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Ten major U.S. banks settled charges of illegally kicking people out of their homes for pennies on the dollar, under two agreements with the government announced this week. The biggest beneficiary is Bank of America which will win a get-out-of-jail free card for selling fraudulent loans to two government-sponsored mortgage finance companies.
Bank of America sold bad mortgages that led to numerous foreclosures via subprime mortgage lenders Countrywide Financial Corporation and Countrywide Home Loans, Inc. that it acquired in 2008. “Through a program aptly named ‘the Hustle,’ Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill,” said Preet Bharara, the U.S. Attorney for the Southern District of New York when he sued the company for $1 billion on behalf of the government last October.
Under the new settlement Bank of America will buy back $6.75 billion in residential mortgage loans sold to the Federal National Mortgage Association (Fannie Mae) and give the government an additional $3.6 billion in cash. The other banks – which include Citigroup Inc, JPMorgan Chase and Wells Fargo – will pay out $3.3 billion in direct payments to people who lost their homes plus another $5.2 billion to others who are threatened with possible eviction for not being able to pay their loans. This is in addition to the $26 billion that many of the same banks agreed to pay out last February under a separate deal with 49 state attorneys general, the Justice Department and the Department of Housing and Urban Development.
Despite the large sums involved, most consumer advocates say that the settlements are far too little for those who lost the most. “Communities of color were particularly hard hit by abusive mortgage practices,” said Debby Goldberg, special project director at the National Fair Housing Alliance. “The $8.5 billion and other settlements are not comparable to the trillions of dollars in wealth sucked from communities,” added Sasha Werblin, senior program manager at the Greenlining Institute.
The two new settlements were drawn up after the effective failure of the Independent Foreclosure Review – a 2011 program set up by the banks to review bad mortgages and compensate those who were eligible. Only about one in ten of the potential 3.8 million beneficiaries signed up for the program because they were skeptical of the effort that was widely perceived as biased towards the lenders. They were probably not wrong – the consultants running the program was billing as much as $250 an hour for 20 hours for each case, according to the New York Times.
“It has become clear that carrying the process through to its conclusion would divert money away from the impacted homeowners and also needlessly delay the dispensation of compensation to affected borrowers,” said Thomas Curry, the federal Comptroller of the Currency. “Our new course of action will get more money to more people more quickly.”
But the activists say that the government had bungled the whole process. “If the reviews had been done right the first time, banks would have been on the hook to pay far more to homeowners,” said Alys Cohen, staff attorney for the National Consumer Law Center.
David Lazarus of the Los Angeles Times put the numbers in context – he estimates that the average amount that most borrowers will get is just $2,000. On the other hand, Lazarus notes that the banks have done quite a bit better in 2011 – the year covered by the settlement: “Citigroup pocketed $11.3 billion in profit. JPMorgan Chase saw record profit of $19 billion. Wells Fargo posted almost $16 billion in profit. (Bank of America) was the poor relation of the family. It earned only $1.4 billion in profit.”
"Default, dear Brutus, is in our stars, not in ourselves……"
Paraphrase from Julius Caesar Cassius (pronounced "Cash Us")
The announcement last week of the new “qualified mortgage” regulations by the Consumer Financial Protection Bureau has generated a largely muted reaction from the industry, banks and non-banks alike. The smaller specialized lenders and servicers in the world of distressed residential mortgage finance can easily live with the new normative standard.
Meanwhile, the large banks are exiting the capital intensive portions of the mortgage business stage right under pressure from Basel III and other regulations. Under B III, mortgage servicing rights above 15% of tangible common equity will require 100% capital weighting. And yet, when it comes to lending standards and risk, one could argue, that the new QM rule is more permissive than the bad old days of the subprime boom. And some people do.
“The Qualified Residential Mortgage rule is meant to discourage "risky" mortgages,” opines our friend and risk manager Nom de Plumber. “However, if risk is defined as value or cash flow volatility, please note how both real estate and personal incomes are far riskier than their associated mortgages----whose payments are typically static rather than volatile.”
He continues: “During this crisis, borrowers generally defaulted not because their mortgage payments skyrocketed unexpectedly, but because their home prices and employment income collapsed. The best solution for risky home prices and incomes is less mortgage leverage. Yet, a 43% DTI is the official, post-crash threshold for "safe, affordable" mortgage payments, oddly far above the 30% to 35% DTI underwriting range of pre-bubble days.”
Once again, notes Nom de Plumber, the regulators are obfuscating. “The QRM rule is barking up the wrong tree, sidestepping the core, persistent problem of excessive debt to purchase unaffordable homes.”
Ed Pinto at AEI also is critical of the new rule for being too permissive, “CFPB’s new ‘qualified mortgage’ rule: The devil is in the details,”:
“The rule is made pursuant to the Dodd-Frank Act’s provision calling for minimum mortgage standards. It is being touted as making sure “prime” loans will be made responsibly. Yet true to the government’s long history of promoting excessive leverage, it sets no minimum down payment, no minimum standard for credit worthiness, and no maximum debt-to-income ratio. Under its tortured definition of “prime”, a borrower can have no down payment, a credit score of 580, and a debt ratio over 50% as long as they are approved by a government-sanctioned underwriting system.”
Pinto is critical of the fact that the CFPB has grandfathered the FHA and GSEs such as Fannie and Freddie for seven years. He also echoes the criticism of Nom de Plumber by noting that “the CFPB has codified HUD’s view that the way to distinguish a prime loan from a subprime one is by the interest rate charged, not risk.”
Of course one area where regulators, Congress, the White House and others are entirely silent is securities fraud. With Attorney General Eric Holder busily destroying what remains of the Department of Justice, there is no agency in the US governance apparatus to address fraud. The degree of securities fraud seen in the Subprime boom was so large that it did threaten the US economy in a systemic way, thus leading to the bailout. But the bailout also hid the bad deeds of a number of prominent officials in Washington and on Wall Street. Just read the first 100 pages of Sheila Bair’s book, “Bull by the Horns.”
"In a nutshell, the "real" point is shockingly simple,” notes one veteran bank attorney. “We forgot a basic lesson of banking. There is no such thing as an ‘off balance sheet liability’ of any financial intermediary on which the financial system depends.”
As the crisis hit, he argues, we faced an inevitable need to "recognize as much as $67 trillion of ‘shadow banking’ unreported ‘off balance sheet’ liabilities. Like a manufacturer that suddenly discovers that it's only product produces cancer and that the damages exceed its net worth, the banking system was flat broke and on course to destroy all the wealth ever accumulated within a year or so.”
“Absent the outstanding crisis management of Chm. Bernanke and others,” says the long serving securities counsel, “the ‘unreported’ $67 trillion liability represented a 67% ‘hit’ to the world's $100 trillion of ‘market value’ for equities,” thus explaining the stock market crash of 2008-9. “If we had not taken steps to prevent deflation and drastically reduce the ‘carry’ cost of all debt, we were a mere 33% away from total worldwide bankruptcy and the inevitable WW III that would have followed,” he argues.
“Sheila Bair got the FDIC to end ‘off balance sheet liabilities’ of US insured banks on Sept. 27, 2011 (assuming bankers are unwilling to stoop to outright thefts that insiders are obligated to report under 18 USC Sec. 4). If her position holds up, we should be past this problem and on a path to ultimate recovery in another year or so.”
Maybe, but the battle in Washington over restraints on securities fraud rages on. From the moment America’s leaders decided to dismantle depression era control of banking (the "level playing field commission" correctly made that a bi-partisan goal in 1969) we began experimenting with "how" and discovering problems that needed solution for the economy to function. From then on, the power of unanticipated consequences led us to the doom we faced in 2008 and the economic gloom we now suffer.
For example, it soon became clear to the likes of Bill Isaac (GOP) and Paul Volcker (Dem) that de-regulated banks needed capital requirements or the FDIC’s insurance fund would be decimated. They discovered, however, that one area of finance, funding trade receivables for manufacturing, was both essential and functioning very well without capital backing, because the depression era lenders created a system based on the Scottish reserve model that was self-correcting.
That observation led Isaac, Volcker and his successor ( Alan Greenspan) to "bless" the notion that a "few very strong banks" should be allowed to do this "risk-free" form of lending in "conduits" that would not be included for capital purposes. That, of course, soon blossomed into the entire $67 trillion "shadow banking" industry.
When those "shadow" liabilities came due in 2006-8, recognition of the hidden liability (backed by assets which had no discernible value at the time) destroyed the net worth of just about everyone. As one of the largest hedge fund managers in the world said to me in 2008, “for a few months we were all broke.”
The illusion that conduits would only be used for low risk lending only lasted through for a few years in the 1980s. The expansion of “off balance sheet liabilities” beyond funding of "risk free" trade receivables a few “trusted banks," along with the emergence of the private RMBS market, forced FASB to consider when receivables were "sold." In 1982 it decided that the issue was whether the seller "purported" to sell the receivables (reliance on legal "form," ignoring such obvious issues as "recourse" that converts a "sale" into an "equitable mortgage").
FDIC, thinking that standard was phony, "opted out" of FASB’s rule and relied on "regulatory accounting" to allow only the "big safe bank conduits" and other "safe" off balance sheet deals it "liked." The S&L crisis proved "regulatory accounting" was a calamity. FSLIC's blessing of special rules to hide losses led, in the Winstar case, to the US having to cover the phony capital FSLIC created using regulatory accounting.
FASB in the early 1990s studied its "purport to be a sale" test and correctly decided it was phony. It adopted "legal isolation" (which recognizes that US law converts fraudulent transfers into secured debts--whereby money paid in exchange for assets a bank wants to hide from capital requirements must be repaid when the "seller's" receiver recovers assets fraudulently transferred). Effective January 1, 1997, FDIC accepted FASB's legal isolation rule, dumping “regulatory accounting” on this issue.
The next "OOPS" soon emerged. ABS/MBS lawyers for banks had lobbied FASB for a looser "isolation" standard for banks by absurdly telling FASB that "trustees" in Bankruptcy (Article 1 "administrative" officers) have more power than FDIC as a bank "receiver" (appointed with Article III "judicial" power--giving receivers truly awesome authority). FASB fell for the lie. As a result, FASB's first "legal isolation" test was believed to be easier on banks than on others.
In this instance the permissive tendency of Washington in the FASB rule making combined with the bank lawyers’ mistaken reading of receivership law to create an impossible situation. FASB falsely assumed receivers have less power, but it turned out that FDIC could overturn literally ALL pre-receivership deals. The banks' lawyers had, in fact, negotiated a standard which allowed for NO financial asset “sales” by banks.
An accounting profession committee posed that very problem to FASB and FDIC and asked if "no sales" was what FDIC wanted. That's resulted in FDIC’s adoption of a "safe harbor" rule for bank asset “sales” that ignored fraudulent transfer laws (which convert transfers for the purpose of leaving a selling bank with inadequate capital into secured borrowings).
It is that rule which Sheila Bair dumped in September 2011, in favor of a rule that finally “levels the playing field,” giving banks the exact power of non-banks--an ability to "sell" assets when the transaction is not done as a fraudulent transfer.
Lawyers that built careers writing the fraudulent transfer arrangements by which banks stripped themselves of assets and generated a large part of the $67 trillion “shadow banking” empire that imploded in 2007-8 are understandably “shocked.” Unless they can find a new loophole, they will be required to opine on fraudulent transfer law in the same manner as has applied to non-bank lawyers since 1997. Absent conformance with those laws, future transfers designed to retain “tail” risk while reducing the capital needed to protect FDIC against “tail” loss will be accounted for as secured borrowings—eliminating a major cause of the crisis.
Like the “tax shelter” salesmen of the early 1980s (who found their business depleted when Congress decided to stop that trade), lawyers whose business it was to generate the $67 trillion “shadow banking” empire undoubtedly feel deprived of valuable “rights.” Their problem, however, is shockingly simple. It is a “fraudulent transfer” to transfer assets with intent to leave the transferor with inadequate capital. This has been Anglo-American law since at least the 14th Century. It is the foundation on which free-enterprise capitalism builds the leverage that permits accelerated growth for new value-added concepts.
All state laws reflect this standard. Thus every bank “sale” done for the purpose of reducing regulatory capital is, by definition, fraud – a form of bank theft.
Only government can waive theft, as long as FDIC affirmatively "waived" the right to challenge these frauds, attorneys could not be required to opine that the transactions complied. When FDIC stopped waiving this type of fraud in September of 2011, "misprision of felonies" (18 USC Sec. 4) mandates that attorneys disclose these matters to authorities. Conversely, this may also mean that banks can't be prosecuted for transfers before made FDIC changed course in September 2011.
Will bank lawyers win a debate by saying "since we clearly cannot be caught having to reveal our clients' thefts, the accountants need to change their rules so we don't need to tell them when theft is occurring"? Stay tuned.
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Government Caves in S&P Fraud Suit: Wall Street Escape From Accountability Virtually Ensures More...
“Epic in scale, unprecedented in world history.” That is how William K. Black, professor of law and economics and former bank fraud investigator, describes the frauds in which JPMorgan Chase (JPM) has now been implicated. They involve more than a dozen felonies, including bid-rigging on municipal bond debt; colluding to rig interest rates on hundreds of trillions of dollars in mortgages, derivatives and other contracts; exposing investors to excessive risk; failing to disclose known risks, including those in the Bernie Madoff scandal; and engaging in multiple forms of mortgage fraud.
So why, asks Chicago Alderwoman Leslie Hairston, are we still doing business with them? She plans to introduce a city council ordinance deleting JPM from the city’s list of designated municipal depositories. As quoted in the January 14th Chicago Sun-Times:
The bank has violated the city code by making admissions of dishonesty and deceit in the way they dealt with their investors in the mortgage securities and Bernie Madoff Ponzi scandals. . . . We use this code against city contractors and all the small companies, why wouldn’t we use this against one of the largest banks in the world?
A similar move has been recommended for the City of Los Angeles by L.A. City Councilman Gil Cedillo. But in a January 19th editorial titled “There’s No Profit in L A. Bashing JPMorgan Chase,” the L.A. Times editorial board warned against pulling the city’s money out of JPM and other mega-banks – even though the city attorney is suing them for allegedly causing an epidemic of foreclosures in minority neighborhoods.
“L.A. relies on these banks,” says The Times, “for long-term financing to build bridges and restore lakes, and for short-term financing to pay the bills.” The editorial noted that a similar proposal brought in the fall of 2011 by then-Councilman Richard Alarcon, backed by Occupy L.A., was abandoned because it would have resulted in termination fees and higher interest payments by the city.
It seems we must bow to our oppressors because we have no viable alternative – or do we? What if there is an alternative that would not only save the city money but would be a safer place to deposit its funds than in Wall Street banks?
The Tiny State That Broke Free
There is a place where they don’t bow. Where they don’t park their assets on Wall Street and play the mega-bank game, and haven’t for almost 100 years. Where they escaped the 2008 banking crisis and have no government debt, the lowest foreclosure rate in the country, the lowest default rate on credit card debt, and the lowest unemployment rate. They also have the only publicly-owned bank.
The place is North Dakota, and their state-owned Bank of North Dakota (BND) is a model for Los Angeles and other cities, counties, and states.
Like the BND, a public bank of the City of Los Angeles would not be a commercial bank and would not compete with commercial banks. In fact, it would partner with them – using its tax revenue deposits to create credit for lending programs through the magical everyday banking practice of leveraging capital.
The BND is a major money-maker for North Dakota, returning about $30 million annually in dividends to the treasury – not bad for a state with a population that is less than one-fifth that of the City of Los Angeles. Every year since the 2008 banking crisis, the BND has reported a return on investment of 17-26%.
Like the BND, a Bank of the City of Los Angeles would provide credit for city projects – to build bridges, restore lakes, and pay bills – and this credit would essentially be interest-free, since the city would own the bank and get the interest back. Eliminating interest has been shown to reduce the cost of public projects by 35% or more.
Consider what that could mean for Los Angeles. According to the current fiscal budget, the LAX Modernization project is budgeted at $4.11 billion. That’s the sticker price. But what will it cost when you add interest on revenue bonds and other funding sources? The San Francisco-Oakland Bay Bridge earthquake retrofit boondoggle was slated to cost about $6 billion. Interest and bank fees added another $6 billion. Funding through a public bank could have saved taxpayers $6 billion, or 50%.
If Los Angeles owned its own bank, it could also avoid costly “rainy day funds,” which are held by various agencies as surplus taxes. If the city had a low-cost credit line with its own bank, these funds could be released into the general fund, generating massive amounts of new revenue for the city.
The potential for the City and County of Los Angeles can be seen by examining their respective Comprehensive Annual Financial Reports (CAFRs). According to the latest CAFRs (2012), the City of Los Angeles has “cash, pooled and other investments” of $11 billion beyond what is in its pension fund (page 85), and the County of Los Angeles has $22 billion (page 66). To put these sums in perspective, the austerity crisis declared by the State of California in 2012 was the result of a declared state budget deficit of only $16 billion.
The L.A. CAFR funds are currently drawing only minimal interest. With some modest changes in regulations, they could be returned to the general fund for use in the city’s budget, or deposited or invested in the city’s own bank, to be leveraged into credit for local purposes.
Beyond being a money-maker, a city-owned bank can minimize the risks of interest rate manipulation, excessive fees, and dishonest dealings.
Another risk that must now be added to the list is that of confiscation in the event of a “bail in.” Public funds are secured with collateral, but they take a back seat in bankruptcy to the “super priority” of Wall Street’s own derivative claims. A major derivatives fiasco of the sort seen in 2008 could wipe out even a mega-bank’s available collateral, leaving the city with empty coffers.
The city itself could be propelled into bankruptcy by speculative derivatives dealings with Wall Street banks. The dire results can be seen in Detroit, where the emergency manager, operating on behalf of the city’s creditors, put it into bankruptcy to force payment on its debts. First in line were UBS and Bank of America, claiming speculative winnings on their interest-rate swaps, which the emergency manager paid immediately before filing for bankruptcy. Critics say the swaps were improperly entered into and were what propelled the city into bankruptcy. Their propriety is now being investigated by the bankruptcy judge.
Not Too Big to Abandon
Mega-banks might be too big to fail. According to U.S. Attorney General Eric Holder, they might even be too big to prosecute. But they are not too big to abandon as depositories for government funds.
There may indeed be no profit in bashing JPMorgan Chase, but there would be profit in pulling deposits out and putting them in Los Angeles’ own public bank. Other major cities currently exploring that possibility include San Franciscoand Philadelphia.
If North Dakota can bypass Wall Street with its own bank and declare its financial independence, so can the City of Los Angeles. And so can the County. And so can the State of California.
Ellen Brown is an attorney, chairman of the Public Banking Institute, and author of 12 books including The Public Bank Solution. She is currently running for California state treasurer on the Green Party ticket.
Filed under: Ellen Brown Articles/Commentary
“A C.E.O. … Might, With Some Justice, Claim That He Was Only Doing What He Fairly Believed The Government Wanted Him To Do” We’ve previously documented that the government helped to create the epidemic of fraud which caused the economic … Continue reading →
Top Judge and Former Head of Fraud Unit: Government Helped Create Epidemic of Fraud was originally published on Washington's Blog
Costas Lapavitsas: From multimillion dollar losses by cities like Baltimore to pension fund losses and much more, the LIBOR interest rate scandal shows that such mechanisms must be taken out of the hands of banks and be run in public interest.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The Lapavitsas Report on Economics with Costas Lapavitsas, who now joins us from London.
Costas is a professor of economics at the School of Oriental and African Studies at the University of London. He's a member of Research on Money and Finance, and he's a regular columnist for The Guardian newspaper.
COSTAS LAPAVITSAS, PROF. ECONOMICS, UNIV. OF LONDON: Pleasure to be here, Paul.
JAY: So what have you been working on this week?
LAPAVITSAS: I think one of the most interesting things to hit the news this week is the Libor manipulation case and the fine that has been imposed on the large British bank RBS for manipulating the Libor.
I think we need to talk a little bit about this so that people understand the significance of it, because it hasn't really been widely appreciated by the public.
Now, the Libor is not a real interest rate. It's a benchmark. It's a benchmark that is set privately by the banks and in secret. There's a committee of banks that does that. On the basis of the Libor, a whole host of other interest rates that are charged to people for their mortgages, to businesses, and so on are determined.
Now, the case and the fine imposed on RBS has discovered, has found that actually RBS has been colluding with brokers and others to manipulate the Libor. This is a criminal dimension. And they've been charged. The British government—.
JAY: Hang on one sec. Just for people that haven't followed this story at all, just a little more on why this matters so much.
LAPAVITSAS: This matters enormously for a number of reasons. As I said to you, as I said, this is not a real interest rate; this is a benchmark. If the banks determine the benchmark in an untruthful way, then they can influence a whole host of other prices, and they can influence the receipts they make from people to whom they've lent money and from the various transactions they make in the derivatives markets. For the banks, the ability to manipulate the Libor is a key mechanism to make extra profits, basically. And they've got this ability to do it because they set the Libor privately and in a special committee, which they run themselves.
Now, the British government is making out that this is a criminal act, which it is, of course, because collusion with the aim of making extra profits is criminal. The point is, however—and this is something that the British government wishes to keep quiet—it isn't simply criminality here. It looks as if the entire game is rigged from beginning to end. In other words, it isn't simply collusion and illegality. The game is rotten.
And it is rotten for two reasons, I would argue. First, the banks have got an incentive to present falsely low rates, because they in this way appear to be stronger than their competitors. And the banks have got an incentive to manipulate the rate sometimes up, sometimes down, because they make different payments in this way on their derivatives portfolio. The banks, then, have got clear incentives to manipulate it, and they signal their incentives to each other.
So this committee doesn't work. It doesn't work systematically in the public interest; it works in the interest of banks. This is becoming increasingly clear, and this is going to be big news, I think, in the months to come, because, of course, there are more banks that would be hit—that will be charged fines in the months ahead.
JAY: How did we get to a situation that a group of banks, most of them private, or maybe all of them privately owned, get to determine what is essentially the most influential rate in the globe? I mean, in theory, central banks are supposed to establish rates, I would have thought.
LAPAVITSAS: Central banks establish the rates at which they themselves lend to the banking system. However, there is also a private market for funds. There's the money market. And in the money market, banks interact with each other and work out the rate at which they lend to each other.
This is the most important price in the financial system. It's more important than the rate at which central banks lend to banks. It's the most important financial price. And presumably, in a neoliberal free-market system such as the one we've got today, it ought to be set through the free competition among the financial institutions. It isn't.
And that's the significance of this. This rate is actually manipulated. These banks have got a secretive committee. They work out the rate, which is the Libor. They don't transact at this rate—this is a benchmark. And they announce it on a daily basis. They manipulate it. They handle it. And by manipulate it, they affect all other actual interest rates at which people undertake [unintel.] transactions.
JAY: Now, just to make this concrete for people, a city like Baltimore claims it's lost millions of dollars that could have been spent on schools or roads or housing or whatever, and they've lost this money, they claim, because of this fraudulently set Libor rate. But how does that work? Why is Baltimore out money because of what some bankers are doing on this committee?
LAPAVITSAS: Because the prices Baltimore would have been charged on various loans it took or on derivatives transactions it engaged in—I don't really know the particulars of the Baltimore case, but the prices it would have been charged and the rates it would have been charged would have been false. They would have not have been true rates. They would have been based on the Libor, a premium would have been added to the Libor, and the Libor rate that would have been used as the base for this would have been a false, manipulated rate. And by manipulating it, the banks would have seen to it that money would have gone into their coffers, that their coffers would have gone up. It's a hidden, silent transfer of income and wealth from the public in general to the banks. It's arguably one of the biggest scams in the history of finance.
JAY: And Baltimore's leading a class action lawsuit of various cities, with Baltimore being the lead city, suing these banks to try to recover this money.
LAPAVITSAS: They're right to do so. As I said, I mean, there is obviously outright criminality in some respects, because these banks have been proven to have colluded with one another to handle—they manipulate the rate directly.
But the point I repeat is that criminality aside, it looks as if the entire game is rigged, that the banks actually can know how to handle and manipulate the rate without actually directly colluding with each other. And that's what's wrong about it, and that's what's bad about it, because it shows that the so-called free market in finance simply doesn't work.
I want to stress the importance of this. You see, neoliberalism and free markets, which is the mantra that we've been listening to and hearing for decades, pivots on the banks and the financial system. This is where it's supposed to be free. This is the markets, these are the markets, and the institutions are supposed to be as free as possible. Well, they're not. They're actually managing this rate, manipulating this rate in their own interests. And they are doing it through a private meeting.
You know, Adam Smith wrote more than two centuries ago that when you let capitalists meet in a nontransparent way on a regular basis, then they will do two things: they will defraud the public and they will raise prices. He argued that two centuries ago. Well, there you are. When you let banks meet on a daily basis, privately, without transparency, without public scrutiny, what they will do is to manipulate this key rate, the fundamental rate of the financial market, to make extra profits. That's what they've been doing.
This is one of the biggest scandals, as I said before, in the history of finance. It's about time the public realized what's happening and demanded intervention.
JAY: Alright. Thanks for joining us, Costas.
LAPAVITSAS: Thank you.
JAY: And thank you for joining us on The Real News Network.
Context: As yet there are no context links for this item.
Costas Lapavitsas is a professor in economics at the University of London School of Oriental and African Studies. He teaches the political economy of finance, and he's a regular columnist for The Guardian.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The Lapavitsas Report on Economics with Costas Lapavitsas, who now joins us from London.Costas is a professor of economics at the School of Oriental and African Studies at the University of London. He's a member of Research on Money and Finance, and he's a regular columnist for The Guardian newspaper.Thanks, Costas.COSTAS LAPAVITSAS, PROF. ECONOMICS, UNIV. OF LONDON: Pleasure to be here, Paul.JAY: So what have you been working on this week?LAPAVITSAS: I think one of the most interesting things to hit the news this week is the Libor manipulation case and the fine that has been imposed on the large British bank RBS for manipulating the Libor.I think we need to talk a little bit about this so that people understand the significance of it, because it hasn't really been widely appreciated by the public.Now, the Libor is not a real interest rate. It's a benchmark. It's a benchmark that is set privately by the banks and in secret. There's a committee of banks that does that. On the basis of the Libor, a whole host of other interest rates that are charged to people for their mortgages, to businesses, and so on are determined.Now, the case and the fine imposed on RBS has discovered, has found that actually RBS has been colluding with brokers and others to manipulate the Libor. This is a criminal dimension. And they've been charged. The British government—.JAY: Hang on one sec. Just for people that haven't followed this story at all, just a little more on why this matters so much.LAPAVITSAS: This matters enormously for a number of reasons. As I said to you, as I said, this is not a real interest rate; this is a benchmark. If the banks determine the benchmark in an untruthful way, then they can influence a whole host of other prices, and they can influence the receipts they make from people to whom they've lent money and from the various transactions they make in the derivatives markets. For the banks, the ability to manipulate the Libor is a key mechanism to make extra profits, basically. And they've got this ability to do it because they set the Libor privately and in a special committee, which they run themselves.Now, the British government is making out that this is a criminal act, which it is, of course, because collusion with the aim of making extra profits is criminal. The point is, however—and this is something that the British government wishes to keep quiet—it isn't simply criminality here. It looks as if the entire game is rigged from beginning to end. In other words, it isn't simply collusion and illegality. The game is rotten. And it is rotten for two reasons, I would argue. First, the banks have got an incentive to present falsely low rates, because they in this way appear to be stronger than their competitors. And the banks have got an incentive to manipulate the rate sometimes up, sometimes down, because they make different payments in this way on their derivatives portfolio. The banks, then, have got clear incentives to manipulate it, and they signal their incentives to each other. So this committee doesn't work. It doesn't work systematically in the public interest; it works in the interest of banks. This is becoming increasingly clear, and this is going to be big news, I think, in the months to come, because, of course, there are more banks that would be hit—that will be charged fines in the months ahead.JAY: How did we get to a situation that a group of banks, most of them private, or maybe all of them privately owned, get to determine what is essentially the most influential rate in the globe? I mean, in theory, central banks are supposed to establish rates, I would have thought.LAPAVITSAS: Central banks establish the rates at which they themselves lend to the banking system. However, there is also a private market for funds. There's the money market. And in the money market, banks interact with each other and work out the rate at which they lend to each other. This is the most important price in the financial system. It's more important than the rate at which central banks lend to banks. It's the most important financial price. And presumably, in a neoliberal free-market system such as the one we've got today, it ought to be set through the free competition among the financial institutions. It isn't. And that's the significance of this. This rate is actually manipulated. These banks have got a secretive committee. They work out the rate, which is the Libor. They don't transact at this rate—this is a benchmark. And they announce it on a daily basis. They manipulate it. They handle it. And by manipulate it, they affect all other actual interest rates at which people undertake [unintel.] transactions.JAY: Now, just to make this concrete for people, a city like Baltimore claims it's lost millions of dollars that could have been spent on schools or roads or housing or whatever, and they've lost this money, they claim, because of this fraudulently set Libor rate. But how does that work? Why is Baltimore out money because of what some bankers are doing on this committee?LAPAVITSAS: Because the prices Baltimore would have been charged on various loans it took or on derivatives transactions it engaged in—I don't really know the particulars of the Baltimore case, but the prices it would have been charged and the rates it would have been charged would have been false. They would have not have been true rates. They would have been based on the Libor, a premium would have been added to the Libor, and the Libor rate that would have been used as the base for this would have been a false, manipulated rate. And by manipulating it, the banks would have seen to it that money would have gone into their coffers, that their coffers would have gone up. It's a hidden, silent transfer of income and wealth from the public in general to the banks. It's arguably one of the biggest scams in the history of finance.JAY: And Baltimore's leading a class action lawsuit of various cities, with Baltimore being the lead city, suing these banks to try to recover this money.LAPAVITSAS: They're right to do so. As I said, I mean, there is obviously outright criminality in some respects, because these banks have been proven to have colluded with one another to handle—they manipulate the rate directly. But the point I repeat is that criminality aside, it looks as if the entire game is rigged, that the banks actually can know how to handle and manipulate the rate without actually directly colluding with each other. And that's what's wrong about it, and that's what's bad about it, because it shows that the so-called free market in finance simply doesn't work. I want to stress the importance of this. You see, neoliberalism and free markets, which is the mantra that we've been listening to and hearing for decades, pivots on the banks and the financial system. This is where it's supposed to be free. This is the markets, these are the markets, and the institutions are supposed to be as free as possible. Well, they're not. They're actually managing this rate, manipulating this rate in their own interests. And they are doing it through a private meeting. You know, Adam Smith wrote more than two centuries ago that when you let capitalists meet in a nontransparent way on a regular basis, then they will do two things: they will defraud the public and they will raise prices. He argued that two centuries ago. Well, there you are. When you let banks meet on a daily basis, privately, without transparency, without public scrutiny, what they will do is to manipulate this key rate, the fundamental rate of the financial market, to make extra profits. That's what they've been doing. This is one of the biggest scandals, as I said before, in the history of finance. It's about time the public realized what's happening and demanded intervention.JAY: Alright. Thanks for joining us, Costas.LAPAVITSAS: Thank you.JAY: And thank you for joining us on The Real News Network.
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James S. Henry is a leading economist, attorney and investigative journalist who has written extensively about global issues. James served as Chief Economist at the international consultancy firm McKinsey & Co and as an investigative journalist his work has appeared in numerous publications like Forbes, The Nation, and the The New York Times. He was the lead researcher of the recently released report titled “'The Price of Offshore Revisited.'
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore.Lanny Breuer, who's head of the Criminal Justice Division at the Justice Department, has announced he's stepping down. According to The Washington Post, quote, Breuer is widely credited with aggressively going after white-collar crime in the aftermath of the crisis. Well, a recent PBS documentary suggests a somewhat different description of how Breuer has done on this front. Here's a clip towards the end of the film.~~~MARTIN SMITH, CORRESPONDENT, PBS FRONTLINE: You gave a speech before the New York Bar Association, and in that speech you made a reference to losing sleep at night worrying about what a lawsuit might result in at a large financial institution. Is that really the job of a prosecutor, to worry about anything other than simply pursuing justice?LANNY BREUER, ASSIST. ATTORNEY GENERAL, U.S. DEPARTMENT OF JUSTICE: Well, I think I am pursuing justice, because if I bring a case against institution A, and as a result of bring that case there's some huge economic effect, if it creates a ripple effect so that suddenly counterparties and other financial institutions or other companies that had nothing to do with this are affected badly, it's a factor we need to know and understand.TED KAUFMAN, FMR. U.S. SENATOR (D-DE): That was very disturbing to me, very disturbing. That was never raised at any time during any of our discussions. That is not the job of a prosecutor, to worry about the health of the banks, in my opinion. The job of prosecutor is to prosecute criminal behavior. It's not to lie awake at night and kind of decide the future of the banks.NARRATOR (VOICEOVER): So far in civil proceedings the government has levied several billion dollars in penalties for misconduct in a crisis that's cost investors and homeowners many hundreds of billions of dollars. But to date not one senior Wall Street executive has been held criminally liable by the Department of Justice for activities related to the financial crisis.~~~JAY: Now joining us to talk about the record of the Justice Department in relation to this type of crime or fraud and prosecuting or lack of it is James Henry. James is a leading economist, attorney, investigative journalist who's written extensively about global issues. He served as the chief economist at the international consultancy firm McKinsey & Company. As an investigative journalist, his work has appeared in numerous publications like Forbes, Nation, and The New York Times. Thanks for joining us again, James.JAMES S. HENRY, ECONOMIST, LAWYER, AND INVESTIGATIVE JOURNALIST: You're quite welcome.JAY: So talk a bit about this, this conundrum, you could say, that Brewer says he was faced with, more or less that if he goes after executives from the big banks, even though he kind of acknowledges it was probably fraud and the FBI agent or FBI official in the film says, you know, if he thinks it was not unintentional the way banks did things—a pretty understated way to say it. But Breuer says he couldn't have done it, because the systemic implications were just too big—not his words, but that's what he's saying.HENRY: Yeah. I mean, that's what he made a statement in September of last year in a speech, saying that he was kind of up nights worrying about what would happen to these massive institutions if he indicted some of these senior executives criminally. I think a lot of outsiders would say that's nonsense, that, you know, you could clearly just put some of the executives in jail—and I think that's what they were actually expecting—without jeopardizing the institutions themselves. Maybe some of these institutions deserve to be corporately indicted and made examples of, and maybe the entire—you know, kind of the salutary effect on the banking system would be great enough to justify putting one of them out of its misery because of the effect it would have on all the others.So I think there's at least a strong argument that this Justice Department, when it came to large financial institutions, was asleep at the switch. And we have no indictments or prosecutions of any individual senior Wall Street executive in the last four years.JAY: What for you is the sort of two or three most outstanding examples of fraud that should have been prosecuted?HENRY: Well, we now see a lot of private lawsuits going on from investors in some of the securitized mortgage packages and people who bought things like CDOs from Goldman Sachs at the same time Goldman Sachs was shorting these securities themselves. So these private suits and the law firms that have been prosecuting them have managed to turn up, you know, reams of evidence of real fraud. And it's all emerging in the course of these private law suits which are about to unfold.It's ironic, given all that evidence, that the Justice Department, with its thousands of attorneys, and, you know, the SEC be able to help out as well, couldn't come to a similar kind of finding, couldn't turn up the whistleblowers that even in the PBS documentary, you know, investigative journalists were able to surface in a matter of weeks. And the New York State attorney general's office has piggybacked already on some of these private lawsuits and has—pursuing its own investigations of some of the largest firms on Wall Street, including Goldman Sachs, JPMorgan, Citibank, Bank of America.These major institutions have basically walked away from justice when it comes to the federal government, and it's been left to the private lawsuits and to the SEC, to the state of New York, to actually piggyback on these private lawsuits and make these cases. It begs the question of, you know, whether or Lenny Breuer and his team was really doing their job when it came to these major financial institutions. They seem to have a soft place in their hearts. And that also extends to other kinds of corporate crime, for example the settlements that they engaged in with HSBC and the money laundering, the tap on the wrist that UBS got for being at the heart of the Libor scandal. It's not just the bank crises; it's also these other kind of shenanigans. So, many of us have been expecting the Justice Department to act here, but they haven't.JAY: So let's talk a little bit about the bigger picture here. The power of finance seems to be such, the biggest financial institutions, their hold over Congress, their hold over the Obama administration, their hold over the Justice Department, it seems to be so deep and profound that they can't be regulated, they can't be prosecuted. Where does this lead? Where does this go?HENRY: I think you can't even get them out of the Treasury Department. I mean, Obama's pick for the successor to Tim Geithner this month is taking office at the Treasury, the secretary of Treasury, is Jacob Lew, who is the guy who was running Citibank's global private banking department in 2006, you know, and then moved on to the White House chief of staff. But here we have, right at the core of power, another senior Wall Street executive.Now, I think Ted Kaufman, who was a senator from Delaware in 2010, then retired, and was a big proponent of prosecutions, basically said that, you know, Wall Street calls the shots in Washington. Dick Durbin said they own this town. And I think that's not only due to financial influence and contributions; it's also due to the fact that there's this revolving-door policy of basically gifting the Treasury Department to former executives from the major banks. You know, we have Bill Daley from JPMorgan, vice chairman of JPMorgan, serving as Obama's chief of staff. It's hard to imagine those folks being tough on the institutions that have provided their bread and butter. And so the track record is entirely consistent with this evidence that we see from the Justice Department's failure to prosecute any of these major institutions.JAY: I mean, I don't think it's anything new with the Obama administration, but Barack Obama the candidate was heavily financed by Wall Street. Everyone was kind of surprised in the primaries that he was actually raising more money than Hillary Clinton was on Wall Street.HENRY: You know, Wall Street's contributions from 1990 to 2008 was an average of $2,500 per day per congressman. You know, it's just hard to compete with that kind of immediate financial clout.And I think there's also a kind of insidious influence on just the ideology. You know, we've had presidential candidate after presidential candidate basically arguing for hands off when it comes to financial regulation—don't really have a good explanation from those folks about what went wrong in 2008. I guess it was, you know, just bad weather. But, you know, to this day, we really haven't had a fundamental, deep examination of the role of the private sector financial institutions in the policies that led to that very, very costly collapse that we're still paying for.JAY: Isn't some of this kind of so inherent in the way the global capitalist system works right now—and it's not new, but it's reached new heights, meaning that the size of the global economy's just so big, there is so much capital moving back and forth, the enterprises, global companies, are so big and operate on such a scale that you need banks that can operate in massive ways? On the other hand, when they get so big, you can't regulate them—they're essentially above the law. I mean, it's a conundrum, is it not?HENRY: If one of these institutions were indicted corporately and made an example of and exposed to the world for their behavior, you'd have a very, very profound effect on the behavior of the whole industry, because they all—you know, they say that bankers could exchange strategies and no one would care, 'cause they all basically pursue the same strategies.JAY: But that's sort of my point, like, if one of them was indicted, if some modest legislation was passed. But my point is you can't even pass the modest reforms. You can't even indict one institution. You can't—the power finance has over the politics, you can't even get, you know, simple, modest things changed in terms [crosstalk]HENRY: Yeah, I think that's the dilemma, that this has been an issue where it's very difficult to mobilize masses of Americans to understand. You know, it's not like on the gun control issue we seem to be making some progress now because people are outraged at a relatively simple situation and they can understand what they need to do about it; in the case of the banking institutions, everyone believes it's so terribly complicated that we have to defer to, you know, the Illuminati. So that's kind of the problem.And then this is an ideal case for presidential leadership. This is exactly where the president should be focusing his attention, because he does have the intellectual horsepower and support in his own team to get this kind of legislation done.JAY: So far what we've seen, he appoints and nominates these people, not prosecute.HENRY: I think his basic interest is not in economics. It's in more political issues. And he's kind of put the Treasury on autopilot. He's trusted to Tim Geithner to run the Treasury. And, you know, he's the technocrat who's been not only head of the New York Fed, but also was a senior official at the IMF. So it's not an area that Obama really wants to worry about in addition to everything else in foreign policy and, you know, the complicated domestic issues that he faces anyway.So he wanted, I think, to assume—part of his stance here has been to say, okay, let Treasury run the economy. And that's been a mistake.JAY: Yeah. Well, it's been a mistake for most Americans. It may have been the right call for some of the mavens of Wall Street, but it wasn't a very good call for anybody else.HENRY: You know, as many of his, you know, people on his political team have been saying, well, this will help us raise money from Wall Street. And indeed it has. I mean, he basically raised a lot more than people expected, given that Romney was in the race, from the very people that have made this economic crisis.JAY: Right. Thanks for joining us, James.HENRY: You're quite welcome.JAY: And thank you for joining us on The Real News Network.
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Forget the Housing, Bond or Derivatives Bubbles … Fraud Is the Biggest Bubble of All Time
The housing bubble which burst in 2007 or so was the biggest bubble of all time.
Many argue that the bubble in U.S. bonds has surpassed the housing bubble as the largest ever.
Of course, given that the derivatives market is more than a thousand trillion dollars, and that is is backed by thousands of times less collateral, a good case can be made for arguing that derivatives are the biggest bubble.
But if you really think about it, the largest bubble in history is fraud, because it includes all of the above and more.
Low interest rates – in turn – are caused by the government’s zero interest rate policy and quantitative easing.
And how did the government sell these programs? By saying that they were necessary to help the economy and create more jobs.
But in reality, zero interest rate policy is just another stealth bailout for the big banks. And quantitative easing only helps the super-elite … and hurt the economy and the little guy (Bernanke knew back in 1988 that QE doesn’t work for its advertised purposes.)
In other words, the government’s low interest rate policies were based upon a fundamental misrepresentation as to their purpose and probable effect.
Indeed, experts say that all bubbles are enabled by fraud.
But there are signs that the fraud bubble is collapsing.
Trust is falling to all-time lows as to many government and private institutions. Why? Because institutional corruption is so rampant that it is becoming obvious to everyone from Joe Sixpack to amateur and sophisticated professional investors.
While liberals tend to distrust big corporations and conservatives tend to distrust the federal government, we all agree that the malignant, symbiotic relationship between the two is the root problem. Indeed, when government and corporatism merge, it is hard for anyone to trust what is going on.
And the people lose all trust in the system.
We noted in 2011 that the Geithner, Bernanke and Paulson lied about the health of the big banks in pitching bailouts to Congress and the American people:
The big banks were all insolvent during the 1980s.
The bailouts were certainly rammed down our throats under false pretenses.
But here’s the more important point. Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not. They were insolvent.
Tim Geithner falsely stated that the banks passed some time of an objective stress test but they did not. They were insolvent.
[All of the big banks were] insolvent in the 1980s, but the government made aconcerted decision to cover that up.
“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion.”
“The problems of Citi, Bank of America and others suggest the system isbankrupt,” Roubini said. “In Europe, it’s the same thing.”
We noted earlier this year:
The American government’s zero interest rate policy is very much like the British Libor manipulation scandal … it’s nothing but an attempt to breathe life back into the insolvent banks, at the expense of the taxpayer. And see this.
And the “financial reform” laws passed in the wake of the crisis have, in some ways, actually weakened regulations of the financial markets, allowed the big banks to get a lot bigger, and have intentionally allowed fraudulent accounting (and see this).
Likewise, the “stress tests” in both Europe and America have been a total scam … a naked attempt to put lipstick on a pig to cover up the fact that the big banks are insolvent.
Matt Taibbi adds details to the bailout scam:
The main reason banks didn’t lend out bailout funds is actually pretty simple: Many of them needed the money just to survive. Which leads to another of the bailout’s broken promises – that taxpayer money would only be handed out to “viable” banks.
Soon after TARP passed, Paulson and other officials announced the guidelines for their unilaterally changed bailout plan. Congress had approved $700 billion to buy up toxic mortgages, but $250 billion of the money was now shifted to direct capital injections for banks. (Although Paulson claimed at the time that handing money directly to the banks was a faster way to restore market confidence than lending it to homeowners, he later confessed that he had been contemplating the direct-cash-injection plan even before the vote.) This new let’s-just-fork-over-cash portion of the bailout was called the Capital Purchase Program. Under the CPP, nine of America’s largest banks – including Citi, Wells Fargo, Goldman, Morgan Stanley, Bank of America, State Street and Bank of New York Mellon – received $125 billion, or half of the funds being doled out. Since those nine firms accounted for 75 percent of all assets held in America’s banks – $11 trillion – it made sense they would get the lion’s share of the money. But in announcing the CPP, Paulson and Co. promised that they would only be stuffing cash into “healthy and viable” banks. This, at the core, was the entire justification for the bailout: That the huge infusion of taxpayer cash would not be used to rescue individual banks, but to kick-start the economy as a whole by helping healthy banks start lending again.
This announcement marked the beginning of the legend that certain Wall Street banks only took the bailout money because they were forced to – they didn’t need all those billions, you understand, they just did it for the good of the country. “We did not, at that point, need TARP,” Chase chief Jamie Dimon later claimed, insisting that he only took the money “because we were asked to by the secretary of Treasury.” Goldman chief Lloyd Blankfein similarly claimed that his bank never needed the money, and that he wouldn’t have taken it if he’d known it was “this pregnant with potential for backlash.” A joint statement by Paulson, Bernanke and FDIC chief Sheila Bair praised the nine leading banks as “healthy institutions” that were taking the cash only to “enhance the overall performance of the U.S. economy.”
But right after the bailouts began, soon-to-be Treasury Secretary Tim Geithner admitted to Barofsky, the inspector general, that he and his cohorts had picked the first nine bailout recipients because of their size, without bothering to assess their health and viability. Paulson, meanwhile, later admitted that he had serious concerns about at least one of the nine firms he had publicly pronounced healthy. And in November 2009, Bernanke gave a closed-door interview to the Financial Crisis Inquiry Commission, the body charged with investigating the causes of the economic meltdown, in which he admitted that 12 of the 13 most prominent financial companies inAmerica were on the brink of failure during the time of the initial bailouts.
On the inside, at least, almost everyone connected with the bailout knew that the top banks were in deep trouble. “It became obvious pretty much as soon as I took the job that these companies weren’t really healthy and viable,” says Barofsky, who stepped down as TARP inspector in 2011.
A month or so after the bailout team called the top nine banks “healthy,” it became clear that the biggest recipient, Citigroup, had actually flat-lined on the ER table. Only weeks after Paulson and Co. gave the firm $25 billion in TARP funds, Citi – which was in the midst of posting a quarterly loss of more than $17 billion – came back begging for more. In November 2008, Citi received another $20 billion in cash and more than $300 billion in guarantees.
We’ve repeatedly noted that the government’s whole strategy in dealing with the financial crisis is to cover up the fraud, and Taibbi notes:
Now, instead of using the bailouts as a clear-the-air moment, the government decided to double down on such fraud, awarding healthy ratings to these failing banks and even twisting its numerical audits and assessments to fit the cooked-up narrative.
A key feature of the bailout: the government’s decision to use lies as a form of monetary aid. State hands over taxpayer money to functionally insolvent bank; state gives regulatory thumbs up to said bank; bank uses that thumbs up to sell stock; bank pays cash back to state. What’s critical here is not that investors actually buy the Fed’s bullshit accounting – all they have to do is believe the government will backstop Regions [bank, as one example] either way, healthy or not. “Clearly, the Fed wanted it to attract new investors,” observed Bloomberg, “and those who put fresh capital into Regions this week believe the government won’t let it die.”
Through behavior like this, the government has turned the entire financial system into a kind of vast confidence game – a Ponzi-like scam in which the value of just about everything in the system is inflated because of the widespread belief that the government will step in to prevent losses. [Exactly.] Clearly, a government that’s already in debt over its eyes for the next million years does not have enough capital on hand to rescue every Citigroup or Regions Bank in the land should they all go bust tomorrow. But the market is behaving as if Daddy will step in to once again pay the rent the next time any or all of these kids sets the couch on fire and skips out on his security deposit. Just like an actual Ponzi scheme, it works only as long as they don’t have to make good on all the promises they’ve made. They’re building an economy based not on real accounting and real numbers, but onbelief.
And see this.
Sandwiched between revelations of mounting losses ($5.8 billion and rising) at JP Morgan in the face of bungled bets by a trader known as the London Whale, and allegations of money laundering for Mexican drug cartels and breaches of U.S. sanctions by HSBC, the disclosures of deliberate rigging of the Libor rate by Barclay’s Bank might appear mundane and a trifle boring in comparison. It is, however, this scandal about an arcane interest rate that most starkly exposes the rotten core of the global financial system.
Barclays paid a fine of $450 million and saw the ignominious exit of its CEO Bob Diamond in a deal with U.S. and British regulatory agencies that involves an agreement to defer prosecution and drop criminal charges in two years if the bank does not commit any federal crimes “after the execution of this agreement.” But this might just be the tip of the iceberg. About twenty other global banks are currently being probed, and the full scale of the scandal is yet to be seen. The Economist, while decrying the “casual dishonesty” revealed in the email exchanges of the “banksters” (including promises of expensive champagne in return for favors!), pronounced this global finance’s “tobacco moment,” when it is forced to acknowledge its destructive practices, with potentially huge settlement costs, reminiscent of the settlements of around $200 billion made by U.S. tobacco companies in 1998 following a protracted lawsuit.1 But the scandal is not simply one of colossal greed and hubris. It is about systemic failure. It is about the fictions and illusions that form the basis of today’s complex global financial system.
The Libor is the London Inter-Bank Offer Rate—the rate at which leading banks can borrow from each other in the London markets. It is, however, not simply the banking system’s cost of borrowing or obtaining funds; it has emerged as the anchor of about $800 trillion worth of international financial transactions.2 A brief outline of the history of the process by which the Libor has become a fulcrum of the global financial system is necessary if we are to understand the significance of the current scandal.
The Libor and the Dawn of Neoliberalism
The origin of the Libor is rooted in the explosion of private financial flows in the international monetary system and more specifically the Eurodollar market (constituted by dollar-denominated bank deposit liabilities held in foreign banks or foreign branches of U.S. banks) in the 1970s. This explosion was itself an outcome of the resurgence of finance and the rise of neoliberalism. The sharp hike in interest rates in the United States in 1979—the Volcker anti-inflation shock, aimed in part at lowering wage rates by increasing unemployment—signaled the aggressive promotion of financial openness and integration as a way out of the crisis of the 1970s.3 This agenda served to buttress the growing power of U.S. corporate and financial capital globally. This “coup of finance” hinged on preserving and extending the pivotal place of the United States in international financial markets, and securing the global hegemony of the dollar after the collapse of the Bretton Woods system of fixed exchange rates.4
The Eurodollar market emerged even as the U.S. government was attempting to restrict capital outflows to reduce growing balance of payments deficits. U.S. banks resorted to the Eurodollar markets (primarily in London) as a way of evading restrictive capital controls and protecting their earnings. This offshore market was also a profitable place for Germany and Russia to park their dollar surpluses. Although international financial business was now based more on dollars than sterling, Eurodollar deposits helped to preserve London as a financial center in the face of the erosion of sterling’s importance as an international reserve. At the same time, its ties to the international hegemony of the dollar were cemented5 and the United Kingdom was drawn more closely “into the American imperial embrace.”6
The Big Bang reforms of 1986 in Britain were an important milestone in this process. In the United States, financial deregulation had been set in motion with the Deregulation of Monetary Control Act of 1980. This culminated almost two decades later with the final dismantling of the regulatory framework of the Glass-Steagall Act (legislated in response to the Great Depression, it had separated commercial from investment banking) by means of the Gramm-Leach-Bliley Act of 1999, giving legislative sanction to the erosion of the regulatory firewall between security traders and deposit bankers. This deregulatory agenda was echoed in the Big Bang reforms of banking in Britain in 1986. These reforms blurred the distinction between stockbrokers, investment advisers, and “jobbers” who created the markets in shares. Britain’s permissive regime brought an influx of U.S. banks and huge bonanzas for bankers. The stodgy world of banking was transformed into a heady world of cutthroat deal-making.
Through the 1970s, the oil surpluses of the OPEC countries were channeled through the Eurodollar markets and recycled to developing countries, especially Latin America, in the form of syndicated offshore dollar loans. The floating of the dollar in 1973 also fostered the growth of futures and swaps: derivatives that allowed international investors to hedge the risks of exchange rate and interest rate fluctuations. The investors and bankers who sought to rake in earnings and fees in these rapidly growing markets for new and exotic instruments of loan syndication and financial derivatives found themselves in desperate need of a benchmark against which to price their deals. The payments in the syndicated sovereign loan market, for instance, were based on some measure of a benchmark risk-free borrowing rate plus a risk premium based on assessments of the borrowing country’s capacity to repay the loan.
A key requirement of a benchmark is that it must bear a stable relationship to the prices of other securities and that it be liquid.7 The U.S. Treasury bill rate was one such price, but the volatility of this market in the late 1970s, a period of high inflation in the United States, prompted a search for new benchmarks around which bankers could structure their deals. Futures contracts on the three-month U.S. Treasury bill were introduced in this context as a way to tame the turbulence of the U.S. Treasury bill markets. Even as the Latin American debt crisis brought the bonanza of syndicated sovereign loans to an abrupt halt in the 1980s, U.S. financial markets were further jolted by the failure of the Continental Illinois Bank in 1984. The sudden surge in demand for safe U.S. Treasury bills led to huge losses for those who had used them as hedges for their purchases of private financial assets (since the price of Treasury bills rose while that of private financial assets fell). Such episodes underscored finance’s search for an alternative benchmark more aligned with the prices of private assets.8
Eurodollar futures contracts had begun to be traded in London in the early 1980s. In 1982 the volume of three-month Eurodollar futures transactions (at around $8 billion) was about one-third the volume of futures transactions in three-month U.S. Treasury bills (around $25 billion). By 1986 the volume of Eurodollar futures had risen to about $50 billion (about ten times the volume of corresponding U.S. Treasury bill futures transactions).9 The percentage share of Eurodollar transactions to all money market transactions—from where the wider financial system draws its short-term liquidity funds—rose from less than 5 percent in 1980 to about 50 percent by 1985.10 Since Eurodollar deposits were emerging as a major source of short-term funding for banks, the offshore Eurodollar borrowing rate emerged as an obvious anchor (the risk-free rate) for the proliferating financial trading. Particularly since financial institutions were finding that the prices of derivatives based on these offshore Eurodollar rates were closely aligned to their own borrowing costs. But in the early 1980s, there were not enough trades for a market-based index for Eurodollar deposits, and the Federal Reserve could not set and enforce targets for this rate like it could for the Federal Funds rate (the rate at which banks could borrow reserves overnight from each other). International financial markets felt hampered by a lack of standard reference rates. The solution was found through the offices of the British Bankers’ Association (BBA), the leading lobbying group of London Banks, with the blessing of the Bank of England.
In 1986, the BBA introduced a new benchmark rate, based on the average of daily estimates from the leading banks. The primary purpose of this new benchmark, the Libor, was to set a rate for dollar deposits held outside the United States and also to serve as a reference rate for a range of securities. Banks seeking to reduce their risk in a context of volatile interest rates found a closer approximation to their actual borrowing costs in this benchmark. The newly introduced standard came to be adopted as the basis of a variety of securities and derivatives (like interest rate swaps) that the banks used to hedge their risky portfolios. It was also adopted as the basis for the resetting of rates on long-term loans in line with the banks’ actual variable costs of funds. The volume of three-month Eurodollar futures contracts doubled between 1986 and 1988 to about $100 billion, while the share of Eurodollar transactions in short-term money market activity crossed 75 percent.11 Facilitated by the surge in Eurodollar lending in the syndicated loans market, the huge interest rate swap market, and later the markets for newer and more complex securities and derivatives got a huge boost.
And so, privately mediated financial instruments came to eclipse the publicly issued U.S. Treasury bill as the source of unregulated liquidity generation for the bloating global financial system. This is not to suggest that the U.S. Treasury bill was completely displaced. As the credit crisis of 2008 revealed, it remained the safe haven when the privately mediated mechanisms of liquidity generation and funding crashed in the wake of the collapse of Lehman Brothers.12 It is at the apex of the monetary hierarchy. In fact, a key indicator of financial distress is the difference between the interest rate banks charge each other on three-month loans (the three-month Libor) and the interest rate on three-month U.S. Treasury bills. A widening spread reflects the higher costs of unsecured interbank lending in a situation of evaporating confidence and growing uncertainty. At the peak of the credit crisis in 2008, this spread had risen to about 450 basis points (4.5 percent) from normal levels of between fifty and one hundred basis points (0.5–1 percent). Banks were finding it harder and harder to borrow from other banks, and interbank lending, which is not based on collateral, dried up. The Federal Reserve had to step in to fund the failing banks and restore lending. Even though private agents are a primary driving force in the money market, these decentralized parallel monetary mechanisms are, in the final instance, backstopped by the state and the market for U.S. Treasury bills.
The Emperor Has No Clothes!
So how is the Libor actually set? There are now rates set for deposits in ten currencies with fifteen maturity periods, for a total of 150 Libor rates. The borrowing rate is set daily by the BBA, on the basis of submissions by a panel of banks, for each of these ten currencies and fifteen maturities. The three-month dollar Libor is one of the most important of these rates. It is supposed to indicate what a bank would pay to borrow dollars for three months from other banks, at 11:00 AM on the day it is set. There are currently eighteen banks on the dollar Libor panel (including Citibank, JP Morgan, and Bank of America).
Each participating bank has to answer the question: At what rate could you borrow funds, were you to do so by asking for and then accepting interbank offers in a reasonable market size, just prior to 11:00 AM? The top quarter and bottom quarter estimates are then discarded, and the Libor is the trimmed average of the remaining submissions, (also known as fixings) calculated and posted by Thomsons-Reuters, the leading business data provider. The idea is that this process of trimming will get rid of outliers and rogues, and the number churned out will be a reasonably accurate gauge of the market. Libor thus claims to measure the rate at which banks can borrow from one another.
But in the real world, banks do not generally lend to each other for longer periods without adequate collateral. Interbank lending takes place through money market funds, but only for short periods. This means that quotes for longer periods are based on estimates and not on actual flows. The submissions are the banks’ own estimates of what they think they would have to pay to borrow if they needed money, and the body charged with collecting this information is not an independent regulatory agency but the banking sector’s own lobby group—the BBA. The calculation is undertaken by a data provider that derives huge chunks of its earnings from the same banking sector! The Libor is an accurate reflection of the state of funding liquidity only if most of the banks submit an honest assessment of the rate at which they believe they can borrow on a given day. The self-regulatory process of rate setting itself provides no checks and balances but relies on the integrity and discipline of markets to ensure the calculations are in line with real market conditions.
What the Barclays settlement has shown is that the bank’s submissions “were over a long period tainted by self-interest, whether to help some of its derivatives traders or out of a desire to protect its reputation in the market.”13 Groups of traders actively conspired with brokers to influence the banks’ rate submissions for the London rate. Banks colluded to push the rates in desired directions. The BBA, a group that had in its 2011 internal newsletter bragged about its lobbying victories and spent an estimated $8 million on lobbying in 2011, is hardly a body that would crack the whip on the sector it represents.14
What this boils down to is the mind-boggling revelation: this crucial rate that is the pivot of trillions of dollars worth of derivatives and loans is in a sense a fiction. “There simply is not enough trading, particularly at longer six-month and twelve-month lending periods, to be sure that the rate genuinely reflects the market.”15 As a senior trader said, “you have this vast overhang of financial instruments that hang their own fixes off a rate that doesn’t actually exist.”16 To make things even murkier, those involved in setting the rates had every incentive to lie, since not only did their banks stand to profit or lose, depending on the level at which the Libor was set each day, their own earnings hinged on these numbers. The Financial Services Authority “has identified price-rigging dating back to 2005, yet some current and former traders say that problems go back much further than that.”17 A former trader at the London office of Morgan Stanley has suggested that such misreporting of rates was fairly common practice even in 1991, a mere five years after the system was put in place.18
There have been, broadly speaking, two kinds of manipulations. The first category was designed to bolster traders’ profits. Traders nudged the money market desks of their banks to massage submissions in order to rake in the gains from deals they brokered. Requests were also passed on to these desks in collusion with counterparts at other banks. So a trader could ask the submitter of the fixings to keep the “fixings” high (or low) until certain deals went through. By keeping rates artificially raised or lowered, traders were guaranteed to make money on these deals. Where the income they paid out was fixed to the Libor, a lower rate reduced the payout; where their earnings were linked to the rate, a hike boosted these earnings. Far from being a manifestation of rogue trading, this pervasive rigging is a reflection of monopoly and cartel-like practices in the closed, clubby world of financiers.
A second category of manipulations, which emerged in the wake of the subprime market collapse, was the submission of artificially low rates. The motivation here was more complicated. Banks that were vulnerable sought to protect their reputations and their continued access to credit by obfuscating the actual difficulties they faced in borrowing. High borrowing costs signaled lack of credit worthiness. In fact, the persistently high Libor rates in 2008 were a sign of credit market distress. But, given the fragile state of investor confidence, persistently high Libor rates were seen, both by banks, regulators, and the central banks as an obstacle to restoring the credit engine.
Barclays’ high Libor submissions as the crisis was unfolding had thus prompted serious concern at the Bank of England. The recent travails of Royal Scotland bank had sent jitters though the financial markets, and Barclays was widely perceived to be the next to fail. The high rates were a signal of Barclays’ growing difficulties in borrowing from the market. There were numerous discussions between Bank of England officials and Barclays’ management (including the controversial phone conversations between bank managers and Paul Tucker, the deputy governor of the Bank of England) through this period. In May 2008, there were some reports of banks low-balling their borrowing rates to avoid looking desperate for cash. Timothy Geithner, who was then head of the New York Federal Reserve, sent a memo to Governor of the Bank of England Mervyn King outlining concerns (though no allegations of outright rigging) about the Libor and making recommendations to beef up its credibility. Given the close connections between private banks, central banks, and regulatory agencies, it is hardly credible that the scale of Libor manipulations caught the central bankers and regulators by surprise. The complete failure of the Central Bankers and regulators to respond reflects the structural stranglehold of private finance.
The relation between the state and the financial system erected on the complex interaction of private and public liquidity generation is fraught with contradiction. There has been a ratcheting up of state support of the banking system not just over the past three years or even the past few decades, but over the past century. However, the bulging safety net stokes even greater speculative and risk-taking behavior. Government interventions that rescue banks from their follies in order to restore stability, in effect, revive and reinvigorate the speculative juggernaut. The state again intervenes to rescue the financial institutions in the wake of the catastrophic bust that inevitably follows. The concentration and growing size of the institutions that need to be bailed out give rise to a dramatic scaling-up of central bank support to the financial system, even as regulatory control is being systematically weakened. As the bets keep increasing in size, the scope of the necessary intervention also grows, so that the cost of each successive meltdown becomes even larger. This destructive relationship has been christened “the doom loop.”19 In the process the state and central banks get more deeply implicated in the imperative to shore up the financial system and become hostage to the actions of private finance.
It is not surprising, given the immense control exercised by the Banking lobby, that any attempt at regulatory reform is resisted and stymied. The fundamental weakness of the Libor seems to have been ignored in the interests of protecting the financial system. It has been argued that the easing of the Libor rates late in 2008 was for the greater public good—a sort of collateral cost of preventing the complete collapse of the financial system. The truth is that it is simply testimony to how the power and influence of Wall Street continued to shape the response of the major central banks—the Bank of England and the Federal Reserve—even after its actions brought the global economy to the brink.
The deep ties and interpenetration between the government and financial sector also forged a common worldview that served the imperatives of finance and the neoliberal distaste for hindering, in any way, its forage for profits. The irony is that the neoliberal rhetoric of free markets that is deployed to justify obscene levels of profiteering and deter any forms of regulation is promoting a financial system where markets and market discipline have been banished! It is bad enough that in the world of exotic custom-built financial products and over the counter derivatives, the “models” spawned by the industry have completely usurped the role of the “market” that economic theory celebrates. As the conjurors of these models reaped fat profits from transactions that were conducted without any transparent process of price discovery through a market mechanism, they were immunized from the consequences of their actions. What we now know is that even these models are built around a notional price where no real market exists. Key features of a “properly functioning market”—wide and free participation and genuine price discovery—are conspicuously absent in the setting of the Libor. Pricing is based on private, self-reported quotes of a small clique of powerful banks without any reference to tangible financial transactions. These same banks also controlled the BBA, the organization that actually posts the daily Libor. While vociferously maintaining that self–regulation and unregulated market forces are the most effective form of discipline for this ballooning sector, the financial oligarchy colluded to preempt any genuine competitive process, or any form of accountability.
Equally blatant forms of collusion have recently come to light in the context of the municipal bond-rigging scam involving major banks, including J. P. Morgan Chase, Bank of America, UBS, Lehman Brothers, and Bear Stearns, who conspired and colluded to deliberately rig the public bids on municipal bonds, a business worth about $3.7 trillion. Towns and municipalities that borrow by issuing municipal bonds to finance various projects have also turned to brokers on Wall Street to handle investment of some of this money instead of keeping it idle over the course of the project. The bonds are supposed to be submitted to a competitive auction (of at least three bids), but what the brokers actually did was allow the bankers to collude to carve out chunks of business. The brokers charged with getting municipalities the best deal actually let the prearranged “winner” have a “last look” at the bids of the competitors, thus allowing the bank to make the lowest possible winning bid. “By shaving tiny fractions of a percent off their winning bids, the banks pocketed fantastic sums over the life of these multimillion-dollar bond deals,” while the broker collected not just fees and commissions but also a fat bribe. Four banks that took part in the scam (UBS, Bank of America, Chase, and Wells Fargo) have agreed to pay $673 million in damages. This is likely to be just a fraction of the actual sums skimmed from public projects all over the United States. Yet for the bankers concerned, this was a perfectly fair auction, since, despite the fact that the secret collusion resulted in lower returns to the municipalities, they still got the highest of the bids. The sharing of the extra margins between the colluding bankers was just extra topping on the cake!20
This same hubris of the financial oligarchs at the center of the complex financial infrastructure, who are in effect deciding market prices in a manner that leaves their clients with as bare a minimum as they can get away with, is evident in the Libor riggings. Bob Diamond, the Barclays CEO, complained in a memo to the staff after the fines scandal hit the headlines that, “We all know these events are not representative of our culture…on the majority of days, no requests were made at all.” Behind this arrogance is a perverse sense of entitlement to immunity from the disciplining ravages not simply of the law but of the market. Instead of the competitive markets espoused in the neoliberal dogma, the field was a hotbed of moral hazard, conflict of interest, and outright criminal fraud.
The Libor scandal is not about the risky bets or bad judgment of rogue traders, but the deliberate strangling of market forces in the pursuit of profits. The story of how such an obviously flawed rate came to enjoy such a central place in the global financial system is in the end a story about how corporate, financial capital was powerful enough to set in place institutional mechanisms to ensure the deliberate subversion of any efforts or any market forces that would stifle their pursuit of profits.
A Fantasy Built on Fiction, Breeding Illusion
Although the difference between the reported Libor rate and the actual borrowing costs might seem small, the total amount of money involved is huge, given that Libor rates affect contracts worth hundreds of trillions of dollars. The rate with which the traders and bankers were playing determines the prices that people and corporations around the world pay for loans or receive for their savings. And the mechanism set up allowed the bankers to dictate the rate, which was a pivotal determinant of their earnings, by conjuring these numbers literally out of thin air!
Adjustable-rate mortgages had been allowed in the U.S. mortgage sector after the St Germaine Depository Institutions Act of 1982. Today, about 90 percent of U.S. commercial and mortgage loans are linked to the Libor.21 In 1999, following the urgings of banking lobbies, the U.S. Student Loan Marketing Agency switched from pricing loans off the Treasury bill rates to using the Libor as a benchmark for loans. It is used as a benchmark to set payments on about $350 trillion worth of derivative contracts.22 The Libor, a fictional number based on good faith estimates of those whose earnings fluctuate dramatically with miniscule gyration of this same rate, is now an integral part of the hardwire of the financial system.
And while the banking system has raked in vast sums due to these manipulations, those on the wrong side of these deals have faced huge losses. Among those who have been defrauded through such deliberate rigging are municipalities like Baltimore. Bankers have embedded interest-rate swaps in many long-term municipal bonds, persuading municipalities and states to issue bonds and simultaneously enter into swaps. In these arrangements, the banks agreed to make variable-rate payments to the issuers, and the issuers, in turn, agreed to make fixed-rate payments to the banks involved. The City of Baltimore had entered into interest rate swaps worth $100 million, swapping fixed interest payment to banks for variable Libor-linked receipts. “Forty U.S. states currently allow municipalities to enter into swap agreements. The total estimated amount in 2010 was between $250–500 billion.”23 The artificial low-balling of the Libor after 2008 meant losses of millions of dollars annually to these government bodies. Such losses deprived these agencies of money at a time of prolonged recession and acute fiscal crisis, exacerbating job losses, and strangling public services. Pension funds that were entrusted with household savings were also ripped off though such manipulations.
And if that was not bad enough, after the crisis, when the State was forced to step in to shore up collapsing financial markets, the Treasury bailout programs used this artificially low Libor as the basis for lending to the banks under the Term Asset Backed Securities Loan Facility. And this despite the misgivings expressed by Timothy Geithner in his email to Mervyn King just a few months earlier! Not only did the structurally flawed rate receive further official sanction, but the rescued banks also ended up getting money at excessively cheap rates, skimming off the public exchequer. Meanwhile, families facing foreclosures of their homes or debts in significant excess of the value of their homes received no such relief.
The British government has announced a review of the Libor-setting process, to investigate ways of improving regulation and governance. Under consideration are recommendations like expanding the panel of banks submitting rates and exploring the possibility of a credible third party to monitor and collate submissions. Alternatives to Libor are being discussed. The bankers, however, do not see either the U.S. Treasury bill rate or the U.S. federal funds rate as a suitable benchmark for the parallel shadow financial system of derivatives and financial engineering, tethered as they are to state policy. An alternative that is finding favor with the bankers is an overnight index rate based on the weighted average of the interest rates paid each day on General Collateral Finance Repurchase Agreements (Repos), using the most traded collateral repos like U.S. government securities. This index will be given a further boost by U.S. Treasury Department moves to offer new floating-rate securities based on this index, as it attempts to maintain surging investor demand for government bonds. These proposals seek a patchwork fix of a system that has been usurped by the financial oligarchy for its own unfettered enrichment, when what is needed is an overhaul! The parties involved are, in the end, only trying to replace the fiction at the center without dispelling the neoliberal illusion that fostered the speculative juggernaut that enriched finance.
Even as the Libor scandal has turned the spotlight on the fundamentally flawed mechanisms of rate setting, Wall Street has been waging its battle against transparency in price setting on other fronts. This can be seen, for instance, in the strong pushback from the bank lobby against the Commodity Futures Trading Commission’s proposal that derivative trading facilities provide market participants with easily accessible prices on a centralized electronic screen and eliminate the one-to-one dealings between traders and investors. While espousing the neoliberal credo, and celebrating the virtues of “self-regulation,” the financial oligarchy continues to resist any attempt to curb its monopolistic stranglehold. Not only is regulatory control being preempted, the financial oligarchy also seeks immunity from market discipline.
The absence of the force of market discipline was, paradoxically enough, part of the argument against the socialist planning project, during a debate that took place before the Second World War between the advocates of capitalist markets and the defenders of planning—the “socialist calculation debate.” Ludwig Von Mises, an economist and philosopher of the Austrian school, argued that even if planners sought to mimic price signals, they could not create a disciplining mechanism analogous to the market, and could not therefore capture capitalism’s socially beneficial dynamism.24 It would seem that neoliberal orthodoxy and the hegemony of market fundamentalism has been instrumental in bringing into being a system plagued by this very failing!
- Syndicated loans are provided by a group or syndicate of banks to a borrowing sovereign or corporation. The rate on the loan is the benchmark rate plus some risk premium.
- Interest rate swaps allow two parties to negotiate a “swap” of payments from fixed rate and floating rate contracts. The floating rates are normally calculated on the basis of a benchmark like the Libor.
- A repo (repurchase agreement) is a method of short-term borrowing. The borrower “sells” a security to the lender with the understanding that the asset would be bought back at a higher price. The higher price represents the interest rate on the loan.
Ramaa Vasudevan is an assistant professor of economics at Colorado State University. She is a member of the Union for Radical Political Economics and an associate of the Dollars and Sense Collective.
- ↩ “The LIBOR Affair: Banksters” (online video), Economist blogs, July 7, 2012, http://economist.com
- ↩ “The LIBOR Scandal: The Rotten Heart of Finance,” Economist, July 7, 2012, http://economist.com.
- ↩ Gerard Dumenil and Dominique Levy, The Crisis of Neoliberalism (Cambridge, MA: Harvard University Press, 2010) and Capital Resurgent (Cambridge, MA: Harvard University Press, 2004).
- ↩ Ramaa Vasudevan, “Finance Imperialism and the Hegemony of the Dollar,” Monthly Review 59, no.11 (April 2008): 35–50.
- ↩ Ibid.
- ↩ Leo Panitch and Sam Gindin, “Finance and the American Empire,” in Leo Panitch and Colin Leys, eds., Socialist Register 2005: The Empire Reloaded (New York: Monthly Review Press, 2005), 54.
- ↩ Jacob Wintellberg and Phillip Woolridge, “Interbank Rate Fixings During the Recent Turmoil,” BIS Quarterly Review, March 2008, http://bis.org.
- ↩ Robert N. McCauley, “Benchmark Tipping in the Money and Bond Markets,” BIS Quarterly Review, March 2001, http://bis.org.
- ↩ Ibid.
- ↩ Ibid.
- ↩ Ibid.
- ↩ Ramaa Vasudevan, “The Credit Crisis: Is the International Position of the Dollar at Stake?” Monthly Review 60, no.11 (April 2009): 24–35.
- ↩ “Fixing Libor,” Financial Times, June 27, 2012, http://ft.com.
- ↩ Melanie Newman, “British Bankers Association Claimed Key Lobbying Victories,” Guardian, July 9, 2012, http://guardian.co.uk.
- ↩ Michael Mckenzie and Brooke Masters, “After Libor—The Search for a New Benchmark,” Financial Times, July 10, 2012, http://ft.com.
- ↩ “The LIBOR Scandal: The Rotten Heart of Finance.”
- ↩ Ibid.
- ↩ Douglass Keenan, “My Thwarted Attempts to Tell of LIBOR Shenanigans,” Financial Times, June 26, 2012, http://ft.com.
- ↩ Andrew Haldane and Piergiorgio Allessandri, “Banking on the State, Presentation at Federal Reserve Bank of Chicago,” September 2009, http://bis.org.
- ↩ Matt Taibbi, “The Scam Wall Street Learned from the Mafia,” Rolling Stone, July 5, 2012, http://rollingstone.com.
- ↩ Mariane Ojo, “LIBOR, EURIBOR and the Regulation of Capital Markets: The Impact of Eurocurrency markets on Monetary Setting Policies,” Munich Personal REPEC Archive Paper No 42093, October 20, 2012, http://mpra.ub.uni-muenchen.de.
- ↩ Gillian Tett, “Libor Affair Shows Banking’s Big Conceit,” Financial Times, June 28, 2012, http://ft.com.
- ↩ “The Libor Probes: An Expensive Smoking Gun,” Economist, April 14, 2012, http://economist.com.
- ↩ Ludwig Von Mises, “Economic Calculation in the Socialist Commonwealth,” in Freidrich Von Hayek, ed., Collectivist Economic Planning (London: Routledge and Kegan Paul, 1935).
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James Heintz has written on a wide range of economic policy issues, including job creation, global labor standards, egalitarian macroeconomic strategies, and investment behavior. He has worked as an international consultant on projects in Ghana and South Africa, sponsored by the International Labor Organization and the United Nations Development Program, that focus on employment-oriented development policy. He is co-author, with Nancy Folbre, of The Ultimate Field Guide to the U.S. Economy. From 1996 to 1998, he worked as an economist at the National Labour and Economic Development Institute in Johannesburg , a policy think tank affiliated with the South African labor movement. His current work focuses on global labor standards, employment income, and poverty; employment policies for low- and middle-income countries; and the links between macroeconomic policies and distributive outcomes.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The PERI Report. These are reports by economists working at the Political Economy Research Institute in Amherst, Massachusetts.And now joining us from Amherst is James Heintz. James Heintz is associate director and research professor at PERI.Thanks for joining us, James.JAMES HEINTZ, ASSOC. RESEARCH PROFESSOR, PERI: Thanks a lot.JAY: So what are you working on this week?HEINTZ: Well, I think one of the exciting things that just was announced in today's news were two major settlements involving the mortgage lending practices of major U.S. banks in the U.S. during the crisis years, the crisis years that we've just been through. And the first of these settlements is the Bank of America settlement with Fannie Mae. And this was a mortgage fraud settlement where Fannie Mae had accepted mortgages that were originated by Bank of America and Bank of America's subsidiary, Countrywide Financial. But these mortgages in the mortgage application process were—the information on the mortgages was misrepresented or falsified. And mortgage fraud involves the misrepresentation of information in the mortgage application process in order to get mortgages approved or to be able to sell them on to another institution, such as Fannie Mae. And it came out that Bank of America and Countrywide Financial had been engaging in these practices leading up to the financial crisis, landing Fannie May with a huge number of bad mortgages based on falsified information. And so this settlement was for $10 billion, a combination of Bank of America buying back some of the bad mortgages from Fannie Mae, and direct payments to Fannie Mae resulting from the mortgage fraud.I think this is really important, because mortgage fraud was central to the subprime mortgage crisis, the emergence of the subprime mortgage crisis, and that a lot of these mortgages didn't necessarily need to happen if the information was correct and due diligence was actually followed on the behalf of the lenders. And so it's an important case.The second case involves foreclosure and proper foreclosure practices among ten major U.S. banks. And so in this case it wasn't the beginning of the mortgage process, the origination of the mortgages that involve mortgage fraud in the Bank of America case, but actually the foreclosure process, where there was just improper review or a total lack of review of the documents involving foreclosure. And this might involve, you know, excessive fees that were part of the mortgages, the modifications to the mortgages not being properly reflected in the foreclosure agreements, and sometimes even the banks not even knowing whether they still held the mortgages or not. So there was a complete lack of review of these documents, with the result that many foreclosures probably went forward when they didn't really have to happen. This is a robosigning type of controversy. And robosigners are those bank employees who have a big stack of foreclosure documents, and they just sign off on the foreclosures.JAY: And how much was the settlement on this?HEINTZ: The settlement on this, it was $8.5 billion. Three-point-three billion goes to people who faced foreclosure in 2009 and 2010, and the other $5.2 billion is going to people who support people who are currently facing the risk of foreclosure, either helping them modify their mortgages or providing other types of relief.JAY: Right. Now, some of the criticism of these settlements goes to that this is sort of a cost of doing business for these banks. It's not enough money that they wouldn't perhaps do it again. And even more so, a lot of this behavior really was criminal behavior, and no one's going to jail for this.HEINTZ: Exactly. So if we're looking at these settlements, the first settlement, the Bank of America settlement, is $10 billion. And that's going to Fannie Mae, a government-sponsored enterprise, mortgage giant.Of the other settlement—it's $8.5 billion—this is actually going to homeowners. But let's just break it down a little bit. If we look at the $3.3 billion that's going to people who faced foreclosure in 2009 and 2010, there were 4.4 million foreclosures in the U.S. during those two years. And so you divide $3.3 billion among 4.4 million foreclosures, and you don't get a huge amount for each foreclosure. Also, you know, not every single one of those foreclosures will be eligible for this. But even if you break it down, it's not a huge amount of money when we consider it in respect to the bailouts that have happened or the cost to households in the U.S. So no. If—these banks, Bank of America and the ten banks in the foreclosure settlement, all received substantial bailout money from the Federal Reserve and the U.S. government. And Bloomberg news last year did an assessment of the size of these bailouts, and it was $7.7 trillion. So that's $7.7 trillion going to financial institutions, and the largest banks accounted for 60 percent of that. But then, if we're looking at this settlement, we're looking at $8.5 billion going to families and households, and that being divided among a huge number of households. So in terms of proportionality, it's just not there. The banks are not paying enough for what they actually had done.JAY: So more of a slap on a wrist than any real measures.HEINTZ: Yeah, I think that's right. And this is happening at a time where mortgage lending is actually a very profitable business for banks to be in. So what banks do is they originate mortgages with homeowners, and then they bundle those mortgages into new products, called mortgage securities, and then sell them on to other investors. But the money that they're getting in from the mortgages from the homeowners, those returns are fairly high now, and the amount that they have to pay back out to the investors to take on these mortgage securities are at an all-time low. So it's that gap between what they're getting in from homeowners and the payouts to investors that defines their profitability, and that's actually very, very high. So it's a very profitable time to be a mortgage lender. And the banks are actually doing okay, reporting higher and higher profits in recent quarters. But if we look at the household sector, the Federal Reserve has a survey of consumer finances that—the new version just came out this year. And it showed that between 2007, right before the crisis, and 2010, the net worth of households, the wealth of households declined by about 40 percent, so a dramatic decline in the wealth that households have, setting them back about two decades in terms of the accumulation of wealth. And that hasn't necessarily come back, and yet households are still heavily indebted. And this is what's causing a major drag on the U.S. economy. Households just feel a lot less wealthy. They've been hit hard. There's been no bailout for them. And at the same time, they have very high levels of debt. So $8.5 billion, when we compare it to the amount of wealth that's evaporated from households, which is about $6.9 trillion, is a drop in the bucket at the very best.JAY: Alright. Thanks for joining us, James.HEINTZ: Thanks a lot.JAY: And thank you for joining us on The Real News Network.
EndDISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.
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In a nearly $13 billion settlement with the US Justice Department in November 2013, JPMorganChase admitted that it, along with every other large US bank, had engaged in mortgage fraud as a routine business practice, sowing the seeds of the mortgage meltdown. JPMorgan and other megabanks have now been caught in over a dozen major frauds, including LIBOR-rigging and bid-rigging; yet no prominent banker has gone to jail. Meanwhile, nearly a quarter of all mortgages nationally remain underwater (meaning the balance owed exceeds the current value of the home), sapping homeowners’ budgets, the housing market and the economy. Since the banks, the courts and the federal government have failed to give adequate relief to homeowners, some cities are taking matters into their own hands.
Gayle McLaughlin, the bold mayor of Richmond, California, has gone where no woman dared go before, threatening to take underwater mortgages by eminent domain from Wall Street banks and renegotiate them on behalf of beleaguered homeowners. A member of the Green Party, which takes no corporate campaign money, she proved her mettle standing up to Chevron, which dominates the Richmond landscape. But the banks have signaled that if Richmond or another city tries the eminent domain gambit, they will rush to court seeking an injunction. Their grounds: an unconstitutional taking of private property and breach of contract.
How to refute those charges? There is a way; but to understand it, you first need to grasp the massive fraud perpetrated on homeowners. It is how you were duped into paying more than your house was worth; why you should not just turn in your keys or short-sell your underwater property away; why you should urge Congress not to legalize the MERS scheme; and why you should insist that your local government help you acquire title to your home at a fair price if the banks won’t. That is exactly what Richmond and other city councils are attempting to do through the tool of eminent domain.
The Securitization Fraud That Collapsed the Housing Market
One settlement after another has now been reached with investors and government agencies for the sale of “faulty mortgage bonds,” including a suit brought by Fannie and Freddie that settled in October 2013 for $5.1 billion. “Faulty” is a euphemism for “fraudulent.” It means that mortgages subject to securitization have “clouded” or “defective” titles. And that means the banks and real estate trusts claiming title as owners or nominees don’t actually have title – or have standing to enjoin the city from proceeding with eminent domain. They can’t claim an unconstitutional taking of property because they can’t prove they own the property, and they can’t claim breach of contract because they weren’t the real parties in interest to the mortgages (the parties putting up the money).
“Securitization” involves bundling mortgages into a pool, selling them to a non-bank vehicle called a “real estate trust,” and then selling “securities” (bonds) to investors (called “mortgage-backed securities” or “collateralized debt obligations”). By 2007, 75% of all mortgage originations were securitized. According to investment banker and financial analyst Christopher Whalen, the purpose of securitization was to allow banks to avoid capitalization requirements, enabling them to borrow at unregulated levels.
Since the real estate trusts were “off-balance sheet,” they did not count in the banks’ capital requirements. But under applicable accounting rules, that was true only if they were “true sales.” According to Whalen, “most of the securitizations done by banks over the past two decades were in fact secured borrowings, not true sales, and thus potential frauds on insured depositories.” He concludes, “bank abuses of non-bank vehicles to pretend to sell assets and thereby lower required capital levels was a major cause of the subprime financial crisis.”
In 1997, the FDIC gave the banks a pass on these disguised borrowings by granting them “safe harbor” status. This proved to be a colossal mistake, which led to the implosion of the housing market and the economy at large. Safe harbor status was finally withdrawn in 2011; but in the meantime, “financings” were disguised as “true sales,” permitting banks to grossly over-borrow and over-leverage. Over-leveraging allowed credit to be pumped up to bubble levels, driving up home prices. When the bubble collapsed, homeowners had to pick up the tab by paying on mortgages that far exceeded the market value of their homes. According to Whalen:
[T]he largest commercial banks became “too big to fail” in large part because they used non-bank vehicles to increase leverage without disclosure or capital backing. . . .
The failure of Lehman Brothers, Bear Stearns and most notably Citigroup all were largely attributable to deliberate acts of securities fraud whereby assets were “sold” to investors via non-bank financial vehicles. These transactions were styled as “sales” in an effort to meet applicable accounting rules, but were in fact bank frauds that must, by GAAP and law applicable to non-banks since 1997, be reported as secured borrowings. Under legal tests stretching from 16th Century UK law to the Uniform Fraudulent Transfer Act of the 1980s, virtually none of the mortgage backed securities deals of the 2000s met the test of a true sale.
. . . When the crisis hit, it suddenly became clear that the banks’ capital was insufficient.
Today . . . hundreds of billions in claims against banks arising from these purported “sales” of assets remain pending before the courts.
Eminent Domain as a Negotiating Tool
Investors can afford high-powered attorneys to bring investor class actions, but underwater and defaulting homeowners usually cannot; and that is where local government comes in. Eminent domain is a way to bring banks and investors to the bargaining table.
Professor Robert Hockett of Cornell University Law School is the author of the plan to use eminent domain to take underwater loans and write them down for homeowners. He writes on NewYorkFed.org:
[In] the case of privately securitized mortgages, [principal] write-downs are almost impossible to carry out, since loan modifications on the scale necessitated by the housing market crash would require collective action by a multitude of geographically dispersed security holders. The solution . . . Is for state and municipal governments to use their eminent domain powers to buy up and restructure underwater mortgages, thereby sidestepping the need to coordinate action across large numbers of security holders.
The problem is blowback from the banks, but it can be blocked by requiring them to prove title to the properties. Securities are governed by federal law, but real estate law is the domain of the states. Counties have a mandate to maintain clean title records; and legally, clean title requires a chain of “wet” signatures, from A to B to C to D. If the chain is broken, title is clouded. Properties for which title cannot be established escheat (or revert) to the state by law, allowing the government to start fresh with clean title.
New York State law governs most of the trusts involved in securitization. Under it, transfers of mortgages into a trust after the cutoff date specified in the Pooling and Servicing Agreement (PSA) governing the trust are void.
For obscure reasons, the REMICs (Real Estate Mortgage Investment Conduits) claiming to own the properties routinely received them after the closing date specified in the PSAs. The late transfers were done throu gh the fraudulent signatures-after-the-fact called “robo-signing,” which occurred so regularly that they were the basis of a $25 billion settlement between a coalition of state attorneys general and the five biggest mortgage servicers in February 2012. (Why all the robo-signing? Good question. See my earlier article here.)
Until recently, courts have precluded homeowners from raising the late transfers into the trust as a defense to foreclosure, because the homeowners were not parties to the PSAs. But in August 2013, in Glaski v. Bank of America, N.A., 218 Cal. App. 4th 1079 (July 31, 2013), a California appellate court ruled that the question whether the loan ever made it into the asset pool could be raised in determining the proper party to initiate foreclosure. And whether or not the homeowner was a party to the PSA, the city and county have a clear legal interest in seeing that the PSA’s terms were complied with, since the job of the county recorder is to maintain records establishing clean title.
Before the rise of mortgage securitization, any transfer of a note and deed needed to be recorded as a public record, to give notice of ownership and establish a “priority of liens.” With securitization, a private database called MERS (Mortgage Electronic Registration Systems) circumvented this procedure by keeping the deeds as “nominee for the beneficiary,” obscuring the property’s legal owner and avoiding the expense of recording the transfer (usually about $30 each). Estimates are that untraceable property assignments concealed behind MERS may have cost counties nationwide billions of dollars in recording fees. (See my earlier article here.)
Counties thus have not only a fiduciary but a financial interest in establishing clean title to the properties in their jurisdictions. If no one can establish title, the properties escheat and can be claimed free and clear. Eminent domain can be a powerful tool for negotiating loan modifications on underwater mortgages; and if the banks cannot prove title, they have no standing to complain.
The End of “Too Big to Fail”?
Richmond’s city council is only one vote short of the supermajority needed to pursue the eminent domain plan, and it is seeking partners in a Joint Powers Authority that will make the push much stronger. Grassroots efforts to pursue eminent domain are also underway in a number of other cities around the country. If Richmond pulls it off successfully, others will rush to follow.
The result could be costly for some very large banks, but they have brought it on themselves with shady dealings. Christopher Whalen predicts that the FDIC’s withdrawal of “safe harbor” status for the securitization model may herald the end of “too big to fail” for those banks, which will no longer have the power to grossly over-leverage and may have to keep their loans on their books.
Wall Street banks are deemed “too big to fail” only because there is no viable alternative – but there could be. Local governments could form their own publicly-owned banks, on the model of the state-owned Bank of North Dakota. They could then put their revenues, their savings, and their newly-acquired real estate into those public utilities, to be used to generate interest-free credit for the local government (since it would own the bank) and low-cost credit for the local community. For more on this promising option, which has been or is being explored in almost half the state legislatures in the US, see here.
Ellen Brown is an attorney, president of the Public Banking Institute, and a candidate for California State Treasurer running on a state bank platform. She is the author of twelve books including the best-selling Web of Debt and her latest book, The Public Bank Solution, which explores successful public banking models historically and globally.
Timothy Alexander Guzman, Silent Crow News - Protests erupted this past Thursday in San Juan, Puerto Rico’s capitol building. The ongoing economic stagnation of Puerto Rico continues with proposed pension cuts for retired public school teachers according to the Associated Press:
The protest interrupted a special legislative session that Gov. Alejandro Garcia Padilla had called to debate reform measures amid pressure to appease Wall Street ratings agencies as the U.S. territory braces for its eighth year in recession. Garcia said the teachers’ pension system has a $10 billion deficit and will run out of funds by 2020 if nothing is done.
“We cannot remain with our arms crossed,” he said. “Postponing this reform will worsen the state of the system, require more drastic measures to save it and contribute to the country’s worsening credit.” The government is seeking to change the system from a defined benefit plan to a defined contribution one and possibly increase the retirement age, among other things.
This means reducing monthly payments and increasing the retirement age. Wall Street is looking to profit from Puerto Rico’s debt problem through “trading revenue” according to Bloomberg News last month:
Lazard Capital held a meeting Oct. 10 at its New York office with about 75 participants said Peter Santry, head of fixed-income trading. As more hedge funds buy and sell commonwealth securities, the firm wants to capture that trading revenue, Santry said. “You want to get business out of it,” Santry said.
Former Governor Luis Fortuno, who lost a re-election bid in November 2012 and is now a partner at Washington-based Steptoe & Johnson LLP, spoke at the Lazard Capital meeting on the legal structures of Puerto Rico debt and the commonwealth’s economy, Santry said. Fortuno declined to comment in an e-mail, saying he wouldn’t discuss current or potential clients.
Citigroup hosted an Oct. 24 conference that attracted more than 200 attendees, eight times more than the company was expecting, according to two participants, who asked not to be identified because the meeting was private. Bank representatives said in the presentation that the company originally booked a conference room and had to find a bigger space, the attendees said.
Former Puerto Rico Governor Luis Fortuno’s decision not to mention his current and future potential cliental for Puerto Rico’s potential commonwealth securities is troubling. But Fortuno’s law firm Steptoe & Johnson LLP in the past represented CEO and Chairman of Goldman Sachs Lloyd Blankfein in relation to mortgage fraud in 2012 that resulted in no criminal charges for the banking institution after a year-long investigation. That should win the hearts and minds of the Puerto Rican people! The new governor Alejandro Garcia Padilla will bow to Wall Street’s demands. “Teachers protesting the proposed measures say they favor alternatives such as increasing taxes on foreign companies to generate more revenue and receiving unclaimed money from the island’s electronic lottery system” according to Bloomberg. Caribbean Business reported back on October 10th ‘García Padilla administration makes new pitch on Wall Street’:
Despite Moody’s ill-timed move, García Padilla’s top economic brass remain steadfast in a plan that they insist will be instrumental in achieving 2.6% growth by the end of 2016.
During an exclusive roundtable interview with CARIBBEAN BUSINESS, Economic Development & Commerce Secretary Alberto Bacó Bagué, Puerto Rico Industrial Development Co. Executive Director Antonio Medina, Puerto Rico Tourism Co. Executive Director Ingrid Rivera Rocafort and Puerto Rico Commerce & Export Co. Executive Director Francisco Chévere explained that a concerted effort is underway to showcase an integrated plan—the fiscal and economic teams together— in presentations to credit-rating agencies on Wall Street.
The idea is for the rating agencies to see the economic-development plan, not as an afterthought, but as an integral part of a strategy—the next step after raising taxes and fixing the government workers’ retirement plan—that will spur growth even in the face of austerity. To that end, they have commissioned a review of Puerto Rico’s economy by the Boston Consulting Group (BCG) that, they say, will certify 2.6% economic growth and the creation of 90,000 new jobs by the end of 2016—if they execute their plan to perfection.
The government of Puerto Rico and the teachers both agree to raise taxes on foreign companies. It is important to note that raising taxes on companies would force them to leave the island altogether in hopes of finding better tax shelters in other nations with a lower tax rate. In the process, jobs would be eliminated which will increase unemployment rates adding to an already struggling economy. Raising taxes on foreign companies is not the only bad idea. Using unclaimed money from the Puerto Rico lottery system would not “trickle down” down to the local economy. The Puerto Rico government would use unclaimed funds to repay its growing $70 billion debt to Wall Street. Puerto Rico’s austerity measures would not create 90,000 jobs with a 2.6%economic growth rate which will be certified by the Boston Consulting Group (BCG) is unrealistic. The only jobs that will exist in Puerto Rico will be through the US government and the military with its ever expanding defense department budgets and continuous wars. What is more disturbing for Puerto Rico’s retired teachers is that they fully depend on their pensions because they do not receive any form of social security benefits or any other retirement incentives. “Nearly 42,000 teachers contribute to a pension system that supports nearly 38,000 retired teachers. Unlike other government workers in Puerto Rico, teachers do not receive Social Security and depend completely on their pensions upon retirement” according to the Bloomberg report. Once austerity measures take place, Wall Street and other private investors would reap the benefits. Puerto Rico will suffer the economic consequences of their politicians because of their loyalties to Washington and Wall Street. Maybe when Governor Alejandro Garcia Padilla’s term expires or if he loses the next election, he will find himself in a cushy position in a Wall Street firm following his predecessor former Governor Luis Fortuno. Don’t be surprised.
In testimony before the Senate Judiciary Committee last week, US Attorney General Eric Holder made an extraordinary admission.
Responding to questioning from Republican Senator Chuck Grassley, who noted that there had been no major prosecutions of financial institutions or executives by the Obama administration, Holder said: “I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them, when we are hit with indications that if we do prosecute—if we do bring a criminal charge—it will have a negative impact on the national economy, perhaps even the world economy…”
In other words, major banks are so economically important that, according to Holder, it is impossible to prosecute them for criminal activity. They are above the law.
This exchange occurred during a discussion of the Justice Department’s settlement last month with British-based HSBC, the world’s third-largest bank. HSBC had been charged with laundering billions of dollars for Mexican and Colombian drug cartels. In exchange for avoiding charges, HSBC agreed to pay $1.9 billion, or roughly two months’ profits. Top US officials explicitly vetoed any criminal charges, even on lesser counts than money laundering.
HSBC is only the latest bank to have received a free pass. Earlier this year, ten financial firms agreed to pay $3.3 billion in cash to settle charges of mortgage fraud: amid the housing market collapse, they had employees fraudulently sign off on thousands of mortgage foreclosures a month.
Last year, the government ended an investigation into Goldman Sachs without charges over its promotion of mortgage-backed securities at the height of the speculative bubble—even as Goldman Sachs bet against the assets itself.
In 2010, the Obama administration reached a settlement with Wachovia Bank on similar charges as those brought against HSBC: laundering billions of dollars of drug money, in this case for the Sinaloa Cartel. The fine was $160 million, less than 2 percent of the previous year’s profits.
Many similar arrangements could be cited. In each case, a check is signed—if there is any punishment at all—and business goes on as usual. Whatever money the financial institutions lose is more than balanced by their take of the $85 billion funneled into the markets every month by the US Federal Reserve.
In justifying the administration’s refusal to prosecute, Holder cites the banks’ immense power over economic life. That these institutions exercise dictatorial control over the economy and engage in unchecked criminal behavior is not an argument for refusing to prosecute them, however. Rather, it is an argument for expropriating them, taking them out of the hands of the criminals that run them, and placing them under the democratic control of the working class.
In its dealings with these institutions, however, the government acts as a direct representative of the financial aristocracy. First Bush and then Obama justified the bank bailouts after the 2008 crash by citing the need to “save the economy.” Since then, millions of jobs have disappeared. To pay for such bank bailouts, governments around the world are implementing brutal austerity measures, wiping out public education, health care, retirement and other social programs.
A stench of corruption hangs over the whole process. There is hardly a single Obama administration official in a position important to the banks that does not have previous ties to Wall Street. These include:
Jacob Lew was confirmed this month by the Senate as Obama’s new treasury secretary. Lew, Obama’s former chief of staff, is also the former chief operating officer of Citigroup’s Alternative Investment Unit, which bet against the housing market as it collapsed.
Mary Jo White is Obama’s pick to head the Securities and Exchange Commission. White, who will likely be confirmed easily after hearings scheduled for today, is a former attorney at the corporate law firm Debevoise & Pimpleton, where she defended Wall Street banks and executives, often against investigations by the SEC itself.
Then there is the extraordinary case of David S. Cohen and Stuart Levey. As members of corporate law firm Miller Cassidy in the 1990s, they defended banks and other corporations from white-collar criminal charges, including money laundering. They passed in and out of the Treasury Department and private practice.
In 2004, Levey joined the Bush administration as undersecretary for terrorism and financial intelligence, responsible for overseeing narcotics trafficking and money laundering. He left in March 2011 to become HSBC’s chief legal officer. His deputy at the treasury department, and his successor, was none other than David S. Cohen. The two ex-colleagues would have both been heavily involved in forging the recent deal to settle HSBC’s money-laundering charges.
No banks or executives are prosecuted, because the individuals who would do the prosecuting and the individuals who would be prosecuted are, more or less, the same people.
Holder made his statements on the banks at the same hearing in which he laid out the Obama administration’s position that it has the authority to assassinate citizens within the United States without judicial review.
The coming together of these two statements is not simply coincidental. There is a class logic at work. With the active assistance of the state, the financial aristocracy is engaged in a looting operation, and criminality has become an integral part of the mode of wealth accumulation.
Anticipating social opposition, this same aristocracy is engaged in a conspiracy against democratic rights. While the banks and executives cannot be touched, anyone opposing these policies will face repressive police-state methods.
The political and economic system is rotten to the core. The only rational and appropriate response to such a state of affairs is to overturn this system, capitalism, and institute a new form of social organization based on the principle of social need—that is, socialism.
The active involvement of the state and all its institutions and parties in the criminal operation makes clear that the interests of the working class cannot be advanced except through a mass social and political movement, which aims to replace the government of the banks with a government of, by and for the working class.
Autonomous Robots Coming Soon to a Hospital Near You
Posted on Feb 8, 2013
FDA has approved the use of autonomous telemedicine robots in U.S. hospitals; although President Obama’s second term inaugural speech was inclusive and liberal, it failed to mention the growing crisis of inequality our nation faces; meanwhile, a new book details the scandalous antics of hard-partying authors. These discoveries and more below.
On a regular basis, Truthdig brings you the news items and odds and ends that have found their way to Larry Gross, director of the USC Annenberg School for Communication. A specialist in media and culture, art and communication, visual communication and media portrayals of minorities, Gross helped found the field of gay and lesbian studies.
FDA Approves First Autonomous Telemedicine Robot for Use in Hospitals
iRobot and InTouch Health have received the FDA’s stamp of approval for their RP-VITA autonomous robot, clearing the way for the bot to begin wandering hospitals throughout the United States.
Classical: What If It’s (Gasp) Entertainment?
It just may be time to give up on one of the most exhausted, long-lived cliches about classical music: that it is “high” art, uniquely deserving respect and support for its greatness.
Even Balzac Had To Intern
A young man graduates from college. At his father’s insistence, he begins interning at a law firm.
Value Evolution, Not Just Revolution, in Higher Ed
Ever since the country’s top universities teamed up last year in loose federations to offer free online classes to the masses, MOOCs have become a household word in higher-education circles.
The Real Problem With Colleges’ Business Model
The simple problem with the existing higher education business model in the United States is that it has involved aggregate per student spending that rises faster than inflation for a long time.
A continuing source of frustration for many Americans has been the fact that no one on Wall Street has gone to jail for the mortgage fraud that nearly crashed the world financial system in 2008.
The Missing Link in Obama’s Liberalism
Consensus! Left and right agree that Barack Obama not only gave a powerfully liberal inaugural address, but that he touched on all the important bases.
What You Need to Know About Genetically Engineered Food
American farmers started growing genetically engineered (GE) crops (which are also commonly referred to as “GMOs”) in 1996, and now plant 165 million acres annually.
Netflix, ‘House of Cards,’ and the Golden Age of Television
TV is replacing movies as elite entertainment, because players like Netflix, HBO, and AMC are in an arms race for lush, high-quality shows
A Portrait of the Adult Children of Immigrants
Second-generation Americans—the 20 million adult U.S.-born children of immigrants—are substantially better off than immigrants themselves on key measures of socioeconomic attainment, according to a new Pew Research Center analysis of U.S. Census Bureau data.
Why Social Movements Should Ignore Social Media
There are two ways to be wrong about the Internet.
How the Internet Reinforces Inequality in the Real World
Maps have always had a way of bluntly illustrating power.
The Study That Could Upend Everything We Thought We Knew About Declining Urban Crime
Bill Bratton took the job as commissioner of the New York Police Department in 1994 under Mayor Rudy Giuliani, setting the stage for a Cinderella story in urban law enforcement that went on to change how virtually every major U.S. city tackles crime.
America’s New Vietnam Syndrome
The kind of questioning that Hagel had to face at his confirmation hearing only goes to show that the ideological divisions of the 1970s have survived into the 21st century, reborn now as arguments over whether Iraq was ‘worth it.’
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February 5, 2013 |
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Is Eric Holder’s “See No Evil, Hear No Evil” Department of Justice finally getting serious about investigating fraud on Wall Street? At first glance, it would seem so, given the news that the Department of Justice has filed civil fraud charges against the nation’s largest credit-ratings agency, Standard & Poor’s, accusing the firm of inflating the ratings of mortgage investments and setting them up for a crash when the financial crisis struck.
On the one hand, there is no question that without the credit rating agencies the Wall Street guys would not have been able to pull off this colossal heist against the American people, and the ratings agencies cannot be excused. In fact, Standard & Poor’s employees openly joked about the company’s willingness to rate deals “structured by cows” and sang and danced to a mock song inspired by “Burning Down the House” before the 2008 global financial collapse, according to the DOJ lawsuit. On the other, the ratings agencies are simply the gift wrappers. DOJ has yet to go after the banksters who created these packages in the first place and who seem to be in the clear as a result of a series of unconscionably low settlements recently reached with the Justice Department.
I suppose we ought to be grateful for these baby steps in the right direction. The ratings agencies themselves have admitted to US government enquiries recently that they took money in return for ratings that were not based on any fundamental assessments other than the cash they were being paid. They have lied about the risk of default in many corporate cases and then marked down debt when the game was up further destabilizing the financial system. Hence, to say that their behavior was at the heart of the great crisis is absolutely correct.
Of course, that inevitably begets the obvious question: what took you so long and why leave it at S&P? As early as September 2004, the FBI warned that there was an “epidemic” of mortgage fraud and predicted that it would cause a financial crisis if it were not stopped. It was not contained. Everyone agrees that the mortgage fraud epidemic expanded massively after the FBI warning and still not one Wall Street figure of any note has gone to jail.
Under Treasury Secretary Geithner, and the Keystone Cops of the Department of Justice, led by Eric Holder and Lanny Breuer, we established a doctrine of “too big to jail” for the very institutions which perpetrated massive frauds on millions of Americans. Those who called for regulations that would take even that most minimal of steps necessary to reestablish the rule of law and restore our nation’s democracy and financial stability were essentially ignored. Geithner’s express rationale was that the financial system's extreme fragility made vigorous investigations of the elite frauds too dangerous, in effect giving the banksters a get-out-of-jail-free card and in effect enshrining crony capitalism and imperiling our economy, our democracy, and our national integrity.
So what’s changed? Well, obviously one has to ask if the departure from Treasury of Mr. Geithner, along with the ignominious resignation of the odious Lanny Breuer at the DOJ heralds a new approach, or are there are other motives in mind?
There is a school of thought which suggests that this lawsuit is an attempt by the US government to intimidate the ratings agencies against any further US debt downgrades. If so, it’s a pretty stupid shakedown. The truth is that sovereign governments like the US empower these agencies simply by listening to them, in the same way they listen to the IMF, and put the interests of these undemocratic and crooked agencies ahead of their own national interests.
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Michael Ratner is President Emeritus of the Center for Constitutional Rights (CCR) in New York and Chair of the European Center for Constitutional and Human Rights in Berlin. He is currently a legal adviser to Wikileaks and Julian Assange. He and CCR brought the first case challenging the Guantanamo detentions and continue in their efforts to close Guantanamo. He taught at Yale Law School, and Columbia Law School, and was President of the National Lawyers Guild. His current books include "Hell No: Your Right to Dissent in the Twenty-First Century America," and “ Who Killed Che? How the CIA Got Away With Murder.” NOTE: Mr. Ratner speaks on his own behalf and not for any organization with which he is affiliated.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The Ratner Report with Michael Ratner, who now joins us from New York City.Michael is the president emeritus of the Center for Constitutional Rights in New York. He's chair of the European Center for Constitutional and Human Rights in Berlin. He's a board member of The Real News. Thanks for joining us again, Michael.MICHAEL RATNER, PRESIDENT EMERITUS, CENTER FOR CONSTITUTIONAL RIGHTS: Good to be with you, Paul.JAY: So I'm—let's kick this one off with a question. So President Obama gets inaugurated, and all of a sudden he has this brilliant flash: oh, no, I need Michael Ratner as attorney general. Now, that's as likely to happen as—well, okay, I'm not going to crack any joke, but let's say it happened. What would you do as attorney general?RATNER: Well, you know, it's an interesting question. And I was asked the question by a progressive newspaper called The Indepedent as well, along similar lines. And, of course, you could decide, you could have a different government, a socialist government. But, of course, that's not going to be decided by the attorney general. So what does the attorney general do? Attorney general heads the Department of Justice. In, like, 200 and some years there's been one woman heading the Department of Justice. So you have to assume it's probably going to be a man this time, which is going to be me. And I came up with some ideas, perhaps eight, nine, ten ideas of what I could actually do. So the first one is a nice—for all of us activists out there, 'cause you get social change through activism. And what I said was, handcuff the FBI, not activists. So the first thing that they could do is get the FBI off the backs of political activists, Muslim activists, people who are out in the streets, Occupy Wall Street people, and just get rid of government, political FBI spying, put handcuffs on the FBI, not on all of us, because that's how social change is made.And right now we're in a situation where Obama and the FBI are still operating under the FBI guidelines that were suggested by President Bush's last attorney general, Mukasey. And they're terrible, because they allow spying and surveillance and wiretapping on people who they have never been even accused or even implicated in a crime without reasonable doubt. They can spy on anybody.So number one, handcuff the FBI and not activists.Number two—and this is the power of attorney general. Even if there's laws on the books saying it's illegal for me to smoke marijuana or take cocaine, the attorney general doesn't have to enforce those federal laws. And so the second thing I would do as attorney general, I would just stop all drug prosecutions. That's not the same as passing laws that says they're legal. But as attorney general, the chief law enforcement officer, stop all drug prosecutions. Already you're going to see our jails getting empty, less people going, huge budget cuts that will make a big difference in, of course, people's personal lives.The third is: what do we do about jails, and what can I do as attorney general? Well, I could ask that every single juvenile, every single person convicted as a juvenile in prison, under 18 years old, should be immediately paroled. They had no place in prison to begin with. They should have been treated. They should have been rehabilitated. Get rid of that right away.Then I would ask that all the political prisoners be released—Leonard Peltier, Mumia Abu-Jamal, etc., anybody—. Mumia, I wouldn't have the authority. He's in a state prison. But all the federal prisoners, such as the Indian activist Leonard Peltier. Get them out. And then, out of federal prisons, ask for parole of anybody who's served over 20 years. Europe really has a maximum of 20 years. Let's get rid of those. They're just being in there for punitive reasons.So I have FBI, drugs, prisons. Then I would end the prosecution of any undocumented workers in the United States. No longer would we use a criminal system, such as operation streamline to jail tens and tens of thousands of people. End the prosecution of undocumented.Fifth, I would stop the prosecution of my own client, Julian Assange, the investigation of him as well as WikiLeaks. I would have stopped the prosecution of Aaron Swartz, the young internet activist who committed suicide really in part as a result, if not even in big part, as a result of the government's persecution of Aaron Swartz, the internet activist. I would stop the prosecution of Bradley Manning. I would stop the one of Jeremy Hammond. Those are two people who allegedly uploaded documents to WikiLeaks. So I would just stop with prosecuting whistleblowers, just get rid of that, because they're exposing secrets that we really have to know. That's the sixth thing.The seventh thing—and this is a hard one to get into for the attorney general, because you think, how do I make this country more equal from an economic point of view. So I've thought long and hard about that. I can't change the tax code. But what could I do? I could decide that anyone making under a certain amount will not be prosecuted if they don't pay taxes.So let's set the figure at, let's say, $40,000. Anyone making under $40,000, if they decide not to pay taxes, I will not prosecute them as the Department of Justice, nor will I use civil jurisdiction or civil courts to try and collect those taxes. That would automatically raise the salary levels, raise the levels of income of, you know, probably the majority of the United States. That's the sixth thing.The seventh thing. I don't want to let the bad guys off the hook here. I have two sets of bad guys. The first thing I would do is begin an investigation and hope to get an indictment of President Obama for operating the drone strikes throughout the world. I would particularly go after them for the killing of al-Aulaqi in Yemen or al-Aulaqi's son in Yemen, a 16-year-old boy, and for another U.S. citizen in Yemen. There's a U.S. law—and a federal judge actually just cited it in a recent decision on drones. It says the president is not exempt from a law that prohibits people from killing Americans overseas. So I'd begin an investigation of President Obama because he has killed American citizens with drones.JAY: Now, not only will you never get appointed, but if in the wildest chance you did, you wouldn't hold the job for very long. Go on.RATNER: Well, once I get him indicted, you know, he can't get rid of me. Anyway, anything I would do is I would go after, obviously, the Bush–Cheney torture kill teams—implemented not only indefinite detention at Guantanamo and Bagram, but who actually tortured people all over the world—Guantanamo, Bagram—who rendered people to torture, and I would investigate and prosecute those people. That seems like a no-brainer. It should have been a no-brainer to Obama. It should have been a no-brainer to Eric Holder, the current person who I'm replacing. But apparently even that has been difficult.JAY: Now, you're talking Bush–Cheney themselves?RATNER: Yes, of course. Bush and Cheney have both admitted that they ordered waterboarding, a form of torture, and they would do it again. That's—you don't need much more. They've openly admitted to ordering people to be tortured. And we know that people have been tortured as a result. Materials were released. Various people at black sites, one person 83 times waterboarded, another person well over 100. Torture's completely illegal. We have an obligation to prosecute torturers under the Convention Against Torture. It hasn't been done by Obama. I as attorney general would actually—of the ones I mentioned, I think a number of them are actually realistic. That one certainly should be carried out.Then, you know, how else do we get at the financial crisis? I gave us one way [unintel.] stop people having to pay taxes. I just won't prosecute them. The other way, and what I made up for this, is: too big to fail, too big not to be in jail. So rather than just give all of these big banks civil penalties, or these investment houses, even if they're $10 billion or $5 billion or $500 million, let's actually have investigations where we jail the crooked bankers, jail the crooked investment houses, because that's the way, at least, we can avert not crisis—'cause we're going to have crisis in capitalism for a long time, economic crisis, but maybe we can take some of the really deep edge off the next economic crisis by trying to get our banks, our mortgage fraud people, etc., to operate in a better way. That's number nine. Number ten. This was an interesting one. This was actually suggested by my daughter, modeled after a law in Bolivia called the Rights of Mother Earth, Ley de Derechos de la Madre Tierra. And what it does is rather than just talk about rights for human beings, talks about rights for the ecosystem and the cultural system that you're in, so that when you do something, you have to not just think about what's going to happen, you know, to me or when you build a dam, but what's going to happen to the whole ecosystem. Bolivia has such a law. And as attorney general, of course, I can't pass that law, but at least I could try and put that law forward. So these are ten real positions that the next attorney general could take. And were I the attorney general, despite the political pushback I could get, these are things that I would actually like to carry out. And while they wouldn't be revolutionary in the sense of overturning this society, what they represent to me are transitional actions, transitional demands and actions that ultimately can lead to a much more equal society.JAY: Well, that's great. I mean, I think if this was an elected position, you could probably get elected to this. Unfortunately, it's not.RATNER: I love you, Paul.JAY: Thanks very much for joining us, Michael.RATNER: Thank you, Paul.JAY: And thank you for joining us on The Real News Network.
EndDISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.
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Aaron Swartz’ passing becomes even more tragic if we do not recognize what he spent his life fighting for, and realize that no matter where we think we stand on the issue of Internet freedom, the interests driving the debate from Wall Street and Washington, do not have any of our best interests in mind.
In your standard dictatorship, activists are brought out back and shot.
In the United States’ crypto-dictatorship, activists are bullied by the state until they go bankrupt, are buried under a mountain of legal woes, are publicly discredited or humiliated, or as in the case of activist and Reddit co-founder Aaron Swartz, made to crack under the constant pressure, and commit suicide.
While superficially the United States may seem more progressive, a dead activist bullied to death for his political views, is a dead activist – whether it was a bullet in the back of the head by SS officers, or a mountain of litigation dumped upon someone by the US Department of Justice.
We are All Aaron Swartz.
Aaron Swartz protesting SOPA (image right)
Swartz was an active opponent of the media industry’s various assaults on Internet freedom and sharing, including the scandalous SOPA/PIPA and ACTA bills. He was the director of Demand Progress, which pursued the following campaigns:
The big business lobbyists who are behind the Internet Blacklist Bill are already making the sequel. The “Ten Strikes” bill would make it a felony to stream copyrighted content — like music in the background of a Youtube video, movies and TV shows — more than ten times.
2. Oppose Protect-IP We knew that members of Congress and their business allies were gearing up to pass a revised Internet Blacklist Bill — which more than 325,000 Demand Progress members helped block last winter — but we never expected it to be this atrocious. Last year’s bill has been renamed the “PROTECT IP” Act and it is far worse than its predecessor.
The new PROTECT-IP Act retains the censorship components from COICA, but adds a new one: It bans people from having serious conversations about the blacklisted sites. Under the new bill, anyone “referring or linking” to a blacklisted site is prohibited from doing so and can be served with a blacklist order forcing them to stop.
3. Bin Laden Is Dead. Will The Patriot Act Live On?The Patriot Act was enacted as a supposedly temporary measure in the wake of 9-11. With Bin Laden’s passing, the era of the Patriot Act, of spying on Americans who aren’t suspected of crimes, of heavy-handed abuse of our dearly held civil liberties, must come to an end.We need to act now to make sure we win this fight. Tens of thousands of Demand Progress members have already urged Congress to fix the Patriot Act. Will you ask Congress and the President to return us to the legal norms that existed before 9-11 and start respecting our civil liberties?
4. Tell Facebook: Stop Censoring Political SpeechA range of Facebook users, from political dissidents to technology bloggers, are reporting the sudden blocking of their pages. Facebook provided no prior warning, nor was there a clear process established to restore access to the blocked pages.
Will you fight back?
Investigators discovered that Goldman traders bragged about selling “shitty” deals to clients and the mega-bank bet against the same financial products it was selling to investors. And they’ve lied about it all the way to the bank.
Millions of Americans have lost their jobs, and small-time homeowners are in jail for mortgage fraud, but no CEOs have been prosecuted for their roles in the financial crisis. It’s time to change that.
Americans are in more debt than ever before, and the banks are going to new extremes to squeeze us for every last penny: If you can’t pay up, they’ll try to get you locked up.
Immigration and Customs Enforcement (ICE) and the Department of Homeland Security (DHS) are out of control. They’ve been seizing domain names without due process: they shut down 84,000 sites by accident last month, arrested a man for linking to other websites, and government officials think ICE and DHS are claiming powers that would even threaten sites like Facebook.
Are our leaders better than Egypt’s? Across the globe, governments know that the Internet is increasingly the lifeblood of democracy — that’s why Egypt’s oppressive regime just shut down the Internet there.
But even as American politicians condemn Egypt for doing so, they’re pushing legislation to give our government the power to do the exact same thing here at home! The so-called ‘Kill Switch’ would let the president turn off our Internet — without a court even having to approve the decision.
Join over 40,000 in fighting it. Add your name!
The most noxious parts of the USA PATRIOT Act are about to expire — but Congress wants to extend them again. These provisions let the government spy on people without naming them in a warrant, and secretly access your library and bank records under a gag order prohibiting anyone from letting you know.
Join over 60,000 in opposing extension. Add your name!
Commerce Secretary Gary Locke just announced that he’s developing virtual ID cards for Internet users — and they could pose a severe threat to our privacy! The program’s called the “National Strategy for Trusted Identities in Cyberspace” and the draft proposal indicates that we’d be forced to use the IDs for any online transactions with the government, and for online interactions with businesses that use them.
Over 30,000 have told Gary Locke to back off. Add your name!
Crimes committed by the big banks helped crash our economy — and WikiLeaks is saying that a whistle-blower has sent them enough evidence to take down Bank of America. So now the big banks are fighting back by trying to get the government to muzzle future whistle-blowers.
Tell the SEC not to listen to them. Add your name!
Politicians are leading the charge to outlaw WikiLeaks and undermine freedom of the press. First Sen. Joe Lieberman (I-CT) successfully pressured Amazon.com to stop hosting the WikiLeaks website and now, as Julian Assange has been arrested in the UK, he’s introduced a new bill changing the law to make WikiLeaks illegal.
More than 30,000 have signed our petition to stop him. Add your name!
Across the country, TSA is replacing airport metal detectors with scanners that take nude photos of you — violating your rights, zapping you with X-rays that could cause cancer, and slowing down the lines. And if you opt-out, they feel up your “sensitive regions.”
Lawmakers in New Jersey and Idaho are trying to stop them. Let’s get a similar bill introduced in every state! Contact your lawmaker!
Immigration and Customs Enforcement (ICE) and the Department of Homeland Security (DHS) are out of control. They’ve been seizing domain names without due process: they shut down 84,000 sites by accident last month, arrested a man for linking to other websites, and government officials think ICE and DHS are claiming powers that would even threaten sites like Facebook.
Over 300,000 signers! Add your name!
PLUS: Download our new flyer for our Stop The Internet Blacklist campaign and start a grassroots movement in your area!
Clearly, Demand Progress is not just another faux-NGO working in tandem with special interests under the guise of “human rights,” “freedom,” and “democracy” to peddle further exploitation and expansion of the powers that be – but rather identified these special interests by name, and exposed both their agenda and the means by which they attempt to achieve it. Swartz’ death is a tragic one, and compounded by the dismissive, almost celebratory atmosphere across the corporate-media of the passing of a man they labeled a suspected criminal.
Swartz was targeted by the US Department of Justice, MIT, and their corporate-financier sponsors because he was a prominent and particularly effective voice against real creeping oppression. He was a pragmatic, technical individual and proposed solutions that short-circuited the typical and ineffectual political infighting that drives most disingenuous or misguided causes.We all stand the potential of being targeted like Swartz if we allow these monopolies to continue dictating the destiny of human progress. We are all Aaron Swartz – and must realize his targeting and subsequent suicide is the manifestation of the real danger these insidious monopolies pose to us.
Sharing is Not a Crime.
Technologically empowered openness and generosity across the corporate-financier dominated Western World is no more a real offense than was being Jewish inside Nazi Germany. But like Nazi Germany, anything can be “outlawed” if it suits political and economic special interest. Are we truly “criminals” for not respecting laws born of special interests, detached from the will and best interests of the people? No, we most certainly aren’t.
Swartz allegedly downloaded scholarly files from an open and unsecured academic archive (and here). The original files are still very much intact and at the disposal of the organization that maintains the archives. Nothing was stolen, yet Swartz was accused of “theft,” facing 30 years in prison and a 1 million dollar fine – this in a nation where rapists and murders can spend less time in prison, and elected representatives involved in willfully selling wars based on patently false pretenses walk free without even the faintest prospect of facing justice.
Swartz’ crusade against the corporate-financier interests attempting to monopolize and control communication and technology is surely why he was targeted by the federal government, academia, and their corporate-financier sponsors. It is no different than an activist being brought out back of a kangaroo court in a third-world dictatorship, and shot. The silence from so-called “human rights” advocates over the treatment, and now death of Aaron Swartz is deafening – exposing them yet again as another cog in the machine.
It is time to fight back – and time to fight back without the help of these disingenuous NGOs and their purposefully futile tactics of solely protesting and petitioning. Pragmatic, technical solutions must also be explored and deployed at the grassroots to shatter these corporate-financier monopolies at the very source of their power – that is – our daily patronage and dependence on their goods and services.
An alternative to the networks, media, services, and even hardware must be devised and deployed across our local communities. Laws born of special interests and flying in the face of the people’s best interests must be exposed, condemned, and entirely ignored. Taking away a human being’s freedom because they copied and shared a file is unconscionable – as unconscionable as imprisoning a human being because of their political, religious, or racial background. We would ignore laws imposed upon our society singling out blacks or Jews, but not laws criminalizing sharing solely for the benefit of corporate special interests?
In December 2012′s “Decentralizing Telecom,” a plan for establishing a second Internet, locally built and maintained, and connected with neighboring networks to run parallel to the existing Internet – but be free of large telecom monopolies – was proposed.
Also published in December of 2012, was “Sharing is Not a Crime: A Battle Plan to Fight Back,” which illustrated the importance of shifting entirely away from proprietary business models and instead, both using and producing open source hardware, software, news, and entertainment.
Establishing local, and eventually national and even international parallel networks is possible, but will take time. Turning toward open source software can begin today, with a visit to OSalt.com and exploring alternatives that are already being used by millions today.
A bridge between where we are now and a truly free Internet made by the people, for the people, and entirely maintained in a decentralized, local manner, is what are called “Pirate Boxes.” David Darts, an artist, designer, and coder, describes a Pirate Box as:
PirateBox is a self-contained mobile communication and file sharing device. Simply turn it on to transform any space into a free and open communications and file sharing network.
Share (and chat!) Freely Inspired by pirate radio and the free culture movements, PirateBox utilizes Free, Libre and Open Source software (FLOSS) to create mobile wireless communications and file sharing networks where users can anonymously chat and share images, video, audio, documents, and other digital content.
Private and Secure PirateBox is designed to be private and secure. No logins are required and no user data is logged. Users remain completely anonymous – the system is purposely not connected to the Internet in order to subvert tracking and preserve user privacy.
Easy to Use Using the PirateBox is easy. Simply turn it on and transform any space into a free communication and file sharing network. Users within range of the device can join the PirateBox open wireless network from any wifi-enabled device and begin chatting and sharing files immediately.
Under David’s FAQ’s regarding Pirate Boxes, a particularly useful question is answered:
Can I make my own PirateBox?
Absolutely! The PirateBox is registered under the GNU GPLv3. You can run it on an existing device or can be built as a stand-alone device for as little as US$35. For detailed instructions, visit the PirateBox DIY page.
For the media-industry to stop the spread of local hardware solutions like Pirate Boxes, they would have to literally be in every single community, inside every single person’s house, to prevent people from taking legally purchased or freely available media, and sharing it – akin to publishers policing the entire population to prevent readers from lending their friends and family their copy of a particular book.
The basic principles and experience one gets from building and using a Pirate Box can allow them to tackle larger mesh networks and eventually, decentralize telecom. By encouraging local meetings where PirateBoxes are used, the foundation for new local organizations and institutions can be laid.
New Paradigms Require New Institutions – Join or Start a Hackerspace
Not everyone possesses the knowledge and skills necessary to create local networks or develop alternatives to the goods and services we currently depend on corporate-financier monopolies for. Even those that do, cannot, by themselves, effectively research, develop, and deploy such alternatives. By pooling our resources together in common spaces called “hackerspaces,” we can. Hackerspaces are not just for technically talented individuals, but a place where anyone with the inclination to learn can come and participate.
Hackerspaces can be organized under a wide range of templates – including clubs where dues are paid, spaces that earn income through providing courses or services to the community, and many others. It will be in hackerspaces, and local institutions like them, that a truly people-driven paradigm shift takes place – one of pragmatism and progress, not endlessly broken political promises from elected officials.
People can visit Hackerspaces.org to see the closest organization near them where they can join in. Conversely, for those who either don’t have a hackerspace nearby to join, or simply want to start their own, see, “How to Start a Hackerspace,” for more information on where to begin.
Aaron Swartz’ passing becomes even more tragic if we do not recognize what he spent his life fighting for, and realize that no matter where we think we stand on the issue of Internet freedom, the interests driving the debate from Wall Street and Washington, do not have any of our best interests in mind.
We are all Aaron Swartz – to reclaim the battle cry abused so flagrantly by the West’s faux-democratic “awakening” in the Arab World and beyond. And we must all become active opponents of this agenda to usurp our ability to determine our own destiny. Aaron Swartz was an exceptional proponent of Internet freedom and openness – but by all of us joining the ranks of this cause, we exponentially complicate the system’s ability to target and destroy any one of us. If your cause is just, and your means constructive and pragmatic, there isn’t just “safety” in numbers, there is invincibility.
Tommy Robinson invited to address US lawmakers, multiple convictions complicate visa decision — RT...
The Failure To Punish Wall Street Criminals Is The Core Cause Of Our Sick Economy U.S. Attorney General Eric Holder said: I am concerned that the size of some of these institutions [banks] becomes so large that it does become … Continue reading →
Government Excuses for Letting the Banksters Off Scot-Free Are Bogus was originally published on Washington's Blog
For years, homeowners have been battling Wall Street in an attempt to recover some portion of their massive losses from the housing Ponzi scheme. But progress has been slow, as they have been outgunned and out-spent by the banking titans.
In June, however, the banks may have met their match, as some equally powerful titans strode onto the stage. Investors led by BlackRock, the world’s largest asset manager, and PIMCO, the world’s largest bond-fund manager, have sued some of the world’s largest banks for breach of fiduciary duty as trustees of their investment funds. The investors are seeking damages for losses surpassing $250 billion. That is the equivalent of one million homeowners with $250,000 in damages suing at one time.
The defendants are the so-called trust banks that oversee payments and enforce terms on more than $2 trillion in residential mortgage securities. They include units of Deutsche Bank AG, U.S. Bank, Wells Fargo, Citigroup, HSBC Holdings PLC, and Bank of New York Mellon Corp. Six nearly identical complaints charge the trust banks with breach of their duty to force lenders and sponsors of the mortgage-backed securities to repurchase defective loans.
Why the investors are only now suing is complicated, but it involves a recent court decision on the statute of limitations. Why the trust banks failed to sue the lenders evidently involves the cozy relationship between lenders and trustees. The trustees also securitized loans in pools where they were not trustees. If they had started filing suit demanding repurchases, they might wind up suedon other deals in retaliation. Better to ignore the repurchase provisions of the pooling and servicing agreements and let the investors take the losses—better, at least, until they sued.
Beyond the legal issues are the implications for the solvency of the banking system itself. Can even the largest banks withstand a $250 billion iceberg? The sum is more than 40 times the $6 billion “London Whale” that shook JPMorganChase to its foundations.
Who Will Pay – the Banks or the Depositors?
The world’s largest banks are considered “too big to fail” for a reason. The fractional reserve banking scheme is a form of shell game, which depends on “liquidity” borrowed at very low interest from other banks or the money market. When Lehman Brothers went bankrupt in 2008, triggering a run on the money market, the whole interconnected shadow banking system nearly went down with it.
Congress then came to the rescue with a taxpayer bailout, and the Federal Reserve followed with its quantitative easing fire hose. But in 2010, the Dodd Frank Act said there would be no more government bailouts. Instead, the banks were to save themselves with “bail ins,” meaning they were to recapitalize themselves by confiscating a portion of the funds of their creditors – including not only their shareholders and bondholders but the largest class of creditor of any bank, their depositors.
Theoretically, deposits under $250,000 are protected by FDIC deposit insurance. But the FDIC fund contains only about $47 billion – a mere 20% of the Black Rock/PIMCO damage claims. Before 2010, the FDIC could borrow from the Treasury if it ran short of money. But since the Dodd Frank Act eliminates government bailouts, the availability of Treasury funds for that purpose is now in doubt.
When depositors open their online accounts and see that their balances have shrunk or disappeared, a run on the banks is likely. And since banks rely on each other for liquidity, the banking system as we know it could collapse. The result could be drastic deleveraging, erasing trillions of dollars in national wealth.
Some pundits say the global economy would then come crashing down. But in a thought-provoking March 2014 article called “American Delusionalism, or Why History Matters,” John Michael Greer disagrees. He notes that historically, governments have responded by modifying their financial systems:
Massive credit collapses that erase very large sums of notional wealth and impact the global economy are hardly a new phenomenon . . . but one thing that has never happened as a result of any of them is the sort of self-feeding, irrevocable plunge into the abyss that current fast-crash theories require.
The reason for this is that credit is merely one way by which a society manages the distribution of goods and services. . . . A credit collapse . . . doesn’t make the energy, raw materials, and labor vanish into some fiscal equivalent of a black hole; they’re all still there, in whatever quantities they were before the credit collapse, and all that’s needed is some new way to allocate them to the production of goods and services.
This, in turn, governments promptly provide. In 1933, for example, faced with the most severe credit collapse in American history, Franklin Roosevelt temporarily nationalized the entire US banking system, seized nearly all the privately held gold in the country, unilaterally changed the national debt from “payable in gold” to “payable in Federal Reserve notes” (which amounted to a technical default), and launched a series of other emergency measures. The credit collapse came to a screeching halt, famously, in less than a hundred days. Other nations facing the same crisis took equally drastic measures, with similar results. . . .
Faced with a severe crisis, governments can slap on wage and price controls, freeze currency exchanges, impose rationing, raise trade barriers, default on their debts, nationalize whole industries, issue new currencies, allocate goods and services by fiat, and impose martial law to make sure the new economic rules are followed to the letter, if necessary, at gunpoint. Again, these aren’t theoretical possibilities; every one of them has actually been used by more than one government faced by a major economic crisis in the last century and a half.
That historical review is grounds for optimism, but confiscation of assets and enforcement at gunpoint are still not the most desirable outcomes. Better would be to have an alternative system in place and ready to implement before the boom drops.
The Better Mousetrap
North Dakota has established an effective alternative model that other states might do well to emulate. In 1919, the state legislature pulled its funds out of Wall Street banks and put them into the state’s own publicly-owned bank, establishing financial sovereignty for the state. The Bank of North Dakota has not only protected the state’s financial interests but has been a moneymaker for it ever since.
On a national level, when the Wall Street credit system fails, the government can turn to the innovative model devised by our colonial forebears and start issuing its own currency and credit—a power now usurped by private banks but written into the US Constitution as belonging to Congress.
The chief problem with the paper scrip of the colonial governments was the tendency to print and spend too much. The Pennsylvania colonists corrected that systemic flaw by establishing a publicly-owned bank, which lent money to farmers and tradespeople at interest. To get the funds into circulation to cover the interest, some extra scrip was printed and spent on government services. The money supply thus expanded and contracted naturally, not at the whim of government officials but in response to seasonal demands for credit. The interest returned to public coffers, to be spent on the common weal.
The result was a system of money and credit that was sustainable without taxes, price inflation or government debt – not to mention without credit default swaps, interest rate swaps, central bank manipulation, slicing and dicing of mortgages, rehypothecation in the repo market, and the assorted other fraudulent schemes underpinning our “systemically risky” banking system today.
Relief for Homeowners?
Will the BlackRock/PIMCO suit help homeowners? Not directly. But it will get some big guns on the scene, with the ability to do all sorts of discovery, and the staff to deal with the results.
Fraud is grounds for rescission, restitution and punitive damages. The homeowners may not have been parties to the pooling and servicing agreements governing the investor trusts, but if the whole business model is proven to be fraudulent, they could still make a case for damages.
In the end, however, it may be the titans themselves who take each other down, clearing the way for a new phoenix to rise from the ashes.
Ellen Brown is an attorney, founder of the Public Banking Institute, and author of twelve books including the best-selling Web of Debt. In The Public Bank Solution, her latest book, she explores successful public banking models historically and globally. Her websites are http://EllenBrown.com, http://PublicBankSolution.com, and http://PublicBankingInstitute.org.
Cities around the country have been ravaged by significant numbers of community foreclosures following the mortgage loan scandals of recent years. Big banks have been wheeling and dealing these finance contracts, often illegally, to execute fraudulent takings of property or profiteering from servicing fees. But they…Read More »
In the very first edition of this new program, Ellen provides a foundational
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In the 1st installment of this article – May the Odds Ever Be in Your Favor – The Reaping, I addressed how wealth inequality created by men rigging the system and utilizing media propaganda ultimately leads to rebellion. In Part … Continue reading →
MAY THE ODDS EVER BE IN YOUR FAVOR – HOPE & DEFIANCE was originally published on Washington's Blog
The Justice Department has just obtained documents showing that JPMorgan Chase, Wall Street’s biggest bank, has been hiring the children of China’s ruling elite in order to secure “existing and potential business opportunities” from Chinese government-run companies. “You all know I have always been a big believer of the Sons and Daughters program,” says one JP Morgan executive in an email, because “it almost has a linear relationship” to winning assignments to advise Chinese companies. The documents even include spreadsheets that list the bank’s “track record” for converting hires into business deals.
It’s a serious offense. But let’s get real. How different is bribing China’s “princelings,” as they’re called there, from Wall Street’s ongoing program of hiring departing U.S. Treasury officials, presumably in order to grease the wheels of official Washington? Timothy Geithner, Obama’s first Treasury Secretary, is now president of the private-equity firm Warburg Pincus; Obama’s budget director Peter Orszag is now a top executive at Citigroup.
Or, for that matter, how different is what JP Morgan did in China from Wall Street’s habit of hiring the children of powerful American politicians? (I don’t mean to suggest Chelsea Clinton got her hedge-fund job at Avenue Capital LLC, where she worked from 2006 to 2009, on the basis of anything other than her financial talents.)
And how much worse is JP Morgan’s putative offense in China than the torrent of money JP Morgan and every other major Wall Street bank is pouring into the campaign coffers of American politicians — making the Street one of the major backers of Democrats as well as Republicans?
The Foreign Corrupt Practices Act, under which JP Morgan could be indicted for the favors it has bestowed in China, is quite strict. It prohibits American companies from paying money or offering anything of value to foreign officials for the purpose of “securing any improper advantage.” Hiring one of their children can certainly qualify as a gift, even without any direct benefit to the official.
JP Morgan couldn’t even defend itself by arguing it didn’t make any particular deal or get any specific advantage as a result of the hires. Under the Act, the gift doesn’t have to be linked to any particular benefit to the American firm as long as it’s intended to generate an advantage its competitors don’t enjoy.
Compared to this, corruption of American officials is a breeze. Consider, for example, Countrywide Financial’s generous “Friends of Angelo” lending program, named after its chief executive, Angelo R. Mozilo, that gave discounted mortgages to influential members of Congress and their staffs before the housing bubble burst. No criminal or civil charges have ever been filed related to these loans.
Even before the Supreme Court’s shameful 2010 “Citizens United” decision — equating corporations with human beings under the First Amendment, and thereby shielding much corporate political spending – Republican appointees to the Court had done everything they could to blunt anti-bribery laws in the United States. In 1999, in “United States v. Sun-Diamond Growers,” Justice Scalia, writing for the Court, interpreted an anti-bribery law so loosely as to allow corporations to give gifts to public officials unless the gifts are linked to specific policies.
We don’t even require that American corporations disclose to their own shareholders the largesse they bestow on our politicians. Last year around this time, when the Securities and Exchange Commission released its 2013 to-do list, it signaled it might formally propose a rule to require corporations to disclose their political spending. The idea had attracted more than 600,000 mostly favorable comments from the public, a record response for the agency.
But the idea mysteriously slipped off the 2014 agenda released last week, without explanation. Could it have anything to do with the fact that, soon after becoming SEC chair last April, Mary Jo White was pressed by Republican lawmakers to abandon the idea, which was fiercely opposed by business groups.
The Foreign Corrupt Practices Act is important, and JP Morgan should be nailed for bribing Chinese officials. But, if you’ll pardon me for asking, why isn’t there a Domestic Corrupt Practices Act?
Never before has so much U.S. corporate and Wall-Street money poured into our nation’s capital, as well as into our state capitals. Never before have so many Washington officials taken jobs in corporations, lobbying firms, trade associations, and on the Street immediately after leaving office. Our democracy is drowning in big money.
Corruption is corruption, and bribery is bribery, in whatever country or language it’s transacted in.
Despite Eight Criminal-Civil Investigations of JPMorgan Chase, the Bank Remains a “Law Enforcement Partner”...
I receive numerous questions from readers about our economic situation and the condition of civil liberty.
There is no way I can answer so many inquiries, and no need. I have written two books that provide the answers, and they are inexpensive. I have done my job. It is up to you to inform yourself. Kindle Reader software is available as a free online download that permits you to read ebooks in your own web browser.
My latest, The Failure Of Laissez Faire Capitalism And Economic Dissolution of the West , is available as an ebook in English as of March 2013 from Amazon.com and from Barnes&Noble.
My book is endorsed by Michael Hudson and Nomi Prims and has a 5 star rating from Amazon reviewers (as of March 23, 2013). Pam Martens’ review at Wall Street On Parade is available here
Libertarians who have not read the book have had an ideological knee-jerk reaction to the title. They demand to know how can I call the present system of crony capitalism laissez faire. I don’t. The current system of government supported crony capitalism is the end result of a 25-year process of deregulation.
Deregulation did not produce libertarian nirvana. It produced economic concentration and crony capitalism.
Amazon provides as a free read the introduction by Johannes Maruschzik to the German edition. Below is my Introduction to my book.
Paul Craig Roberts, March 27, 2012
Not only has your economy been stolen from you but also your civil liberties. My coauthor Lawrence Stratton and I provide the scary details of the entire story in The Tyranny of Good Intentions . In the US law is no longer a shield of the people against arbitrary government. Instead, law has been transformed into a weapon in the hands of the government.
Josie Appleton documents that in England also law has been turned into a weapon against the people. http://www.spiked-online.com/site/printable/13420/  Anglo-American law, the foundation of liberty and one of the greatest human achievements, lies in ruins.
Libertarians think that liberty is a natural right, and some Christians think that it is a God-given right. In fact, liberty is a human achievement, fought for by Englishmen over the centuries. In the late 17th century, the achievement of the Glorious Revolution was to hold the British government accountable to law. William Blackstone heralded the achievement in his famous Commentaries On The Laws Of England, a bestseller in pre-revolutionary America and the foundation of the US Constitution.
In the late 20th century and early 21st century, governments in the US and Great Britain chafed under the requirement that government, like the people, is ruled by law and took steps to free government from accountability to law.
Appleton says that the result is a “tectonic shift in the relationship between the state and the citizen.” Citizens of the US and UK are once again without the protection of law and subject to arbitrary arrests and indictments or to indefinite detention in the absence of indictments.
In the US, citizens can be detained indefinitely and even executed without due process of law. There is no basis in the US Constitution for these asserted powers. The unconstitutional powers exist only because Congress, the judiciary and the American people have accepted the lie that the loss of civil liberty is the price paid for protection against terrorists.
In a very short time the raw power of the state has been resurrected. Most Americans are oblivious to this outcome. As long as government is imprisoning and killing without trials demonized individuals whom Americans have been propagandized to fear, Americans approve. Americans do not understand that a point is reached when demonization becomes unnecessary and that precedents have been established that revoke the Bill of Rights.
If you are educated by these two books, you will be better able to understand what is happening and, thus, you will be in a better position to survive what is coming.
Introduction to The Failure of Laissez Faire Capitalism and Economic
Dissolution of the West: Towards a New Economics for a Full World
The collapse of the Soviet Union in 1991 and the rise of the high speed Internet have proved to be the economic and political undoing of the West. “The End Of History” caused socialist India and communist China to join the winning side and to open their economies and underutilized labor forces to Western capital and technology. Pushed by Wall Street and large retailers, such as Wal-Mart, American corporations began offshoring the production of goods and services for their domestic markets. Americans ceased to be employed in the manufacture of goods that they consume as corporate executives maximized shareholder earnings and their performance bonuses by substituting cheaper foreign labor for American labor. Many American professional occupations, such as software engineering and Information Technology, also declined as corporations moved this work abroad and brought in foreigners at lower renumeration for many of the jobs that remained domestically. Design and research jobs followed manufacturing abroad, and employment in middle class professional occupations ceased to grow. By taking the lead in offshoring production for domestic markets, US corporations force the same practice on Europe. The demise of First World employment and of Third World agricultural communities, which are supplanted by large scale monoculture, is known as Globalism.
For most Americans income has stagnated and declined for the past two decades. Much of what Americans lost in wages and salaries as their jobs were moved offshore came back to shareholders and executives in the form of capital gains and performance bonuses from the higher profits that flowed from lower foreign labor costs. The distribution of income worsened dramatically with the mega-rich capturing the gains, while the middle class ladders of upward mobility were dismantled. University graduates unable to find employment returned to live with their parents.
The absence of growth in real consumer incomes resulted in the Federal Reserve expanding credit in order to keep consumer demand growing. The growth of consumer debt was substituted for the missing growth in consumer income. The Federal Reserve’s policy of extremely low interest rates fueled a real estate boom. Housing prices rose dramatically, permitting homeowners to monetize the rising equity in their homes by refinancing their mortgages.
Consumers kept the economy alive by assuming larger mortgages and spending the equity in their homes and by accumulating large credit card balances. The explosion of debt was securitized, given fraudulent investment grade ratings, and sold to unsuspecting investors at home and abroad.
Financial deregulation, which began in the Clinton years and leaped forward in the George W. Bush regime, unleashed greed and debt leverage. Brooksley Born, head of the federal Commodity Futures Trading Commission, was prevented from regulating over-the-counter derivatives by the chairman of the Federal Reserve, the Secretary of the Treasury, and the chairman of the Securities and Exchange Commission. The financial stability of the world was sacrificed to the ideology of these three stooges that “markets are self-regulating.” Insurance companies sold credit default swaps against junk financial instruments without establishing reserves, and financial institutions leveraged every dollar of equity with $30 dollars of debt.
When the bubble burst, the former bankers running the US Treasury provided massive bailouts at taxpayer expense for the irresponsible gambles made by banks that they formerly headed. The Federal Reserve joined the rescue operation. An audit of the Federal Reserve released in July, 2011, revealed that the Federal Reserve had provided $16 trillion–a sum larger than US GDP or the US public debt–in secret loans to bail out American and foreign banks, while doing nothing to aid the millions of American families being foreclosed out of their homes. Political accountability disappeared as all public assistance was directed to the mega-rich, whose greed had produced the financial crisis.
The financial crisis and plight of the banksters took center stage and prevented recognition that the crisis sprang not only from the financial deregulation but also from the expansion of debt that was used to substitute for the lack of growth in consumer income. As more and more jobs were offshored, Americans were deprived of incomes from employment. To maintain their consumption, Americans went deeper into debt.
The fact that millions of jobs have been moved offshore is the reason why the most expansionary monetary and fiscal policies in US history have had no success in reducing the unemployment rate. In post-World War II 20th century recessions, laid-off workers were called back to work as expansionary monetary and fiscal policies stimulated consumer demand. However, 21st century unemployment is different. The jobs have been moved abroad and no longer exist. Therefore, workers cannot be called back to factories and to professional service jobs that have been moved abroad.
Economists have failed to recognize the threat that jobs offshoring poses to economies and to economic theory itself, because economists confuse offshoring with free trade, which they believe is mutually beneficial. I will show that offshoring is the antithesis of free trade and that the doctrine of free trade itself is found to be incorrect by the latest work in trade theory. Indeed, as we reach toward a new economics, cherished assumptions and comforting theoretical conclusions will be shown to be erroneous.
This book is organized into three sections. The first section explains successes and failures of economic theory and the erosion of the efficacy of economic policy by globalism. Globalism and financial concentration have destroyed the justifications of market capitalism. Corporations that have become “too big to fail” are sustained by public subsidies, thus destroying capitalism’s claim to be an efficient allocator of resources. Profits no longer are a measure of social welfare when they are obtained by creating unemployment and declining living standards in the home country.
The second section documents how jobs offshoring or globalism and financial deregulation wrecked the US economy, producing high rates of unemployment, poverty and a distribution of income and wealth extremely skewed toward a tiny minority at the top. These severe problems cannot be corrected within a system of globalism.
The third section addresses the European debt crisis and how it is being used both to subvert national sovereignty and to protect bankers from losses by imposing austerity and bailout costs on citizens of the member countries of the European Union.
I will suggest that it is in Germany’s interest to leave the EU, revive the mark, and enter into an economic partnership with Russia. German industry, technology, and economic and financial rectitude, combined with Russian energy and raw materials, would pull all of Eastern Europe into a new economic union, with each country retaining its own currency and budgetary and tax authority. This would break up NATO, which has become an instrument for world oppression and is forcing Europeans to assume burdens of the American Empire.
Sixty-seven years after the end of World War II, twenty-two years after the reunification of Germany, and twenty-one years after the collapse of the Soviet Union, Germany is still occupied by US troops. Do Europeans desire a future as puppet states of a collapsing empire, or do they desire a more promising future of their own?
(Photo: Tetsumo)Modern Monetary Theory is a way of doing economics that incorporates a clear understanding of the way our present-day monetary system actually works – it emphasizes the frequently misunderstood dynamics of our so-called “fiat-money” economy. Most people are unnerved by the thought that money isn’t “backed” by anything anymore – backed by gold, for example. They’re afraid that this makes money a less reliable store of value. And, of course, it is perfectly true that a poorly managed monetary system, or one which is experiencing something like an oil-price shock, can also experience inflation. But people today simply don’t realize how much bigger a problem the opposite condition can be. Under the gold standard, and largely because of the gold standard, the capitalist world endured eight different deflationary slumps severe enough to be called “depressions.” Since the gold standard was abolished, there have been none – and, as we shall see, this is anything but coincidental.
The great virtue of modern, fiat money is that it can be managed flexibly enough to prevent *both* deflation and also any truly damaging level of inflation – that is, a situation where prices are rising faster than wages, or where both are rising so fast they distort a country’s internal or external markets. Without going into the details prematurely, there are technical reasons why a little bit of inflation is useful and normal. It discourages people from hoarding money and encourages healthy levels of consumption and investment. It promotes growth – provided that a country’s fiscal and monetary authorities manage it properly.
The trick is for the government to spend enough to ensure full employment, but not so much, or in such a way, as to cause shortages or bottlenecks in the real economy. These shortages and bottlenecks are the actual cause of most episodes of excessive inflation. If the mere existence of fiat monetary systems caused runaway inflation, the low, stable rates of consumer-price inflation we have seen over the past thirty-plus years would be pretty difficult to explain.
The essential insight of Modern Monetary Theory (or “MMT”) is that sovereign, currency-issuing countries are only constrained by real limits. They are not constrained, and cannot be constrained, by purely financial limits because, as issuers of their respective fiat-currencies, they can never “run out of money.” This doesn’t mean that governments can spend without limit, or overspend without causing inflation, or that government should spend any sum unwisely. What it emphatically does mean is that no such sovereign government can be forced to tolerate mass unemployment because of the state of its finances – no matter what that state happens to be.
Virtually all economic commentary and punditry today, whether in America, Europe or most other places, is based on ideas about the monetary system which are not merely confused – they are starkly and comprehensively counter-factual. This has led to a public discourse about things like budget deficits and Treasury debt which has become, without exaggeration, utterly detached from reality. Time and time again, these pundits declaim that hyperinflation is imminent, that interest rates are on the verge of an uncontrollable upward spike, and that the jig will be up for sure just as soon as the next T-bond auction fails. But even though, time after time, it is the pundits’ prognostications which fail, no one seems to take any notice. This must change. A reality-based economics is needed to make these things make sense again, and Modern Monetary Theory is here to put everyone on notice that a quite different jig is the one that’s really up.
The gold standard was finally and completely abolished over the course of a two-year period which started in 1971, when Richard Nixon ended the convertibility of the dollar for gold and devalued U.S. currency for the first time since the end of World War II. In 1973, the U.S. stopped trying to peg the dollar to any currency or commodity, instead allowing its value to be set on a freely-floating international currency market. The monetary system we inaugurated then is the one we still have now.
It is not the same as the one which has been adopted by most of Europe – and this very prominent source of confusion about the role of money in the world today will receive close scrutiny at the proper point. But first, we need to carefully unpack the implications of taking both gold and any sort of “peg” out of the monetary equation in the first place. In 1971, gold-linked money became fiat-money – not for the first time, of course, but for the first time in a long time. And it wasn’t just any currency. It was, by far, the world’s most important currency, economically. It was also the world’s reserve currency – the good-as-gold and backed-by-gold currency which the entire non-communist world used to settle transactions between various countries’ central banks. And yet, what everyone, and especially every American was told at the time was that it really wouldn’t make much difference.
The political emphasis, at the time, was entirely on the importance of making sure that no one panicked. The officials of the Nixon administration acted like cops who had just roped off a fresh crime scene: “Just move right along, folks,” they kept intoning. “Nuthin’ to see here. Nuthin’, to see.” All of the experts and pundits said essentially the same thing – this was just a necessary technical adjustment that was only about complicated international banking rules. It wouldn’t affect domestic-economy transactions at all, or matter to anyone’s individual economic life. And so it didn’t – at least, not right away or in any way that got linked back to the event in later years. The world moved on, and Nixon’s action was mainly just remembered as a typical, high-handed Nixonian move – one which at least carried along with it the virtue of having pissed off Charles De Gaulle.
But what had really happened was epoch-making and paradigm-shattering. It was also, for the rest of the 1970s, polymorphously destabilizing. Because no one had a plan for, or knew, what all of this was going to mean for the reserve currency status of the U.S. dollar. Certainly not Richard Nixon, who was by then embroiled in the early stages of the Watergate scandal. But no one else was in charge of this either. In the moment, other countries and their central banks followed Washington’s line. They wanted to forestall any kind of panic too. But, inevitably, as the real consequences of the new monetary regime kicked in, and as unforeseen and unintended knock-on effects began to be felt, this changed.
The world had a choice to make after the closing of the gold window, but even though it was a very important choice, with very high-stakes outcomes attached to it, there was no international mechanism for making it – it just had to emerge from the chaos. Either the U.S. dollar was going to continue to be the world’s reserve currency or it wasn’t. If it wasn’t, the related but separate question of what to use instead would come to the fore. But, as things unfolded, no other choice could be imposed on the only economic powerhouse-nation, so all the other little nations eventually just had to work out ways to adjust to the new status quo.
Even after Euro-dollar chaos, oil market chaos, inflationary chaos, a ferocious multi-national property crash and a severe, double-dip American recession, the dollar continued to be the reserve currency. And it still wasn’t going to be either backed by gold or exchangeable at any fixed rate for anything else. But while the implications of this were enormous, almost no one understood them at the time, or ever, subsequently, figured them out. For the 1970s was the period during which Keynesianism was decertified as the reigning economic philosophy of the capitalist world – replaced by something which, at least initially, purported to have internalized and improved upon it. This too was a choice that wasn’t so much made as stumbled into. The chaotic, crisis-wracked world we now live in is the one which subsequent versions of this then-new economic perspective have helped to create.
Conventional, so-called “neo-classical” economics pays little or no attention to monetary dynamics, treating money as just a “veil” over the activity of utility-maximizing individual “agents”. And, as hard as this is for non-economists to believe, the models which these ‘mainstream’ economists make do not even try to account for money, banking or debt. This is one big reason why virtually all members of the economics profession failed to see the housing bubble and were then blind-sided by both the 2008 financial collapse and the grinding, on-going Eurozone crisis which has followed in its wake. And the current group-think among ‘mainstream’ economists is yet another case where failure is no obstacle to continued funding – or continued failure. The absence of any sort of professional, intellectual or academic accountability will be a theme here.
The public policy reversal that began with Margaret Thatcher and Ronald Reagan promised that the deregulation of capitalism would lead to greater shared prosperity for everyone. Today, even though the falsehood of this claim is brutally obvious, the same economic nostrums and stupidities that were used to justify it in the first place continue to be trotted out and paid homage to by a class of financial-media personalities who equate making a lot of money with understanding money. It does not seem to occur to them that financial criminals and practitioners of bank-fraud can get rich through sociopathy alone.
What needs to be said is this: Keynesian economics worked before, and the improved version – now generally called “post-Keynesian” – will work again, to deliver what the market-fundamentalism of the past three decades has patently and persistently failed to deliver *anywhere in the world*. Namely – a prosperity which is shared by everyone. The principal purpose of Modern Monetary Theory is to explain, in detail, why this this worked in the past and how it can be made to work again.
Here’s how: start with a 100% payroll tax cut for both workers and employers – one that will only expire (if it does at all) when we have achieved full employment. This will not de-fund Social Security. And yes, we’ll come back to this point and cover it in great detail in due course. But first, stop and think back on the effect which federal revenue-sharing had on the economy in 2009 and 2010. If you’re thinking there were fewer teachers, nurses, policemen and fire-fighters getting laid off, you are correct. If you’re thinking that more roads, dams, bridges and sewer systems were getting repaired, you’re right again. But if you think that adding 800 million dollars to the deficit over two years is a guaranteed way to generate hyper-inflation, double-digit interest rates and bond-auction failures, leading ultimately to a frenzied worldwide rush to dump dollar-denominated financial assets, well, now would be a good time to ask yourself why you believe this.
One more point – one more plank in this three-point program to restore fiscal and monetary sanity: let’s give everyone who wants to work and is able to work some *work to do*. A currency-issuing government can purchase anything that is for sale in its own currency, including the labor of every last unemployed person who is still looking for a job. So, a key policy recommendation of Modern Monetary Theory is the idea of a “Job Guarantee”. The federal government should take the initiative and organize a transitional-job program for people who just can’t find work in the private sector – as it currently exists in real-world America today. Because the smug one-liner that starts and ends with: “Government can’t create jobs – only the private sector can create jobs!” is about the un-funniest joke on the planet right now.
The government creates millions of jobs already. Isn’t soldiering a job? Isn’t flying the President around in Air Force One a job? What about all the doctors and nurses down at the V.A. hospital, and the day-care workers on military bases? They certainly all appear to be employed. When you go into a convenience store to buy some – uh – local-and-organic Brussels sprouts, say, how closely does the clerk examine the bills and coins you tender? Did any clerk or cashier ever squint or turn your five-dollar bill sideways and back and ask, “Hmm.. are you sure this money came from work that was performed in the private sector?” No. They didn’t. Because the money governments pay to public employees is exactly the same money everyone else gets paid in.
A guaranteed transition-job would need to be different from the familiar examples cited above in certain ways. It would be important to make sure that such a program always hired “from the bottom”, not from the top. That’s an important way of making sure that such programs don’t create real-resource bottlenecks by competing with the private sector for highly skilled or specialized labor. Hence, a transition-program job would more closely resemble an entry-level job at a defense plant. Such a job only exists because of Pentagon orders for fighter planes or helmets or dog food for the K-9 units. There is no sort of ambiguity about where the stuff is going or how it is being paid for. And when the people who mow the lawn or sweep the parking lot get paid, they know, without having to think about it, that their wages will spend exactly the same way down at the grocery store as everyone else’s.
Defence spending is actually quite a good analog to the idea of a transitional-job program – one that would provide work to any and every person who wanted it. The only time the American economy ever achieved an extended, years-long period with zero unemployment, low, well-controlled inflation rates and with no significant financial aftershock at the end was the World War II era – broadly defined to include the Lend-Lease buildup of 1940 and 1941. This solution to the problem of mass unemployment worked in the 1940s and it would work today. In the 1940s, of course,the jobs were almost all war-related. But, economically, this makes no difference.
The connection between war and economic prosperity has been noticed before. It led some 19th Century thinkers (and also Jimmy Carter) to wonder whether there could be a “moral equivalent of war”. Well, there can be – by way of the Job Guarantee. The biggest pre-condition has been met, because one result of most wars has been that they forced the combatant countries off the gold standard. Now, all countries have left it. What matters next is whether there are enough real resources available to produce goods and services that are equal in value to the government’s job-guarantee spending. If these resources are available – if they are not already being used to produce something else – then the increased demand that results from the payment of job-guarantee wages will not be inflationary, regardless of what they go to produce.
Money is 100% fungible. Whether the job-guarantee program makes fighter planes or wind turbines makes no economic difference – the workers employed by it will spend their wages on the same things other workers buy. What matters, economically, is whether there are sufficient real resources and labor available to produce these goods and services in line with the increased demand for them. If there are, no additional government intervention is necessary in order to mobilize them. The same private-profit motivation which induces a company to produce one widget can be relied upon to induce the production of another one.
Most popular misconceptions about job-guarantee work as inefficient “make-work” ignore these private-sector dynamics. It is simply assumed that if the publicly-funded workers don’t personally contribute to making shoes or soap, their wages will result in “more money chasing the same goods” – and that this will automatically cause inflation. This is an obvious fallacy which has been empirically falsified many, many times, but most people continue to treat it as an article of economic faith. So, one of MMT’s most pressing tasks today is to make the case that we can, indeed, end mass unemployment without undermining price stability.
There are many other economic problems and challenges in the world today. Modern Monetary Theory is not a panacea for them. Even if its insights and policy recommendations become widely known, and even if they are someday fully implemented, societies will still face challenges such as inequality, regulatory capture and predatory financial behavior, including the kind of predatory mortgage lending that led to the worldwide crash in 2008. In order to understand these additional economic problems and dangers, we need to look at economics in a larger context, and correctly situate Modern Monetary Theory within this wider frame.
Modern Monetary Theory is based on earlier work which also focused on the relationship between the state and its money – ideas which come under the generic designation of “Chartalism”. MMT also remains firmly within the Keynesian tradition of macroeconomnic theorizing, and recognizes an extensive interconnectedness with other economists whose work is categorized as “post-Keynesian”. Some of MMT’s other notable academic progenitors include Hyman Minsky, Abba Lerner and, more recently, the English economist Wynne Godley, whose emphasis on achieving consistency in the analysis of economic stocks and flows presaged the emphasis which MMT-orbit economists put on it today.
The label “Modern Monetary Theory” is not particularly apt. It became attached to its advocates through the informal agency of Internet comment-threading, not because anyone considered it either very useful or very descriptive. In other words, it “just stuck”. In fact, the identity of the first person to use the “MMT” label is lost to online history. So, to be clear, MMT is only modern in the broad sense in which virtually everything that got started in the Western world in the 19th Century is called “modern”. It is not exclusively monetary either – it has quite a bit to say about fiscal policy as well. And it was not, initially, theoretical – it started as a body of quite empirical observations about the dynamics of the monetary system and the many ways they are being misunderstood these days. For MMT has a dual pedigree which is itself quite remarkable.
On the one hand, it represents the patient, decades-long academic work of a cadre of perhaps eight or ten working economists (originally there were three or four, plus their students). But MMT was independently co-discovered by a single person. A person who had no specific training or academic background in economics at all – the American businessman and auto-racing enthusiast Warren Mosler. How he came to initially suspect and, ultimately, clearly understand that the spending of sovereign governments had become operationally independent of their taxing and borrowing is recounted in his 2010 book, “The Seven Deadly Innocent Frauds of Economic Policy.” The 1996 publication of an earlier book of his, “Soft-Currency Economics,” launched MMT as a social, intellectual and online movement. And while the academic side of MMT was completely unknown to him at first, it was not long before the two camps discovered each other, and this has led to a very extensive collaboration in the years since.
Today, MMT is being discovered by a rapidly-growing worldwide Internet audience. And the public’s growing interest in MMT is evident in other ways as well. One of the movement’s leading spokespersons, Dr. Stephanie Kelton of the University of Missouri at Kansas City, has been a repeat guest on an MSNBC weekend show. She, and other MMT economists, are frequent guests on a number of popular, mostly-progressive radio programs as well – both in the U.S. and in English-speaking countries around the world. And Warren Mosler’s seminal 2010 book was recently published in Italian.
(For obvious reasons, the stressed and austerity-damaged countries of the Eurozone’s southern tier are places where people are becoming more open to fresh economic ideas. At a 3-day conference in Rimini, Italy in 2012, a panel of four MMT/post-Keynesian speakers lectured to a crowd of over 2,000 people in a packed sports arena. Many in the audience crossed multiple international borders to attend.)
MMT has been mentioned, though not yet accurately described, in several of Paul Krugman’s columns for the New York Times. And certain aspects of it have been noticed even more widely in the media – for MMT is the theoretical basis of the “trillion-dollar coin” approach to fiscal cliffs. (The idea was first proposed and debated on Warren Mosler’s website.) In short, MMT is getting harder and harder to ignore. And since it really does have answers to some of the world’s most urgent and otherwise perplexing questions, it seems likely that MMT will soon become quite impossible to ignore. What follows is written to try to hasten that day.
This will be an intentionally simplified, non-technical exposition of the principal tenets of Modern Monetary Theory. The no-algebra version, in other words. It is intended as a guide for non-economists and other lay people who may have heard the phrase or seen a video clip about MMT and who wish to learn more. It is not a substitute for more complete and, necessarily, much more technical treatments that are available elsewhere, including the MMT Primer here at NEP.
Confining myself to examples and cases so widely known that no one will wonder where they came from accounts for the absence of footnotes in this. And since I make no claim to have learned knowledge of anything, I will just say, up front, that everything I know was thought of first by someone else. But rather than interrupt the narrative or complicate the process by trying to establish who said any particular thing first, I hope it is sufficient for me to just thank the MMT community at large for any material that I have borrowed or re-purposed along the way.
I also depart, here, from MMT’s mostly-neutral stance on contested political and ideological questions. For while MMT principles apply equally, irrespective of things like the size of government or the conceptions and misconceptions of people running governments, it has a policy bias no one can really miss. I choose to emphasize rather than de-emphasize this bias – and I will sometimes even put it front-and-center. I hope no one will mistake this for any sort of rebuke toward those who choose not to do this. We have simply reached a point where practical applications need to be put on an equal footing with their theoretical underpinnings.
For somewhere – maybe somewhere in Italy – and on a day which may not be all that far off now, Modern Monetary Theory is going to start changing the world.
New York Attorney General Eric Schneiderman’s Residential Mortgage-Backed Securities (RMBS) task force received ample attention from news and activist organizations alike following its dramatic announcement at last year’s State of the Union Address. The task force was supposed to investigate and prosecute Wall Street fraud that led to the housing bubble and the eventual collapse of the broader economy. FDL alum David Dayen’s recent piece in Salon reminds us that, one year later, the “new” task force has essentially amounted to what the “old” task force always was: “a conduit for press releases about investigative actions already in progress.”
Firedoglake was among a few groups that met the news of the taskforce with skepticism, but others like MoveOn.org, Rebuild the American Dream and the Courage Campaign were ebullient in their praise of the president and NY attorney general alike. My inbox was flooded with emails like this one, calling on me to thank the President, and get ready for the Wall Street prosecutions to come rolling in.
One month after being tapped to chair the task force, Schneiderman and his fellow ‘Justice Democrat’ California Attorney General Kamala Harris dropped their longstanding objections to a rather pathetic nationwide foreclosure fraud settlement that not only allowed some of the biggest criminals involved to walk upon payment of a relatively paltry settlement, but as FDL contributor Cynthia Kouril wrote at the time, “The court system will be permanently corrupted by forged and perjurious documents… This settlement is an incredible breach of the social contract between the government and the governed.” Months went by without mention of or word from the taskforce. The New York Daily News began to wonder aloud in April of that year whether the taskforce would actually do anything at all, and David Dayen repeatedly wrote at FDL News of the complete lack of information that had yet to surface on the taskforce.
The public – or rather, those who knew about this disturbing trend – was outraged at Schneiderman’s inaction, but the biggest outside champions of the taskforce were nowhere to be found. There were no emails from MoveOn calling on their millions of members to urge Schneiderman and the President to act. Really, how could they? They had already declared victory at the formation of the taskforce, and so all leverage was lost. This lack of public pressure from the groups most influential with administration officials may have contributed to the fact that the RMBS task force still does not have its own offices, phone lines or staff.
To this day, it seems these Beltway liberals are incapable of understanding the nature of our predicament. The Nation Magazine’s editor and publisher Katrina vanden Heuvel, for one, defended these groups’ efforts in the Washington Post, writing, “Dayen blames groups like the Campaign for a Fair Settlement, the New Bottom Line, Move On and the Campaign for America’s Future (disclosure: I’m on its board) for buying in to the plot. In reality, though, these organizations have been pressuring the Obama administration for months to clean house at Justice, devote real resources to the task force and make it a top priority inside the White House.”
But David’s response gets at the heart of what I would like to address in this post (emphasis mine):
…I’m sure the Administration trembles at the pressuring from the groups that sent out glowing press releases a year ago about the “real leadership” shown by the President in announcing a task force that, by this own admission, carried no guarantee of resources or prioritization.
Look, nobody likes having to admit they’ve been duped. But I reject the assertion that there are only two courses of action here, that “we can either fight to see that this investigation is real or we can take our ball and go home.” That fight over the investigation is doomed. What would be useful is to examine the role of these DC progressive groups, who continue to build coalitions aimed at “pressuring” the White House and who continue to fail in spectacular fashion.
Unfortunately, this isn’t the first time MoveOn and the establishment liberals have fallen silent when they were needed most.
At the onset of the Occupy movement, many people were very uncomfortable with the speed with which groups like MoveOn.org, Democracy for America and others latched on to the “99%” messaging and began using it to further their own goals. DFA sold 99% bumper stickers. MoveOn held protests at Romney fundraisers, branding them “Hobnobs with the 1%” while quietly letting the President hobnob in Manhattan just weeks before.
Throughout the winter of 2011, local governments managed to find rare bipartisan consensus in mutual hatred of the Occupy encampments in their communities. Crackdowns began across the country at an alarming rate. Examples include:
- Charlotte City Council has proposed an ordinance that “makes camping on public property a “public nuisance” and would prohibit “noxious substances,” padlocks and other camping equipment that city officials fear could impede traffic and create public safety issues.” (Convenient, since the DNC was hosted last fall.)
- City officials in Bloomington posted an eviction notice for Occupy Bloomington after three arrests during a downtown march. Gov. Mitch Daniels also introduced new ‘security rules’ for the Statehouse, including allowing no more than 3,000 people to be inside the statehouse at any one time, “no protest signs larger than 2’ X 2’, no signs on sticks, no obscenity, no engaging in lewd acts contrary to state law, no Coke cans. Also no gambling.”
- Occupy Eugene actually inspired the city to build a wrought iron fence around the home of a city council member who voted to forbid fires at the encampment. Councilman Poling says “his family is unnerved and some neighbors appalled, such as a family with two small children out looking at Christmas lights who saw five masked women demonstrating topless in front of his house.” Poling then went so far as to equate the topless protesters with the 1994 drive-by shooting at a Eugene synagogue by white supremacists, and demanded the city pay for redecorating his home. All Occupy Eugene asked for was to build a homeless shelter in the city.
But suddenly, at the moment Occupy could have really used their enthusiasm to rally to the movement’s defense, MoveOn, DFA and the others disappeared. As crackdowns intensified, Firedoglake and others called on our activists to lobby their local governments and speak out against the crackdowns, and show up at encampments in solidarity. We sent supplies and livestreamed on our front pages, doing everything we could reasonably do with the time afforded to us to protect the Occupy camps, but it wasn’t enough.
In a President’s first term, one might reasonably argue that these groups should avoid advocacy that could possibly ‘hurt’ their candidate’s chances at winning an election. While I don’t personally agree with this strategy, others are entitled to their own and I respect that. If MoveOn doesn’t feel it can safely navigate the space between supporting Occupy and the President at the same time, it may choose sides as it pleases.
But we are in the President’s second term. Giving the announcement of the RMBS working group a standing ovation — while completely hyperbolic — makes some sense 1 year out from Obama’s re-election. But now that he’s back in office (and assuming MoveOn’s protestations against Wall Street crimes are sincere) wouldn’t one expect to hear calls for action from Schneiderman and the administration, given their total failure thus far?
There is a troubling pattern to the efforts of some of the most visible, well-known advocacy groups on the left that seem, time and time again, to actually empower our opponents rather than empower our movement. When MoveOn and DFA failed to rally to the side of Occupy when they needed them most, they gave a pass to local governments to crack down and devastated the veracity of the movement itself at a time when it could have really dealt a blow to Wall Street. When the MoveOn coalition failed to follow through on their calls for justice for Wall Street crimes after the formation of the RMBS working group, it gave the public the false impression of progress while allowing Wall Street criminals to continue about their business.
The pattern goes something like this:
1. MoveOn comes out swinging at Wall Street, latches on to the emotions of the moment and pulls everyone into a big ‘progressive’ campaign with a coalition made of groups either affiliated with MoveOn or with other (Veal Pen) groups with close ties to the administration.
2. Then there is a moment of mass potential. Whether it’s the crackdowns at the height of the Occupy movement or the announcement of the RMBS working group, this moment attracts substantial press and public attention.
3. The next step should be to leverage the energy of that moment to continue to push for real change in the face of adversity: defend Occupy, or use your considerably large base of activists to urge the government to prosecute Wall Street criminals. But instead, MoveOn et al declare victory in the boldest terms and recede into the background. The coalition is not effectively activated. Everyone feels accomplished, and they should because they just managed to further cement the status quo.
4. Our opponents on Wall Street and in government seize on these opportunities as any shrewd actor would, recognizing that the public’s leverage has been squandered. With the campaign over, they can proceed apace with their agenda. Occupy camps were destroyed and MoveOn was nowhere to be found. Eric Schneiderman didn’t even so much as get a separate phone line for the RMBS working group, and continues to spoil what little remaining chances are left for Wall Street prosecution, and MoveOn is nowhere to be found.
Meanwhile, settlements with Wall Street criminals abound and Americans suffer. Aside from the recent lawsuit announced against S&P, which seems promising for now, not a single Wall Street executive has been jailed for their role in the financial crisis. The least MoveOn and their partners could do is send out an email.
Bloomberg noted last year that 77% of JP Morgan’s net income comes from government subsidies.
Bloomberg reported yesterday:
What if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all? What if the billions of dollars they allegedly earn for their shareholders were almost entirely a gift from U.S. taxpayers?
Lately, economists have tried to pin down exactly how much the subsidy lowers big banks’ borrowing costs. In one relatively thorough effort, two researchers — Kenichi Ueda of the International Monetary Fund and Beatrice Weder di Mauro of the University of Mainz — put the number at about 0.8 percentage point. The discount applies to all their liabilities, including bonds and customer deposits.
Small as it might sound, 0.8 percentage point makes a big difference. Multiplied by the total liabilities of the 10 largest U.S. banks by assets, it amounts to a taxpayer subsidy of$83 billion a year. To put the figure in perspective, it’s tantamount to the government giving the banks about 3 cents of every tax dollar collected.
The top five banks — JPMorgan, Bank of America Corp., Citigroup Inc., Wells Fargo & Co. and Goldman Sachs Group Inc. – – account for $64 billion of the total subsidy, an amount roughly equal to their typical annual profits (see tables for data on individual banks). In other words, the banks occupying the commanding heights of the U.S. financial industry — with almost $9 trillion in assets, more than half the size of the U.S. economy — would just about break even in the absence of corporate welfare. In large part, the profits they report are essentially transfers from taxpayers to their shareholders.
The money hasn’t just gone to the banks shareholders … It has also gone to line the pockets of bank management:
- Bailout money is being used to subsidize companies run by horrible business men, allowing the bankers to receive fat bonuses, to redecorate their offices, and to buy gold toilets and prostitutes
Economist Steve Keen says:
“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.
Nobel economist Joseph Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.
Breaking up the big banks would stabilize the economy … and dramatically increase Main Street’s access to credit.
But the government has chosen the banks over the little guy … dooming both:
The big banks were all insolvent during the 1980s.
The bailouts were certainly rammed down our throats under false pretenses.
But here’s the more important point. Paulson and Bernanke falsely stated that the big banks receiving Tarp money were healthy, when they were not. They were insolvent.
Tim Geithner falsely stated that the banks passed some time of an objective stress test but they did not. They were insolvent.
Both the creditors and the debtors were mortally wounded by the 2008 financial crisis. The big banks wouldn’t have survived without trillions in handouts, guarantees, loans, idiot-proof profits courtesy of the government.
So the government chose sides. The creditors were wiped out, just like a lot of Main Street was wiped out. In one sense, the government chose who would live (the giant banks and other bailed out and favored companies) and who would die (the other 99%).
But in fact, the big banks were no longer creditors after the 2008 crash. Specifically, the big banks which held the mortgages and the loans were wiped out.
The government moved the arms and legs of the big banks to pretend they were still alive … and have been doing so ever since. But they were no longer going concerns after they went bust.
The government pumped blood back in these dead banks and turned them into zombies. They will never come back to life in a real sense … they are still zombies, 3 years later.
The big zombie banks can never come back to life, and – by trying to save them – the government is bleeding out the little guy.
By choosing the big banks over the little guy, the government is dooming both.
Remember, the Federal Reserve has paid banks high interest rates to stash money (their “excess reserves”) with the Fed for the express purpose of preventing loans to Main Street.
And the Fed plans to throw more money at the banks when the Federal Reserve starts to tighten. As FTreports:
US Federal Reserve officials fear a backlash from paying billions of dollars tocommercial banks when the time comes to raise interest rates.
The growth of the Fed’s balance sheet means it could pay $50bn-$75bn a year in interest on bank reserves at the same time as it makes losses and has to stop sending money to the Treasury.
In an interview with the Financial Times, James Bullard, president of the St Louis Fed, said: “If you think of the profitability of the biggest banks, if you’re going to talk about paying them something of the order of $50bn – well that’s more than the entire profits of the largest banks.”
At the moment it only pays 0.25 per cent interest on those reserves. But according to its exit strategy, published in June 2011, the Fed plans to raise interest rates before it sells assets. Interest of 2 per cent on $2.5tn of reserves would run to $50bn a year.
The eventual tightening could lead to substantial amounts being transferred to commercial banks from the Fed, given the amounts of cash they have parked there. Wells Fargo has $97.1bn sitting at the Fed, the largest amount of any bank, ahead of JPMorgan Chase at $88.6bn and Goldman Sachs at $58.7bn, according to an FT analysis of SNL data.
Foreign banks also have a striking amount of cash at the Fed, potentially aggravating the Fed’s PR problem. Analysts at Stone & McCarthy noted recently that there had been a steep increase in foreign banks placing reserves at the Fed and suggested that “US banks may have distaste for the opportunistic arbitrage”, between lower market rates and the interest on reserves, whereas overseas institutions “might not feel encumbered in the same fashion”.
And while this post focuses on bailouts and subsidies to big American banks, a large percentage of the bailouts went to foreign banks (and see this). And so did a huge portion of the money from quantitative easing. More here and here.
Gretchen Morgenson of the New York Times had this little bombshell tucked into the business section Saturday: The Federal Reserve is still giving bailouts to big banks. Not only that, they're giving away billions in legal claims:
The existence of one such secret deal, struck in July between the Federal Reserve Bank of New York and Bank of America, came to light just last week in court filings.
That the New York Fed would shower favors on a big financial institution may not surprise. It has long shielded large banks from assertive regulation and increased capital requirements.
Still, last week’s details of the undisclosed settlement between the New York Fed and Bank of America are remarkable. Not only do the filings show the New York Fed helping to thwart another institution’s fraud case against the bank, they also reveal that the New York Fed agreed to give away what may be billions of dollars in potential legal claims.
Here’s the skinny: Late last Wednesday, the New York Fed said in a court filing that in July it had released Bank of America from all legal claims arising from losses in some mortgage-backed securities the Fed received when the government bailed out the American International Group in 2008. One surprise in the filing, which was part of a case brought by A.I.G., was that the New York Fed let Bank of America off the hook even as A.I.G. was seeking to recover $7 billion in losses on those very mortgage securities.
It gets better.
What did the New York Fed get from Bank of America in this settlement? Some $43 million, it seems, from a small dispute the New York Fed had with the bank on two of the mortgage securities. At the same time, and for no compensation, it released Bank of America from all other legal claims.
[...] To anyone interested in holding banks accountable for mortgage improprieties, the Fed’s actions are bewildering. If the Fed intended that Maiden Lane II own the right to sue Bank of America for fraud, why didn’t it pursue such a potentially rich claim on behalf of taxpayers? The Fed made $2.8 billion on the Maiden Lane II deal, but the recovery from Bank of America could have been much greater. Why did it instead release Bank of America from these liabilities and supply declarations that seem to support the bank in its case against A.I.G.?
The New York Fed would not discuss this matter, citing the litigation. But taxpayers, who might have benefited had the New York Fed brought fraud claims, deserve answers to these questions.
[...] A New York Fed spokesman said it supported the settlement because it would generate significant value without potentially high litigation costs.
And of course, without disclosing any embarrassing details. That's how we do things now.
The deal was announced quietly, just before the holidays, almost like the government was hoping people were too busy hanging stockings by the fireplace to notice. Flooring politicians, lawyers and investigators all over the world, the U.S. Justice Department granted a total walk to executives of the British-based bank HSBC for the largest drug-and-terrorism money-laundering case ever. Yes, they issued a fine – $1.9 billion, or about five weeks' profit – but they didn't extract so much as one dollar or one day in jail from any individual, despite a decade of stupefying abuses.(Illustration by Victor Juhasz)
People may have outrage fatigue about Wall Street, and more stories about billionaire greedheads getting away with more stealing often cease to amaze. But the HSBC case went miles beyond the usual paper-pushing, keypad-punching sort-of crime, committed by geeks in ties, normally associated with Wall Street. In this case, the bank literally got away with murder – well, aiding and abetting it, anyway.
For at least half a decade, the storied British colonial banking power helped to wash hundreds of millions of dollars for drug mobs, including Mexico's Sinaloa drug cartel, suspected in tens of thousands of murders just in the past 10 years – people so totally evil, jokes former New York Attorney General Eliot Spitzer, that "they make the guys on Wall Street look good." The bank also moved money for organizations linked to Al Qaeda and Hezbollah, and for Russian gangsters; helped countries like Iran, the Sudan and North Korea evade sanctions; and, in between helping murderers and terrorists and rogue states, aided countless common tax cheats in hiding their cash.
"They violated every goddamn law in the book," says Jack Blum, an attorney and former Senate investigator who headed a major bribery investigation against Lockheed in the 1970s that led to the passage of the Foreign Corrupt Practices Act. "They took every imaginable form of illegal and illicit business."
That nobody from the bank went to jail or paid a dollar in individual fines is nothing new in this era of financial crisis. What is different about this settlement is that the Justice Department, for the first time, admitted why it decided to go soft on this particular kind of criminal. It was worried that anything more than a wrist slap for HSBC might undermine the world economy. "Had the U.S. authorities decided to press criminal charges," said Assistant Attorney General Lanny Breuer at a press conference to announce the settlement, "HSBC would almost certainly have lost its banking license in the U.S., the future of the institution would have been under threat and the entire banking system would have been destabilized."
It was the dawn of a new era. In the years just after 9/11, even being breathed on by a suspected terrorist could land you in extralegal detention for the rest of your life. But now, when you're Too Big to Jail, you can cop to laundering terrorist cash and violating the Trading With the Enemy Act, and not only will you not be prosecuted for it, but the government will go out of its way to make sure you won't lose your license. Some on the Hill put it to me this way: OK, fine, no jail time, but they can't even pull their charter? Are you kidding?
But the Justice Department wasn't finished handing out Christmas goodies. A little over a week later, Breuer was back in front of the press, giving a cushy deal to another huge international firm, the Swiss bank UBS, which had just admitted to a key role in perhaps the biggest antitrust/price-fixing case in history, the so-called LIBOR scandal, a massive interest-raterigging conspiracy involving hundreds of trillions ("trillions," with a "t") of dollars in financial products. While two minor players did face charges, Breuer and the Justice Department worried aloud about global stability as they explained why no criminal charges were being filed against the parent company.
"Our goal here," Breuer said, "is not to destroy a major financial institution."
A reporter at the UBS presser pointed out to Breuer that UBS had already been busted in 2009 in a major tax-evasion case, and asked a sensible question. "This is a bank that has broken the law before," the reporter said. "So why not be tougher?"
"I don't know what tougher means," answered the assistant attorney general.
Also known as the Hong Kong and Shanghai Banking Corporation, HSBC has always been associated with drugs. Founded in 1865, HSBC became the major commercial bank in colonial China after the conclusion of the Second Opium War. If you're rusty in your history of Britain's various wars of Imperial Rape, the Second Opium War was the one where Britain and other European powers basically slaughtered lots of Chinese people until they agreed to legalize the dope trade (much like they had done in the First Opium War, which ended in 1842).
A century and a half later, it appears not much has changed. With its strong on-the-ground presence in many of the various ex-colonial territories in Asia and Africa, and its rich history of cross-cultural moral flexibility, HSBC has a very different international footprint than other Too Big to Fail banks like Wells Fargo or Bank of America. While the American banking behemoths mainly gorged themselves on the toxic residential-mortgage trade that caused the 2008 financial bubble, HSBC took a slightly different path, turning itself into the destination bank for domestic and international scoundrels of every possible persuasion.
Three-time losers doing life in California prisons for street felonies might be surprised to learn that the no-jail settlement Lanny Breuer worked out for HSBC was already the bank's third strike. In fact, as a mortifying 334-page report issued by the Senate Permanent Subcommittee on Investigations last summer made plain, HSBC ignored a truly awesome quantity of official warnings.
In April 2003, with 9/11 still fresh in the minds of American regulators, the Federal Reserve sent HSBC's American subsidiary a cease-and-desist letter, ordering it to clean up its act and make a better effort to keep criminals and terrorists from opening accounts at its bank. One of the bank's bigger customers, for instance, was Saudi Arabia's Al Rajhi bank, which had been linked by the CIA and other government agencies to terrorism. According to a document cited in a Senate report, one of the bank's founders, Sulaiman bin Abdul Aziz Al Rajhi, was among 20 early financiers of Al Qaeda, a member of what Osama bin Laden himself apparently called the "Golden Chain." In 2003, the CIA wrote a confidential report about the bank, describing Al Rajhi as a "conduit for extremist finance." In the report, details of which leaked to the public by 2007, the agency noted that Sulaiman Al Rajhi consciously worked to help Islamic "charities" hide their true nature, ordering the bank's board to "explore financial instruments that would allow the bank's charitable contributions to avoid official Saudi scrutiny." (The bank has denied any role in financing extremists.)
In January 2005, while under the cloud of its first double-secret-probation agreement with the U.S., HSBC decided to partially sever ties with Al Rajhi. Note the word "partially": The decision would only apply to Al Rajhi banking and not to its related trading company, a distinction that tickled executives inside the bank. In March 2005, Alan Ketley, a compliance officer for HSBC's American subsidiary, HBUS, gleefully told Paul Plesser, head of his bank's Global Foreign Exchange Department, that it was cool to do business with Al Rajhi Trading. "Looks like you're fine to continue dealing with Al Rajhi," he wrote. "You'd better be making lots of money!"
But this backdoor arrangement with bin Laden's suspected "Golden Chain" banker wasn't direct enough – many HSBC executives wanted the whole shebang restored. In a remarkable e-mail sent in May 2005, Christopher Lok, HSBC's head of global bank notes, asked a colleague if they could maybe go back to fully doing business with Al Rajhi as soon as one of America's primary banking regulators, the Office of the Comptroller of the Currency, lifted the 2003 cease-and-desist order: "After the OCC closeout and that chapter is hopefully finished, could we revisit Al Rajhi again? London compliance has taken a more lenient view."
After being slapped with the order in 2003, HSBC began blowing off its requirements both in letter and in spirit – and on a mass scale, too. Instead of punishing the bank, though, the government's response was to send it more angry letters. Typically, those came in the form of so-called "MRA" (Matters Requiring Attention) letters sent by the OCC. Most of these touched upon the same theme, i.e., HSBC failing to do due diligence on the shady characters who might be depositing money in its accounts or using its branches to wire money. HSBC racked up these "You're Still Screwing Up and We Know It" orders by the dozen, and in just one brief stretch between 2005 and 2006, it received 30 different formal warnings.
Nonetheless, in February 2006 the OCC under George Bush suddenly decided to release HSBC from the 2003 cease-and-desist order. In other words, HSBC basically violated its parole 30 times in just more than a year and got off anyway. The bank was, to use the street term, "off paper" – and free to let the Al Rajhis of the world come rushing back.
After HSBC fully restored its relationship with the apparently terrorist-friendly Al Rajhi Bank in Saudi Arabia, it supplied the bank with nearly 1 billion U.S. dollars. When asked by HSBC what it needed all its American cash for, Al Rajhi explained that people in Saudi Arabia need dollars for all sorts of reasons. "During summer time," the bank wrote, "we have a high demand from tourists traveling for their vacations."
The Treasury Department keeps a list compiled by the Office of Foreign Assets Control, or OFAC, and American banks are not supposed to do business with anyone on the OFAC list. But the bank knowingly helped banned individuals elude the sanctions process. One such individual was the powerful Syrian businessman Rami Makhlouf, a close confidant of the Assad family. When Makhlouf appeared on the OFAC list in 2008, HSBC responded not by severing ties with him but by trying to figure out what to do about the accounts the Syrian power broker had in its Geneva and Cayman Islands branches. "We have determined that accounts held in the Caymans are not in the jurisdiction of, and are not housed on any systems in, the United States," wrote one compliance officer. "Therefore, we will not be reporting this match to OFAC."
Translation: We know the guy's on a terrorist list, but his accounts are in a place the Americans can't search, so screw them.
Remember, this was in 2008 – five years after HSBC had first been caught doing this sort of thing. And even four years after that, when being grilled by Michigan Sen. Carl Levin in July 2012, an HSBC executive refused to absolutely say that the bank would inform the government if Makhlouf or another OFAC-listed name popped up in its system – saying only that it would "do everything we can."
The Senate exchange highlighted an extremely frustrating dynamic government investigators have had to face with Too Big to Jail megabanks: The same thing that makes them so attractive to shady customers – their ability to instantaneously move money around the world to places like the Cayman Islands and Switzerland – makes it easy for them to play dumb with regulators by hiding behind secrecy laws.
When it wasn't banking for shady Third World characters, HSBC was training its mental firepower on the problem of finding creative ways to allow it to do business with countries under U.S. sanction, particularly Iran. In one memo from HSBC's Middle East subsidiary, HBME, the bank notes that it could make a lot of money with Iran, provided it dealt with what it termed "difficulties" – you know, those pesky laws.
"It is anticipated that Iran will become a source of increasing income for the group going forward," the memo says, "and if we are to achieve this goal we must adopt a positive stance when encountering difficulties."
The "positive stance" included a technique called "stripping," in which foreign subsidiaries like HSBC Middle East or HSBC Europe would remove references to Iran in wire transactions to and from the United States, often putting themselves in place of the actual client name to avoid triggering OFAC alerts. (In other words, the transaction would have HBME listed on one end, instead of an Iranian client.)
For more than half a decade, a whopping $19 billion in transactions involving Iran went through the American financial system, with the Iranian connection kept hidden in 75 to 90 percent of those transactions. HSBC has been headquartered in England for more than two decades – it's Europe's largest bank, in fact – but it has major subsidiary operations in every corner of the world. What's come out in this investigation is that the chiefs in the parent company often knew about shady transactions when the regional subsidiary did not. In the case of banned Iranian transactions, for instance, there are multiple e-mails from HSBC's compliance head, David Bagley, in which he admits that HSBC's American subsidiary probably has no clue that HSBC Europe has been sending it buttloads of banned Iranian money.
"I am not sure that HBUS are aware of the fact that HBEU are already providing clearing facilities for four Iranian banks," he wrote in 2003. The following year, he made the same observation. "I suspect that HBUS are not aware that [Iranian] payments may be passing through them," he wrote.
What's the upside for a bank like HSBC to do business with banned individuals, crooks and so on? The answer is simple: "If you have clients who are interested in 'specialty services' – that's the euphemism for the bad stuff – you can charge 'em whatever you want," says former Senate investigator Blum. "The margin on laundered money for years has been roughly 20 percent."
Those charges might come in many forms, from upfront fees to promises to keep deposits at the bank for certain lengths of time. However you structure it, the possibilities for profit are enormous, provided you're willing to accept money from almost anywhere. HSBC, its roots in the raw battlefield capitalism of the old British colonies and its strong presence in Asia, Africa and the Middle East, had more access to customers needing "specialty services" than perhaps any other bank.
And it worked hard to satisfy those customers. In perhaps the pinnacle innovation in the history of sleazy banking practices, HSBC ran a preposterous offshore operation in Mexico that allowed anyone to walk into any HSBC Mexico branch and open a U.S.-dollar account (HSBC Mexico accounts had to be in pesos) via a so-called "Cayman Islands branch" of HSBC Mexico. The evidence suggests customers barely had to submit a real name and address, much less explain the legitimate origins of their deposits.
If you can imagine a drive-thru heart-transplant clinic or an airline that keeps a fully-stocked minibar in the cockpit of every airplane, you're in the ballpark of grasping the regulatory absurdity of HSBC Mexico's "Cayman Islands branch." The whole thing was a pure shell company, run by Mexicans in Mexican bank branches.
At one point, this figment of the bank's corporate imagination had 50,000 clients, holding a total of $2.1 billion in assets. In 2002, an internal audit found that 41 percent of reviewed accounts had incomplete client information. Six years later, an e-mail from a high-ranking HSBC employee noted that 15 percent of customers didn't even have a file. "How do you locate clients when you have no file?" complained the executive.
It wasn't until it was discovered that these accounts were being used to pay a U.S. company allegedly supplying aircraft to Mexican drug dealers that HSBC took action, and even then it closed only some of the "Cayman Islands branch" accounts. As late as 2012, when HSBC executives were being dragged before the U.S. Senate, the bank still had 20,000 such accounts worth some $670 million – and under oath would only say that the bank was "in the process" of closing them.
Meanwhile, throughout all of this time, U.S. regulators kept examining HSBC. In an absurdist pattern that would continue through the 2000s, OCC examiners would conduct annual reviews, find the same disturbing shit they'd found for years, and then write about the bank's problems as though they were being discovered for the first time. From the 2006 annual OCC review: "During the year, we identified a number of areas lacking consistent, vigilant adherence to BSA/AML policies. . . . Management responded positively and initiated steps to correct weaknesses and improve conformance with bank policy. We will validate corrective action in the next examination cycle."
Translation: These guys are assholes, but they admit it, so it's cool and we won't do anything.
A year later, on July 24th, 2007, OCC had this to say: "During the past year, examiners identified a number of common themes, in that businesses lacked consistent, vigilant adherence to BSA/AML policies. Bank policies are acceptable. . . . Management continues to respond positively and initiated steps to improve conformance with bank policy."
Translation: They're still assholes, but we've alerted them to the problem and everything'll be cool.
By then, HSBC's lax money-laundering controls had infected virtually the entire company. Russians identifying themselves as used-car salesmen were at one point depositing $500,000 a day into HSBC, mainly through a bent traveler's-checks operation in Japan. The company's special banking program for foreign embassies was so completely fucked that it had suspicious-activity alerts backed up by the thousands. There is also strong evidence that the bank was allowing clients in Sudan, Cuba, Burma and North Korea to evade sanctions.
When one of the company's compliance chiefs, Carolyn Wind, raised concerns that she didn't have enough staff to monitor suspicious activities at a board meeting in 2007, she was fired. The sheer balls it took for the bank to ignore its compliance executives and continue taking money from so many different shady sources while ostensibly it had regulators swarming all over its every move is incredible. "You can't make up more egregious money-laundering that permeated an entire institution," says Spitzer.
By the late 2000s, other law enforcement agencies were beginning to catch HSBC's scent. The Department of Homeland Security started investigating HSBC for laundering drug money, while the attorney general's office in West Virginia snooped around HSBC's involvement in a Medicare-fraud case. A federal intra-agency meeting was convened in Washington in September 2009, at which it was determined that HSBC was out of control and needed to be investigated more closely.
The bank itself was then notified that its usual OCC review was being "expanded." More OCC staff was assigned to pore through HSBC's books, and, among other things, they found a backlog of 17,000 alerts of suspicious activity that had not been processed. They also noted that the bank had a similar pileup of subpoenas in money-laundering cases.
Finally it seemed the government was on the verge of becoming genuinely pissed off. In March 2010, after seeing countless ultimatums ignored, they issued one more, giving HSBC three months to clear that goddamned 17,000-alert backlog or else there would be serious consequences. HSBC met that deadline, but months later the OCC again found the bank's money-laundering controls seriously wanting, forcing the government to take, well . . . drastic action, right?
Sort of! In October 2010, the OCC took a deep breath, strapped on its big-boy pants and . . . issued a second cease-and-desist order!
In other words, it was "Don't Do It Again" – again. The punishment for all of that dastardly defiance was to bring the regulatory process right back to the same kind of double-secret-probation order they'd tried in 2003.
Not to say that HSBC didn't make changes after the second Don't Do It Again order. It did – it hired some people.
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As Rolling Stone’s chief political reporter, Matt Taibbi's predecessors include the likes of journalistic giants Hunter S. Thompson and P.J. O'Rourke. Taibbi's 2004 campaign journal Spanking the Donkey cemented his status as an incisive, irreverent, zero-bullshit reporter. His books include Griftopia: A Story of Bankers, Politicians, and the Most Audacious Power Grab in American History, The Great Derangement: A Terrifying True Story of War, Politics, and Religion, Smells Like Dead Elephants: Dispatches from a Rotting Empire.
Your humble blogger is headed to DC today to participate in a General Accountability Office session on the US banking industry. In a letter last month to Gene L. Dodaro, Comptroller General of the United States, Senator Sherrod Brown (D- OH) and Senator David Vitter (R-LA) complain that despite the passage of the Dodd-Frank law, the largest US banks continue to grow and remain “too big to fail.” They write:
“Though Congress has enacted financial sector reforms that its supporters, both in Congress and the Administration, intended to mitigate the TBTF problem, we are concerned that these measures may not be sufficient to eliminate government support for the largest bank holding companies. Federal Reserve Board Governor Daniel Tarullo recently lamented, ‘to the extent that a growing systemic footprint increases perceptions of at least some residual too-big-to-fail quality in such a firm, notwithstanding the panoply of measures in Dodd-Frank and our regulations, there may be funding advantages for the firm, which reinforces the impulse to grow.’”
And this statement is true. But when you look at why the TBTF banks are so large, much of the blame lies with Washington. In fact, Congress itself is probably the leading reason for the odious doctrine called “too big to fail.” Congress has mismanaged the finances of the US Treasury and has thus given the bankers who service the nation’s debt big leverage, even extortionate powers. The US government cannot strike down the bankers without killing the ability of the government to finance its debts – at least absent the intercession of the Federal Open Market Committee.
As I noted in a comment for IRA this week, “Mutually Assured Destruction: The Legacy of Timothy Geithner -- and Robert Rubin,” the real reason that the DOJ does not go after the big banks is the same reason why the Fed has always pandered to the zombie dance queens, namely the overriding concern about the market for Treasury debt. In the minds of Washington's ministerial class, systemic risk trumps securities fraud -- or anything else. The TBTF banks and three or four other players are all that remains of the primary dealer community. Mess with the remaining big banks, so the story goes, and the world really does end.”
Of course, the problem with the whole issue of “too big to fail” is that the large banks are net takers of resources from the economy. The hundreds of billions of dollars per year in subsidies that flow through the largest banks c/o the Fed and various federal agencies far exceed the nominal profits reported by the entire banking industry. Consider, for example, that the total interest expense for the US banking industry was just $16 billion in Q3 2012 compared with almost $100 billion in Q4 2007. Add in the debt leverage and the annual subsidy to the banks from the Fed for just QE alone is hundreds of billions per year.
As I told the GAO:
“The subsidy value of the SIFI/TBTF designation is enormous and basically gives the TBTF bank a funding profile similar to a US government agency. Thus the most obvious value of the SIFI label is the economic benefit in terms of funding cost. If market participants really believed that a TBTF bank could, in fact, fail and default in a legal sense, then the funding costs would reflect that perception. The list of subsidies that flow to the TBTF banks includes the Fed’s zero rate/QE policies, the cartel pricing profits from agency mortgage originations, and the exemption from the automatic stay in bankruptcy for OTC derivative contracts. My rough guess as to the size of the annual subsidy for the five largest US SIFI institutions would be $500 billion annually or more.”
It may even be hypocritical for members of Congress to complain about the zombie banks given the degree to which large banks have become instruments of public policy. The subsidies for TBTF banks reflect policy decisions made in Washington by Congress, such as tying monetary policy to “full employment,” a notion that goes back to WWII and the Great Depression. The large banks simply align themselves to make maximum profit from America’s decidedly socialist the public policy goals.
The wisdom that allows Congress to subsidize the housing market to the tune of several points worth of annual interest expense implicitly endorses the role of the TBTF banks. There is no higher risk adjusted return for banks than making a residential mortgage loan that is covered by the FHA, extracting fees from the borrower, then selling that loan into the TBA market for a several point profit. Uncle Sam holds the first lost risk and the bank holds the servicing on the loan.
At least that was the plan until the Dodd-Frank legislation. Now the TBTF banks are headed into a brave new world where much of the subsidies from housing are being offset by a new tax called Basel III. Under the foreign-inspired capital rules, large banks will be forced out of the mortgage market and will no longer be able to retain large portfolios of loan servicing. Over time, this change in the cost of capital for large banks could see them shift their activities even more toward capital markets and derivatives. The irony of Dodd-Frank and Basel III is that it may make the TBTF banks more risky and unstable.
Indeed, even as members of Congress fret about the problem of TBTF, a move is afoot to repeal the Volcker Rule as part of continuing financial reform. I have never been a fan of the Volcker Rule, a part of the Dodd-Frank law that prohibits banks from trading for their own account. The London Whale trade at JPMorgan was an example of a prohibited activity under the Volcker Rule, one reason that the bank had started to terminate employees in the CIO office in 2011, prior to the supposed bad acts.
The trouble with the Volcker Rule is that is completely misses the point of the subprime crisis, namely securities fraud at the syndicate desk. The fact of banks trading their own book is trivial compared to the vast larceny that took place across the trading floor on the new issue desk. Of course, former Fed Chairman Paul Volcker understands this very well. As I have noted before, Volcker has never seen a TBTF bank he would not bail out given the chance. Indeed, the public paragon Paul Volcker is the father of too-big-to-fail, as I noted in my 2010 book “Inflated.”
So while the attention of Senators Brown and Vitter is commendable, somebody needs to take them aside and tell them the punch line to the joke. The TBTF banks are big because of excessive risk taking, not because of leverage per se, and much of this risk is underwritten by Washington. You can increase capital requirements in a static sense, but it is the type of business model decisions taken by these banks which is the real issue for the public. As I told the GAO:
“When a bank hides risk, as in the case of the Citigroup SIV example, the problem is internal systems and controls, not capital. In the JP Morgan episode with the “London Whale,” the problem likewise was internal systems and controls, not capital. The JPM example with the London Whale apparently involved deliberate risk taking, not hedging, but regulators seem willing to accept the bank’s version of why this loss event occurred.” See my earlier ZH comment in terms of what did or did not happen in 2010, “A few more questions for JPMorgan on the London Whale.”
The problem with “too-big-to-fail” is first and foremost the behavior of our beloved political leaders in Washington. Our love-hate relationship with the big banks is a legacy of WWII and the fiscal depravity which has followed ever since. When we start to shrink the federal government and our chronic deficits, the large banks will get smaller. The zombie banks feed from the public trough in many ways. Just don’t assume that when Washington screams “no, no” to more zombie love that those protestations are entirely genuine.
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- The Man Who Killed Osama bin Laden... Is Screwed (Esquire)
- G7 fires currency warning shot, Japan sanguine (Reuters)
- North Korea Confirms It Conducted 3rd Nuclear Test (NYT)
- Italian Police Arrest Finmeccanica CEO (WSJ)
- Legacy, political calendar frame Obama's State of the Union address (Reuters)
- China joins U.S., Japan, EU in condemning North Korea nuclear test (Reuters)
- Wall Street Fading as Emerging-Market Banks Gain Share (BBG)
- Berlin Conference 2.0: Drugmakers eye Africa's middle classes as next growth market (Reuters)
- Barclays to Cut 3,700 Jobs After Full-Year Loss (BBG)
- US Treasury comment triggers fall in yen (FT)
- ECB Ready to Offset Banks’ Accelerated LTRO Payback (BBG)
- Fed's Yellen Supports Stimulus to Spur Jobs (WSJ)
- Libor Scrutiny Turns to Middlemen (WSJ)
- Samsung Girds for Life After Apple in Disruption Devotion (BBG)
Overnight Media Digest
* North Korea appeared to have exploded a nuclear device Tuesday, its third experimental detonation in a long effort to build weapons of mass destruction that the U.S. and other countries consider a serious threat.
* Pope Benedict XVI will become the first pontiff in six centuries to resign, marking the end of a transitional papacy that focused more on theological and internal renewal and less on the broader challenges that face the Roman Catholic church at the start of its 21st century of existence.
* U.S. regulators are widening their probe of global interest-rate-rigging by scrutinizing what they claim is a pivotal role of two U.K. brokerage firms in the scandal, people close to the investigation say.
* The regulator that oversees the professional conduct of Britain's accountants has launched a probe into the past financial reports of Autonomy Corp, the U.K. software company that Hewlett-Packard Co purchased for $11 billion in 2011 and later accused of having made outright financial misrepresentations ahead of the deal.
* Hedge-fund manager David Einhorn has proposed that Apple Inc issue a special class of stock that would carry a high dividend yield.
* Nasdaq OMX Group Inc, long on the hunt for a partner, has ramped up its conversations about strategic options ranging from joint ventures to a sale, according to people familiar with the talks, as rival NYSE Euronext moves ahead with a merger that will form an even-bigger competitor.
* U.S. regulators told the world's biggest maker of insulin, Denmark's Novo Nordisk, that they couldn't approve a potential blockbuster diabetes drug, delaying its U.S. introduction and sending the company's shares tumbling.
* Hostess Brands Inc won permission to place a selection of its cake and bread assets, including the Twinkie brand, on the auction block as the baking company continues to sell off its business piece by piece.
EDF Energy is seeking state support to guarantee the new nuclear reactors it plans to build in the UK. EDF is asking the government to underwrite some of the project's financing. Nasdaq OMX Group was in talks with private equity firm Carlyle Group about taking the trans-Atlantic exchange operator private, but the talks broke down because of disagreements over valuation.
Britain's accountancy regulator said it was investigating the financial reports of British software firm Autonomy before it was bought by Hewlett-Packard, a deal that was later subject to accusations of fraud. Goldman Sachs has promoted Gregg Lemkau to jointly head its global mergers and acquisitions (M&A) team.
Telefonica has put off plans to list its Latin American business.
BlackRock sold a large stake in oil services group Saipem - a unit of Italy's Eni, in deal that is under the scrutiny of Italian and British regulators.
Lion Capital, a big investor in Findus - the UK-based frozen food company engulfed in the horse meat scandal, has called on management to explain how the adulteration took place.
Dutch retailer Ahold sold its 60 percent stake in its Nordic joint venture - ICA - to co-owner Hakon Invest for 2.5 billion euros ($3.34 billion) in cash.
* British accounting regulators said on Monday that they would investigate the financial reporting at the British software maker Autonomy before its $11.1 billion acquisition by Hewlett-Packard Co in 2011.
* Concern over the euro moved to the forefront Monday as finance ministers of the countries using the currency held their monthly meeting. But this time, with the European Union's recession continuing, the topic was the strength of the euro rather than its many weaknesses.
* The Swedish investment company Hakon Invest agreed on Monday to buy the remaining stake in the Nordic retailer ICA it did not already own for $3.1 billion.
* A new 24-hour news and entertainment channel, Fusion, has powerful backers in Univision and ABC News, a unit of the Walt Disney Co, and underscores the growing influence of the burgeoning Hispanic audience.
* Mary Jo White, who has been nominated to run the U.S. Securities and Exchange Commission, has also disclosed that her husband would relinquish his partnership at Cravath, Swaine & Moore, converting his interest in the firm from an equity to non-equity status.
* Pope Benedict XVI's surprise announcement on Monday that he will resign on Feb. 28 sets the stage for a succession battle that is likely to determine the future course of a church troubled by scandal and declining faith in its traditional strongholds around the world.
* It will be four years on Tuesday since the last fatal crash in the United States, a record unmatched since propeller planes gave way to the jet age more than half a century ago. Globally, last year was the safest since 1945, with 23 deadly accidents and 475 fatalities, according to the Aviation Safety Network, an accident researcher.
THE GLOBE AND MAIL
* The Harper government will not resurrect its controversial Internet surveillance bill, and will not introduce new legislation to monitor the activities of people on the web.
* Former school trustee Liz Sandals inherited one of Ontario's most difficult files Monday, taking on the post of Education Minister and the ambitious task of resolving a dispute with Ontario's teachers and restoring sports teams, clubs and other after-school activities.
Reports in the business section:
* Genivar Inc, one of Quebec's biggest engineering firms, uncovered "inappropriate conduct" after investigating the company's role in financing political parties and bidding on municipal contracts, another sign of corruption in the province's engineering and construction industry.
* A federal report on military procurement to be released Tuesday will recommend bidders be required to explicitly outline how they will spur innovation and long-term economic growth in Canada, a source familiar with the file told the National Post.
* WestJet Airlines Ltd will launch its new regional carrier Encore in Western Canada this summer starting on June 24, the company said Monday.
* Following the grilling in London last week, outgoing Bank of Canada governor Mark Carney may be in for a second round of tough questioning Tuesday, this time from Canadian Ministers of Parliament.
Fly On The Wall 7:00 AM Market Snapshot
Alexandria Real Estate (ARE) upgraded to Overweight from Equal Weight at Evercore
Boston Properties (BXP) upgraded to Outperform from Sector Perform at RBC Capital
DCT Industrial (DCT) upgraded to Market Perform from Underperform at Wells Fargo
Digital Realty (DLR) upgraded to Overweight from Equal Weight at Evercore
Gold Fields (GFI) upgraded to Neutral from Sell at Citigroup
J.M. Smucker (SJM) upgraded to Outperform from Market Perform at Bernstein
Nortel NetApp (NTAP) upgraded to Buy from Hold at Brean Capital
Novo Nordisk (NVO) upgraded to Buy from Neutral at Nomura
Royal Gold (RGLD) upgraded to Buy from Neutral at UBS
Suburban Propane (SPH) upgraded to Buy from Neutral at BofA/Merrill
Walgreen (WAG) upgraded to Buy from Neutral at Mizuho
Boyd Gaming (BYD) downgraded to Sell from Neutral at Goldman
Capstead Mortgage (CMO) downgraded to Market Perform from Outperform at JMP Securities
Corporate Office (OFC) downgraded to Equal Weight from Overweight at Evercore
Cubic (CUB) downgraded to Hold from Buy at Benchmark Co.
Facebook (FB) downgraded to Market Perform from Outperform at Bernstein
General Growth (GGP) downgraded to Underperform from Sector Perform at RBC Capital
Macerich (MAC) downgraded to Sector Perform from Outperform at RBC Capital
Piedmont Office (PDM) downgraded to Underperform from Outperform at RBC Capital
Qualcomm (QCOM) downgraded to Neutral from Overweight at JPMorgan
Questar (STR) downgraded to Neutral from Buy at UBS
Cincinnati Bell (CBB) initiated with a Hold at Deutsche Bank
CyrusOne (CONE) initiated with a Buy at Deutsche Bank
CyrusOne (CONE) initiated with a Neutral at BofA/Merrill
Idenix (IDIX) initiated with a Neutral at RW Baird
Legacy Reserves (LGCY) initiated with an Overweight at Barclays
Manchester United (MANU) initiated with an Outperform at Raymond James
Navios Maritime Partners (NMM) initiated with a Buy at Citigroup
Theravance (THRX) initiated with an Outperform at RW Baird
Barclays (BCS) to reduce headcount by at least 3,700 this year
Rexnord (RXN) hired Goldman Sachs (GS) to explore possible sale
JANA Partners rejected Agrium's (AGU) settlement offer, director appointments
Arris (ARRS), Google (GOOG) received second DOJ request for more information about Arris' proposed acquisition of Motorola Home business from Google
American Express (AXP), Twitter signed online purchasing agreement
Procter & Gamble (PG), Verix Business initiated strategic partnership
VMware (VMW) acquired Virsto, terms not disclosed
Groupon (GRPN) acquired MashLogic, terms not disclosed
Laclede Group (LG) announced sale of New England Gas Co. (SUG) to Algonquin Power
Masco (MAS) sees “repair and remodel” to grow modestly in FY13
Titan International (TWI) announced offer for Wheels of India
Nielsen (NLSN) initiated dividend policy, declared 16c per share dividend
Companies that beat consensus earnings expectations last night and today include:
Otter Tail (OTTR), American Financial Group (AFG), Masco (MAS), Nielsen (NLSN), Tesoro Logistics (TLLP), Lionsgate (LGF)
Companies that missed consensus earnings expectations include:
Owens & Minor (OMI), Dun & Bradstreet (DNB), Rexnord (RXN), Danaos (DAC), tw telecom (TWTC), Cubic (CUB)
Companies that matched consensus earnings expectations include:
- Fed Vice-Chairwoman Janet Yellen offered a vigorous defense of the central bank's easy-money policies, suggesting she favors continuing them amid a slow economic recovery and disappointing job market, the Wall Street Journal reports
- Behind David Einhorn's protestations on Apple (AAPL) is a novel way to return cash to shareholders. Einhorn, of hedge fund Greenlight Capital, proposed that Apple issue a special class of stock, which he called "perpetual preferred," that would carry a high dividend yield. But with some investors feeling more confident about the future, shareholder pressure is growing to put that cash to work, the Wall Street Journal reports
- The NTSB is investigating whether tiny fiber-like formations, known as dendrites, inside lithium-ion batteries could have played a role in battery failures on two Boeing (BA) 787 Dreamliners last month, Reuters reports
- The shifting nature of Africa’s disease burden is luring Big Pharma (SNY, GSK) as new opportunities open up for treating chronic diseases afflicting the middle classes, rather than just fire-fighting infection.European companies, in particular, hope to reap rewards by investing early in a region where many of them already have historic commercial ties, Reuters reports
- Global investment banks based in Europe and the U.S., facing regulatory and cost-cutting pressures at home, are losing market share (CS, MS, C) in emerging economies to smaller domestic competitors, Bloomberg reports
- In 2007, Wal-Mart Stores (WMT) planned to open as many as 2,000 in-house medical clinics by mid-2012. Today, they have fewer than 130 clinics and is closing locations faster than it’s opening them. CVS Caremark (CVS) has about 630 MinuteClinics and aims to have 1,500 within four years, Bloomberg reports
ARCA Biopharma (ABIO) files to sell 3.48M shares of common stock for holders
American Capital Mortgage (MTGE) to offer 18M shares of common stock
ConnectOne Bancorp (CNOB) 1.6M share IPO priced at $28.00
DryShips (DRYS) announces offering of 5M common shares of Ocean Rig UDW
Gulfport Energy (GPOR) 7.75M share Secondary priced at $38.00
HCA Holdings (HCA) files to sell 50M shares of common stock for holders
Kosmos (KOS) commences offering of 30M shares of common stock
Motricity (MOTR) requests withdrawal of registration statement
Newcastle Investment (NCT) files to sell 20M shares of common stock
Team Health (TMH) files to sell 9.63M shares of common stock for holders
Warburg Pincus agrees to sell 2.5M shares of Primerica (PRI)
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It's been said that the wealthy win because they can always hire half the poor to shoot the other half. Rarely is there a sadder case of this than when it comes to trying to protect the planet that feeds us, clothes us, and generates the only pocket of breathable atmosphere in our solar system.
Because look, say you're a committed environmentalist, your beloved spouse has treatable cancer, and the only way to save his or her life is to take a job clubbing the last baby seal on the beach. That seal is toast. And so is anything or anyone else that stands between your partner and their chemo.
Don't think the greedy jerks who own everything don't know it; they downright count on it to get their way.
Driving down wages, increasing animosity among the lower classes by scapegoating various segments of also-poor people, decreasing the health and safety of working conditions -- these aren't unfortunate side effects of our current economic incentive structures. They are the point, fueling a vicious cycle where more profits flow to the top while workers are too desperate to do anything about it. The effect, as it was recently said, is this:
The great problem we have today in improving our society, in fixing our economy, is that so many people don't want to give up what they have. . . . [W]hat the past 40 years have proven is this: if you lose your job, you're on your own. If you're in your 40s and 50s and you lose a good job, you'll probably never, ever, have a good job ever again. . . .
People know, they know and they are right, that economic change, in our society, could cost them everything. Their job and any prospect of a good job. Their house. Their marriage. Their health care and even their life.
So they grasp tightly to what they have, and everyone fights to make sure that nothing really changes. Each person, with their little or big piece of the pie, fights viciously to keep it whether it's good for society or not. They are right to do so.
The biggest enemy of our environment, therefore, is mass desperation wielded like a billy club in the hands of the extremely wealthy. The following are some ideas on how to both disarm them and take the next steps towards creating a more awesome society to live in.
1. Increase the minimum wage. Adjusted for inflation, the minimum wage is lower than it was in the 1970s. It's not a family wage, even though it's all some families can get. Yet the whole time it's been declining, productivity and profits have gone up, but a fair share of the increase hasn't been passed on to workers. Raising the minimum wage would put upward pressure on the share of business profits that go to workers, making life less precarious for millions of people.
2. Shorten the work week and increase paid time off. It's hard to have an engaged citizenry when work demands so much of people's time that they can barely unwind, let alone follow the news. A full-time work week barely leaves time to be a good parent, a good friend, or even a good housekeeper; forget hitting the mark on all three. The idea that a 40 hour work week, plus the 10-20 hours of preparation and commute time involved, is a reasonable base amount of time to demand of someone is premised on the social expectations of a bygone era where a full-time worker had a full-time caregiver at home. Lowering the full-time work week to even 35 hours would not only create more job openings, it would likely boost per hour productivity, as it has done in some European nations.
3. Cut higher education and worker retraining costs to students. In the era of the GI Bill, not only was it free for returning veterans to go to college, it was affordable for almost anyone who could spring a part-time summer job. But federal funding cuts have piled on top of state funding cuts, and tuition is now ridiculous at most public colleges. It's patently ridiculous to saddle new college graduates with a mortgage-worth of debt when they graduate and set out on their own. Particularly when the value of a college education has decreased for so many, but is nonetheless necessary because it's barely possible anymore to find family-wage blue collar employment. And when people lose their jobs, they should be able to retrain, if possible, if they can't find work in their original field.
4. Restore federal funding for university research programs. Research departments have had to increasingly rely on industry funding, a type of ballyhooed public-private partnership, which has reduced the independence and objectivity of the nation's research institutions to everyone's detriment. There are many cases, but you have to look no further than the way the fossil fuel industry has corrupted university research on fracking, such that very little information at all is available about the risks of hydraulic fracturing recovery of natural gas, and the public must mainly rely on anecdotes and independent filmmakers to hear anything negative about its consequences.
5. Expand unemployment insurance. Want workers not to fear the loss of outdated, polluting industries? Make sure they know they won't be out on the street if they have to look for work for a while, and that they don't have to take the first crappy job that comes their way. It would go a long way towards preventing rank-and-file workers from fighting to the death to defend industries that are long past their sell-by date.
6. Break up the big banks. The financial sector has grown significantly in terms of their share of GDP and has been the biggest accelerant of income inequality in the country. Add to that the longstanding investment policies of these very large banks to either refuse loan capital to, or downgrade the ratings of, businesses who refuse to move production overseas, bust unions, liquidate pensions or drive down wages, and they have overweening power to make life miserable for the average worker. They can no longer be trusted in any respect to be good stewards of the capital they've extracted from the rest of us and their power must be dismantled.
7. Financial transaction tax.