bonuses

False Fear: Cyborgs Instead of CEOs

Leo Gerard — Mon, 28 Mar 2011 11:43:09 -0400

The nightmare for far too many is Cyborgs. The public fears HAL, the 2001 Space Odyssey computer that killed astronauts rather than forfeit its objective.

So terrified of the sentient machine, citizens overlook the allegory. The soft-spoken, reasonable-sounding HAL behaves exactly like a greed-driven, multi-national corporation. The corporate mission is profit. With 29 workers massacred in a Massey mine explosion and 11 slain in the BP oil rig explosion in just one month last year, greedy corporations have shown they’re willing to kill rather than forfeit their profit objective.

In America, the UK and Europe, the entities that should be feared -- greedy corporations -- are pulling politicians’ strings. Reckless speculation by multi-national financial corporations took down the world economy, creating the worst recession since the Great Depression. Governments – in the UK, Europe and America – used worker tax dollars to bail out the banks. Now those big banks are granting outsized bonuses and pay packages to their executives while demanding that governments balance recession-ruined budgets with cuts to social services, education, pay and pensions for government workers and worker’s rights to collectively bargaining for better lives.

Workers, students and pensioners in the UK and Europe have protested these measures for a year, from general strikes in Greece to national strikes in France. In the U.K. students, in the largest numbers since the 1960s, protested education fee increases. Last weekend, the U.K.’s Trades Union Congress (TUC) organized the March for the Alternative in which a quarter million demonstrators walked for five hours in London to protest austerity imposed on workers while corporations get breaks.

The diamond-crusted rich on both sides of the Atlantic have determined that workers and the vulnerable will pay the consequences of the bankster-caused recession. And they’re exploiting the financial crisis to strip workers of collective bargaining rights, preventing them from ever regaining what they’ve lost.

That is what’s going on in Wisconsin -- and in a half dozen other American states where right-wing legislatures and governors are passing or pressing for legislation decimating workers’ rights to collectively bargain, even after workers accepted pay cuts to help balance budgets.

The disingenuousness of these right-wing governors in blaming public employees is clear. First of all, many of the state leaders granted huge tax breaks to corporations, lowering the states’ anticipated revenues, then demanded state workers bear the brunt of filling budget deficits.

Second, many of these governors didn’t stop at demanding public workers accept pay cuts. They also insisted on terminating workers’ rights to bargain for better pay, benefits and working conditions in the future. In addition, these right-wingers are meddling in the relationship between private sector unions and corporations. They want to forbid private employers from subtracting union dues from paychecks and remitting the money to the union. And they want to pass legislation intended to bankrupt unions and to prevent them from supporting progressive candidates who would treat workers fairly and protect their rights.

This is how it played out in Wisconsin: The governor, right-winger Scott Walker, gave corporations more than $100 million in tax cuts then decreed that public workers, such as teachers, nurses and librarians, take wage and benefit concessions. And Walker threatened to send out the National Guard, a state-run militia despite the name, to quell protests. This raised the specter of the May 4, 1970 massacre at Kent State when Ohio National Guardsmen called out by the governor gunned down unarmed students protesting the Vietnam War.

Contrary to Walker’s expectations, his threat energized opposition. Repeatedly, tens of thousands of workers, students, retirees, environmentalists, religious leaders and children poured into the streets and occupied the state capitol building in Madison, Wisconsin to protest the right-wingers’ plan.

Walker’s proposal passed in the state Assembly and needed a vote in the state Senate before it could get to his desk for final signature. To prevent a quorum needed to vote on the measure, all 14 Democratic senators left the state. They became known as the “Fab 14” as they remained holed up in hotels in Illinois for weeks, trying to negotiate a less draconian measure with the governor.

Although public opinion polls showed 60 percent of Wisconsin citizens opposed cutting collective bargaining rights, although workers already had accepted the pay reductions Gov. Walker had contended were vital to balance the budget, although protestors occupied the capitol building with a sit-in and sleep-in for weeks, the right wingers devised a scheme, in a secret meeting behind doors locked to the public, to vote without a quorum to deny government workers their collective bargaining rights.

In the midst of the dispute, Gov. Walker revealed his puppet masters – the Koch brothers, owners of the Georgia-Pacific paper company, with plants in the United States and the U.K. While contending he had no time to talk to progressive leaders or union officials about his union-busting legislation, Gov. Walker jumped on the phone for 20 minutes when told the caller was billionaire David Koch. The billionaire was Walker’s second largest campaign contributor; he provided $1 million to a fund to attack Walker’s opponent, and he bankrolls the right-wing’s right-wing, the Tea Party.

Events in some other countries show it doesn’t have to be this way. Brazil just passed a law giving unions a director’s seat on each board of a state-owned company. And in Australia, progressive labor legislation has enabled unions to increase membership by 20 percent in the past two years.
There are some signs of success in U.S. workers’ struggle to stop the corporate-backed right-wing campaigns. A Wisconsin judge has halted implementation of the union-busting measure because the way conservatives passed it appears illegal. And progressives are working to recall – or remove from office – eight right-wing Wisconsin senators who voted against worker rights. They’ve pledged to mount a recall campaign against Gov. Walker as soon as it’s legally possible.

In addition, labor activists and their supports have derailed proposed anti-union legislation in Indiana and Missouri.

That’s an indication of what coordinated coalitions of citizen protesters can do. That’s an indication that organized workers with their allies can take on global capital and win.

The difference between HAL and corporations is that HAL is fictional while greedy multi-national corporations are real threats. In the end, a human defeated HAL. In democracies, workers united with their allies can take on corporations and win as well.

Life at the Top: An Endless Bowl of Bonuses

Sam Pizzigati — Fri, 28 Jan 2011 12:46:35 -0500

The latest figures on Wall Street compensation reveal a recovery that starts — and stops — at America's economic summit.

Back in the Great Depression, even at the height of America’s misery, some people made quite a bit of money. Chase National Bank chair Albert Wiggin, for instance, netted a windfall worth over $4 million after the 1929 stock market crash — the equivalent of over $52 million today — trading his own bank short.

But most of America’s rich actually saw their fortunes sink, and significantly so, during the Great Depression.

The average incomes of the nation’s richest tenth of 1 percent, calculates economist Emmanuel Saez, fell from $1,242,237 in 1928, the last full year before the Great Depression, to $737,861 in 1931, as measured in today’s dollars.

Our current Great Recession is most definitely not repeating this sinking-at-the-top history. Our rich today are more than holding their own.

On Wall Street, business has hardly ever been better, with profits this past year projected to settle at the fourth-highest all-time total. Wall Street bonuses, new data show, are enriching bankers and traders at levels not far off the records set in the go-go years right before the 2008 financial industry meltdown.

At JPMorgan Chase, news reports last week detailed, $9.33 billion in 2010 compensation will be divvied up among 26,314 employees, for a $369,651 per employee average, about the same as the $378,600 average in 2009.

But few “average” JPMorgan employees will make anywhere near that $369,651 figure. Bonuses at JPMorgan — and every other Wall Street giant — go disproportionately to top bankers and traders.

At Goldman Sachs, 35,700 employees will “share” $15.4 billion in compensation for 2010, a $430,700 average, down somewhat from 2009's $498,246 average. For Goldman execs, not to worry. The $15.4 billion 2010 pay total doesn’t include any of the stock trading windfalls that Goldman’s top executives — the bank’s 475 managing “partners” — will soon be reaping.

Back in December 2008, with Wall Street reeling and Goldman shares selling at a bargain-basement $78 each, Goldman’s power suits awarded themselves options to buy 36 million shares of Goldman stock at that bargain price, ten times more options than Goldman granted the year before.

Goldman shares have lately been selling around $175 each, creating a potential $100 per share personal profit for Goldman's elite. Overall, analysts reported last week, Goldman Sachs CEO Lloyd Blankfein and his family are now sitting on a stash of Goldman shares worth $355 million.

All these dollars cascading onto Wall Street, says JPMorgan Chase CEO Jamie Dimon, signal “the foundation of a broad-based economic recovery.”

That signal, outside Wall Street, remains exceedingly weak. Unemployment rates in the United States are running substantially above jobless rates in Germany, Japan, and other peer nations. And U.S. wages, the Wall Street Journal noted earlier this month, “have taken a sharp and swift fall” all across the nation.

One consequence: America’s “doubled-up” population — families that have lost their homes and moved in with friends or relatives — has hit the 6 million mark.

These hard times everywhere but at the top, New York Times analyst David Leonhardt suggested last week, most likely at root reflect contemporary America's deep-seated power imbalance “between employers and employees.”

U.S. employers, notes Leonhardt, now “operate with few restraints.” With labor protection laws loophole-ridden and courts tilting aggressively the corporate way, companies can dictate outright labor relations terms with their employees.

To maintain profit rates, these companies can downsize, outsource, and replace full-timers with temps. Or shove down wages and slash benefits. Or hoard cash and speculate on financial markets — and never have to worry that anyone in government will intervene.

We historically, here in the United States, have had a word for power imbalances this striking and stark: plutocracy, or rule by the rich.

The plutocratic rule we experience today can seem all-encompassing. The rich and powerful appear to slide endlessly and effortlessly from the summit of one sphere of American economic and political power to another.

Some of these moves make national headlines. Peter Orszag, after running the federal budget office for the Obama White House, moves to a plush senior global banking slot at Citigroup. Former JPMorgan Chase executive Bill Daley becomes the new White House chief of staff.

Other moves go more under the radar. Former U.S. senator Mel Martinez, a Florida Republican, moves to JPMorgan Chase. Theo Lubke, the lead derivatives expert at the New York Federal Reserve Bank, hops in bed with Goldman Sachs. The top exec in the New York City public school system, Joel Klein, joins the Rupert Murdoch media empire as an executive vice-president.

In this clubby atmosphere, backs get scratched at the power summits — and everyday people get shafted. New York City’s richest 1 percent, as one new report details, now average more income per day — about $10,000 — than New York’s poorest 1 million residents average in a year.

How long can this state of affairs continue? History can be a guide — and an inspiration, too. In the Great Depression, over five years passed before Congress felt enough grassroots heat to start passing the landmark bills — like the Wagner labor rights legislation — that truly upended America’s power dynamics.

We’re still only three years into the Great Recession. Wall Street’s bonus boys may not be as home-free as they think.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.

Highway Robbery and the Progressive Future

Zach Carter — Wed, 08 Dec 2010 09:27:33 -0500

Kevin Drum gives a pretty thorough analysis of President Obama’s open assault on the mainstream Democratic Party at yesterday’s press conference, and declares that “programmatic liberalism is dead.” I think that’s more than a little exaggerated, but regardless, it’s not a fair description of the policies at stake in Obama’s lousy tax deal. The tax deal is fundamentally about whether the United States still believes it has a basic commitment to protect its most vulnerable citizens from harm. For so basic an intuition to be the subject of political negotiation should be abhorrent to anybody of any ideological stripe in today’s United States. The deal is not a signal of strength or weakness on the left or the right, it is a symbol of rank political cynicism.

Protecting the most vulnerable members of society is not a liberal idea. It is the basic moral intuition of every philosophical and religious tradition but two: cruel interpretations of Friederich Nietzsche, and a brand of libertarianism far more radical than anything in contemporary American politics. Republicans were threatening to cut off unemployment benefits and a poverty tax credit for families with children. Let me emphasize: poverty relief for children.

These policies should never, ever be the subject of political negotiation. Obama could have raised a fuss, he could have publicly shamed his adversaries for threatening a basic moral building block of a decent society. Instead, he offered absurd giveaways to the rich that have not only been the ire of “the professional left,” but of the mainstream Democratic Party for almost a decade. Nearly every Democrat in Congress is now wondering if a primary challenge will be the result of support for this deal. And Obama now has the gall to chastise “the left” for being outraged.

A decent society takes care of its poor. Committing to conservative political thinking does not require one to believe that the poor should suffer for no reason. The number of poor families in the United States has gone up dramatically during the worst recession since the Great Depression, just as the number of unemployed parents has skyrocketed. These problems are caused by major structural economic problems, not by laziness or recklessness on the part of families (and even if it were only the result of laziness or recklessness, a decent society would not take that out on the children of the lazy and reckless). Amid mass poverty, any policymaker should support poverty relief.

This is a moral intuition even more fundamental than the commitment to equality of opportunity—the root belief that a decent society does not let its members endure extreme suffering needlessly. It is not egalitarian, it is not Marxist, it is not socialist, it is not liberal. It is just something a decent society does. It can be described with economic language, but it is not fundamentally an economic problem, unless short-term poverty relief somehow results in total economic calamity. Needless to say, the United States faces no such crisis from aiding its poor.

But Obama did not make this case. He didn’t even try. He entered a room with Republican leaders, and returned to declare they had been given everything they wanted.

Shortly before the deal was announced, Gretchen Morgenson and Louise Story of The New York Times ran a numbers on how the Bush tax cuts affect Wall Street bonuses. For every $1 million in bonus payouts, they calculated, the Bush tax cuts allow Wall Streeters keep an additional $40,000 to $50,000 in income.

The price Republicans demanded for allowing the United States to participate in the basic moral foundation of every decent society the world over was $40,000 for every $1 million in Wall Street bonuses. That should be appalling to liberals and conservatives alike, and a President who does not go to the mat to shame his opponents under such circumstances is bound to lose respect among his followers.

Via a link to a prior post, Kevin defines “programmatic liberalism” as the Progressive Era of 1911 – 1919, the New Deal of the 1930s, and the 1960s. All of these involved significant restructurings of the United States government and its institutions. This is not the sort of thing under discussion in the tax debate. Not even close.

“Should the poor be sustained?” Is a much different question than, “Is it the proper jurisdiction of government to regulate X given recent events?” All kinds of ideological issues can play into regulatory questions. But for quite literally centuries, there has been a broad moral consensus about the right of the poor to live (this glosses over racism and sexism, of course). The “professional left” is not demanding new institutions or government functions. It’s demanding that our society actually be a society.

And so Obama’s assault on what he called “purist” and “sanctimonious” left cannot be viewed as anything but outrageous. MoveOn and DailyKos and FireDogLake are not actually demanding leftist positions on tax policy—their opponents are threatening outright brutality, and the President of the United States is not seriously challenging those threats. Obama’s willingness to capitulate does reveal the man’s fundamental human compassion—but it also portends serious dangers. The next major negotiation, as Matt Yglesias and Mike Konczal have emphasized, will be over raising the federal debt ceiling. If it is not raised, the United States will have no choice but to default on its debt, and the global economy will collapse. If Obama is willing to throw up the Bush tax cuts to preserve the basic moral foundation of society, then he will certainly offer anything to prevent mere economic Armageddon. With this deal, the President has signaled that whenever a difficult choice arrives, he will roll over.

Here’s a leftist tax position: restore tax rates on millionaires to Johnson-era levels of 90 percent, and use that money to guarantee free college education for the children of families earning less than $50,000 a year. Nobody on the “professional left” is demanding that right now. We’re demanding that the basic functioning of society not be ransomed away in the name of bigger bonuses, and that negotiations over economic and tax policy not allow the most vulnerable members of society to be used as bargaining chips.

So perhaps this is what Kevin means. Now that a Democratic president is willing to cave on negotiations about the moral foundation of society, liberals cannot hope for serious economic progress for several decades. I see things otherwise. Two years ago, pundits were forecasting the end of conservatism as it has been practiced for 30 years. “Liberal” thought is not dead. Our president is simply ineffective.

Wall Street Whiners Threaten to Wreck the Economy-- Again

Zach Carter — Sun, 26 Sep 2010 18:10:38 -0400

I agree with everything Paul Krugman has to say about Max Abelson's excellent run-down of the Wall Street whinery, but his critique stops a little too short. Abelson's piece emphasizes that Wall Street isn't really upset about any policies the Obama administration has adopted, since, as I and many others have noted, the Obama administration has been very friendly on that front. What they're upset about-- at least what they say they're upset about-- is the jargon. Obama called bailed-out bankers "fat cats" after they paid themselves obscene bonuses with taxpayer money. To the bankers Abelson quotes, this amounts to some kind of unfair discrimination. That's absurd-- the bailout barons Obama criticized had wrecked the economy and then paid themselves like princes for profits secured by taxpayer largesse. Those who did not benefit from such largesse have no reason to feel slighted by the critique, and those who did benefit have no reason to be complaining from their second homes in the Hamptons.

But what I find most interesting is that the cry-babies in Ableson's story actually threaten to wreck the economy over this rhetoric. The key passage is at the end of Ableson's piece:

Wall Street's emotions have consequences. "If, as a result of this anger, credit becomes unavailable, particularly for small and mid-size businesses," Mr. Schwarzman wrote in The Washington Post this year, before his Poland blunder, "then at best the economy will slow and, at worst, we will find ourselves in a dire situation." He said bankers felt under siege and were responding by "becoming conservative," a lovely little pun about lending and politics.

Credit does not just magically become "unavailable" because of "anger." Some class of angry people has to decide not to make credit available.

There are plenty of reasons why bankers might decide not to extend loans, but feeling "under siege" because the president called you a fat cat of isn't one of them. No sane businessperson would let those feelings overwhelm her decision-making process when the bottom line is at stake. If there were evidence that regulations were going to change dramatically and banks would have to keep more capital on hand to cushion against losses, there's a case to be made that banks might not be eager to extend loans as a result (not a very good case, though, since banks could just raise capital in the markets to support profitable lending opportunities). But freaking out because the President calls you a fat cat and preemptively shutting down your business makes, well, no sense.

Another of Abelson's anonymous Wall Street sources repeats the insanity:

"He's pissing on us and Wall Street and bankers and capitalism; then we have gotten afraid," the executive who turned CNBC on mute said. "We then are not investing in maybe what we should invest in."

What, exactly, are this guy and his friends afraid of? That Obama might call him another name that he likes even less than "fat cat?" Obama has proposed a couple of tax changes for some types of Wall Street revenue and some types of hedge fund pay-- but the fear of higher taxes wouldn't be grounds to invest less, or invest improperly. Bumping up the capital gains rate from 15 percent to 20 percent doesn't alter the incentive structure at all-- it isn't going to push any bankers or traders out of the investment business.

So these brats are saying one of two things with their tantrums. Either Wall Street is dominated by completely irrational fools who will wreck their businesses after hearing a dirty words, or this is a threat: Treat us like superhuman royalty, or we'll wreck the economy. If the first case is true, then these guys are paying themselves enormous sums of money to be total idiots-- something the "well operators" that one of Abelson's anonymous Wall Street sources spits on never do. If the second is true, then we have another excellent reason to keep these sharks out of economic policy debates.

UPDATE: Also note the use of anonymous sources in Abelson's story. Usually that anonymity protects somebody from something-- in financial journalism, anonymity usually protects a source who divulges a trading strategy or a lobbying tactic that ought to be a company secret. But these guys are just whining, and asking for Abelson not to tell anybody who they are. At least some members of the Wall Street whinery are ashamed of themselves.

Where Are The Prosecutions? SEC Lets Citi Execs Go Free After $40 Billion Subprime Lie

Zach Carter — Fri, 30 Jul 2010 15:55:38 -0400

What is the penalty for bankers who tell $40 billion lies? Somewhere between nothing and a rounding-error on your bonus.

The SEC just hit two Citigroup executives with fines for concealing $40 billion in subprime mortgage debt from investors back in 2007. The biggest fine is going to Citi CFO Gary Crittenden, who will pay $100,000 to settle allegations that he screwed over his own investors. The year of the alleged wrongdoing, Crittenden took home $19.4 million. That's right. Crittenden will lose one-half of one percent of his income from the year he hid a quagmire of bailout-inducing insanity from his own investors. That's it. No indictment. No prison time. Crittenden doesn't even have to formally acknowledge any wrongdoing.

In 2007, as financial markets were freaking out about the subprime situation, Citi repeatedly told its investors that it owned just $13 billion in subprime mortgage debt. It was true—if you didn't count an additional $40 billion in subprime debt that the company was also holding onto.

Citi's CEO at the time, Chuck Prince, has not been charged with anything. As Yves Smith emphasizes, all of the top financial officers of every major corporation are responsible for the accuracy of their quarterly financial statements. Lying on those statements is a federal crime. This is the sort of thing that securities fraud cases are built around.

The SEC's own statements about what went on at Citi are damning. If the agency can make this kind of information public, they ought to be pursuing criminal prosecutions. The SEC says that senior Citi management had been collecting information about the company's subprime situation as early as April 2007, but repeatedly cited the $13 billion figure to investors over the next six months, waiting to acknowledge the additional $40 billion in subprime debt until November 2007. The SEC also says that Crittenden knew the "full extent" of Citi's subprime situation by September at the latest, but the company continued to cite $13 billion in earnings reports through October.

Citi's subprime shenanigans had consequences for taxpayers, pushing the company to the brink of total collapse and prompting one of the biggest bailouts of 2008.

Phil Angelides and the Financial Crisis Inquiry Commission deserve a lot of credit for highlighting the absurdity of Citi's actions in a hearing on April 7 of this year (the key passage starts on page 368 of this pdf transcript). Angelides' line of questioning revealed that even Citi's board knew that the subprime exposure was much greater than what the company was claiming in public. Citi's board at the time included Robert Rubin, former Treasury Secretary and architect of much of the deregulation that lead to the current crisis who took home $120 million for his work at Citi.

Either the SEC or the Justice Department could be pursuing criminal cases against Citi executives. What does it take to get the Justice Department's attention on a financial fraud case? You have to launder $380 billion in drug money, and even then, DOJ lets you off with a slap on the wrist. The DOJ caught Wachovia doing just that, and the bank is getting off with a minor fine that won't even make a dent in it's second-quarter profits.

The Citi settlement is worse than a get-out-of-jail free card for Crittenden, Prince and their cohorts. The SEC actually fined Citi's shareholders $75 million for the alleged wrongdoing of their executives. For some varieties of corporate misconduct, like Wachovia's drug money laundering, hitting shareholders with the fine is appropriate. Wachovia's money laundering operations directly enriched the company and its shareholders. This was not the case with Citi's subprime scandal. Citi's executives were hurting their own shareholders. Instead of meting out serious punishment to those executives, the SEC is fining Citi's shareholders, the very people wronged in the incident.

This deference to the elites who wrecked the economy just keeps playing out. When Bank of America lied to its shareholders about billions of dollars in bonus payments it was about to make, the SEC decided to fine BofA shareholders and let the firm's executives off the hook. The decision-makers at Wachovia who allowed the firm to funnel drug money despite repeated warnings by whistleblowers have not been indicted. Nobody at Washington Mutual has been indicted despite clear evidence of rampant mortgage fraud at the firm. Lehman Brothers' repo 105 accounting scam is going unpunished, as are similar schemes at other banks including Bank of America. After much public relations flogging, the SEC let Goldman Sachs off easy.

More than 1,100 bankers went to jail in the aftermath of the savings and loan crisis. Massive financial crises simply do not occur without widespread fraud. The failure to prosecute that fraud poses systemic risks for the global economy. With too-big-to-fail behemoths dominating the financial landscape, the prospect of prison is the only serious check on executives interested in cannibalizing the economy for personal gain. If the SEC and the Department of Justice continue to let executives get away with outrageous acts without even taking the case to court, our financial system is doomed to repeat the same excesses and abuses we've seen over the past decade. If Crittenden did what the SEC claims he did, he screwed over his own investors and scored a huge bonus in the process. Everybody on Wall Street understands the implications: breaking the law is a great way to make a lot of money. When a class of elites can thumb its nose at the law with impunity, the result is not only a threat to the efficiency of our economy, but a threat to the basic functioning of our democracy.

In Defense Of The Volcker Rule

Zach Carter — Tue, 18 May 2010 09:39:07 -0400

Some version of Wall Street reform is going to pass the Senate this week. The question now is how strong that reform will be. There are still three crucial battles to be waged, all of which would significantly change the way Wall Street does business. We will not fix Wall Street with this round of legislation, but we can reduce taxpayer exposure to bailouts and rein in consumer banking abuses. I'll address the Volcker Rule in this post, and tackle consumer protection and derivatives issues later this week.

One of the most important battles in the next few days will be over the Merkley-Levin amendment, which would require regulators to implement some version of the Volcker Rule. The Volcker Rule would ban economically essential commercial banks from engaging in reckless proprietary trading. "Prop trading," as it is known on Wall Street, allows banks to gamble with taxpayer funds by making speculative trades in the securities markets with taxpayer-guaranteed deposits. It's economically inefficient, it establishes grotesque conflicts of interest between bankers and their clients, and creates big bailout bills when the bets backfire. We want commercial banks to be doing important economic work like making loans. We do not want them to be taking on totally unnecessary risks in the pursuit of short-term profit, and prompting epic bailouts when that risk backfires.

The existing Senate language crafted by Sen. Chris Dodd, D-Conn., is not strong enough to end the excesses inherent in prop trading. Dodd would require regulators to conduct a study of whether prop trading by commercial banks endangers the economy, and then allow—but not require—them to write regulations to fix any problems.

Merkley-Levin, by contrast, would force regulators to ban prop trading by commercial banks, and establish a set of criteria that future regulators could not legally evade. While regulators would have some leeway in defining key aspects of the rule, they would have much less authority to impose weak rules than they have under Dodd's language. Merkley-Levin is a significant step in the direction of economic progress, but it has sparked some recent debate in the financial blogosphere, earning the ire of the Economics of Contempt (EoC) blog, which in turn has lead economist and blogger Mark Thoma to question the ultimate usefulness of the amendment.

EoC is wrong. Merkley-Levin is a very significant piece of legislation, which is why the GOP is threatening to filibuster it. EoC alleges that there are three fatal loopholes to Merkley-Levin. To my mind, none of them are important, and one is just flat wrong. I'll address them in order of simplicity.

First, EoC claims that Merkley-Levin would allow banks to simply move all of their prop trading offshore, citing legislative language that would permit:

(G) Proprietary trading conducted by a company pursuant to paragraph (9) or (13) of section 4(c), provided that the trading occurs solely outside of the United States and that the company is not directly or indirectly controlled by a United States person.

EoC has misread the provision. The second half of this sentence explicitly prohibits banks from moving their prop trading offshore. The key language is "not directly or indirectly controlled" by a U.S. bank. If Citigroup opens a London subsidiary to do its prop trading, that will be illegal, because Citigroup, a U.S. company, controls the subsidiary.

On to the next alleged loophole. EoC claims:

Merkley-Levin actually weakens the Volcker Rule by creating a whole bunch of new categories of exceptions to the prop trading ban . . . (1) trades 'in connection with underwriting'; (2) market-making trades; and (3) trades 'in facilitation of customer relationships.' Regulators still have to use the rulemaking process to define 'market-making,' which will no doubt encompass any trade which can be justified as a hedge against any risk the bank faces in its trading book.

First, it is simply not the case that this language actively weakens the Volcker Rule. While some key definitions are left for regulators to work out on their own, this is still better than the existing Dodd approach, which amounts to: "Please regulators, conduct a study." Dodd opposed the Volcker Rule from the get-go, and that's why his language is exceptionally weak. EoC's alternative to the Merkley-Levin language simply doesn't make sense—he says regulators—the people he doesn't trust to flesh out Merkley-Levin—should have broad leeway to write their own rules:

People often ask why I say that complicated financial regulations can't be written at the statutory level. The reason, sorry to say — which Merkley-Levin demonstrates quite well — is that Congress sucks at writing complicated financial regulations.

Here's the problem: If regulators are hellbent on interpreting Merkley-Levin in a way that would gut the substance of the reform, then they certainly aren't going to get tough on prop trading with the much broader Dodd language, which just lets regulators do whatever they want.

On to the third alleged loophole. The legislation allows for, "Risk-mitigating hedging activities designed to reduce risks to the banking entity or nonbank financial company." EoC says this gives banks broad leeway to claim that proprietary trades are really legitimate hedges against risks in other aspects of the bank's business—even when that business is in another subsidiary of the bank.

This is much ado about nothing. If regulators really want to say that a prop trade is a useful hedge, this so-called loophole won't make it any easier to stop them than the Dodd language would. In other words, if regulators do not want to enforce the law, no legislative language is going to stop them (see Alan Greenspan, mortgage fraud).

The closest we can come to protecting the financial system against bad regulators is to follow the advice of Nouriel Roubini and others, who argue that Congress should ban economically essential commercial banks from engaging in any securities underwriting, market-making or derivatives dealing activities whatsoever. Commercial banks were barred from these businesses when the Glass-Steagall Act was in effect from the 1930s into the 1990s, and throughout that era, banking was a perfectly profitable and competitive business that did not require massive and costly bailouts.

Ultimately, we should reinstate Glass-Steagall. But that doesn't mean that Merkley-Levin should be rejected. At this point, it is clear that Glass-Steagall is not going to be seriously considered during this legislative cycle, and the Volcker Rule would still empower good regulators to go after one of the most dangerous forms of financial recklessness. If Congress approves Merkley-Levin, the Volcker Rule would immediately become law. Without the amendment, we'll have to wait for a study, and wait for the heads of various regulatory agencies to agree on whether proprietary trading is even dangerous, a process that has been designed to prevent the Volcker Rule from ever being finalized. Nothing can completely immunize the financial system against bad regulators. But Merkley-Levin does about the best job possible to make the Volcker Rule a regulatory reality.

Next up: Blanche Lincoln's derivatives bill.

Congress Backs Wall Street, Rejects Big Bank Break-Up

Zach Carter — Fri, 07 May 2010 10:01:09 -0400

Late last night, the U.S. Senate rejected the single most important element of Wall Street reform by a vote of 33 to 61. The SAFE Banking Act would have forced the break-up of the nation's six largest banks, and dramatically reduced the political clout of America's financial elite. The 61 votes against the measure are votes in favor of Wall Street's stranglehold on our economy. No matter what else is ultimately enacted in the name of Wall Street reform, Congress has decided that it will not confront the single greatest problem in the U.S. economy: Too Big To Fail.

On Wednesday, the Senate also voted down a $50 billion Wall Street tax that would have been used to fund the cost of shutting down a major failing bank. By rejecting both the break-up bill and the bank tax, the Senate has punted on ending too-big-to-fail. For now, it appears that Wall Street has emerged from the Great Financial Crash of 2008 with even greater political might than it wielded during the reign of George W. Bush. In the Citizens United era, both Democrats and Republicans have decided they can only get so tough with Corporate America.

Last night, 27 Democrats joined all but three Republicans to vote against breaking up the banks. President Barack Obama opposed both the tax and the break-up measures, and hosted J.P. Morgan Chase CEO Jamie Dimon for dinner at the White House on Monday. J.P. Morgan is the largest U.S. bank, and spent more money on lobbying in 2009 than any other bank. House Minority Leader John Boehner (R-OH) has aggressively courted Dimon for campaign cash.

There is literally no economic evidence that megabanks do anything to help the economy that cannot be accomplished with smaller institutions. By contrast, centuries of research has shown that giant banks are destructive. Adam Smith was warning against the dangers of megabanking back in the 18th Century. And the current crisis in Europe-- which appears to be deepening by the day-- should make those dangers apparent to everyone living in today's economy. There are plenty of good economic reasons to cut our financial behemoths down to size, and no good reasons not to.

The good news is, there are still some smaller-bore reforms in the legislation that are worth voting for, and it appears that some version of reform, however tepid, will ultimately be approved. Congress will be deploying a screwdriver to perform a job fit for a bulldozer, but a few weeks ago, it was not obvious that even the screwdriver would make it through.

Shortly before the vote on breaking up the banks, Sen. Bernie Sanders (I-VT) cut a deal with Sen. Chris Dodd (D-CT) that would subject all of the Federal Reserve's bailout operations to a thorough public audit. Despite all of the attention heaped on the Treasury Department and the Troubled Asset Relief Program, the Fed has operated as the chief bailout engine of the U.S. government, pumping $4.3 trillion into the banking system without almost no public disclosure. We don't know who received money, or on what terms, or who approved the transactions. It now appears very likely that this information will finally see the light of day. Obama, who had opposed a more comprehensive Fed audit, now supports the Sanders plan.

But by allowing megabanks to remain super-sized, Congress has insulated them from the fallout associated with the Fed disclosures, and given them a tool to fight other reforms. Our giant financial institutions are not only too-big-to-fail, they are too-big-to-regulate. There are meaningful reforms still on the table—a ban on risky proprietary trading, an overhaul of consumer protection and the reining in of the crazy derivatives casino that brought down AIG—but all will be much more difficult to enforce at the complex megabanks which currently dominate both the marketplace and Capitol Hill.

Major economic realignments are not quickly established. It took seven years for Franklin Delano Roosevelt to pass all of his New Deal-era banking reforms. We have known for some time that this legislation, however stringent, would be incomplete. Hedge funds, credit rating agencies, Fannie Mae and Freddie Mac all must be addressed by separate legislation. The SAFE Banking Act must be considered in every subsequent reform package.

Here are the Senators who voted last night to preserve Wall Street's power. Senators in bold also voted for the bailout bill in 2008:

Akaka (D-HI)

Alexander (R-TN)

Barrasso (R-WY)

Baucus (D-MT)

Bayh (D-IN)

Bennet (D-CO)

Bond (R-MO)

Brown (R-MA)

Brownback (R-KS)

Burr (R-NC)

Carper (D-DE)

Chambliss (R-GA)

Cochran (R-MS)

Collins (R-ME)

Conrad (D-ND)

Corker (R-TN)

Cornyn (R-TX)

Crapo (R-ID)

Dodd (D-CT)

Enzi (R-WY)

Feinstein (D-CA)

Gillibrand (D-NY)

Graham (R-SC)

Grassley (R-IA)

Gregg (R-NH)

Hagan (D-NC)

Hatch (R-UT)

Hutchison (R-TX)

Inhofe (R-OK)

Inouye (D-HI)

Isakson (R-GA)

Johanns (R-NE)

Johnson (D-SD)

Kerry (D-MA)

Klobuchar (D-MN)

Kohl (D-WI)

Kyl (R-AZ)

Landrieu (D-LA)

Lautenberg (D-NJ)

LeMieux (R-FL)

Lieberman (ID-CT)

McCain (R-AZ)

McCaskill (D-MO)

McConnell (R-KY)

Menendez (D-NJ)

Murkowski (R-AK)

Nelson (D-FL)

Nelson (D-NE)

Reed (D-RI)

Risch (R-ID)

Roberts (R-KS)

Schumer (D-NY)

Sessions (R-AL)

Shaheen (D-NH)

Snowe (R-ME)

Tester (D-MT)

Thune (R-SD)

Udall (D-CO)

Voinovich (R-OH)

Warner (D-VA)

Wicker (R-MS)

Stand Up To Wall Street Today

Zach Carter — Thu, 29 Apr 2010 08:45:35 -0400

Today is the big day: thousands of people will march on Wall Street this afternoon to protest big bank abuses.

After watching Wall Street stack the economic deck against, well, just about everybody, it's time for reform. Big Banks secured the most generous bailout in history back in 2008, and today they're back to business as usual, placing trillions of dollars worth of risky bets in the capital markets casinos and paying out epic bonuses to their executives. And the sad truth is, megabanks still hold enormous sway in Washington, D.C. Sweeping reform is still possible. We can still change the very way Wall Street does business-- but only if we make our voices heard.

The Securities and Exchange Committee's fraud suit against Goldman Sachs and the recent hearings held by Sen. Carl Levin (D-MI) have detailed what millions of families fighting foreclosure already knew: Big Banks are out to make money any way they can, and they won't let pesky details like ethical standards, or even the law, get in their way.

Wall Street's reckless excess cost our economy more than 8 million jobs, pushed foreclosures to record levels, and decimated retirement accounts all over the country. But even as more and more homes move into foreclosure, bank profits are going up, fueled by trillions of dollars in bailouts from U.S. taxpayers and accounting gimmicks blessed by corrupted regulators.

This isn't about Republicans or Democrats, it's about Democracy. Big Finance doesn't have to play by the same rules the rest of us do. When they take big risks with other people's money, they win no matter what. If the bets pay off, bankers get rich. If the bets backfire, taxpayers eat the losses, and bankers get rich anyway. When they aren't being bailed out, Big Banks are flexing their political muscles to keep regulators from cracking down on obvious abuses. Banks issued hundreds of billions of dollars in outrageous subprime mortgages during the years of the housing bubbles, and backed hundreds of billions more by propping up other predatory lenders. Regulators looked the other way. Wells Fargo was the top subprime lender at the height of the housing bubble. Has anybody gone to jail? No. Has the Federal Reserve even sanctioned the firm? No.

So long as our economy is dominated by giant firms that we all know are too big to fail, this is how our economy will function. Congress must order the break-up of our biggest banks, and write new rules to crack down on predatory lending and excessive risk-taking. We need a new Consumer Financial Protection Agency that looks out for citizens, not bank profits. The crazy derivatives casino that brought down AIG must be dismantled.

The atmosphere is changing in Washington. The SEC is standing up to Goldman Sachs. Senate Republicans have abandoned their filibuster against Wall Street reform. Congress will spend the next two weeks in heavy debate over how to fix our broken financial system, and some kind of reform bill now seems certain to pass. But without pressure from ordinary citizens, Wall Street's army of lobbyists will ensure that the final bill is a toothless reform-in-name-only. But if you tell Congress we need real reform, Congress will listen.

If you live in New York, meet at City Hall Park (Broadway and Chambers) at 3:30. If you don't live in New York, call your Senator and say you're fed up with abusive banks.

Liveblogging The Goldman Sachs Hearing

Zach Carter — Tue, 27 Apr 2010 17:00:44 -0400

6:05

This hearing has now been going for more than eight hours, and for better or for worse, I need to head over to do an interview with Al Jazeera English. It goes on at 7:00. I'll be talking about financial reform, in addition to the Goldman fraud case.

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6:00

For those who don't know, Goldman took $10 billion in TARP funds, received at least $11.9 billion through the AIG bailout, and issued $21 billion in government-guaranteed debt under the Temporary Liquidity Guarantee Program, debt which is still outstanding, and which the government is still liable for losses (though is unlikely to take any losses any time soon).

Blankfein's 2009 bonus was $9 million. Goldman's profits would have been impossible without government backing.

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5:50

John McCain is keeping it simple and going for the jugular. He just asked Blankfein how much TARP money Goldman received and how big his bonus was for 2009.

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5:40

Lots of disagreement between Levin and Blankfein over market-making. Blankfein is insisting that it does not need to tell its clients who buy the long side of a deal when Goldman is taking the short side. Blankfein says that since somebody takes the opposite side of a deal, it's irrelevant whether Goldman takes it or not.

Levin is pressing him on other cases, when there is no baked-in short side to a deal, cases where Goldman just sells a security to an investor, and then goes and bets against it without telling the investor. Levin wants to know whether Goldman had an obligation to tell these investors that Goldman was betting against what it was selling. Blankfein says no.

This is hard to square with most understandings of ethical conduct. Goldman has a sales force that goes out and pushes products to investors. When Goldman bets against those same products, and doesn't tell the people it's selling them to, that is not good.

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5:00

"I don't beileve so."

That's Viniar's response to Sen. Tom Coburn (R-OK), asking whether an unbiased person could look at what Goldman did in its Abacus synthetic CDO deal. Viniar is the only person in the room who believes that.

"I don't believe it's unethical."

That's Viniar's response to releasing many emails from Fabrice "Fabulous Fab" Tourre that paint him in a very undignified light. Coburn has suggested throughout the hearing that Goldman is throwing Tourre under the bus, and has made a very convincing case. It is, in fact, the smart thing for executives to do, and they do it all the time-- chalk a problem up to a few bad apples, say there's no bigger problem at the firm, and wash their hands of the incident.

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4:00

To clarify, I don't have an objection to Goldman shorting the housing market, in principle. As I said earlier, shorting as such can be a useful economic activity. But while Goldman was shorting the market, it was simultaneously packaging securities based on that market and selling them to investors, believing all the while those securities were doomed.

That's pretty horrible, even if Goldman's net long/short position adds up to zero. They're still fueling a fire for assets that they think are no good, and in the process, making the subprime mortgage mess worse. It is not important whether Goldman's total contribution to this disaster is large or small relative to other firms. It's clear that Goldman's subprime mortgage activities added up to billions of dollars, and that it hurt actual people in the real economy. That's terrible.

It's also clear from the testimony of everyone on the panel today that none of those people think they have any responsibility to the broader economy. If Goldman Sachs makes money ruining the economy, that's fine with them.

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3:45

A week or so ago, Goldman put out an official statement insisting that they did not short the housing market. Levin is making a strong push to show that the statement Goldman issued was misleading.

After starting out with straightforward answers, Viniar appears to be dodging.

The best stab Levin has made so far is the point that Goldman was, in fact, net short by billions of dollars in 2007. The company's "we didn't short the housing market" claim is only makes mathematical sense if you combine both 2007 and 2008.

This actually hurts Goldman more than it sounds like it does, because for much of 2007, investors were still clamoring for mortgage-backed securities and CDOs, and Goldman was packaging them and selling them, despite taking an overall stance against those securities.

Viniar says it was all a strategy to reduce risk. But reducing risk would have meant simply offsetting the long positions. "You blew right by zero," Levin says, and that's true.

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3:30

Goldman CFO Viniar says Goldman's total net revenues from mortgages in 2007 were less that $500 million-- less than 1 percent of its total revenues. He also says Goldman lost money on the mortgage market in 2007 and 2008 combined.

There are a lot of ways to account for revenues, and a lot of ways to define the "mortgage business." I'd like to hear more detail on this.

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3:00

Goldman's strategy so far today has been to stall, stall, stall. They're doing their best to not answer questions, and take as long as possible not answering questions. This started at 10:00 and has been going on now for five hours.

The Goldman execs are coming off as very unpleasant and dishonest people. There is clearly a lot of documentation to sort through here, but these guys are doing their best to just say nothing and stay as unrepentant as possible.

Here's what happened. These guys sold people stuff that Goldman was betting against, without telling them that Goldman was betting against it. By stalling and evading, the Goldman execs may have dodged criminal charges against themselves. But nothing they have presented today has convinced anyone watching that the basic activity under question-- betting against your clients without telling them-- is wrong.

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2:30

I'm ready to see Viniar and Blankfein.

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1:05

Probably worth doing a break-down of what "market-making" is. Clients come to Goldman saying they want to place a bet on something. Goldman arranges a transaction, which people can bet for or against. The defense offered by everybody at Goldman is that they weren't betting against their clients, they were simply arranging a transaction, which people could be long or short (bet for or against). In some of these transactions, Goldman took the short side of the deal.

This is a decent defense, up to a point, provided you haven't been deceiving investors in arranging the deal. That's what the SEC says Goldman did. That's also what the emails Levin dug up imply.

But it's only a good defense up to a point. When Goldman is knowingly creating assets that are economically destructive-- assets that set up foreclosures and fuel a subprime frenzy-- they've done something wrong. When a client comes to you and says he wants to bet against subprime mortgages issued in California, and you know that allowing him to do so will cause more economically destructive subprime mortgages to be issued in California, you do have a responsibility to say no.

Imagine if Goldman Sachs were an auto manufacturer. One of its suppliers comes to the company and says it is going to cut a lot of costs by legally dumping tons of toxic chemicals on poor people in Central Michigan. In that case, Goldman would have a responsibility to find another supplier-- regardless of the effect on its bottom line. Even though it's legal, it's wrong, and a good corporate citizen wouldn't do it. It's just as wrong to knowingly wreak economic havoc, which Goldman was obviously doing.

Now, of course, major corporations in the United States do not behave ethically, and many people reading that last paragraph probably think it sounds a little quaint. And I agree, we are going to be disappointed if we expect corporations to behave in the public interest if they don't have to. I think that says something really horrible about American business. But it also underscores the role of government in a market economy. If pervasive practices are both legal and destructive, they have to be countered through regulation, or outlawed. To talk about the free market in this context is nonsensical.

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12:15

Sen. Ted Kaufman (D-DE) is having a field day with stated-income mortgages. A stated-income loan (also known as a no-doc loan) involves no documentation of the borrower's income. Stated-income loans are completely stupid. Even Ben Bernanke thinks they ought to be outlawed. There are "prime" stated-income loans and "subprime" state-income loans, but in every case, their risk is impossible to determine-- there is no way to tell whether the information in them is accurate or not, and they're a huge invitation to fraud (80% of which is committed by lenders, according to the FBI).

This is Sparks' defense of Goldman's participation in the stated-income loan business: "There were people in my business unit who actually wanted to be long that risk."

This relates to a lot of points Goldman has been making about sophisticated investors. It really is true that a lot of sophisticated investors did incredibly stupid things, sincerely believing that housing prices would never drop. It is also true that these people were paid a lot of money to do this, even though it cost their company tons of money.

It is also true that a lot of sophisticated investors bought stuff they thought was going to tank at some point, but believed they'd be able to sell it off before those assets dropped in value. Think of it as subprime hot-potato. Many of these investors were wrong, mistimed their trades, and got paid a lot of money to make decisions that ultimately wrecked their firms.

It is also true that a lot of sophisticated investors bought assets because they were systematically defrauded by other sophisticated players.

But in all of these cases, the major trouble could have been prevented by straightforward, boring consumer protection regulations in the mortgage market. Regulation matters. If Ben Bernanke, Alan Greenspan or John Dugan had cracked down on garbage mortgages, Wall Street would not have been able to run wild with our neighborhoods. These people completely failed us over the past five years, and there is no reason to believe they will not completely fail us again. What we need is a new Consumer Financial Protection Agency with the authority to both write and enforce consumer protection rules for anybody extending credit to consumers.

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11:50

Nice work again from Collins. "If Goldman's position was truly . . . to remain as neutral as possible, how do you account for all of these references [from company executives] to 'the big short'?"

Sparks is really a marvel. He just says he wouldn't "speculate" about what those words mean.

Goldman shouldn't have to retreat from shorting the housing market. That's how it made a lot of money, and shorting can be a totally responsible strategy for both its investors and the economy.

What's not responsible in any business is withholding crucial, financially important information from your clients. And that's how it appears that Goldman went about shorting the housing market, which is why nobody from Goldman wants to talk about how it made money betting against the housing market-- the way it placed its bets was totally dishonest.

It's also worth emphasizing that shorting stocks is an economically useful function because it's a transparent operation (excluding naked shorts, which are illegal). Stocks are traded on an exchange, so shorting helps move stocks in rational directions and notify the market when a company is in trouble.

But Goldman's shorts were not transparent, because they were conducted in the totally opaque market for credit default swaps, which are not traded on exchanges. The kind of behavior Goldman is being accused of here would have been impossible-- repeat, impossible-- if the derivatives bets they made were open to the investing public. There would be no way for Goldman to exploit its information asymmetries if we had market systems that eliminated them.

That's why Goldman Sachs spends a lot of money on lobbying. Derivatives reform, in particular, would make it a lot harder for the company to screw over its clients for money. A strong Volcker Rule would make it even harder for Goldman to do that.

In case you forgot, yesterday every Senate Republican and Sen. Ben Nelson (D-NE) voted against even opening debate on financial reform.

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11:35

Collins is off to a good start with the witnesses. She asked Sparks whether he believes he had a responsibility to act in the best interest of his clients. Market makers do not have legal obligations to do this in the sense that investment advisers do-- that is to say, they can't be sued for failing to do so-- but it's still really ugly for them to be arranging transactions that hurt their clients.

Sparks dodged the question, so did The Fabulous Fab.

Collins: "Your clients are not paying you big fees just to efficiently conduct transactions . . . they're paying you for judgment as well."

And now Collins is asking whether companies like Goldman Sachs should be subject to a clear "fiduciary duty"-- ability to be sued-- to act in their clients' best interest.

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11:33

I do not want to get on Carl Levin's bad side.

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11:30

Ha! Levin just asked Sparks whether he was aware that subprime lender Fremont had a bad reputation in 2007. Sparks said he couldn't recall.

Apparently I was working in the wrong business in 2007, because as a lowly financial journalist, I was aware, along with everyone in the newsroom I worked in, that Fremont had a terrible reputation. What's more, I can remember the fact! Apparently we all could have been making a lot more money by being out of the loop at Goldman Sachs.

There's another point here that Levin isn't really going after, because it only involves indirect unethical behavior. Goldman packaged $700 million in Fremont loans into securities and pushed them to investors. Fremont, a terrible, terrible lender, never would have been able to make its subprime loans if Wall Street had not been itching to securitize them. Fremont's business model only worked when it could sell off its bad loans to Wall Street to be sold in securitized form to investors. When it stopped being able to sell off those loans, the company collapsed.

That means that while Goldman didn't issue many mortgages directly, it was clearly fueling the subprime fire. Fremont depended on Goldman for its very existence. And neighborhoods paid the price with a tidal wave of foreclosures.

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