Lehman's 'Get Out of Jail Free' Card

August 19, 2012, 11:30 a.m.

Will Wall Street Ever Be Prosecuted? Since writing "Goldman: Too Big to Jail," August 12, 2012, questioning why both Justice and the SEC dropped their cases against Goldman Sachs, CBS' "60 Minutes" has asked, and in large measure answered, the same question about the Lehman Brothers case: "The Case Against Lehman Brothers," CBS 60 Minutes, August 19, 2012.



You can find the online "60 Minutes" video here, and the full transcript here.

Here are some Fair Use excerpts from that program. Steve Kroft is the interviewer, Anton Valukas is the bankruptcy court-appointed Chicago lawyer tasked with investigating what happend within Lehman, and the additional narrative is in italics.

When Lehman Brothers collapsed, 26,000 employees lost their jobs and millions of investors lost all or almost all of their money, triggering a chain reaction that produced the worst financial crisis and economic downturn in 70 years. Anton Valukas' job was to provide the bankruptcy court with accurate, reliable information that the judges could use to resolve the claims of creditors picking over Lehman's corpse. . . .

Steve Kroft: Did these quarterly reports represent to investors a fair, accurate picture of the company's financial condition?

Anton Valukas: In our opinion, they did not.

Steve Kroft: And isn't that against the law?

Anton Valukas: It certainly, in our opinion, was against civil law if you will. There were colorable claims that this was a fraud, yes.

By colorable claims Valukus means there is sufficient evidence for the Justice Department or the Securities and Exchange Commission to bring charges against top Lehman executives, including CEO Richard Fuld, for overseeing and certifying misleading financial statements, and against Lehman's accountant, Ernst and Young, for failing to challenge Lehman's numbers. . . .

Steve Kroft: How are you so sure of that? Anton Valukas: Because we read the emails in which we observed the people saying that they were doing it. . . . A jury would have to decide who's telling the truth.

But so far there has been no jury to hear the evidence. Despite Valukas' findings -- and the supporting documents and testimony to back them up -- the Securities and Exchange Commission has not brought any charges of any kind against former Lehman executives. For the past few months, we've made numerous requests to interview the SEC's head of enforcement. All of those requests have been declined.

Steve Kroft: The Securities and Exchange Commission has not brought a case.

Anton Valukas: No, they have not.

There is one plausible explanation why SEC hasn't has not gone after top Lehman executives. As it turns out, some of Lehman's most egregious accounting shenanigans took place right under the noses of government regulators.

Steve Kroft: How closely was the SEC monitoring Lehman Brothers during this time?
Anton Valukas: They were on premises. They were talking to the Lehman people daily. They officed there.

After six years of reporting on stories like this, no wonder Steve Kroft candidly concludes, in a "60 Minutes Overtime" interview (5:18 minutes in), "I think this is the last story I'll do about nobody being held accountable, because I've really sort of given up. I don't think the federal government, either the SEC or the Justice Department, are going to bring any cases against individuals. I just don't think they're going to."

This is one time when I don't really welcome the confirmation. I'd like to have been proven wrong. But Kroft's conclusions is almost identical to mine in "Goldman: Too Big to Jail."

That he and I come to these conclusions when a Democratic Administration is calling the shots is distressing. Especially since we have no alternative. If anything, the Republicans would be worse -- although it's difficult to imagine how they might go about achieving that distinction.

# # #

Banks As Robbers: The $38 Billion Heist

August 21, 2009, 6:40 a.m.

How Banks Profit From Robbing Customers
(brought to you by FromDC2Iowa.blogspot.com*)
After years of watching bank robbers take their money, banks are turning the tables and now making billions by robbing their customers.

And, so far, the local papers are not following up on this story for their readers.

"If You Can't Trust Your Banker . . ."

[Credit: "Shady Deal at Sunny Acres," Maverick, 2nd Season, 1958. The popular early television series, Maverick, "starring James Garner and Jack Kelly, remains the most famous and widely discussed episode of the Western comedy television series Maverick. Written by Roy Huggins and Douglas Heyes and directed by Leslie H. Martinson, this 1958 second season episode depicts gambler Bret Maverick (James Garner) being swindled by a crooked banker (John Dehner) after depositing the proceeds from a late-night poker game, then recruiting his brother Bart Maverick (Jack Kelly) to mount an elaborate sting operation to recover the money." It's also the source of two oft-quoted lines: "If you can't trust your banker, whom can you trust?" and "I'm working on it." See, "Shady Deal at Sunny Acres," wikipedia.org.]

As Woodie Guthrie put it in the lyrics to "Pretty Boy Floyd":

As through this life you travel, you meet some funny men
Some rob you with a six-gun, some with a fountain pen

And although this blog entry doesn't address the outrage of foreclosures against the banks' victims in this time of economic hardship, Guthrie's next two lines are also telling:

As through this life you ramble, as through this life you roam
You'll never see an outlaw take a family from their home

I'm indebted this morning to Stephen Phillips for bringing yet another Karl Denninger essay to my attention 10 days ago. Karl Denninger, "Bribed Regulators: Another Example," Market-Ticker, August 10, 2009.

The Financial Times made the basic story available on August 9. Saskia Scholtes and Francesco Guerrera, "Banks make $38bn from overdraft fees," Financial Times, August 9, 2009 ("US banks stand to collect a record $38.5bn in fees for customer overdrafts this year, with the bulk of the revenue coming from the most financially stretched consumers amid the deepest recession since the 1930s, according to research. The fees are nearly double those reported in 2000.").

By yesterday, 11 days later, the outrage had even attracted the attention of the New York Times' editorial writers. Editorial, "Debit Card Trap," New York Times, August 20, 2009, p. A26.

And what I'd like to know is why have so few newspapers carried this story? "Some have," you say? That's not what I mean. What I want to know is why our local papers have not responded to these shocking revelations by simply gathering and reporting the relevant data about the banks in the local community. A few phone calls should do it. It's not exactly an expensive six-month assignment requiring a team of investigative reporters. And it would be a community service that every subscriber would really appreciate -- at a time when the papers are looking for subscribers.

How about it in my home town, Press-Citizen, Gazette, Daily Iowan?

"So what's the big deal?" I hear you ask. "Overdrafts cost the banks. We've had overdraft fees forever."

"Not like these, you haven't," I respond. Read on.

The story is not in the existence of overdraft fees, it's in (a) the new way banks manipulate them to make them a major profit center, (b) the excesses this produces for some customers, and (c) who those customers are.

Here's how Denninger reports it (bracketed bold headings are mine):

[Banks' New Math] 70% of the overdrafts happen at a POS terminal or ATM, not by writing a check. . . .

There is no reason whatsoever for anyone to take such a hit. The bank knows before they approve the transaction that the money isn't there in the account.

This is not the same thing as a check, which the bank has no way to warn you about before you write it, as there is no "connection" between your checkbook and their computer. . . .

IF we had honest regulators it would be strictly unlawful for a bank to intentionally approve a debit transaction which it knew you did not have the funds to settle . . ..

In fact, it was not all that long ago, in the 1980s and early 1990s, when this was the case: If you went to the ATM and tried to withdraw $100, but didn't HAVE $100, the transaction would be declined. Every time.

But then the banks came to realize that if they let the transaction go through they could make an unregulated loan for that $100 to you, charging you $30 or more for the privilege -- an annualized interest rate of thousands of percent!

[Don't Ask, Don't Tell; The Fountain Pen Robbery] This is clearly predatory behavior. Nobody with half a brain would knowingly sign up for a "service" that would cover a POS or ATM withdrawal at 5,000% interest, yet that is exactly what nearly every bank in the land will currently do by default when you open a new account. They bury the "disclosure" in their terms and conditions, but nowhere do they state these "fees" in equivalent annual percentage rate terms.

[Watch Your Money Disappear in the Banks' Shell-and-Pea Game] It gets better: Banks will intentionally "sort" transactions from a given day to produce the maximum overdraft fee. They sort withdrawals to debit the largest-amount-first, because the fee is assessed per item.

An example: $1,000 in your account. You write checks for $20, $50, $100, $1,000 and all are presented on the same business day.

How many checks will hit you with an overdraft fee? THREE -- every time. The bank will re-order the transactions so that the $1,000 check is processed first, guaranteeing that the $20, $50 and $100 checks overdraw, thereby generating three overdraft charges.

If they processed the transactions "largest item LAST" you'd generate one overdraft fee -- on the $1,000 check.

It gets better.

You have $1,000 in your account. It is after 2:00 PM, the cut-off for a business day. You go to the mall and use your debit card four times to buy a $5 Latte, $15 lunch, a $40 pair of pants and $25 for a couple of movie tickets.

The next morning a $1,000 check hits your account.

The bank processes the $1,000 check first, even though in terms of actual presentation time the debit card withdrawals were approved first, and whacks you for four overdraft fees instead of the one legitimate fee on the $1,000 check. That Latte just cost you as much as $45!

So who bears the primary burden of these fraudulent practices? Surprise . . .

[The Poor Pay More] 3/4 of all accounts have not had an overdraft in the last 12 months. This means that one quarter of all accounts are responsible for basically all of this.

Of the remaining quarter, half of those account for nearly all (90th percentile plus) of the overdrafts. This means that roughly 12.5% of consumers are bearing the entire brunt of these fees.

Why do the regulators permit this? You tell me. These are the same regulators who thought it would be really nifty, ideologically pure, and very profitable to let the banks package what are called "toxic assets" (mortgages unlikely to be paid) and sell them as securities. It was a win-win. So long as this industry-wide ponzi scheme worked, bank managers would collect bonuses and shareholders would get dividends and higher stock prices. And if and when it all collapsed -- as it was obvious it someday would, and now has -- they could do their little Chicken Little dance and scare the Congress (funded with the campaign contributions from Wall Street and the banking industry) into handing over trillions of taxpayers' dollars to cover the losses. And if a few billion of that is paid in bonuses to reward those who brought on the economic collapse, well, hey, they have to live, too.

Karl Denninger continues:

This sort of predation is responsible for nearly $40 billion dollars a year in pure "profit" for the banks, it is directed specifically at those who have the least in resources to cover it, and it relies on lack of clear disclosure and intentionally-predatory "sorting rules" to get past what would otherwise result in a howl of protest by consumers and lawmakers alike.

This sort of practice should be absolutely outlawed, and if we had anything approaching an honest Congress and Federal Reserve it would have been years ago.

As Paul Krugman notes in an aside this morning, "I don’t know if administration officials realize just how much damage they’ve done themselves with their kid-gloves treatment of the financial industry, just how badly the spectacle of government supported institutions paying giant bonuses is playing." Paul Krugman, "Obama's Trust Problem," New York Times, August 21, 2009, p. A27.

Here are some consistent quotes from the New York Times' editorial (linked above):

Moebs Services, a research company that has conducted studies for the government as well as some banks, reported recently that banks will earn more than $38 billion this year from overdraft and bounced-check fees. Moebs also estimates that 90 percent of that amount will be paid by the poorest 10 percent of the customer base.

Federal regulators . . . stood idly by while this system evolved . . ..

[A]s more people began to use debit cards, the banks started to view overdraft fees as a major profit center and started to automatically enroll debit card holders into an overdraft program. Some banks instituted a tiered penalty system, charging customers steadily higher fees as the overdrafts mount. . . .

One college student . . . made seven small purchases including coffee and school supplies that totaled $16.55 and was hit with overdraft fees that totaled $245. . . .

Credit card companies . . . were rightly criticized when some drove up interest rates to 30 percent or more. According to a 2008 study by the F.D.I.C., overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent. . . .

And so "the beat (ing up of the American consumer by the banking-governmental axis of evil) goes on."

I ask again: Where is the local media's reporting of the bank overdraft practices in our community? Are the papers on the side of the beleaguered local consumers (as newspapers openly were 100 years ago), or on the side of the rapacious, unregulated banks? They can't be both.

And to close with another song, as Pete Seeger asked the question in an only slightly different context,

Which side are you on, boys?
Which side are you on?

____________

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
# # #

Banks Declare Their Bailout a Success

April 16, 2009, 10:30 a.m., 1:40 p.m. (addition of endnotes to sources)

Cash, Credit, and Mortgage Foreclosures
(brought to you by FromDC2Iowa.blogspot.com*)
Things may not be quite as bad as the Onion News Network portrays, but its report sure fingers the problem -- as we'll explore in a moment, below.

Let's see now, why was it we were told we had to "right now, no questions asked or answered, trust us" give billions of taxpayer dollars to some of America's largest banks and their wealthy executives? Oh, yeah, the suggestion was pretty heavy that ordinary taxpayers weren't sophisticated enough to really understand, which is why we had to leave the solutions to the guys who created the problem -- guys who tend to rotate back and forth between Wall Street and the Treasury Department.

But for those of us who insisted on more explanation, we were told that this gift was necessary in order to get the banks to abandon their blackmail threat ("give us $700 billion right now or we won't loan money any more") and start loaning money again, restructuring mortgages to enable those who would otherwise become homeless to stay in their homes, creation of more jobs, and the increased buying consumers would do once credit became available. And the point was always stressed that the goal was not to help banks on Wall Street but the consumers on Main Street.

So it's been a few months. What are the results?

Have the banks increased their loan operations? Well, no, not really; in fact they've cut back further, drying up more credit, than they did before they got our money. Meanwhile, they've helped themselves to another pot of gold that has received very little attention from the media. [Endnote 1.]

So how about the foreclosures, are there fewer? Well, no, not actually; there have been 24% more foreclosures this quarter than a year ago. And what about President Obama's plan to forestall foreclosures? The banks have decided that it was a program only designed to keep people in their homes over the winter, when their adverse publicity is the worst as a result of evicting families into the snow. Now that spring is here they're back to evicting people big time. [Endnote 2.]

At least I hope we have had a dip in the number of those who are still receiving unemployment. Hope again; it's more like a cyst than a bubble. After the bank bailouts, what are called "continuous jobless claims" have now escalated to what are the highest levels in American recorded history. [Endnote 3.]

But then I guess at least consumer purchasing must have turned around, right? Wrong. Consumer purchasing declined even further from February to March. [Endnote 4.]

Golly, I'm beginning to feel sorry for those big banks; these must be really tough times for them. Not quite; they're having some very profitable quarters. [Endnote 5.]

Kind of looks like "three strikes you're out," huh? Wrong again; it looks like the bankers will be coming back to the Treasury and Congress asking for an extension on what they consider a very successful "bailout billions for bankers" program. And so long as they continue to be willing to give back in campaign contributions a small share of what Congress gives them, as a token of their appreciation (in what the two major parties have called their "give a million, get a billion" outreach programs), it looks like there may be even more billions coming their way. [Endnote 6.]

To further sweeten the kitty, the Onion News Network is reporting, the Treasury is now recalling all currency still possessed by American citizens:


Treasury Department Issues Emergency Recall Of All US Dollars

Would anyone care for a cup of tea?

Endnotes
1. "Lending by the nation's largest banks fell 6 percent in February from the previous month, continuing a downward trend that began in October with the financial crisis, according to data published yesterday by the Treasury Department. The 21 banks in the survey have received more than $211 billion in federal funding to support new lending with the aim of stimulating the economy. The money has not accomplished its purpose. The banks reported a 24 percent decline in the dollar value of business lending . . .." Binyamin Appelbaum, "Lending by Bailout Recipients Falls Again," Washington Post, April 16, 2009.

"Demand for commercial and industrial loans was weak, and there were several reports that business borrowers were postponing capital expenditures." "Banking and Finance," U.S. Federal Reserve April Beige Book Summary, Bloomberg, April 15, 2009. ["The nation's major banks, concerned about their own deteriorating finances, are making fewer loans to corporations. By cutting back on loans that companies use to buy other concerns, build factories and develop products, the lending slowdown weakens the national economy and could precipitate or lengthen a recession that many economists say has already begun. Michael Quint, "Banks Cut Business Lending, Hurting Weakened Economy," New York Times, October 16, 2008.]

"Goldman Sachs . . . is quietly holding on to other forms of public support that come with virtually no strings attached. Banks have been benefiting from an indirect subsidy adopted by the federal government at the height of the financial crisis last fall that allows them to issue their debt cheaply with the backing of the Federal Deposit Insurance Corporation. . . . [G]iven the huge amounts of debt issued by Goldman, JPMorgan Chase and Morgan Stanley alone, any major collapse could breach the F.D.I.C.’s reserves. The agency has asked Congress for authority to borrow more money from the Treasury in case of an emergency." Louise Story, "U.S. Program Lends a Hand to Banks, Quietly," New York Times, April 14, 2009.

2. "[F]oreclosures surged in the first quarter, according to reports released on Thursday. . . . James J. Saccacio, chief executive of RealtyTrac, said . . . that foreclosures would probably increase over the next months as temporary halts to foreclosures expired at banks . . .." Jack Healy, "No End Yet for Downturn in Housing, New Data Suggest," New York Times, April 16, 2009; "U.S. foreclosure filings rose to a record in the first quarter as . . . temporary programs to delay action on defaults came to an end." Dan Levy, "Foreclosure Filings in U.S. Climbed to Record in First Quarter," Bloomberg, April 16, 2009.

3. "Continuing jobless claims rose to 6 million for the week ending April 4, an increase of more than 100 percent from the same time last year." Ibid.; "The total number of people remaining on the jobless benefit rolls . . . [is now] topping 6 million for the first time . That's the highest on records dating from 1967." Christopher S. Rugaber, "Jobless Claims Top 6M; Housing Starts Plummet," Associated Press Mobile News Network [an iPhone app], April 16, 2009.

4. It turns out that what consumers need to increase their spending is more cash, not more credit! "The Rockefeller Institute of Government recently released a report . . . indicating that the [states'] sales tax decline in late 2008 was the worst in 50 years . . . because sales to consumers have fallen — a spending decline that has been unusually steep by historical standards." Catherine Rampell, "Comparing This Recession to Previous Ones: Retail Sales," New York Times, April 16, 2009;

"Geithner believes the only way to rescue the economy is to get the big banks to lend money again. But he’s dead wrong. Most consumers cannot and do not want to borrow lots more money. They’re still carrying too much debt as it is. Even if they refinance their homes – courtesy of the Fed flooding the market with so much money mortgage rates are dropping – consumers are still not going to borrow more. And until there’s enough demand in the system, businesses aren’t going to borrow much more to invest in new plant or machinery, either." Robert Reich, "We Need More Stimulus, Not More Bailout," April 14, 2009.

5. "J.P. Morgan Chase this morning reported first-quarter earnings of $2.1 billion, as it profited from the availability of cheap funding from depositors and the federal government. The results offered the latest indication that some banks are beginning to overcome the weight of massive losses on their outstanding loans, following reports of first-quarter profits from Goldman Sachs and Wells Fargo." Binyamin Appelbaum, "J.P. Morgan Chase Reports Strong 1Q Earnings," Washington Post, April 16, 2009.

6. "With only $110 billion remaining in the TARP bailout fund, all signs are that Tim Geithner is preparing to return to Congress seeking more bailout money. . . . Congress won’t be happy but in the end it will cough up another 300 to 500 billion." Robert Reich, "We Need More Stimulus, Not More Bailout," April 14, 2009.
______________

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

# # #

Obama's Potential Wall Street Downfall

April 12, 2009, 11:00 a.m. (with thanks to Sherman Johnson and Stephen Phillips for the cited articles); April 14, 2009, 8:00 (addition of Noam Chomsky's "Democracy Now!" interview, April 13, and Simon Johnson's BBC interview)

The Pebble in My Shoe
(brought to you by FromDC2Iowa.blogspot.com*)
I have a pebble in my shoe.

Talk about "a good walk spoiled" -- the characterization of golf widely attributed to Mark Twain (though scholars are unable to confirm he ever said it).

President Obama and Wall Street

"It is the extent to which he has selected, put in place, and supported the decisions of, an economic team that even the most casual observer would have to conclude is far more interested in bailing out their super-wealthy buddies on Wall Street than the suffering millions on Main Street."

It's the uncomfortable feeling I have in my otherwise joyous springtime walk with our President, Barack Obama.

On the one hand, I'm still thrilled by the man -- and his wife. He's "brilliant" -- in both the academic and the Irish sense of the word. His ability to win back from the world the respect for America that we once enjoyed. His willingness and ability to reach out to everyone from Congressional Republicans to Iran -- whether or not his gestures are returned in kind. His very full schedule of events and public appearances -- many of which have to have been first-time experiences for him -- and virtually all of which have been error-free hits. His mastery of the English language and skill in stringing it into complete sentences. His judgment. His continuing ability to inspire us, notwithstanding a global economic collapse and two self-defeating wars. His "cool."

He's caused me to reflect back on my own first presidential appointment as Maritime Administrator when I was 29, after my first experience at being called to the Oval Office by the President of the United States. Immediately on my desk was the need to design and launch a world tour for the world's first nuclear-powered merchant ship -- ultimately providing my first encounter with royalty: the kings of Norway, Denmark and Sweden. The first international conference I ever attended (a secret NATO group) required my chairing the sessions. My only prior contact with higher education was limited to my own degrees and experience as a young law professor at UC Berkeley; now I found myself responsible for a four-year college, the Kings Point Maritime Academy. My first congressional testimony was only weeks before, at my own Senate confirmation hearings. The list of firsts continued on for many weeks.

All of that was as nothing compared to Obama's first three months, but it does give me some capacity for empathy -- and awe.

He has so much ability, so much potential. If only we had a Senate and House made up of men and women worthy of his leadership. If only our corporate and other institutional leaders were willing to put the country's best interests ahead of their own personal financial enrichment.

But along with all that admiration and awe is that irritating little pebble in my shoe.

It is the extent to which he has selected, put in place, and supported the decisions of, an economic team that even the most casual observer would have to conclude is far more interested in bailing out their super-wealthy buddies on Wall Street than the suffering millions on Main Street -- with a price tag, not incidentally, in the trillions of taxpayer dollars put on my great granddaughter's credit card.

I've written about this at length, as the list of links to prior blog entries at the bottom of today's entry bears witness.

But it's clearly not just me. There is a rising tide of cynicism throughout our country on this score, from all positions on the political spectrum, that causes me concern that it could end up drowning all that wonderful potential with which Obama arrived at the White House in January.
_______________
Nobel Prize-winning Economist Paul Krugman

Nobel Prize winning economist and New York Times columnist Paul Krugman is among those who think the Administration has been taking us down the wrong economic road -- to the profit of those who caused the problems, and the loss of America's taxpayers. As he puts it, in excerpts from the first of the three examples I quote below,

"the financial industry still has a lot of friends in high places."

Indeed, it does.

[M]y sense is that policy makers are still thinking mainly about rearranging the boxes on the bank supervisory organization chart. They’re not at all ready to do what needs to be done — which is to make banking boring again.

Part of the problem is that boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.

Can they be persuaded otherwise? Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come.

Paul Krugman, "Making Banking Boring," New York Times, April 10, 2009.
_______________
Noam Chomsky

If you haven't heard of retired MIT professor Noam Chomsky it's probably because you've been listening and watching America's mainstream media.

The New York Times has said of Chomsky, "Judged in terms of the power, range, novelty and influence of his thought, Noam Chomsky is arguably the most important intellectual alive today." Wikipedia reports, "Chomsky was voted the leading living public intellectual in The 2005 Global Intellectuals Poll conducted by the British magazine Prospect. He reacted, saying 'I don't pay a lot of attention to polls.' In a list compiled by the magazine New Statesman in 2006, he was voted seventh in the list of 'Heroes of our time.'" "Noam Chomsky," Wikipedia.

In Amy Goodman's "Democracy Now!" interview April 13, 2009, she described him as "one of the most important dissident intellectuals of our time . . . a world-renowned linguist, philosopher, social critic, and Institute Professor Emeritus at the Massachusetts Institute of Technology. Among his many books over the past few decades are Hegemony or Survival: America’s Quest for Global Dominance, Manufacturing Consent: The Political Economy of the Mass Media, Profit over People: Neoliberalism and Global Order, and Human Rights and American Foreign Policy. There’s a great collection of his work, just out now, edited by Anthony Arnove, called The Essential Chomsky." "Noam Chomsky on the Global Economic Crisis, Healthcare, US Foreign Policy and Resistance to American Empire," Democracy Now!, April 13, 2009.

Odd, wouldn't you say, that such an individual is not at least consulted by Washington's most powerful, not at least given a seat at the table, not testifying before Congress, that he is not a regular participant in the Sunday morning talk shows?

The link immediately above will take you to a video of Goodman's interview with Noam Chomsky. After watching it you'll have some understanding of why we have to rely on Amy Goodman to bring us those who have an alternative view of our life, politics and economy. Chomsky demonstrates his usual calm, understated, straight-forward explanation of what's going on, pulling together into a single, understandable world view, supported with both historical and current references, explaining why you and I are right to be angry and cynical, and why Obama's so far at odds with reasonable, centrist populism.

If you'd prefer to read a transcript it's also provided there.

Here's an excerpt:

Actually, the business press just had some interesting things to say about this. Bloomberg News, you know, main business press, had an article in which they reviewed the records of the people who Obama invited to his economic summit. I think it must have been last November or December. They just reviewed the record. I think there were a couple dozen of them. People on the—you know, people like, say, Stiglitz, Krugman, they were never even allowed close to it, let alone anyone from the left or labor and so on, given token representation. So they went through the records, and they concluded that these people should not be invited to fix up the economy. Most of them should be getting subpoenas because of their record of accounting fraud, malpractice and so on, and helping bring about the current crisis.

You may disagree with Chomsky's take on things. Many do. But you owe it to yourself to at least listen to what he's saying -- especially his dramatically different alternative scenarios for America's future if our financial oligarchy is successful in continuing in power (an understanding consistent with that of Simon Johnson, below). And if you still disagree with him you need to ask those two basic questions: "What do you mean? And, How do you know?" What are the historical and current references that support your view over his?
_______________
Former IMF Economist Simon Johnson

"The finance industry has effectively captured our government . . .. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform."

The May 2009 edition of The Atlantic contains a particularly insightful article by a former chief economist for the International Monetary Fund who sees similarities between causes of third world countries' economic collapse and that of the United States: Simon Johnson, "The Quiet Coup."

Substantial excerpts from that article (though a small portion of its total content) are set forth below. You can also listen to Simon Johnson's 6-minute BBC interview.

Here is The Atlantic editors' summary of the piece:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government — a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Simon Johnson, "The Quiet Coup," The Atlantic, May 2009. Needless to say, the entire article is well worth a read. The parallels to our economy are scary. Meanwhile, here are some excerpts:

Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense . . .. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise. . . .

Squeezing the oligarchs . . . is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them. . . .

[V]arious policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. . . .

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. . . .

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

. . . [T]he principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. . . .

[I]t was never clear (and still isn’t) what combination of interests was being served, and how. . . . This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. . . . Many observers suspected that the purpose [of the original Paulson plan] was to overpay for those [toxic] assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. . . . [T]he convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official . . . (and a Goldman alum) told Congress . . . [the price] makes sense for the investors and . . . for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. . . .

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary. . . .

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. . . .

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank . . .. Under these conditions, cleaning up bank balance sheets is impossible. . . .

[A] government-managed bankruptcy procedure . . . would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse. . . .

The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. . . .

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. . . .

Anything that is too big to fail is too big to exist. . . .

The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting. . . .

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

_______________
Attorney Sean Olender

"To 'fix' all these problems . . . the Obama administration [has] chosen people (or their accomplices) who stole from the public.

Finally, here are excerpts from an article by Sean Olender, a San Jose writer and attorney, from the San Francisco Chronicle:

President Obama must stop the bailouts and start the prosecutions. It's time to focus on anti-poverty programs to protect the growing unemployed from hunger and homelessness. Stealth payments to billionaire bondholders must cease immediately. . . .

Debt became America's growth industry.

The scheme collapsed because Americans' wages weren't sufficient to pay the interest on existing debts. The only way out of this is to tighten our belts and pay down debt, the opposite of what our bank-owned government is advising.

The administration and the banks keep talking about a credit crisis, but there isn't one. . . . If you want a mortgage and can afford to pay it back, you can borrow at low rates today. . . . But most Americans don't want more debt because it is a debilitating path to poverty. The average American family already pays 14 percent of annual income in interest to banks. . . .

The endlessly recycled plan to buy "troubled" assets . . . seeks for taxpayers to buy worthless assets at high prices to absorb rich investors' losses. That's it. . . . There is no goal beyond that . . . : keep rich people from taking losses. . . .

Imagine the president saying, "Debt is the lifeblood of our economy. We desperately need to get more American families deeper in debt." That's what he means, and that's what these bailouts hope to do. . . .

Imagine you bet $500,000 on a stock and it dropped to $20,000. If you owned Treasury Secretary Tim Geithner, he'd get on TV and explain that if the government didn't buy your shares for $500,000, the economy would suffer because you couldn't invest anymore. He'd say the "free market" isn't pricing the stock "right," and we have to "help" the market with taxpayer money to make sure you get the "right" price. . . .

Worsening economic figures are being used to confirm that more bailouts are needed rather than that previous ones might be failing. The logic is much like medieval blood letting: The patient died because we didn't drain enough of his blood.

The promise of more bailouts also keeps everyone from doing what's necessary. Millions of houses sit empty, open to vandalism and destruction, while millions of Americans live in cars or on the street. Our tax money is given to banks and speculators to hold houses empty. . . .

[T]he bailout did nothing to stop foreclosures from going through the roof. . . .

To "fix" all these problems . . . the Obama administration [has] chosen people (or their accomplices) who stole from the public. That's why no one has been prosecuted. Would former Treasury Secretary and Goldman Sachs chief Henry Paulson have pressured for an investigation of Goldman Sachs? Right.

As president of the Federal Reserve Bank of New York, current Treasury Secretary Geithner had a front-row seat during the run-up to the crisis and watched for years while pushing a "no regulation" policy. Why? At that time his friends were winning their bets and making a lot of money.

Why didn't Bush or Obama pick Brooksley Born (the Commodity Futures Trading Commission chair who tried to regulate credit default swaps) or Harry Markopolos (the whistle-blower in the Madoff scandal) to serve as treasury secretary or chairman of the SEC? Because Born and Markopolos are technically competent and possess integrity. Banks would tolerate neither quality in an administration official. . . .

The solution is law enforcement, not handouts. On Jan. 31, 2009, Santa Barbara police held a 53-year-old homeless man on $20,000 bail for shoplifting $7.69 worth of soup and bread. Yet Bush did not move to prosecute a single executive at any of these banks, and Obama likewise doesn't want to be "vengeful" by investigating the crimes of investment bankers.

If the government feels lenient, can't it let alone families camping in a vacant lot in Sacramento, or homeless people stealing bread? . . .

Here are some resources:

-- "Facts and Myths about the Financial Crisis of 2008" by Patrick Kehoe and V.V. Chari. Published by the Federal Reserve Bank of Minneapolis, http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4062

-- Lists of the banks, and how much bailout funds each has received under the Troubled Assets Relief Program (TARP). http://www.financialstability.gov/latest/reportsanddocs.html

-- Insightful economic analysis by Mish Shedlock at his blog, "Mish's Global Economic Trend Analysis. http://globaleconomicanalysis.blogspot.com/ [And see his "Bernanke's Scorecard Revisited," April 11, 2009.]

Sean Olender, "'Bailout psychology' destroying the economy," San Francisco Chronicle, April 5, 2009, mp. H-2.

_______________
Pete Seeger

And lest you think this is some kind of a new phenomenon, listen to Pete Seeger's "Banks of Marble" musical explanation of the last time we were robbed big time:



And remember Paul Krugman's warning, quoted above, that if we don't get out from under Wall Street's influence we're going to be back in the dumpster again: "Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come."
_______________
Nicholas Johnson

Finally, I'll conclude with links to a number of the blog entries I've written over the past eight months -- most of which include today's theme.

Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009

Nicholas Johnson, "Terrorist Bankers," February 13, 2009

Nicholas Johnson, "Financial Crises for Dummies," February 17, 2009

Nicholas Johnson, "They're Back!!" February 20, 2009

Nicholas Johnson, "The Burden We Ought to Bear," February 23, 2009

Nicholas Johnson, "Candid Conservatism," February 27, 2009

Nicholas Johnson, "Bankers as Arsonists," March 3, 2009

Nicholas Johnson, "Don't Buy Stuff," March 6, 2009

Nicholas Johnson, "The Story of Stuff," March 16, 2009

Nicholas Johnson, "What a Mess," March 19, 20, 2009

Nicholas Johnson, "Punishment to Fit Financial Crimes," March 23, 2009

Nicholas Johnson, "Don't Trust the 'Experts,'" April 9, 2009
_______________

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

# # #

Financial Crises for Dummies

February 17, 2009, 7:20 a.m.

Financial Crises for Dummies:
An Open Letter to Secretary Geithner and Congress
(brought to you by FromDC2Iowa.blogspot.com*)
[This parable showed up in my email this morning. The author is unknown. (Given the Berlin setting it may have originated in Germany.) In any event, it's as good an explanation of how we got into this mess as I've seen.

It's also a warning to Washington that "we know what you're up to."

My solution?

1. Kill the zombie banks before they strike again; shareholders take a bath, FDIC protects depositors.

2. Let investors, not taxpayers, evaluate the value of, and buy, "toxic assets" (what an oxymoron that is!) with no government guarantees.

3. Temporarily nationalize any banks that believe they need taxpayer funds, buying their stock at current market value.

4. Break up those "too big to fail" (any bank "too big to fail" is simply too big, and too inclined to take risks likely to fail).

5. Fire the top executives (after getting back from them as much of their ill-gotten gains as possible), and then prosecute and imprison those guilty of violating any laws.

6. Distribute the assets to community banks.

7. Re-enact Glass-Steagall. (This is the 1933 Act of Congress that, among other things, prohibited bank holding companies from owning other financial companies. Its repeal, by the Gramm-Leach-Bliley Act of 1999 was a major cause of the current economic collapse.)

Why do these things? This parable explains why:]
__________
Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around and as a result increasing numbers of customers flood into Heidi's bar.

Taking advantage of her customers' freedom from immediate payment constraints, Heidi increases her prices for wine and beer, the most-consumed beverages. Her sales volume increases massively.

A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.

He sees no reason for undue concern since he has the debts of the alcoholics as collateral.

At the bank's corporate headquarters, expert bankers transform these customer assets into DRINKBONDS, ALKBONDS and PUKEBONDS. These securities are then traded on markets worldwide. No one really understands what these abbreviations mean and how the securities are guaranteed. Nevertheless, as their prices continuously climb, the securities become top-selling items.

One day, although the prices are still climbing, a risk manager (subsequently of course fired due his negativity) of the bank decides that slowly the time has come to demand payment of the debts incurred by the drinkers at Heidi's bar.

However they cannot pay back the debts.

Heidi cannot fulfil her loan obligations and claims bankruptcy.

DRINKBOND and ALKBOND drop in price by 95%. PUKEBOND performs better, stabilizing in price after dropping by 80%.

The suppliers of Heidi's bar, having granted her generous payment due dates and having invested in the securities are faced with a new situation. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor.

The bank is saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties.

The funds required for this purpose are obtained by a tax levied on the non-drinkers.


Source: David Horsey, Seattle Post-Intelligencer, March 27, 2008, DavidHorsey.com.
__________
Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009

Nicholas Johnson, "Terrorist Bankers," February 13, 2009

Nicholas Johnson, "Financial Crises for Dummies," February 17, 2009
_______________

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

# # #

Geithner's Same Old, Same Old

February 10, 2009, 1:55 p.m.

"Same As the Old Boss!"
(brought to you by FromDC2Iowa.blogspot.com*)
As I listened to Treasury Secretary Tim Geithner explain his "Financial Stability Plan" the line that kept running through my head was "Meet the new boss -- same as the old boss!" from The Who's "Won't Get Fooled Again" (lyrics from "Folk and Traditional Song Lyrics" -- the line is about 7:50 into this YouTube video):



Geithner's plan strikes me as what the Bush Administration Treasury Secretary Paulson's plan might sound like after you had run it through a public relations firm.

This is not surprising, given that Geithner was working with Paulson on that earlier taxpayer giveaway program. Paulson who spent 32 years at Goldman Sachs and who is reported to have left with a net worth of $700 million. Goldman Sachs, where Geithner went to get his chief of staff, Mark Patterson. Patterson who, after working for Majority Leader Tom Daschle, signed on as Goldman Sachs' Washington lobbyist from 2005 through April 2008 -- thereby violating not only Obama's campaign promise to not hire lobbyists, but the subsequently adopted exception that lobbyists could join his Administration only if they worked in areas unrelated to their previous lobbying. Justin Rood and Emma Schwartz, "Another Lobbyist Headed into Obama Administration; Leaves Critics Questioning the President's Commitment to Changing Washington," ABC News, January 27, 20089.

[And see: "Even before the revelation of his tax delinquency, the new Treasury secretary was a dubious choice to make this pitch. Geithner was present at the creation of the first, ineffectual and opaque bank bailout — TARP, today the most radioactive acronym in American politics. Now the double standard that allowed him to wriggle out of his tax mess is a metaphor for the double standard of the policy he must sell: Most “ordinary Americans” still don’t understand why banks got billions while nothing was done (and still isn’t being done) to bail out those who lost their homes, jobs and retirement savings. . . . [T]he political problems caused by Geithner’s tax infraction are secondary to the larger questions raised by his past interaction with the corporations now under his purview. . . . [H]e still has not satisfactorily explained why, as president of the New York Fed, he failed in his oversight of the teetering Wall Street institutions. Nor has he told us why . . . he secured a waiver from Obama to hire a Goldman Sachs lobbyist as his chief of staff . . . [or]why Lehman Brothers was allowed to fail while A.I.G. and Citigroup were spared." Frank Rich, "Slumdogs Unite!" New York Times, February 7, 2009.]

Geithner didn't sell me, and judging by the near-5% drop in the S&P 500 following his presentation he didn't sell the financial community either -- though I rather suspect for different reasons.

["Stock prices fell sharply on Tuesday after Treasury Secretary Timothy F. Geithner unveiled the government’s latest efforts address the troubled banking system, a plan whose price tag could reach $2 trillion in money from the Treasury, Federal Reserve and private sector. . . . Despite the size and scope of the Obama administration’s plans, investors said Mr. Geithner’s proposal raised more questions than it answered. The way out of the financial crisis, analysts said, looked as murky as ever." Jack Healy, "Stocks Slide as New Bailout Disappoints," Reuters/New York Times, February 10, 2009.]

Tell me why (to use some hypothetical numbers), if you could buy an entire bank, buy up all its stock at market prices, for say, $15 billion, why would you make the executives who brought it to near bankruptcy a gift from the U.S. Treasury of $25 billion (by buying its "toxic assets") and then have the Federal Reserve "loan" it an additional $50 billion? (In November 2008 the government agreed to cover up to $306 billion worth of Citigroup losses. See editorial immediately below.

And please note that U.S. taxpayers' dollars at risk are currently approaching $10 trillion dollars! Mark Pittman and Bob Ivy, "U.S. Taxpayers Risk $9.7 Trillion on Bailout Programs," Bloomberg.com, February 9, 2009 ("Senator Byron Dorgan . . . said on the Senate floor Feb. 3, 'Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?' . . . The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.")

["[I]n a few months last year, the government overpaid for banks’ troubled assets by some $78 billion — a redistribution, in effect, of taxpayer dollars to the banks and their shareholders. And for what? The system . . . has since edged up to the abyss again. . . . Putting taxpayers first means that in exchange for shoring up the banks, the government must receive ownership stakes . . .; de facto, taxpayers would own the bank. . . . Contrary to stereotype, in countries that have successfully weathered serious bank crises, including the United States, such a takeover is preferable to leaving firms in the hands of those who have so badly mismanaged them." Editorial, "Bank Bailout, Redux," New York Times, February 7, 2009.]

Ah, you say, temporary nationalization won't work because the government can't run banks. Putting aside the fact that governments have done so in other countries, if our government can't run banks then I guess there's no one in this country who can. Because the only folks who have removed all doubt as to their inability to run banks are those in the private sector who have been running them into the ground.

Geithner apparently did sell President Obama -- who cannot now dodge the fact that this is his plan. The Times reports this morning that its elements emerged following "a spirited internal debate," a debate that Geithner won and David Axelrod and others lost -- a debate that we must assume could only have been judged by Obama, who has proclaimed himself as being, to borrow Bush's self-characterization, "the decider." Stephen Labaton and Edmund L. Andrews, "Geithner Details New Bank Rescue Plan," New York Times, February 10, 2009.

Even Geithner acknowledged, "I want to be candid: this comprehensive strategy will cost money, involve risk, and take time. . . . We will have to adapt it as conditions change. We will have to try things we’ve never tried before. We will make mistakes. We will go through periods in which things get worse and progress is uneven or interrupted." (The full text of his presentation is available as "Remarks of Treasury Secretary Timothy Geithner Introducing the Financial Stability Plan," February 10, 2009.)

The Times' story continues:

Some of President Obama’s advisers had advocated tighter restrictions on aid recipients, arguing that . . . the administration did not demand enough sacrifices from the companies that receive federal money. . . .

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod . . ..

Officials . . . expect to return to Congress for more money later this year. . . .

The $500,000 pay cap for executives at companies receiving assistance . . . applies only to very senior executives. Some officials argued for caps that applied to every employee at institutions that received taxpayer money.

Abandoning any pretense about limiting the moral hazards at companies that made foolhardy investments, the plan also will not require shareholders of companies receiving significant assistance to lose most or all of their investment. Some officials had suggested that the next bailout phase not protect existing shareholders. . . .

Nor is the government announcing any plans to replace the management of virtually any of the troubled institutions, despite arguments by some to oust current management at the most troubled banks.

Finally, . . . the administration . . . will not dictate to the banks how they should spend the billions of dollars in new government money.

And for all of its boldness, the plan largely repeats the Bush administration’s approach of deferring to many of the same companies and executives who had peddled risky loans and investments at the heart of the crisis and failed to foresee many of the problems plaguing the markets.

There you have it: what Geithner himself acknowledges is a costly, risky plan taking us to times when things will get worse, with mistakes along the way.

It is a plan that gives trillions of taxpayers' money to the same guys who created the problem, who have shown themselves to be ethically and intellectually incapable of solving it, and it does this without replacing any of them, with no restraint on what they do with the money, little or no loss to their shareholders, no requirement that they make loans, and no limit on what most of them can be paid with our money or how much of it goes to private jets and office redecoration -- and as an afterthought less than 5% that may someday be devoted to helping those facing mortgage foreclosure.

In short, this proposed giveaway to the banking and investment industries is -- like the Obama Administration's recent adoption of the Bush approach to rendition and torture -- a plan that, as the Times says, "largely repeats the Bush administration’s approach." [See, e.g., "Justice Department Stands Behind Bush Secrecy in Extraordinary Rendition Case," ACLU, February 9, 2009 ("The Justice Department today repeated Bush administration claims of 'state secrets' in a lawsuit against Boeing subsidiary Jeppesen DataPlan for its role in the extraordinary rendition program").]

"Meet the new boss -- same as the old boss!"
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Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009

Nicholas Johnson, "Geithner's Same Old, Same Old," February 10, 2009
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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Quick Fix: Support Jobless, Not Bankers

February 7, 2009, 10:30 a.m.

Banker Bailout Billions Not the Answer
(brought to you by FromDC2Iowa.blogspot.com*
There's even more reason this morning [Feb. 7] to make the economic recovery case I've been urging in these blog entries ever since the potential consequences of our downturn became obvious to all.

In a failing economy, 70% of which depends upon consumer spending, once the government decides to infuse trillions of dollars into the economy the first place to put it is in the pockets of those who will spend it: the jobless.

Yesterday we learned we now have 598,000 more of them among us than we had a month ago. ("[T]he Labor Department announced that 598,000 jobs were lost in January. The contraction in jobs is already steeper than in any other recession since at least the early 1980s. And economists warn that several more shoes are about to drop . . .." Carl Hulse and David M. Herszenhorn, "Senators Reach Accord on Stimulus Plan as Jobs Vanish," New York Times, February 7, 2009.)

Adequate and additional funding for the unemployed does not require the creation of new programs (they're already in existence), can distribute the money faster than almost any other way, provides money to those most likely to spend it (rather than invest it), and to spend it almost immediately (rather than months from now), with a multiplier effect of roughly 1.7 in economic impact (compared to 0.27 for tax cuts), in the single largest economic sector (consumer spending).

And for those who look at economic recovery issues from a moral, ethical, humanist, communitarian, sociological or religious perspective, clearly those who are down on their luck through no fault of their own are the ones most deserving of our government's assistance. The point is, even if these considerations are ignored, and one just looks at the numbers like a steely-eyed banker, caring for the jobless is also the most cost-effective way out of the hole we're in.

But it's not quite that easy, as Christopher S. Rugaber's AP story explains. Christopher S. Rugaber, "Recession exposes holes in jobless benefit system; Holes exposed in jobless safety net as more than 5 million go without unemployment benefits," Associated Press/Yahoo! Finance, February 6, 2009.

o Half or more Of the 11.6 million currently jobless Americans aren't covered.

o Some earned too little to qualify -- in part because of how their earnings are calculated.

o Part-time workers aren't covered.

o Benefits run out (after, say, 26 weeks) long before new jobs appear, since the program was designed for those "between jobs" during brief recession dips not the massive, continuing joblessness of a major global depression.

o The programs are funded by employers, now contributing less.

o They are administered as state, rather than federal, programs; states are running out of money, and under-staffed to handle the rapid increase in applications.

Here are some excerpts from Rugaber's story:

The government safety net designed to protect laid-off workers from financial catastrophe is falling short, leaving nearly half the 11.6 million jobless Americans without unemployment benefits.

The shortcomings are fueling the recession as an increasing number of workers fall through the cracks and curtail spending. The trend highlights what economists say is a growing need for a 21st century makeover of a program started in the depths of the Great Depression.

Among the key problem areas:

-- There are many more part-time workers now than in 1935, but the program only covers those looking for full-time work.

-- Many eligible jobless Americans are shut out because states use an outdated system for calculating their income, making it more difficult to meet requirements.

-- Unemployment spells increasingly last longer than the usual 26-week jobless benefits program.

Jobless benefits are essentially mini-financial stimulus packages for struggling American families. Helping laid-off breadwinners continue to purchase goods and services until they find new jobs ultimately bolsters the economy and makes further layoffs less likely. . . .

[J]obless benefits . . . vary by state but average about $300 a week. . . .

[Covering] part-time workers and more low-wage workers . . . could extend benefits to 500,000 people . . ..

But more fundamental reforms are needed to address the system's underlying weaknesses, several economists said.

Many of the 5.2 million unemployed Americans without jobless benefits already ran through their 26 weeks of assistance. The program, funded by states through taxes levied on employers, has been no match for a recession that is frustrating the ambitions of even the most qualified job hunters.

That is forcing families to cut back on spending and dip into savings, if they have any. . . .

Gus Faucher, director of macroeconomics at Moody's Economy.com, said if the government provided benefits to more workers, it would reduce the severity of the recession. . . .

Before the emergency extensions, only about one-third of unemployed Americans were receiving benefits, a level that has declined steadily since coverage was at its peak in 1975.

The proportion of workers covered usually increases during recessions as Congress typically enacts extended benefits. Some experts argue that extensions should be automatic during downturns to avoid politicizing them. . . .

High demand -- and insufficient funding -- has made it difficult for many unemployment offices to keep up. Last month, online systems for requesting benefits in three states crashed under the crush of claimants. . . .

At least a half-dozen states have had to borrow money from the federal government to pay benefits after exhausting their unemployment insurance trust funds. . . .

In decades past, layoffs during recessions were often short-lived and workers were eventually rehired by the same company. Today, companies are more likely to eliminate jobs for good, either by shutting down plants or moving them abroad, according to a study by the Brookings Institution.

The result: Unemployment spells tend to be longer . . ..

Many states don't count workers' most recent 3 to 6 months of wages . . . [S]hortchang[ing] low-income workers, who may not be able to prove they earned the minimum required for benefits. . . .

In 21 states that have begun calculating eligibility using up-to-date wages, roughly 40 percent of those who initially didn't qualify were able to do so . . ..

Jeffrey Kling, an economist at the Brookings Institution, says . . . the government should temporarily replace part of the income workers lose when they take lower-paying jobs after a layoff.

The stimulus package provides some little nods in the direction of the jobless, but is a far cry from solutions. Once these problems are fixed, once all of the jobless are offered financial support, job training and job opportunities, once we've at least begun to expand for them the immediate relief of health care and ways to hang onto their homes, then and only then should we be considering any additional hundreds of billions for bankers.

Presumably, the Republicans in the House and Senate will support me on this. After all, their objections to some elements of the Obama stimulus package were that they didn't think they would create jobs, that any impact on economic stimulus would be too far in the future, or that they had nothing to do with stimulating the economy, and that taken together they involved far too much total money.

Surely those concerns are all equally applicable to the additional hundreds of billions Treasury Secretary Geithner is about to propose for his banking friends. Those billions not only won't create jobs, they will not even require the banks to make loans! And given the $2.4 trillion the Fed has already provided the banks, and the $350 billion in TARP funds, the amounts Geithner is talking about far, far exceed anything ever considered for the jobless, or for jobs programs.

Stephen Labaton, "New Plan to Help Banks Sell Bad Assets," New York Times, February 7, 2009 ("[T]he Obama administration has settled on a plan to inject billions of dollars in fresh capital into banks . . . [that] will not require banks to increase their lending. That is despite criticism that institutions that already received money from the Troubled Asset Relief Program, or TARP, either hoarded it or used the funds to acquire other banks. . . . The goal is to relieve the banks of their worst assets . . ..")

There may be more details tomorrow, but I still intend to measure them by the standards I set out at the end of the blog entry two days ago. Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009.
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Related Blog Entries on Global Economy and Bailouts
Nicholas Johnson, "Who's The Reason?" September 5, 2008

Nicholas Johnson, "How Much Do You Owe the Chinese?" September 6, 2008

Nicholas Johnson, "Taxpayer Rescue," September 15, 2008

Nicholas Johnson, "Global Finance: The Great Fountain Pen Robbery," September 21, 2008

Nicholas Johnson, "Alternatives to 'The Plan,'" September 28, 2008

Nicholas Johnson, "Better Alternatives to Congress' Bailout Plan," October 2, 2008

Nicholas Johnson, "Can We Trust Our Bankers?" October 29, 2008

Nicholas Johnson, "It's the Economy," November 7, 2008

Nicholas Johnson, "Jobs, Not Unemployment, Key to Recovery," November 8, 2008

Nicholas Johnson, "Trust Your Instincts, Auto Bailout's Terrible Idea," November 14, 2008

Nicholas Johnson, "Auto Bailout: An Open Letter to Congress," November 19, 2008

Nicholas Johnson, "A Trillion Here, a Trillion There," November 20, 2008

Nicholas Johnson, "FromDC2Iowa's Weekend Edition," November 21, 2008 ("The Answer to Global Economic Collapse" and "Auto Bailout: 'Show Me the . . . Plan'")

Nicholas Johnson, "Citigroup Deal Stinks," November 25, 2008

Nicholas Johnson, "Only Select Few Are Thankful for Trillions," November 27, 2008

Nicholas Johnson, "Auto Loan Makes Too Few Dollars Even Less Sense," December 4, 2008

Nicholas Johnson,"Quick Fix for the Economy," December 12, 2008

Nicholas Johnson, "You Know It's Serious When We Start Laughing," December 15, 2008

Nicholas Johnson, "A Car in Every Garage," December 16, 2008

Nicholas Johnson, "Forget Madoff, Focus on Bernanke," December 17, 2008

Nicholas Johnson, "Of Theaters and Automobiles," December 20, 2008

Nicholas Johnson, "There's Bad News and . . . and . . .," December 21, 2008

Nicholas Johnson, "Et Tu, Toyota?" December 22, 2008

Nicholas Johnson, "Revolting Developments," December 23, 2008

Nicholas Johnson, "First Things First," January 8, 2009

Nicholas Johnson, "Why We Should 'Point Fingers' and 'Look Backwards,'" January 13, 2009

Nicholas Johnson, "Fool Me Twice," January 14, 2009

Nicholas Johnson, "Economic Sorrows and Solutions," January 27, 2009

Nicholas Johnson, "No More for Wall Street!" February 1, 2009

Nicholas Johnson, "Hang Onto Your Wallet," February 5, 2009

Nicholas Johnson, "Quick Fix: Support Jobless, Not Bankers," February 7, 2009
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source -- even if I have to embed it myself. -- Nicholas Johnson

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