OurFuture.org Blogs: Zach Carter

Will Weak Reforms Bring On Another Crisis?

Zach Carter — Tue, 16 Mar 2010 10:57:06 -0700

Senate Banking Committee Chairman Christopher Dodd, D-Conn., unveiled his latest financial reform proposal on Monday, and the stakes for the new legislation couldn’t be higher. After consumer groups raised a major ruckus, Dodd has dropped one of his most egregious concessions to the bank lobby—cutting enforcement authority from the proposed Consumer Financial Protection Agency (CFPA). That’s good news: Without a major regulatory overhaul, the U.S. economy’s destructive boom and bust cycle will start all over again.

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We’ve been down this road before. The Enron fiasco should have served as a wake-up call for policymakers, but instead, the weak federal response to Enron’s major fraud helped pave the way for the current economic slump.

What does Enron have to do with the crisis?

As Megan Carpentier emphasizes for The Washington Independent, one of the key “reforms” Congress enacted in the Enron aftermath was a law requiring every CEO to sign-off on their company’s accounting statements—but it has accomplished almost nothing.

Enron collapsed due to accounting fraud. Its executives weren’t stupid or careless—they made their money by engaging in deliberate and coordinated acts of illegal deception. But CEOs of companies like Enron had always been able to deny that they knew about the shenanigans that were playing out in their accounting departments. By forcing CEOs to sign off on their accounting statements, Congress was attempting to “deny them plausible deniability,” as Carpentier puts it.

But accounting fraud has plagued the U.S. economy, even after the Enron scandal. It also plays a major role in the Wall Street crisis. A recent court report from Lehman Brothers’ bankruptcy examiner reveals that the company arranged a series of complicated transactions to hide $50 billion in debt, making Lehman appear healthier than it was. By hiding this debt, Lehman was able to make bigger bets on the mortgage market. The defense issued by Lehman CEO Richard Fuld? He apparently didn’t know the accounting hijinks were happening

An epidemic of fraud

Most U.S. policymakers are still having a hard time coming to grips with the fact that our financial system is rife with fraud at almost every level. Writing for AlterNet, Joe Costello reports on a recent Roosevelt Institute conference featuring several major economic luminaries. Costello argues that some of Wall Street’s biggest problems were driven by run-of-the-mill fraud. And a key vehicle for this fraud, Costello notes, was the derivatives market—the same market that allowed Enron to perpetrate its own frauds. Many of the scams aren’t even particularly new or creative. They’re simply the same cons that helped usher in the Great Depression.

“If we’re going to get our economy up and running again, the first thing we’re going to have to do is end the fraud,” Costello writes.

Protecting Whistleblowers

But astonishingly, even after the worst financial crisis in history, bigwig bankers have been able to avoid fraud charges and investigations. Even when the Justice Department went after Swiss banking Giant UBS for a massive tax evasion scheme, they let the company’s U.S. executives off the hook and instead jailed the very whistleblower who told the government about the fraud.

The whistleblower, Bradley Birkenfeld, is by no means innocent of wrongdoing—he even smuggled diamonds in a toothpaste container for a wealthy UBS client. But as Corbin Hiarr notes for Mother Jones, jailing the man who blows the whistle sends exactly the wrong message to anybody in Big Finance who recognizes a problem. Not only will your employer come at you with everything it has, but the government you aid will actually send you to prison. The fraudsters you finger get to retire to the Caymans.

This is part of the reason that successful financial reform is not just what the rules are, but who gets to enforce them. There were many reasonable rules against predatory lending that bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency (OCC) could have used to thwart the financial crisis early on, but neither agency was interested in doing so. They were more concerned with short-term banking profits, and up until 2007, sketchy accounting was allowing banks to book big gains on the subprime market.

Why we need a CFPA

That’s why all the way back in June of 2009, President Barack Obama proposed establishing a CFPA focused exclusively on defending consumers against banks. With no concerns for bank profitability, CFPA regulators could go after unfair practices and fraud because they were wrong, regardless of what they did for bank balance sheets.

The proposal was watered down significantly in the House, as Kai Wright notes for The Nation, and just a week ago it appeared that Dodd was ready to completely torpedo the new regulator in an effort to craft bipartisan support for a so-called “reform” bill.

He’s backed off since then, but without strong enforcement authority, nothing is gained—the same corrupt regulators will simply continue to look the other way. But Dodd would still house the new agency at the Federal Reserve. Dodd insists the Fed would have no authority over the CPFA, but if that were the case, why would he introduce the provision at all?

“Reform in name alone will be useless to both consumers and politicians,” writes Wright.

Strong financial reform is overwhelmingly popular. While it’s good to see Dodd backing away from some of the gifts he’d previously proposed to bank lobbyists, progressives must keep the pressure high to ensure that financial reform is strengthened as it moves through the Senate.

It’s easy for a corrupt lawmaker to vote against a weak bill: He can always plead that the bill wasn’t good enough and be right. But serious, popular reform is not so easy to oppose. If Dodd and the Democratic leadership make the politicians backed by the bank lobby—that’s literally every Republican, plus a handful of conservative Democrats—stand up and vote against a good bill, many of them will have to choose between their lobbyist friends and their political future.

This is a project of The Media Consortium, a network of leading independent media outlets. This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium.

The Rising Toll Of Wall Street's Global War

Zach Carter — Tue, 23 Feb 2010 06:12:49 -0800

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Over the past thirty years, Wall Street has waged a steady war against governments around the globe, convincing policymakers of various ideological stripes that whatever raises profits for bankers and traders will be good for the rest of society. It's a very simple and appealing portrait of how the world works. Unfortunately, it's completely wrong.

Profiting from hunger

In an interview with AlterNet's Terrence McNally, economic luminary Raj Patel explains the connection between widespread global poverty and wild Wall Street profits. Markets are defined by a set of rules—if those rules completely disregard social welfare, then the participants in those markets will ignore them as well. When traders can make a quick buck speculating on the price of rice, they will, even if that speculation drives up the price of a basic necessity and makes people go hungry.

We've known this for a long time, but as Patel illustrates, governments have allowed financial bigwigs to rewrite the basic rules of the road so that Wall Street can extract profits from anything—even hunger. That process created several crises in the developing world over the past few decades, and has now ravaged the economies of the United States and Europe. As Patel notes:

By basically gaming the system with regulations -- that they authored -- which encouraged a certain kind of playing fast and loose with the numbers, it was possible through some creative accounting for huge amounts of systematic risk to be kicked off into the future and ignored. And of course when the catastrophic risk was realized, everyone ran for the hills and started demanding public support.

Financial turmoil in Greece

This political sleight-of-hand is demonstrated by the looming fiscal crisis in Greece. As Richard Parker explains for The Nation, Goldman Sachs colluded with prior Greek administrations to hide the nation's fiscal situation from both its own citizens and investors (Parker is an adviser to current Greek Prime Minister George Papandreou). Goldman was not interested in fair play—it was interested in making money off of the Greek government in any way it could. If that meant actively sabotaging the market by hiding important information, well, Goldman didn't care.

First Greece, then ...

Now that this budget façade has been stripped away, Goldman and other investors are now profiting from making things very difficult for Greece. As Matthew Yglesias explains for The American Prospect, the rational, profit-maximizing choices of investors are now actively helping to drive Greece into a default that hurts everyone:

When Greece starts looking shaky, the interest rate it needs to pay on its deficit goes up, which makes the country look even shakier. This cycle can push a vulnerable country into a default situation.

Various Greek administrations clearly bear significant responsibility for the situation. Nobody forced them to get in bed with Goldman Sachs, just as nobody forced U.S. administrations to gut our financial regulatory system. But the problem in Greece is not just a problem for a single Mediterranean nation—there is very real risk that the investor "unease" could spread to Portugal, Ireland, Spain, Italy, and by extension the European Union and the global economy. The bonuses at Goldman Sachs and J.P. Morgan Chase this year were not a sign of renewed strength in the global economy.

Community Security Clubs to the rescue

So if Wall Street can't save us, what can? Our communities could play a significant role, as Andrée Collier Zaleska explains for Yes! Magazine. Zaleska profiles Common Security Clubs in Portland, Boston and Fort Lauderdale to show how people hit hard by the economic downturn are banding together to make ends meet, and organizing for political action.

"[Jared] Gardner, a busy organizer in Portland, launched four CSCs in his church, two of which were comprised almost entirely of unemployed people. By the time his own group had met five times, they were planning tours of local co-housing projects, organizing to fight locally for progressive taxation, and wondering how to bring the rest of their church into the time bank they had created."

Markets are supposed to serve human needs, not the other way around. But Wall Street isn't going to give up its stranglehold on the U.S. political process for nothing. While community-driven efforts are a good start, we need much larger actions and reform to restore balance to the global economy.

This is a project of The Media Consortium, a network of leading independent media outlets. This post features links to the best independent, progressive reporting about the economy by members of The Media Consortium. Visit the Audit for a complete list of articles on economic issues, or follow the Media Consortium on Twitter.

Don't Let Citizens United Wreck Our Economy

Zach Carter — Tue, 02 Feb 2010 07:55:13 -0800

In a landmark decision last week, the Supreme Court ruled that corporations could spend unlimited funds to influence American elections, overturning a century of legal precedent. The Court's ruling in Citizens United v. FEC undermines the integrity of the U.S. government, as President Barack Obama emphasized at his State of the Union address. But the decision also deals a damaging blow to the U.S. economy by encouraging lawmakers to write economic rules that benefit specific companies at the expense of everyone else.

The editors of The Nation lay out the High Court's hubris in no uncertain terms:

The Citizens United campaign finance decision by Chief Justice John Roberts and a Supreme Court majority of conservative judicial activists is a dramatic assault on American democracy, overturning more than a century of precedent in order to give corporations the ultimate authority over elections and governing. This decision tips the balance against active citizenship and the rule of law by making it possible for the nation's most powerful economic interests to manipulate not just individual politicians and electoral contests but political discourse itself.

Citizens United and the financial crisis

How does this ruling have any bearing on the economy? Markets are not simply the product of random interactions between consumers and producers. Even under the most radical, laissez-faire economic theories, markets are defined, coordinated and policed by the government. For the economy to function at all, we need the government to define what constitutes fair play.

But over the past few decades, we've watched Congress and the executive branch rewrite those rules of the game under heavy corporate influence, creating artificial profits for a set of favored companies with very bad consequences for the broader economy.

The U.S. banking industry serves as a prime example. Since the 1980s, banks have been spending like crazy in all kinds of elections, and getting just about anything they want in return. I interviewed Harvard University Law Professor and TARP Oversight Panel Chair Elizabeth Warren for AlterNet, and she presented a concise but unsettling economic history of consumer protection law:

Thirty years ago we had laws that put some basic fairness into the consumer credit market. Over time, the large financial institutions captured the regulators who were supposed to be the cops on the beat to enforce those laws. They also pumped hundreds of millions of dollars into Washington to make sure that no new cops were put on the beat. Without good laws, the industry started selling ever-more-deceptive products, and their friendly regulators looked the other way.

The bank lobby and the AIG bailout

In Mother Jones, Corbin Hiar reveals how even a bank that engineered a massive tax fraud scheme was able to benefit from the AIG bailout. Major financial institutions convinced Congress to block any regulation of credit default swaps (CDS) all the way back in 2000. CDS contracts were essentially insurance on the value of financial assets—if the assets lost value, banks would still get paid as if they were highly profitable.

CDS insurance encouraged banks to engage in risky mortgage lending, and allowed them to book huge profits on those risky mortgages during the housing boom, even though many of those mortgages were doomed from the get-go. AIG binged so heavily on CDS that the company was on the brink of bankruptcy in the fall of 2008. But an AIG bankruptcy would have hammered the major banks who served as AIG's betting partners, most notably Goldman Sachs. Those banks would have received just pennies on the dollar from a bankrupt AIG. But under the bailout, the New York Federal Reserve paid the banks off at full value, without demanding any concessions whatsoever.

"The credit crunch was an existential threat to every over-leveraged big bank. What's most shocking about the AIG bailout ... is that these endangered banks were able to extract such a sweet deal from the government," Hiar writes. "The banks were paid the full value of all the CDS contracts they had made with AIG—including those mortgage-backed securities they had bought when it was clear the subprime market was collapsing."

The only AIG counterparty to even consider taking CDS losses was Swiss banking giant UBS, which was negotiating a separate settlement with the U.S. government over a massive tax evasion scheme. But even the tax fraudsters at UBS ultimately received full payment on their CDS exposure, and it now appears that the Swiss bank will be able to protect its wealthy tax-evading clients.

With the AIG bailout, the corporate takeover came full-circle. The banks purchased radical deregulation in Congress, and when the deregulated banks destroyed themselves, the government paid out billions to save them. The rest of the economy was ravaged by predatory lending, and taxpayers, not bankers, footed the bill for bank losses.

Redefining corruption

So the Citizens United decision will not introduce corporate influence in elections. Instead, it takes an uneven playing field and tilts it further in the favor of corporate executives. The Roberts court didn't just open the floodgates for corporate cash in U.S. elections and call it a day. It also explicitly redefined "corruption" to give corporations—and anyone else—greater leeway to financially curry favor with politicians. Heather K. Gerken details the new definition for The American Prospect:

The most important line in the decision ... was this one: "ingratiation and access ... are not corruption." For many years, the Court had gradually expanded the corruption rationale to extend beyond quid pro quo corruption (donor dollars for legislative votes). It had licensed Congress to regulate even when the threat was simply that large donors had better access to politicians or that politicians had become "too compliant with the[ir] wishes." Indeed, at times the Court went so far as to say that even the mere appearance of "undue influence" or the public's "cynical assumption that large donors call the tune" was enough to justify regulation. "Ingratiation and access," in other words, were corruption as far as the Court was concerned.

Most of us would consider the key lawmakers ensnared in the Jack Abramoff scandal as fundamentally corrupt—Abramoff flew former Republican Whip Tom DeLay of Texas to Scotland for golfing vacations in an effort to win greater leverage over DeLay's legislative agenda. The court's ruling claims that this kind of activity is not corrupt, and bars Congress from passing any laws to counteract it. As filmmaker Alex Gibney emphasizes in an interview with Amy Goodman of Democracy Now!, the court has essentially taken Tom DeLay's corporatist philosophy and made it a piece of constitutional law.

"Tom DeLay's view is, we spend more money on potato chips than we do on political campaigns. His view would be, let the money rush down like great waters,," Gibney says. "I think the court was channeling Tom DeLay when they issued their recent decision."

Why citizens need to speak out now

So what can we do about this? As GRITtv's Laura Flanders discusses in a roundtable discussion with several progressive leaders, there will be a long fight for a Constitutional Amendment to ban corporate influence in politics. Until then, as progressive strategist Mike Lux explains, citizens will have to take an aggressive stance against Corporate America as shareholders. Corporate power is exercised by a handful of executives, but the resources that support that power come from ordinary Americans who own stock in those companies, primarily through retirement plans. By demanding that the giant firms we own do not highjack our democracy with lobbying, we can limit some of the damage from the court's recent decision.

If you liked the bank bailouts, then there's plenty for you to love about the Citizens United decision. If you didn't, then it's time to speak up.

Zach Carter writes for The Media Consortium, a network of leading independent media outlets. Visit the Audit for a complete list of articles on economic issues, or follow us on Twitter. And for the best progressive reporting on critical economy, environment, health care and immigration issues, check out The Mulch, The Pulse and The Diaspora.

The Weekly Audit: Why Accountability Matters

Zach Carter — Tue, 26 May 2009 09:05:04 -0700

With workers all over the globe trudging through a catastrophic recession, it's almost a given that governments will be battling the economic slide for a long time. Part of the effort to rebuild must involve new rules and regulations, but meaningful systems for economic accountability will be just as essential. If we do not hold the reckless executives who caused this crisis accountable for their actions, we risk regressing into similar turmoil in the near future.

We all know that times are tough, and almost all of us agree on the cause: A massive Wall Street risk-binge combined with an almost total failure of regulatory oversight. It's surprising that few meaningful criminal charges have been filed amid what may very well be the worst financial crisis in history. Bernie Madoff will likely spend the rest of his life behind bars, but the subprime mortgage brokers who specialized in predatory loans–and the Wall Street banks that bought them–have yet to face consequences in court.

In The American Prospect, Tim Fernholz details the efforts of some state-level officials to investigate and punish white-collar crime at the nation's largest financial firms. Much of the problem, Fernholz explains, results from an insane legal landscape at the federal level. Active deregulation of the financial sector, which began in the 1980s, is shielding the irresponsible risk-taking that caused the current crisis from legal penalties.

Despite these obstacles, Massachusetts Attorney General Martha Coakley and other key officials are going after some of the worst offenders, and have successfully taken action against some of the predatory profiteers, including subprime mortgage lender Fremont Investment & Loan and Wall Street icon Goldman Sachs. Coakley secured an injunction against Fremont to prevent the company from foreclosing on its borrowers, and Goldman agreed to modify $50 million in predatory mortgages.

But while Coakley's investigations may bring some much-needed relief to troubled homeowners, they're only part of the solution. If executives that approved their companies' subprime policies go through this crisis unscathed, it will be difficult to deter similar behavior in the future.

Fremont had to be sold off last year at fire-sale prices to avoid bankruptcy, but Goldman has weathered the economic downturn better than many of its Wall Street brethren. Much of the company's resiliency, however, stems from its ability to secure billions upon billions of dollars of bailout financing from the U.S. government. Over at AlterNet, Jim Hightower blasts Goldman for its multiple avenues of taxpayer support and emphasizes that only the notorious Troubled Asset Relief Program (TARP) comes with any strings attached whatsoever. While Congress attached some very modest restrictions on executive compensation to the TARP bailout, the FDIC and the Federal Reserve have provided big banks with trillions in loans and guarantees completely free of restrictions on how these perks are deployed.

Goldman received $10 billion under TARP, which the company hopes to repay soon to shrug off those CEO pay limits. When the government bailed out AIG, $12 billion of the funds were directed Goldman's way. But perhaps the greatest and lowest-profile outrage comes in the form of the FDIC's Temporary Liquidity Guarantee Program. Hightower notes that the FDIC has guaranteed $28 billion of Goldman's recently issued corporate debt without imposing any restrictions on the Wall Street giant. In short, if Goldman were to default, the government would pay off its investors. This taxpayer guarantee has allowed Goldman and many of its banking peers to secure capital at exceptionally low rates, helping the firms survive during a time when any financing is hard to come by.

Even if Goldman is able to repay its TARP money, the company remains thoroughly dependent on taxpayer assistance. Once the TARP funds are paid off, Goldman will be free to pay its executives whatever it wants—even when that salary is subsidized by American tax dollars. That's a pretty perverse definition of accountability.

Of course, botched bailouts are not unique to the financial sector. As John Nichols explains in The Nation, the terms of automaker Chrysler's bankruptcy proceeding include plans to close down manufacturing plants across the Midwest, a strategy that undermines the entire economic justification for bailout: Sparing investors pain in order to save jobs.

"Tens of billions of taxpayer dollars are being poured into Chrysler and General Motors, ostensibly to 'save' the U.S. auto industry," Nichols writes. "Yet, the companies have acknowledged that they plan to use the money to shutter factories, lay-off tens of thousands of factory workers and dramatically downsize dealership networks–at the cost of as many as 100,000 additional jobs."

Still worse, it appears that both Chrysler executives and officials from the Obama administration mislead Congress on the implications of the bankruptcy. Nichols cites a letter from Rep. Dennis Kucinich, D-Ohio, in which the lawmaker says Congress was told there would be no permanent job losses a result of the Chrysler bankruptcy filing. The very next day, plant closings were announced in Michigan, Missouri, Wisconsin, and Ohio.

Even the economic stimulus package rewarded companies with a history of recklessness. In a piece for Salon, ProPublica journalists Michael Grabell and David Epstein reveal how contractors that have paid substantial fines for violating environmental regulations, federal safety rules and laws against racism have been able to score new business with the federal government. The worst offender? A contractor known as CACI International, which has been awarded three contracts worth $1.5 million under the stimulus package, despite ties to abuses at Abu Ghraib prison in Iraq.

CACI helped hire interrogators at Abu Ghraib, but an Army investigation found that the contractor ended up employing people with "little or no interrogator experience." Abuses committed by CACI employees included dragging a handcuffed prisoner on the ground, placing a prisoner in an "unauthorized stress position," dressing a prisoner in women's underwear and lying to investigators about using dogs in interrogations, according to Grabell and Epstein.

If the government relies on criminals to build the recovery, the public is not going to get the results it needs. But the recovery is only part of the solution to the current economic crisis. If we fail to prosecute executives whose active scheming and criminal negligence brought down the global economy, we are inviting more of the same behavior in the future.

Zach Carter writes The Weekly Audit for The Media Consortium.

OurFuture.org Blogs: Zach Carter

Will Weak Reforms Bring On Another Crisis?

WEEKLY AUDITThe Global Economic Crisis

What does Enron have to do with the crisis?

An epidemic of fraud

Protecting Whistleblowers

Why we need a CFPA

The Rising Toll Of Wall Street's Global War

WEEKLY AUDITThe Global Economic Crisis

Profiting from hunger

Financial turmoil in Greece

First Greece, then ...

Community Security Clubs to the rescue

Don't Let Citizens United Wreck Our Economy

Citizens United and the financial crisis

The bank lobby and the AIG bailout

Redefining corruption

Why citizens need to speak out now

The Weekly Audit: Why Accountability Matters

WEEKLY AUDIT
The Global Economic Crisis

WEEKLY AUDIT
The Global Economic Crisis