talk about themselves like they were cancer survivors or something."

Even so, he refuses to buy into the notion that executives were so out of touch they would be influenced by the moral hazard argument -- taking great risks because the government would be there to bail them out.

"I don't think in reality any of these people ever said to themselves, 'Let's throw caution to the wind, because if I drive my company into the ground we'll be saved,'" Mr. Sorkin said.

erlam@nationalpost.com

Why Do We Need the SEC?

2009-05-20T06:03:00.000-07:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Strange Death of American Capitalism

2009-05-18T05:00:00.000-07:00

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The Strange Death of American Capitalism

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

Book Review of Bailout Nation by Barry Ritholtz

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2009-05-18T04:55:00.000-07:00

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

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

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

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

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

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

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

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

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

2009-05-18T04:51:00.000-07:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OTHER VOICES: Wall Street greed brought down Detroit

2009-05-18T04:40:00.000-07:00

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8:00 pm, May 17, 2009

OTHER VOICES: Wall Street greed brought down Detroit

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

By John Mogk

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

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

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

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

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

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

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

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

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

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

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

2009-05-18T03:40:00.001-07:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cuomo discusses Wall Street culpability, responsibility

2009-05-06T15:35:00.000-07:00

Andrew Cuomo: Culpability and Comeuppance on Wall Street

Maria Bartiromo talks to New York Attorney General Andrew Cuomo

By Maria Bartiromo

05/06/2009

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

MARIA BARTIROMO

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

ANDREW CUOMO

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

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

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

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

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

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

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

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

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

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

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

Reserve Fund founder charged with fraud

2009-05-06T15:31:00.000-07:00

Reserve Fund founder charged with fraud

By Aaron Elstein

Published: May 5, 2009 - 3:27 pm

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

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

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

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

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

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

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

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

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

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

SEC charges money market fund with fraud

2009-05-06T15:29:00.001-07:00

SEC charges money market fund with fraud

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

By Tami Luhby, CNNMoney.com senior writer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The meltdown

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

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

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

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

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

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

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

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

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

2009-04-06T04:24:00.000-07:00

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

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

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

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

William K. Black: Thank you.

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

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

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

Black: Absolutely.

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

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

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

Black: Yes.

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

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

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

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

Moyers: Yeah. Liars' loans--

Black: Liars' loans.

Moyers: Why did they call them liars' loans?

Black: Because they were liars' loans.

Moyers: And they knew it?

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

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

Moyers: You think they really said that to borrowers?

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

Moyers: Ninja?

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

Moyers: You're talking about significant American companies.

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

Moyers: Which company?

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

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

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

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

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

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

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

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

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

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

Black: Our system…

Moyers: Our financial system…

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

Moyers: Is there a law against liars' loans?

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

Moyers: Because…

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

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

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

Moyers: Who did?

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

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

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

Moyers: That's right.

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

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

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

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

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

Moyers: And why…

Black: How mad is this?

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

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

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

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

Moyers: The cover up?

Black: Sure. The cover up.

Moyers: That's a serious charge.

Black: Of course.

Moyers: Who's covering up?

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

Moyers: What do you mean?

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

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

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

Moyers: As?

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

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

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

Moyers: What facts?

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

Moyers: You--

Black: Taking away people's bonuses?

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

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

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

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

Moyers: And that's a law?

Black: That's the law.

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

Black: Not could. Was mandated--

Moyers: By the law.

Black: By the law.

Moyers: This law, you're talking about.

Black: Yes.

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

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

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

Black: Well, where's the Pecora investigation?

Moyers: The what?

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

Moyers: What do you mean?

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

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

Black: Absolutely.

Moyers: You are.

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

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

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

Moyers: A.I.G. did?

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

Moyers: Even though Goldman Sachs had a big vested stake.

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

Moyers: Yeah, like a conflict of interest, it seems.

Black: Massive conflict of interests.

Moyers: So, how did he get away with it?

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

Moyers: Who's going to get the facts?

Black: We need some chairmen or chairwomen--

Moyers: In Congress.

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

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

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

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

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

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

Black: Yes.

Moyers: Why?

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

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

Black: Right.

Moyers: It was relatively a handful of people.

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

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

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

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

The sum of all fears

2009-02-25T05:18:00.000-08:00

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

2009-02-17T12:37:00.001-08:00

SEC charges Texas financier with 'massive' fraud
By STEPHEN BERNARD, AP Business Writer Stephen Bernard, Ap Business Writer 52 mins ago
NEW YORK – Federal regulators on Tuesday charged Texas financier R. Allen Stanford and three of his firms with a "massive" fraud that centered around high-interest-rate certificates of deposit, and raided some of the companies' offices.
In a complaint filed in federal court in Dallas, the Securities and Exchange Commission alleged Stanford orchestrated a fraudulent investment scheme centered on an $8 billion CD program that promised "improbable and unsubstantiated high interest rates."
Stanford's assets, along with those of the three companies, were frozen. Stanford's firms include Antigua-based Stanford International Bank, broker-dealer Stanford Group Co. and investment adviser Stanford Capital Management, which are both based in Houston.
The bank's chief financial officer, James Davis, and Stanford Financial Group's chief investment officer, Laura Pendergest-Holt, were also charged in the complaint.
U.S. District Court Judge Reed O'Connor has appointed a receiver to handle the frozen assets.
The charges come amid an investigation that has lasted more than three months and included the SEC, the Financial Industry Regulatory Authority, the U.S. brokerage industry's self-policing body, and the Florida Office of Financial Regulation. Investigators visited the Florida offices of Stanford Group last month.
Stanford Group did not immediately return calls seeking comment.
Alfredo Perez, a spokesman for the U.S. Marshal's Service in Houston, confirmed that agents raided Stanford's office in Houston Tuesday morning, but he did not have any other immediate comment.
The SEC alleged Stanford and his businesses misrepresented the safety of the deposits, claiming the bank reinvested client funds in liquid financial instruments to help return profits on investments sharply higher than average rates of similar products.
"Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises, and fabricated historical return data to prey on investors," Linda Chatman Thomsen, director of the SEC's division of enforcement, said in a statement.
The SEC also accuses Stanford of running a second scheme tied to sales of a mutual fund product, which allegedly used false historical performance data to grow the program from less than $10 million in 2004 to more than $1 billion. The alleged fraud helped generate $25 million in fees for Stanford Group in 2007 and 2008, according to the SEC.
Stanford, 58, is one of the most prominent businessmen in the Caribbean, with investment advisers around the world helping him grow a personal fortune estimated at $2.2 billion by Forbes magazine.
His Stanford International Bank Ltd. said deposits surged from $624 million in 1999 to $8.4 billion in December. The bank is based in the twin-island Caribbean nation of Antigua and Barbuda, which has carved out a niche as a tax haven and offshore base for Internet gambling.
Stanford has deep roots in Texas, where he graduated from Baylor University, and still speaks with a slight twang. But he travels in different circles now — knighted in 2006 by the islands' government, Stanford is known there as "Sir Allen." And last year he shook up the staid world of professional cricket by bankrolling the purse in a $20 million winner-take-all match in Antigua between England and a West Indies select team.
The England and Wales Cricket Board said it has suspended negotiations for a new sponsorship deal amid the allegations.

15 Companies That Might Not Survive 2009

2009-02-09T04:41:00.000-08:00

15 Companies That Might Not Survive 2009
Rick Newman
Friday February 6, 2009, 11:53 am EST
Who's next?

With consumers shutting their wallets and corporate revenues plunging, the business landscape may start to resemble a graveyard in 2009. Household names like Circuit City and Linens 'n Things have already perished. And chances are, those bankruptcies were just an early warning sign of a much broader epidemic.

Moody's Investors Service, for instance, predicts that the default rate on corporate bonds - which foretells bankruptcies - will be three times higher in 2009 than in 2008, and 15 times higher than in 2007. That could equate to 25 significant bankruptcies per month.

We examined ratings from Moody's and data from other sources to develop a short list of potential victims that ought to be familiar to most consumers. Many of these firms are in industries directly hit by the slowdown in consumer spending, such as retail, automotive, housing and entertainment.

But there are other common threads. Most of these firms have limited cash for a rainy day, and a lot of debt, with large interest payments due over the next year. In ordinary times, it might not be so hard to refinance loans, or get new ones, to help keep the cash flowing. But in an acute credit crunch it's a different story, and at companies where sales are down and going lower, skittish lenders may refuse to grant any more credit. It's a terrible time to be cash-poor.
[See how Wall Street continues to doom itself.]

That's why Moody's assigns most of these firms its lowest rating for short-term liquidity. And all the firms on this list have long-term debt that Moody's rates Caa or lower, which means the borrower is considered at least a "very high" credit risk.

Once a company defaults on its debt, or fails to make a payment, the next step is usually a Chapter 11 bankruptcy filing. Some firms continue to operate while in Chapter 11, retaining many of their employees. Those firms often shed debt, restructure, and emerge from bankruptcy as healthier companies.

But it takes fresh financing to do that, and with money scarce, more bankrupt firms than usual are likely to liquidate - like Circuit City. That's why corporate failures are likely to be a major drag on the economy in 2009: In a liquidation, the entire workforce often gets axed, with little or no severance. That will only add to unemployment, which could hit 9 or even 10 percent by the end of the year.
[Want to land a plum job without paying taxes? Here's how.]
It's possible that none of the firms on this list will liquidate, or even declare Chapter 11. Some may come up with unexpected revenue or creative financing that helps avert bankruptcy, while others could be purchased in whole or in part by creditors or other investors. But one way or another, the following 15 firms will probably look a lot different a year from now than they do today:

Rite Aid. (Ticker symbol: RAD; about 100,000 employees; 1-year stock-price decline: 92%). This drugstore chain tried to boost its performance by acquiring competitors Brooks and Eckerd in 2007. But there have been some nasty side effects, like a huge debt load that makes it the most leveraged drugstore chain in the U.S., according to Zacks Equity Research. That big retail investment came just as megadiscounter Wal-Mart was starting to sell prescription drugs, and consumers were starting to cut bank on spending. Management has twice lowered its outlook for 2009. Prognosis: Mounting losses, with no turnaround in sight.

Claire's Stores. (Privately owned; about 18,000 employees.) Leon Black's once-renowned private-equity firm, the Apollo Group, paid $3.1 billion for this trendy teen-focused accessory store in 2007, when buyout funds were bulging. But cash flow has been negative for much of the past year and analysts believe Claire's is close to defaulting on its debt. A horrible retail outlook for 2009 offers no relief, suggesting Claire's could follow Linens 'n Things - another Apollo purchase - and declare Chapter 11, possibly shuttering all of its 3,000-plus stores.
[See 5 pieces missing from Obama's stimulus plan.]

Chrysler. (Privately owned; about 55,000 employees). It's never a good sign when management insists the company is not going out of business, which is what CEO Bob Nardelli has been doing lately. Of the three Detroit automakers, Chrysler is the most endangered, with a product portfolio that's overreliant on gas-guzzling trucks and SUVs and almost totally devoid of compelling small cars. A recent deal with Fiat seems dubious, since the Italian automaker doesn't have to pony up any money, and Chrysler desperately needs cash. The company is quickly burning through $4 billion in government bailout money, and with car sales down 40 percent from recent peaks, Chrysler may be the weakling that can't cut it in tough times.

Dollar Thrifty Automotive Group. (DTG; about 7,000 employees; stock down 95%). This car-rental company is a small player compared to Enterprise, Hertz, and Avis Budget. It's also more reliant on leisure travelers, and therefore more susceptible to a downturn as consumers cut spending. Dollar Thrifty is also closely tied to Chrysler, which supplies 80 percent of its fleet. Moody's predicts that if Chrysler declares Chapter 11, Dollar Thrifty would suffer deeply as wel
l.
Realogy Corp. (Privately owned; about 13,000 employees). It's the biggest real-estate brokerage firm in the country, but that's a bad thing when there are double-digit declines in both sales and prices, as there were in 2009. Realogy, which includes the Coldwell Banker, ERA, and Sotheby's franchises, also carries a high debt load, dating to its purchase by the Apollo Group in 2007 - the very moment when the housing market was starting to invert from a soaring ride into a sickening nosedive. Realogy has been trying to refinance much of its debt, prompting lawsuits. One deal was denied by a judge in December, reducing the firm's already tight wiggle room.
[See why "Wall Street talent" is an oxymoron.]

Station Casinos. (Privately owned, about 14,000 employees). Las Vegas has already been creamed by a biblical real-estate bust, and now it may face the loss of its home-grown gambling joints, too. Station - which runs 15 casinos off the strip that cater to locals - recently failed to make a key interest payment, which is often one of the last steps before a Chapter 11 filing. For once, the house seems likely to lose.

Loehmann's Capital Corp. (Privately owned; about 1,500 employees). This clothing chain has the right formula for lean times, offering women's clothing at discount prices. But the consumer pullback is hitting just about every retailer, and Loehmann's has a lot less cash to ride out a drought than competitors like Nordstrom Rack and TJ Maxx. If Loehmann's doesn't get additional financing in 2009 - a dicey proposition, given skyrocketing unemployment and plunging spending - the chain could run out of cash.

Sbarro. (Privately owned; about 5,500 employees). It's not the pizza that's the problem. Many of this chain's 1,100 storefronts are in malls, which is a double whammy: Traffic is down, since consumers have put away their wallets. Sbarro can't really boost revenue by adding a breakfast or late-night menu, like other chains have done. And competitors like Domino's and Pizza Hut have less debt and stronger cash flow, which could intensify pressure on Sbarro as key debt payments come due in 2009.

Six Flags. (SIX; about 30,000 employees; stock down 84%). This theme-park operator has been losing money for several years, and selling off properties to try to pay down debt and get back into the black. But the ride may end prematurely. Moody's expects cash flow to be negative in 2009, and if consumers aren't spending during the peak summer season, that could imperil the company's ability to pay debts coming due later this year and in 2010.

Blockbuster. (BBI; about 60,000 employees; stock down 57%). The video-rental chain has burned cash while trying to figure out how to maximize fees without alienating customers. Its operating income has started to improve just as consumers are cutting back, even on movies. Video stores in general are under pressure as they compete with cable and Internet operators offering the same titles. A key test of Blockbuster's viability will come when two credit lines expire in August. One possible outcome, according to Valueline, is that investors take the company private and then go public again when market conditions are better.

Krispy Kreme. (KKD; about 4,000 employees; stock down 50%). The donuts might be good, but Krispy Kreme overestimated Americans' appetite - and that's saying something. This chain overexpanded during the donut heyday of the 1990s - taking on a lot of debt - and now requires high volumes to meet expenses and interest payments. The company has cut costs and closed underperforming stores, but still hasn't earned an operating profit in three years. And now that consumers are cutting back on everything, such improvements may fail to offset top-line declines, leading Krispy Kreme to seek some kind of relief from lenders over the next year.

Landry's Restaurants. (LNY; about 17,000 employees; stock down 66%). This restaurant chain, which operates Chart House, Rainforest Café, and other eateries, needs $400 million in new financing to finalize a buyout deal dating to last June. If lenders come through, the company should have enough cash to ride out the recession. But at least two banks have already balked, leading to downgrades of the company's debt and the prospect of a cash-flow crunch.

Sirius Satellite Radio. (SIRI - parent company; about 1,000 employees; stock down 96%). The music rocks, but satellite radio has yet to be profitable, and huge contracts for performers like Howard Stern are looking unsustainable. Sirius is one of two satellite-radio services owned by parent company Sirius XM, which was formed when Sirius and XM merged last year. So far, the merger hasn't generated the savings needed to make the company profitable, and Moody's thinks there's a "high likelihood" that Sirius will fail to repay or refinance its debt in 2009. One outcome could be a takeover, at distressed prices, by other firms active in the satellite business.

Trump Entertainment Resorts Holdings. (TRMP; about 9,500 employees; stock down 94%). The casino company made famous by The Donald has received several extensions on interest payments, while it tries to sell at least one of its Atlantic City properties and pay down a stack of debt. But with casino buyers scarce, competition circling, and gamblers nursing their losses from the recession, Trump Entertainment may face long odds of skirting bankruptcy.

BearingPoint. (BGPT; about 16,000 employees; stock down 21%). This Virginia-based consulting firm, spun out of KPMG in 2001, is struggling to solve its own operating problems. The firm has consistently lost money, revenue has been falling, and management stopped issuing earnings guidance in 2008. Stable government contracts generate about 30 percent of the firm's business, but the firm may sell other divisions to help pay off debt. With a key interest payment due in April, management needs to hustle - or devise its own exit strategy.
- With Carol Hook, Danielle Burton and Stephanie Salmon

Trying not to let sleazy dogs lie

2009-01-25T11:07:00.000-08:00

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?...

2009-01-22T10:11:00.000-08:00

"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

2009-01-21T15:00:00.000-08:00

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."
__

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

2009-01-19T16:04:00.000-08:00

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...

2009-01-19T16:01:00.000-08:00

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

2009-01-17T05:17:00.000-08:00

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

2009-01-12T03:35:00.000-08:00

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

2009-01-12T03:30:00.000-08:00

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

2009-01-07T10:49:00.000-08:00

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

2009-01-06T11:32:00.000-08:00

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

2009-01-04T16:04:00.000-08:00

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

2009-01-04T16:01:00.001-08:00

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

2009-01-04T15:52:00.000-08:00

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."

The Big Lie Exposed: Wall Street as Institutionalized Fraud

2009-01-01T05:14:00.000-08:00

Jeff Schweitzer
Posted December 30, 2008 05:40 PM (EST)

The Big Lie Exposed: Wall Street as Institutionalized Fraud

While investors express dismay and shock about Bernard Madoff's $50 billion Ponzi scheme, nothing about the affair is even slightly surprising. The scandal is perfectly understandable in light of a fundamental truth that nobody wants to accept: Wall Street itself is nothing but a grand Ponzi scam. Wall Street is institutionalized fraud sanctioned by government and blindly accepted by society.

As with religion and faith, people want to believe, and will therefore ignore obvious facts that contradict hopeful thinking about investment returns. The structural flaws of Wall Street are readily apparent to anybody who wishes to see the truth, but few do. Since the early 1930s, voices of reason have been sounding the alarm but investors gorging on hope refuse to listen, and the scam self-perpetuates. Over several postings I intend to convince you beyond any doubt that Wall Street is an elaborate scam, never intended to work for individual investors.

Wall Street is ostensibly in the staid business of analysis, strategy and money management. But we encounter a problem immediately. Brokers, through whom all trades must be completed, make money with every trade, whether that trade is profitable to the investor or not. A more balanced system that would discourage fraud would pay brokers a fee tied to portfolio performance. It can be done. In the current system, any advice offered by anybody on Wall Street will consistently drive toward strategies and trades that make money - not for investors, but for the entrusted adviser. That brokers are not disinterested is only one of many problems. The system is weighted against individuals in favor of the powers on the Street. Make no mistake: you are a target. I will explain why.

The Game is Rigged and Inherently Corrupt

The focus of this first blog about Wall Street is to expose to bright light the false idea that Wall Street is a "free market." In fact, the market is highly manipulated, opaque, inherently corrupt, and rigged against individuals. Wall Street is everything that Adam Smith feared. Smith, the father of modern economics, said that the invisible hand only works in a society adhering to moral norms that prohibit theft and misrepresentation. Yet theft and misrepresentation are the twin gods of Wall Street.

Don't believe me? Well, let us take a trip down memory lane. I would bet that many readers have already forgotten about Drexel Lambert. That is too, bad, because the story of that company presaged the collapse of the Lehman Brothers. We could have learned our lesson then, but did not. During the 1980s, Drexel was the fifth-largest investment bank in the United States. That is until Dennis Levine was charged with insider trading. He pleaded guilty, and implicated Ivan Boesky, who led to Michael Milken.

By 1990 the company was bankrupt. There are deep parallels between the junk bonds (low-rated debt securities) that brought down Drexel and the sub-prime lending and credit default swaps that caused the implosion in 2008. The three are radically different financial instruments, but all share the corrupt idea the something can be created from nothing, that there really is a free lunch. We had plenty of warning; the bright red lights were flashing before us for 30 years. We turned a blind eye. Instead of shoring up the foundation of our financial system, Republicans threw fuel into the fire by legislating even more deregulation, and then more still. The result was absolutely predictable, and inevitable.
The Drexel bankruptcy should have been a wake-up call. Instead, we learned nothing.

Remember Kenneth Lay, Andrew Fastow, and Jeffrey Skilling of Enron, who before Madoff were the preeminent poster boys for corporate greed? They are by no means alone even if the most memorable. In the back alley game of "Fleece the Shareholder," skilled competitors are abundant. Dennis Kozlowski, Tyco's ex-chairman and chief executive, showed some real creativity. Morgan Stanley, always promoting an image of steady, conservative, trustworthy values, agreed to pay $50 million to settle federal charges that investors were never informed about compensation the company received for selling certain mutual funds.

Disinterested brokers? Hardly. Before that the SEC settled with Putnam Investments, the fifth largest mutual fund company, which allegedly had allowed a select group of portfolio managers and clients to flip mutual fund shares to profit from prices gone flat. Dick Strong of the Strong Funds admitted to skimming his investors to benefit himself. Sound like Madoff? What was Strong's punishment? Strong was allowed to sell his fund business for hundreds of millions of dollars.

Think you are safe with mutual funds? The headline in the USA Today on Friday, September 3, 2004, read "Fund scandal investigation is nowhere near an end." Christine Dugas writes: "Nearly two dozen [mutual] fund firms have been implicated in the scandal, and several executives have resigned or been forced out." Mutual fund firms agreed to fines totaling more than $2.6 billion in more than 100 settlements. But don't get your hopes up. Little of the $2.6 billion was ever returned to shareholders.

No, indeed, you are only treated well if you are one of the wealthy clients. Some mutual funds allowed those favored few to buy and sell shares in rapid-fire fashion. Oddly, this practice is actually legal, but harmful to innocent shareholders not lucky enough to be included in the inside game. That would be you. The game, while profitable to those who are allowed to play, costs long-term shareholders, like you, millions of dollars a year. Why? Because mutual funds are forced to keep more assets in cash to accommodate these excess trades, and along with that comes an increase in trading costs, which funny enough are passed on to all shareholders. That would be you.

The corruption does not stop there of course. We also have the issue of late trading. Fund shares, unlike stocks, are priced only once daily at their 4 p.m. closing price. That is true for you, but not for favored clients. Some funds allowed a few big clients to lock in the closing price after 4 p.m., letting them profit from late-breaking news. That is the ultimate insider trading.

Even corporations have the presumption of innocence until proven guilty, but the list of firms tied to the mutual fund scandal investigation is impressive, and includes Janus, Strong, Bank of America's Nations Funds, Bank One's One Group funds, Alliance Capital, Prudential Securities, Fred Alger Management, Merrill Lynch, and Wilshire Associates. And you were surprised that Wall Street melted down in 2008?

Perhaps most annoying, the practice that led to the mutual fund scandal in the first place was never addressed by regulators, even as the foundation was collapsing underneath them. Well-connected investors still had the chance to trade after the market has closed long after the scandal broke. Any effort to increase shareholder power was and is vigorously fought. A proposal that would force the SEC to give shareholders a greater voice in selecting board members was defeated in October 2004. Commissioner Harvey J. Goldschmid, an advocate of the proposal, said "The commission's inaction at this point has made it a safer world for a small minority of lazy, inefficient, grossly overpaid and wrongheaded CEOs." And we were unprepared for the collapse this year?

The ugly truth does not end here by any means. Long before sub-prime lending started a chain reaction that brought our economy to its knees, the once-venerable Fannie Mae was accused of fleecing investors. The Wall Street Journal reported that the Justice Department opened a formal investigation in October 2004, following reports that the mortgage company may have manipulated its books to meet earnings targets. This is after Fannie tried to hinder an official investigation by refusing to provide relevant information. Oddly, the Enron scandal ultimately revealed Fannie's alleged deception, when the energy company's collapse forced Fannie Mae to replace Arthur Anderson with a new auditor. Nobody can say with a straight face that we did not have sufficient warning that the house of cards was on wobbly ground. The corruption at Fannie Mae was blatantly obvious, yet nothing was done. And we're not done.

WorldCom has the fine distinction of perpetrating accounting fraud that led to one of the largest bankruptcies in history prior to Lehman Brothers. The public first learned of this crime in June 2002. WorldCom filed for bankruptcy in July 2002. At issue was the discovery of improper bookkeeping concerning billions of dollars. But here is where you, the small individual investor, should focus your attention. Evidence shows that the accounting fraud was discovered as early as June 2001, when several former employees gave statements alleging instances of hiding bad debt, understating costs, and backdating contracts. However, WorldCom's board of directors did not investigate these claims. In June 2001, a shareholder lawsuit was filed against WorldCom, but it was thrown out of court due to lack of evidence. Yet one year later the hard reality of that fraud was brought to light, but to no benefit to small-time investors.

Rite Aid executives were accused of securities and accounting fraud that forced the drugstore chain to restate more than $1 billion in earnings. Executives at the company were been charged with colluding in overstating Rite Aid's income in every quarter from May 1997 to May 1999, forcing the company to restate results by $1.6 billion, the largest restatement ever recorded, according to the SEC, at that time.

And who can forget the Adelphia Communications scandal? In that sordid case, the company inflated earnings to meet Wall Street's expectations, falsified operations statistics, and concealed blatant self-dealing by the founding family, the Rigas, who collected $3.1 billion in off-balance-sheet loans backed by Adelphia.

But wait, there's more! Call now and we'll double the offer. Wall Street's dark secrets get even worse. The September 6, 2004, issue of Newsweek pointed out that when investors lose money, they can go to arbitration, but that the option is more illusion than reality. Critics complain that the system is "stacked against the little guy" because the arbitrators are closely aligned with the brokerage firms, with industry ties that any objective observer would call a blatant conflict of interest.

Well, OK, if arbitration is stacked against individual investors, at least we have recourse through the courts, right? Wrong. In March 2006, the U.S. Supreme Court issued a ruling making it harder for investors to join forces to fight fraud lawsuits against Wall Street companies. The 8-0 decision blocks state class-action lawsuits by stockholders who contend they were tricked into holding onto declining shares. The Court wanted to prevent "wasteful, duplicative litigation."

This ruling is seen as a major victory for Merrill Lynch, which faced numerous lawsuits stemming from Eliot Spitzer's 2002 investigation into that firm's shady practices. This was before Eliot was caught with his pants down. In that investigation, if you recall, Spitzer brought to light records revealing that Merrill Lynch analysts recommended that investors buy stocks described in internal memos as "dogs" or "disasters." Disinterested brokers? Right. And we are simply shocked that Wall Street collapsed in 2008.

Do you get the clear sense that something is rotten in Denmark? Do you begin to understand that Wall Street is not there to protect your interests? This small sampling of corruption is not an exception that proves the rule; corruption is the rule. The patients are running the asylum. Small investors do not stand a chance. Criminality is so pervasive, so deeply structural, so inherent to the system that brief moments of honest transaction are simply incidental. Madoff is inevitable; he is Wall Street.

Wall Street is the product of a long trail of greed, crime and corruption. The market looks nothing like that envisioned by Adam Smith. In stark contrast to Smith's theories, the Street's history is nothing but one of fraud for the simple reason that the entire enterprise is built on a deeply fraudulent idea: that the future can be predicted. That is the next myth I will debunk in the blog to follow.