Merle Hazard is the one and only country-music singer writing songs about the Financial Crisis. He’s been on PBS NewsHour with Jim Lehrer; he’s been the subject of articles by The Economist, London’s Financial Times, The New York Times, and Der Spiegel. And by gum, the man can carry a tune! Here’s Merle Hazard performing “Double Dippin'”!
According to The New York Times today ––
On Dec. 10, one of the lawmakers under investigation, Representative Joseph Crowley, a New York Democrat who sits on the Ways and Means Committee, left the Capitol during the House debate to attend a fund-raising event for him hosted by a lobbyist at her nearby Capitol Hill town house that featured financial firms, along with other donors. After collecting thousands of dollars in checks, Mr. Crowley returned to the floor of the House just in time to vote against a series of amendments that would have imposed tougher restrictions on Wall Street.
He’s just one of our national legislators under investigation by Congress to determine exactly how money flows in Washington, and how it directly influences inhibits reform. Here’s another:
The right honorable Tom Price just happened to schedule a “Financial Services Luncheon” on December 10, the same day as Rep. Crowley’s fundraising event and the exact same day that the first full House vote on the financial reform bill was held. During a two-month period around the vote, he scored $23,000.
Now, old hands around D.C. like Tom DeLay might call this “business as usual in Washington.” Any sane person, however, would rather be inclined to call this bribery. No, I’m not suggesting that you members of the governmental elite will ever actually be convicted of such a crime. Just know that we know exactly what you’re doing, and how you’re doing it. You are colluding with business interests to keep yourselves employed, to the detriment of the future of the United States of America. You are the epitome of the fault Tocqueville foresaw in the American system –– to wit, that people would be more inclined to vote their immediate self-interest than have the education and wisdom to consider long-term ramifications. Crowley and Price, and all others –– we’ll be seeing you.
Read to your heart’s content at The New York Times.
Okay, it’s like this. The main reason we’re in a Great Recession is that, back in 1999, the U.S. government compromised itself to death. Bill Clinton wanted to increase lending to minorities. The Republican-controlled Congress (swept into office by Newt Gingrich’s “Contract with America”) said, “Only if you decrease regulation at the same time,” and so Phil Gramm (appointed senior economic adviser to McCain’s presidential campaign) drew up a bill that gutted Glass-Steagall, the 1933 act that prevented the Depression from happening again. President Clinton, weakened by the Monica Lewinsky scandal, didn’t have much wiggle-room in the Oval Office any more, and signed the legislation.
So, naturally, you get a huge housing boom totally based upon dodgy accounting and ludicrous credit standards which blows up in the world’s face.
You can’t make this stuff up, right?
Guess what. The BP oil spill is a result of exactly the same legislative deathmatch. The New York Times has a superb piece this morning by David S. Abraham declaring, this is a disaster that Congress voted for. In a highly balanced and nuanced argument, Abraham details how Congress really and truly has been addicted to providing the oil industry with economic incentives beyond all reason:
In a 1995 attempt to encourage more exploration, Congress agreed to reduce the cut of the proceeds the government could collect on oil and gas drilling in deep waters. Ten years later, despite higher oil prices and declarations from President George W. Bush that more incentives were not needed, a Republican-led Congress reduced royalties yet again.
It’s madness, of course – especially when
at the same time that Congress called for new drilling incentives, it also gutted oversight. From 2002 to 2008, legislators approved budgets reducing regulatory staffing levels by more than 15 percent… A 2004 Coast Guard study found that its “oil spill response personnel did not appear to have even a basic knowledge of the equipment required to support salvage or spill clean-up operations.”
When Bobby Jindal calls for more offshore drilling in order to help pay for coastal damage inflicted by offshore oil-and-gas operations (yeah, you read that right), then we have truly entered a land of the comedic insane, where the Mad Hatter starts writing Catch-22 contracts. The astounding thing is that, at base, it’s an exquisitely simple recipe for disaster: radically lower the barriers to enter the market, while radically de-regulating (by which we mean: knocking down the laws and rules that govern participation in this country’s economy) and what you get are toxic assets. That’s what we call a house, these days: a toxic asset, destroying the person who possesses it (for D&D fans, that’s kind of like a poisoned amulet, except with lots of bricks and mortar and wiring and plumbing).
But we should be calling the oil spill a toxic asset too. The definition’s more apt; no metaphors needed here. It’s a natural resource that’s killing our economy and destroying the ecosystems of our oceans. It’s a substance that, for decades now, has powered our economy; now it’s bringing the Gulf to a standstill. It’s the toxic asset, our home mortgage that’s underwater. The rich will probably walk away from it, their dirty souls skimming the tops of the oily waves in that Gulf between them and us.
David Harvey, Distinguished Professor at the City University of New York, gives the world’s most pithy and complete explanation of the cumulative financial crises over the last 80 years to show us what’s happened. It’s an 11-minute showstopper of a lecture, and it is the only coherent 360-degree view of the crisis I’ve ever seen. I can’t emphasize how brilliant this is. Harvey is having an open online course reading Book I of Marx’s Capital. Watch this, and it’ll all make sense. Plus, it’s cartoony!
My name is Sam E. Antar. I am a convicted felon, former CPA, and former Chief Financial Officer of Crazy Eddie, Inc. During the 1980s, I helped mastermind with my cousin Eddie Antar and Uncle Sam M. Antar (co-founders of the company) one of the largest securities frauds of its time. Crazy Eddie Antar was coined by US Attorney Michael Chertoff as, “the Darth Vader of Capitalism.”
I believe that former criminals like me must do more than just express regret for our crimes and pay whatever punishment society imposes upon us. I believe that it is our obligation and responsibility to educate society, so that society can avoid future perils caused by new generations of criminals.
I teach law enforcement, government entities, businesses, professionals, and students about white collar crime and train them to catch corporate miscreants.
With that preamble, how can you not read his blog, especially this post about the SEC’s kick-ass tactics on Goldman Sachs? Antar writes, “When a company or individual receives a surprise subpoena on a Friday from the SEC, it is usually designed to ruin their weekend plans.” Antar also notes that the SEC’s chief counsel on this case is none other than Richard E. Simpson, who was the guy who put Sam and Crazy Eddie behind bars. After decades of SEC fecklessness (to put it charitably), finally they are swinging for the bleachers.
Goldman Sachs has finally sussed out the fact that negative publicity is bad for business. Time to get your stuff in gear, Masters of the Universe. Hey, that’s all right: just throw a few billion into marketing and lobbying, like the entertainment and insurance industries have done, and you’re sorted.
“Goldman has become one giant pinata to whack,” said Charles M. Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, adding that he couldn’t recall a previous instance where a company cited bad publicity as a risk to its business. “It’s reflective of the rather bizarre political climate in which we operate.”
Follow the story at the Wall Street Journal’s MarketWatch.
Read an excerpt from the book at Vanity Fair.
I have a couple friends who have the most exciting job imaginable in a field with a really boring reputation: they’re forensic accountants. They’re the folks who are called upon to tease out the fake numbers of financial fraudsters once an indictment’s come down. They helped put Bernie Madoff in jail, and a lot of other Wall Street hooligans too. How do I know? Because I asked ’em. I also asked ’em if they’d like a post at the National Security and Exchange Commission (SEC). One laughed. He said, “When they pay me as much as I’m making here!”
Now, these folks I know, they’re brilliant. And they’re right on. But they make their money after everyone else has lost theirs. That’s not right. And when I read something like this, I get really mad:
Why do you think the S.E.C. failed to wake up to Madoff’s $65 billion Ponzi scheme until he turned himself in?
They weren’t even asleep at the switch; they were comatose. They didn’t respond to heat and light, much less evidence of wrongdoing. They were not engaged in the fight.
That’s Harry Markopolos, who describes himself as “the SEC’s doormat for nine years,” who’s being profiled in The New York Times and has a new book out, No One Would Listen.
Simply put, we need to reform the compensation system for federal employees. People who work in finance are, naturally, motivated by money. People who are motivated by money and ethics and personal accountability and interesting problems go into fields like venture capitalism and forensic accounting. It makes no sense to hire SEC investigators and put them on a bureaucratically-contrived federal tier pay system tied to seniority. If, long ago, we had created enough incentives for my brilliant friends to work for the federal government and stop the Ponzi schemers and mortgage tranchers before the crap hit the fan, we could all have breathed a sigh of relief and continued to sip our martinis. As it stands, my friends the forensic accountants are skiing at Killington and sipping martinis while the rest of us are on the Mad Dog 20/20.
~ David Schneider
ELIOT SPITZER, FRANK PARTNOY and WILLIAM BLACK write for the NYT,
WE end this extraordinary financial year with news that the Treasury is in discussions with American International Group about selling the taxpayers’ 80 percent ownership stake in that company. The government recently permitted several banks to break free of its potential oversight by repaying loans made during the rescue. But with respect to A.I.G., the Treasury should not move so fast. There is one job left to do.
A.I.G. was at the center of the web of bad business judgments, opaque financial derivatives, failed economics and questionable political relationships that set off the economic cataclysm of the past two years. When A.I.G.’s financial products division collapsed — ultimately requiring a federal bailout of $180 billion — those who had been prospering from A.I.G.’s schemes scurried for taxpayer cover. Yet, more than a year after the rescue began, crucial questions remain unanswered. Who knew what, and when? Who benefited, and by exactly how much? Would A.I.G.’s counterparties have failed without taxpayer support?
The three of us, as experienced investigators and prosecutors of financial fraud, cannot answer these questions now. But we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade. Before releasing its regulatory clutches, the government should insist that the company immediately make these materials public. By putting the evidence online, the government could establish a new form of “open source” investigation.
Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story. In past cases of financial fraud — from the complex swaps that Bankers Trust sold to Procter & Gamble in the early 1990s to the I.P.O. kickback schemes of the late 1990s to the fall of Enron — e-mail messages and internal documents became the central exhibits in our collective understanding of what happened, and why.
So far, prosecutors and regulators have been unable to build such evidence into anything resembling a persuasive case against any financial institution. Most recently, a jury acquitted Bear Stearns employees of fraud related to the collapse of the subprime mortgage market, in part because available e-mail messages suggested the employees had done nothing wrong.
Perhaps A.I.G.’s employees would also be judged not guilty. But we would like to see the record to find out. As fraud investigators, we would like to examine the trading patterns of A.I.G.’s financial products division, and its communications with Goldman Sachs and other bank counterparties who benefited from the bailout. We would like to understand whether the leaders of A.I.G. understood that they were approaching a financial Armageddon, and whether they alerted their counterparties, regulators and shareholders to the impending calamity.
We would like to see how A.I.G. was able to pay huge bonuses to its officers based on the short-term income they received from counterparties for selling guarantees that, lacking adequate loss reserves, the companies would never be able to honor. We would also like to know what regulators knew, and what they did with the information they had obtained.
Congress wants answers, too. This month, during hearings on Ben Bernanke’s nomination to a second term as chairman of the Federal Reserve, several senators fumed about being denied access to his A.I.G.-related documents.
No doubt, some of the e-mail messages contain privileged conversations among lawyers. Others probably include private information that is irrelevant to A.I.G.’s role in the crisis. But the vast majority of these documents could be made public without legal concern. So why haven’t the Treasury and the Federal Reserve already made sure the public could see this information? Do they want to protect A.I.G., or do they worry about shining too much sunlight on their own performance leading up to and during the crisis?
Mike Wilkinson writes for the Detroit News,
Despite an official unemployment rate of 27 percent, the real jobs problem in Detroit may be affecting half of the working-age population, thousands of whom either can’t find a job or are working fewer hours than they want.
Using a broader definition of unemployment, as much as 45 percent of the labor force has been affected by the downturn.
And that doesn’t include those who gave up the job search more than a year ago, a number that could exceed 100,000 potential workers alone.
“It’s a big number, and we should be concerned about it whether it’s one in two or something less than that,” said George Fulton, a University of Michigan economist who helps craft economic forecasts for the state.
Mayor Dave Bing recently raised eyebrows when he said what many already suspected: that the city’s official unemployment rate was as believable as Santa Claus. In Washington for a jobs forum earlier this month, he estimated it was “closer to 50 percent.”
Although the government doesn’t produce an unemployment number that high, it’s not hard to get close.
Officially, the unemployment rate in Detroit was estimated at 27 percent in October. But that number does not include people working part-time who want full-time work, nor does it include “discouraged” workers, who have stopped looking for work. It also doesn’t include people who have gone back to school rather than search for a job.
‘Detroit’ by Gratuitous Art Films.
Elizabeth Warren writes for the Huffington Post,
Can you imagine an America without a strong middle class? If you can, would it still be America as we know it?
Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can’t make the minimum payment on their credit cards. One in eight mortgages is in default or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners out on the street.
Families have survived the ups and downs of economic booms and busts for a long time, but the fall-behind during the busts has gotten worse while the surge-ahead during the booms has stalled out. In the boom of the 1960s, for example, median family income jumped by 33% (adjusted for inflation). But the boom of the 2000s resulted in an almost-imperceptible 1.6% increase for the typical family. While Wall Street executives and others who owned lots of stock celebrated how good the recovery was for them, middle class families were left empty-handed.
The crisis facing the middle class started more than a generation ago. Even as productivity rose, the wages of the average fully-employed male have been flat since the 1970s.
But core expenses kept going up. By the early 2000s, families were spending twice as much (adjusted for inflation) on mortgages than they did a generation ago — for a house that was, on average, only ten percent bigger and 25 years older. They also had to pay twice as much to hang on to their health insurance.
To cope, millions of families put a second parent into the workforce. But higher housing and medical costs combined with new expenses for child care, the costs of a second car to get to work and higher taxes combined to squeeze families even harder. Even with two incomes, they tightened their belts. Families today spend less than they did a generation ago on food, clothing, furniture, appliances, and other flexible purchases — but it hasn’t been enough to save them. Today’s families have spent all their income, have spent all their savings, and have gone into debt to pay for college, to cover serious medical problems, and just to stay afloat a little while longer.
Through it all, families never asked for a handout from anyone, especially Washington. They were left to go on their own, working harder, squeezing nickels, and taking care of themselves. But their economic boats have been taking on water for years, and now the crisis has swamped millions of middle class families.
Do I even need to mention people are angry out there? I apparently do, because despite our over-crowding prisons, they are not currently packed with bankers. A lot of us scratched our heads when the great bailouts weren’t followed by a stringing of the scape-goats, but is it too late for red eyed retribution?
Sure we have a few ponzi schemers locked away, but not one high profile banking executive has answered for the millions who watched their savings and investments get wiped out. It might not feel like it, but out there some folks are trying. There are a number of pending civil suits all over the country and the FBI has more than 580 large-scale corporate fraud investigations currently underway. New York Attorney General Andrew Cuomo just subpoenaed five board members of the Bank of America and plans to haul in ten more, but at the end of the day no one believes they will spend a night in jail.
Don’t get me wrong, I’m glad they have to jump through a few hoops to keep their billions in bonuses, but if we don’t put them away soon will this country survive the turbulence of financial angst?
The whole thing boils down to one question, is it too late for comeuppance? I don’t think so.
Shakespeare teaches us that there is always time for just deserts.
A short film about U.S. monetary policy, in two parts.
Total running time: 14:38
From the Washington Post, we receive a remarkable but somewhat unsurprising revelation:
Genevievette Walker-Lightfoot, a lawyer with the U.S. Securities and Exchange Commission, raised the alarm about Bernie Madoff’s financial management firm way back in 2004. She noticed accounting irregularities and drew up a list of questions she wanted to ask Madoff, including several that apparently drove to the heart of the largest Ponzi scheme in world history.
She then brought these questions to a supervisor, who pocket-vetoed them. At the time, the SEC was being pressured to investigate mutual funds — a “different matter” altogether, apparently — and Madoff was never pursued.
We might chalk the entire thing up to the idiotic Federal government and its woefully inadequate priorities, but The Washington Post doesn’t stop there. Apparently, one of Walker-Lightfoot’s supervisors was Eric Swanson, assistant director of the SEC.
He later married Bernie Madoff’s niece.
As they say down at the bank, “You do the math.”
Swanson is no longer with the SEC and is currently being investigated by the SEC’s inspector general regarding the matter. Here’s a link to the WashPost article.
Look, I know this is getting boring. Redundant. Infuriating. But now that all the cards are on the table, and everyone’s holding a Deuce and a Six of Clubs while betting on a royal flush, a whole lot of very smart people are starting to tell us exactly how money works. People like John Lanchester. If you read the New Yorker, you might get a piece of what John knows. But if you read The London Review of Books, you get another piece entirely:
“IN THE STOCK MARKET, ALL MONEY IS NOT CREATED EQUAL. The price of a share is determined by what people think it’s worth – obviously. But what people think it’s worth is in turn decided by what they think the company’s prospects are. Take the example of companies A and B. Both of them make widgets. Company A is a fast-growing internet-based firm, eWidget, which is promising to take over the world market in widgets by riding the new trend for firms and customers to order their widgets online. Last year its earnings were £200 million. The company’s pitch to the stock market runs something like this: the global market for widgets is £1 trillion. In time, say ten years, it is clear that 30 per cent of widgets will be ordered over the internet. Our ambition is to win 10 per cent of that market. (The trick is to keep these projected and made-up figures sounding sensible and achievable: don’t claim that the net will be all the market, and that you’ll get all of that business. State a huge number for the total market, and claim to be after a sensible fraction of it.) Continue reading “Bonus financial chicanery!”
“EVERYONE BOUGHT REAL ESTATE; and everyone was a ‘real estate man’ either in name or practice. The barbers, the lawyers, the grocers, the butchers, the clothiers – all were engaged now in this single interest and obsession. And there seemed to be only one rule, universal and infallible – to buy, always to buy, to pay whatever price was asked, and to sell again within two days at any one price one chose to fix. It was fantastic. Along all the streets in town the ownership of the land was constantly changing; and when the supply of streets was exhausted, new streets were feverishly created in the surrounding wilderness; and even before these streets were paved or a house had been built upon them, the land was being sold, and then resold, by the acre, by the lot, by the foot, for hundreds of thousands of dollars.”
~ Thomas Wolfe, You Can’t Go Home Again, 1934
Steven Malanga, in CityJournal, has a perfect bead on what happens WHEN HISTORY ATTACKS! “We’ve largely forgotten,” he writes, “that Herbert Hoover, as secretary of commerce, initiated the first major Washington campaign to boost homeownership… Without waiting to see if postwar prosperity might solve the problem, in 1922 Hoover launched the Own Your Own Home campaign, hailed at the time as unique in the nation’s history.
The great national effort seemed to pay off. From mid-1927 to mid-1929, national banks’ mortgage lending increased 45 percent. The New York Times applauded the ‘wave of homebuilding’ that ‘swept over’ America; the country was becoming ‘a nation of home owners.’
Soon after the October 1929 Wall Street crash, the housing market began to collapse…The Own Your Own Home campaign had trapped many Americans in mortgages far beyond their reach. New homeowners who had heard throughout the initiative that ‘the measurement of a man’s patriotism and worth as a citizen’ was owning a home, wrote housing policy expert Dorothy Rosenman in 1945, had been ‘swept up by the same wave of optimism that swept the rest of the nation.’ Financial institutions were exposed as well.” Read more…
“TAKE A TYPICAL TRADER at a bank, investment bank, hedge fund or whatever. Darwinian selection ensures us that these folks are generally smart young people with more than the usual appetite for both money and risk-taking. Unfortunately, their compensation schemes exacerbate these natural tendencies by offering them the following sort of go-for-broke incentives when they place financial bets: Heads, you become richer than Croesus; tails, you get no bonus, receive instead about four times the national average salary, and may (or may not) have to look for a new job. These bright young people are no dummies. Faced with such skewed incentives, they place lots of big bets. If tails come up, OPM (Other People’s Money) will absorb almost all of the losses anyway.
Whoever dreamed up this crazy compensation system? That’s a good question, and the answer leads straight to the doors of the top executives of the companies. So let’s consider the incentives facing the CEO and other top executives of a large bank or investment bank (but, as I’ll explain, not a hedge fund). For them, it’s often: Heads, you become richer than Croesus ever imagined; tails, you receive a golden parachute that still leaves you richer than Croesus. So they want to flip those big coins, too.
From the point of view of the companies’ shareholders — the people who provide the OPM — this is madness. To them, the gamble looks like: Heads, we get a share of the winnings; tails, we absorb almost all of the losses. The conclusion is clear: Traders and managers both want to flip more coins — and at higher stakes — than shareholders would if they had any control, which they don’t.
The source of the problem is really quite simple: Give smart people go-for-broke incentives and they will go for broke. Duh.”
Over at The New Yorker, John Lanchester provides just about the pithiest summary of Our World of Hurt. Even if you don’t pick up any of the books he’s reviewing, this piece is essential reading for a full understanding of the outrageous irresponsibility of investment bankers.
Primarily, he answers the biggest question left remaining on the whole mess: what are credit-default swaps?
“SAY YOU’RE IN THE GROCERY BUSINESS, and feel gloomy about your prospects. Your immediate neighbor is in the stationery business, and he feels gloomy about his prospects, less so about yours. You get to talking, and one of you hits on a brilliant idea: why not just swap revenues? You take his earnings for the year, and he takes yours. The actual business doesn’t change hands, making the swap, in banking terminology, ‘synthetic.’
…But competition was making those swap deals less profitable. The quest was for a new, and therefore newly lucrative, product to sell. What got the J. P. Morgan team rolling was this thought: instead of swapping bonds or currency or interest rates, why not swap the risk of default? In effect, it could sell the risk that a borrower won’t be able to pay back his debt. Since banking is based on making loans to customers, the risk of default by those customers is a crucial part of the business. A product that made it possible to reduce that risk—by selling it to somebody else—had the potential to create a gigantic new market…
The new financial instruments, as clever as they were, had an unfortunate side effect: they broke banking. At its heart, banking is a simple business. Customers deposit money at a bank, in return for interest; the bank lends that money to other people, at a higher rate of interest. This isn’t glamorous or interesting, but banking is not supposed to resemble skydiving or hip-hop; what recommends it is that it’s a good way of making steady money (and of creating credit in the economy), as long as the bank is careful about whom it lends money to. The quality of the loans is critical, because those loans are the bank’s earning assets.
This isn’t some incidental issue; it’s the very core of what banking is. But the model of packaging plus securitization spurned the principle that a bank had to individually assess and monitor every loan. The mathematics of valuation models—horrendously complex equations to assess probabilities and correlations, cooked up in mad-scientist style by the firms’ ‘quants’—took on the burden of assessing statistical risk. The idea that a banker looks a borrower in the eye and takes a view on whether he can trust him came to seem laughably nineteenth-century. As for the risks? Well, as Lawrence Summers said when he was Deputy Secretary of the Treasury, ‘The parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.'”
As I said, ESSENTIAL READING.
Reel ’em in, yeah. Here’s some trailer bait. “Where Credit’s Due” is going to tell you things about the American banking industry you probably didn’t know. Our government knew this stuff, at one point. How’d we manage to screw that up?