Category Archives: Financial Crisis

A Conspiracy So Immense

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Charles Pierce sums it up:

[T]here is no pile of money anywhere in the country, no matter how large or small, and no matter how vital to the people who were depending upon it, to which the grifters in the financial-services “industry” do not feel entitled as fuel for their unquenchable greed.

To see what Mr. Pierce is reacting to specifically, see “Looting the Pension Funds” by Matt Taibbi. Please read it all, but in brief, he’s showing us that the financial sector has been looting government worker pension funds for years, because they could, and now that the pension funds are mostly gone, the public workers are being blamed for the dire circumstances of state and local governments. Taibbi:

It’s a scam of almost unmatchable balls and cruelty, accomplished with the aid of some singularly spineless politicians. And it hasn’t happened overnight. This has been in the works for decades, and the fighting has been dirty all the way.

All across America, pension funds have been diverted into “investments” that somehow made no money for anyone except the power brokers on Wall Street. Or else the pension funds were used to make up the revenue shortfall created by tax cuts that benefited only the wealthy. David Sirota provides some examples:

In Rhode Island, the state government slashed guaranteed pension benefits while handing $75 million to a retired professional baseball player for his failed video game scheme.

In Kentucky, the state government slashed pension benefits while continuing to spend $1.4 billion on tax expenditures.

In Kansas, the state government slashed guaranteed pension benefits despite being lambasted by a watchdog group for its penchant for spending huge money on corporate welfare “megadeals.”

Paul Krugman today came out and called the Masters of the Universe types a “powerful group of what can only be called sociopaths.” These malefactors of great wealth not only think they are entitled to any remaining bits of wealth or privilege still available for plundering, but they want our adulation as well. When they don’t get it, they feel persecuted.

This Is Just Wrong

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Vampire squids, indeed —

The report cited a case of an 81-year-old Rhode Island woman who fell behind on a $474 sewer bill. A corporation bought the home in a tax sale for $836.39. The woman was evicted from the home she had lived in for more than 40 years and the corporation resold the place for $85,000, the report said. …

… One elderly Montana woman, who lived alone and had no close family to help her, fell more than $5,000 behind on taxes, the report said. After she failed to respond to letters from the company that bought her home in a tax sale, she was evicted from her Missoula home. As a result, she lost about $150,000 in equity in the property, according to the report.

At the very least, I say the companies that foreclose should not be allowed to profit more than they are owed, and any additional funds from a sale should go to the homeowner.

Why There Are Laws

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The recent loss of $2 billion by JP Morgan Chase is the subject of today’s column by Paul Krugman. He argues that there are some things banks should not be allowed to do, because they are dangerous to the economy as a whole.

Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on.

Why, exactly, are banks special? Because history tells us that banking is and always has been subject to occasional destructive “panics,” which can wreak havoc with the economy as a whole. Current right-wing mythology has it that bad banking is always the result of government intervention, whether from the Federal Reserve or meddling liberals in Congress. In fact, however, Gilded Age America — a land with minimal government and no Fed — was subject to panics roughly once every six years. And some of these panics inflicted major economic losses.

Krugman goes on to say that in the 1930s we came up with a workable solution involving oversight and guarantees. “Most notably, banks with government-guaranteed deposits weren’t allowed to engage in the often risky speculation characteristic of investment banks like Lehman Brothers.” This gave us “half a century of relative financial stability.” Then banks began to engage in risky speculations again, and the results were a financial disaster in 2008 in which taxpayers had to step in to prevent total meltdown.

But, predictably, the crew at Reason say that regulation is still wrong.

… the Wall Street calamities that shook the economy a few years back weren’t a result of isolated mistakes at the individual bank level. They were the result of networked failures, in which multiple market players make the same set of mistakes at the same time, taking up all the give in the system simultaneously.

Some of us would say that Chase’s $2 billion loss was something of a canary in the coal mine, showing us that there still is danger lurking in the financial sector. The correct response is to step in now to fix the bug and not wait for another system fail. And, without looking, I’m willing to guess that the crew at Reason was opposed to regulations that might have prevented the 2008 disaster also, before it happened. The “free minds” at Reason rarely surprise me.

And, of course, next they say that there’s no reason to think that more regulation would change anything, because regulations might not be implemented properly —

… “proper” implementation is always harder than it sounds. And I’m not sure we have any more reason to trust that regulators have the wisdom and judgment to prevent such losses any more or better than the bankers themselves.

This is the argument one hears every time there’s a death in a coal mine. Some mouthpiece for the coal mining industry argues that the accident shows that regulations aren’t necessary because (blah blah blah). The truth is that safety regulations passed into law in 1977 gave us nearly two decades of death-free coal mining. Then the Bush Administration turned the Mine Safety and Health Administration over to industry insiders, who weakened regulations, resulting in the loss of 70 miners in six separate disasters.

And this is supposed to prove that regulations don’t work.

Back to the financial sector — saying that a single incident (less than four years after Lehman Brothers died) doesn’t prove a need for more regulation is like saying that because there were only 4.8 homicides per 100,000 U.S. residents in 2010, we don’t need homicide laws. And those evil government prosecutors sometimes get the wrong guy convicted, anyway.

Michael Hiltzik writes in the Los Angeles Times,

The Whale affair shows that JPMorgan doesn’t understand how to manage risk. When you’re making multibillion-dollar bets using inherently volatile and unpredictable financial devices, nobody does — JPMorgan’s own risk models showed that its exposure had suddenly doubled in a period of weeks prior to its disclosure, which means either that the risk models were hopelessly outclassed, or that risk models can’t ever be reliably accurate under all conditions. Either way, it leads to the conclusion that Dimon desperately tried to evade on “Meet the Press”: that the only way to make this sort of risk-taking safe for the financial system is to make it illegal in the first place.

You really have to be pretty delusional to argue that the JPMorgan episode is not a warning that there are regulatory loopholes that need to be closed.

Something Rotten in Marketland

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If you don’t think the financial sector is thoroughly corrupt, check out what Paul Krugman says about it: “of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.”

The rating agencies emerged as the “free market” version of financial regulation — they sold research to people considering investment. Libertarian theory argues that government oversight isn’t necessary, because the Holy Free Market (blessed be It) is naturally self-regulating. You see, rating companies like Moody or Standard and Poor have to maintain good reputations to stay in business. Therefore, management will take care to run such a company honestly.

Hah. Behold how free market competition corrupted the system:

It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt — which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages — could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job. It’s all too obvious, in retrospect, how this could have corrupted the process.

It appears that free markets are not so much self-regulating as self-corrupting.

(BTW, I just hopped over to Reason magazine to see what the High Acolytes of Free Markets had to say about the latest revelations on the ratings agencies. Um, nothing.)

A Senate proecdural vote on Wall Street reform is scheduled for 5 pm today. It is expected that Republicans will hang together to block the bill from going forward. They are scrambling to put forward their own bill, a bill designed to cover their asses so they can claim they aren’t really protecting Wall Street.

However, Steve Benen says that Dems are in a “heads we win, tails you lose” mood, and are preparing to hang the GOP with the meme that they are protecting fat cats.

Rackets and Racketeers

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The latest on the Goldman Sachs scandal:

Paul Krugman writes in “Looters in Loafers” that the financial reforms being promoted by the Obama Administration would have gone a long way toward restraining Goldman Sachs from defrauding its clients. However, he also suggests adding language to the bill to specifically prohibit “Producers”-type scams.

He notes also that Republicans continue to talk about “bailouts” as if that were the only issue at hand:

The main moral you should draw from the charges against Goldman, though, doesn’t involve the fine print of reform; it involves the urgent need to change Wall Street. Listening to financial-industry lobbyists and the Republican politicians who have been huddling with them, you’d think that everything will be fine as long as the federal government promises not to do any more bailouts. But that’s totally wrong — and not just because no such promise would be credible.

For the fact is that much of the financial industry has become a racket — a game in which a handful of people are lavishly paid to mislead and exploit consumers and investors. And if we don’t lower the boom on these practices, the racket will just go on.

See Vicky Ward, “Senior Goldman Exec Is Married to Former Head of ACA.” ACA would be ACA Capital, the selection-manager-of-record of the infamous Abacus Fund. ACA asked John Paulson to choose the bonds included in the fund, allegedly without realizing John Paulson would be enriched if the Fund failed. The president of ACA is the husband of the managing director and deputy general counsel of Goldman Sachs.

And the New York Times is reporting that senior executives at Goldman Sachs were playing an “active role” in the mortgage unit as the mortgage market began to go south.

Next Up: Financial Reform

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I haven’t had time to write as much about the pre-skirmish on financial reform as I’d like, but much of what I’d like to say is summed up in “Why’s Sen. McConnell trashing Wall Street regulation bill?” by David Lightman and Halimah Abdullah of McClatchy Newspapers. See also “Whose Side Are They On?” in today’s New York Times.

Paul Krugman calls the Goldman Sachs/ The Producers failed securities scam “looting.” See also libertarianism exposed.

SEC Accuses Goldman Sachs of Fraud

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This is juicy — the New York Times just reported —

Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail.

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

Goldman investors lost billions, the article says, but Goldman ended up making money on the “investment instrument.”

The “instrument,” called Abacus 2007-AC1, was packed with mortgage bonds chosen by John A. Paulson, a hedge fund manager widely praised for correctly predicting the bursting of the housing bubble. The SEC says Paulson chose bonds he believed would default. Marketing materials for Abacus claimed the bonds were being chosen by an independent third party, when in fact they were chosen by someone intended to make a lot of money from the deception.

I’m not entirely clear how one might “bet against” a fund, but as I understand it Paulson and Goldman Sachs took a ton of insurance (mostly from AIG) on the fund so that they would clean up when it went bust.

I hope this signals the Obama Administration is getting tougher on the Golden Parachute crowd.

Update: Andrew Leonard at Salon clarifies things a bit:

According to the SEC complaint, in early 2007, at the request of John Paulson, a prominent hedge fund trader, Goldman Sachs created a security — called Abacus 2007 AC-1 — built from underlying mortgage-backed securities that Paulson had cherry-picked as most likely to blow up. While Goldman Sachs then turned around and sold the security to its own clients, Paulson and Goldman bought credit default insurance on the underlying mortgage bonds. Paulson and Goldman cashed in, while Goldman’s clients lost millions. At no time did Goldman divulge Paulson’s involvement to its clients.

Update: Paul Krugman’s column was written before this news came out, obviously, but it sorta kinda relates.

Update:

Michael Hirsch:

The case shows how pathological the markets had become. The cart was beginning to drive the horse: rather than packaging mortgage-backed securities together and selling them around the world in order to spread risk, such products were being created for the sole reason to permit traders to short them and make money on their almost certain failure. As blogger Yves Smith pointed out in her withering review of Michael Lewis’s new book, The Big Short, such short sellers kept the subprime market going long after it should have died a natural death by creating products that fooled investors into thinking the market was healthier than it really was.

Even as I keyboard, someone at Reason must be frantically writing a “Hit & Run” blog post that blames government regulation.

Update: The libertarians at Reason so far haven’t commented on the Goldman Sachs situation. So far the only pushback I’ve seen from the Right is that Goldman Sachs was Barack Obama’s biggest Wall Street contributor during the 2008 elections. In other words, it’s the old McCarthyite guilt-by-association trick.

Goldman Sachs was a major contributor to both the Obama and McCain campaigns, according to OpenSecrets.com, although it’s true Goldman Sachs gave more money to Obama. But then, so did just about everybody.

McCain’s top five contributors (individual contributions bundled together by industry):

Merrill Lynch $373,595
Citigroup Inc $322,051
Morgan Stanley $273,452
Goldman Sachs $230,095
JPMorgan Chase & Co $228,107

Looky there — they’re all from the financial sector.

Barack Obama’s top five contributors:

University of California $1,591,395
Goldman Sachs $994,795
Harvard University $854,747
Microsoft Corp $833,617
Google Inc $803,436

A little more variety, there.

Update: Reason, the Cato Institute blog and the Lew Rockwell site still haven’t posted anything about the Goldman Sachs issue as of 5:30 pm. I guess they’re still struggling to find a way to blame government regulation.

The Corrupt Financial Sector

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Kevin Hall of McClatchy Newspapers tells us what Moody’s Investors Service was up to before the meltdown:

Moody’s blue-ribbon board of directors stopped receiving key information from an internal committee that was supposed to keep the board informed of risks to the company, a McClatchy investigation has found.

Instead, the ad hoc risk-management committee suddenly disappeared, precisely at the time when the board and management should have been shifting to higher alert as the financial world began quaking.

As McClatchy reported last year, the credit-rating agency had been handing out Triple-A grades like candy for Wall Street mortgage securities that were backed by pools of home loans that turned out to be junk.

Moody’s, of course, is a financial research group that analyzes the financial soundness of commercial and government entities and hands out credit scores on borrowers. It’s not exactly a watchdog, but you could argue that it’s a means by which the glorious and infallible free market, praised be its name, regulates itself.

Well, so much for that.

Former Moody’s executives told Hall that the Moody’s board of directors were meeting six times a year, although what they actually did is questionable. The adjective “incurious” was attached to them a couple of times. For this industriousness, members were paid salaries of up to $115,000 a year, plus stock. Nice work if you can get it.

A committee charged with the job of warning the company of threats was disbanded in 2007 after a management shakeup, and the board either didn’t notice or didn’t care. The whole business stinks of crony capitalism.

Also,

… the legislation to overhaul financial regulation that’s now moving through Congress aims to empower ratings-agency boards by requiring a direct line of communication between the company officials who police for risks and the boards. It’s not clear whether that would have made any difference at Moody’s.

It wouldn’t have made any difference at Moody’s because the board members, apparently, did not take their responsibilities seriously. It appears people in the company were trying to get their attention and warn them something bad was about to go down, but the board remained oblivious. I’m sure the members all expect to golden parachute into a cushy retirement, no matter whether they succeed or fail, if they haven’t parachuted already.

I’m sure that if you give them enough time and latitude, libertarians will find some reason why Moody’s meltdown was the government’s fault, and that such things can never happens when markets are unregulated. But it seems to me that the financial sector is just plain corrupt, through and through.

Blinded by Data

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Noted in passing: The Wall Street Journal ran an editorial titled The “Lost Wages of Youth” that claimed the recent increase in the minimum wage had caused a rise in unemployment in teenagers. It’s behind a subscription wall, but you can read their data at New Republic, courtesy of Jonathan Chait. WSJ even published a line graph showing increases in teen unemployment superimposed over a timeline of minimum wage increases, 2007-present.

Now, anyone who has not been in a coma during that time period might have noticed that unemployment is up all over, and not just among minimum-wage earners. So Chait and Brendan Nyhan published another chart that shows teen unemployment has actually gone up less than unemployment as a whole during this same time period.

In other words, although data show a rise in unemployment among teens, there is no reason to assume that minimum wage increases were a cause, never mind the cause, unless you also assume that the rise in minimum wage also caused the nation’s financial meltdown. As Brendan Nyhan put it, “a preliminary examination shows no obvious statistical evidence of a relationship between the minimum wage and the teen or black teen unemployment rates once we account for the upward trend in joblessness.”

Of course. One has to ask, how stupid do you have to be to not have seen the big, honking flaw in WSJ’s presentation? As stupid as this guy.

Capitalism: A Love Story

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The opening credits to Michael Moore’s latest film appear against a backdrop of bank surveillance videos, shot during actual bank robberies. As I sat through this assortment of real life holdups – showing robbers sticking guns into tellers’ faces, jumping over counters, quickly grabbing the cash and stuffing it into bags – criminal human behavior that most of us have never experienced – it dawned on me that these bank videos depicted greed at its most intense and personal. This sets the tone for the rest of the film.

A 1960s Encyclopedia Britannica educational film, like the kind many of us saw in grade school, follows next, explaining the fall of the Roman Empire. The clip shows how Roman decadence, including a vast gulf between rich and poor, as well as bread and circuses for the poor, brought the empire down. This is brilliantly intercut with scenes from contemporary America, scenes that the original producers of the Britannica film could never have imagined. It’s as though the decades-old voiceover is describing our own time, instead of the Roman.

Moore then does a great job showing how the general prosperity of post World War 2 America gave way to Reaganism, from whence the looting of this country shifted into gear. Having grown up in a rust belt town in the 1960s – not unlike Flint Michigan – what Moore showed from his youth paralleled my own experience of how good those times were; this must seem unbelievable to younger generations.

A central, if not explicitly stated theme of the movie is how unbridled capitalism is turning our country into a nation of serfs. Wall Street dictates to an impotent government, even to President Ronald Reagan. Destitute citizens are hired by companies to issue foreclosure notices to those who are still clinging onto their homes. Those being evicted from their homes are hired and paid by the bank to clean up their home, before the bank takes it over.

For most Michael Moore films, I have found – because I’ve spent a lot of time on the internet – that I pretty much already know the subject matter going into the theater, and am simply thrilled that someone else gets it, and has the guts and vision to put it into a film. This movie went beyond that for me. I learned about Dead Peasant insurance – life insurance policies taken out by major companies on their employees. When an employee dies, the benefit goes to the company. While this might make sense in the case of hard to replace, highly valuable individuals, Moore shows that this practice is widely used on thousands of ordinary employees simply to make a buck, to add to the bottom line.

There were two other segments that opened my eyes. One was a memo written by Citigroup to (I believe) its biggest investors. It spoke of how the USA has become a Plutonomy – an economy run by and for the benefit of the wealthy. It openly talked about threats to this arrangement, notably the fact that everyone still has a vote. I have long realized that this was the state of affairs in the US, kind of a dirty secret that most people know to varying degrees; but to see this explicitly revealed, with all the implications, in black and white from a major player in the oligarchy was stunning.

The other segment is rare footage of FDR delivering a speech on a Second Bill of Rights, shortly before his death. None of these rights – for example, the right to a job and a good education – essentially elements of economic security – ever became part of the American way. Moore argues that they did become part of Germany and Japan, whose constitutions were rewritten after World War 2. He shows how the Japanese and German carmakers survived despite this, while American automakers have faltered and failed. Moore shows us a few worker owned companies in the US, and how their wages and conditions are much better than their top-down, capitalist competitors.

The villains in this movie are less the Republicans – although George W. Bush makes quite a few appearances via his speeches – and more the plutocrats who are behind both the Republicans and Democrats. The major heroes in this movie are: Marcy Kaptur (Rep-OH), Elizabeth Warren (chair of the Congressional Oversight Panel, formerly known as the TARP program), and William Black, a senior regulator during the S+L crisis. The minor heroes are many: among them are the Republic Window and Door workers who staged a successful sitdown strike to force the company’s bankers to pay them withheld wages; a poor family in Miami who organized their neighborhood and successfully rebuffed the bank’s (and the law’s) attempts to evict them.

Of course, there are the usual Michael Moore stunts of trying to speak to some corporate executive by storming the front gate – these are annoying but probably a necessary comic relief given the density and impact of the surrounding material. I felt that this film is probably Moore’s finest, most polished work. Having a large budget with lots of assistants to find the best archival footage, the best subjects to interview, and great music really helps. There are brilliant gems and nuggets throughout. It’s not easy to fit a critique of a huge subject like capitalism – something that all of us live and breathe in, to the point of being unaware of any other way of life, a sacred part of our national mythos, into a powerful 127 minute film.

Capitalism: A Love Story opened September 23 in NY and LA; it opens nationwide October 2.