pippinghole

Jon Stewart Compares 'Wall Street' Justice to 'Occupy Wall Street' Justice

noreply@blogger.com (pippinghole) — Thu, 08 May 2014 01:00:00 +0000

AlterNet / By Cliff Weathers

The Daily Show Host and Samantha Bee compare the only two convictions resulting from the banking scandal.

With his tongue firmly implanted in his cheek, Jon Stewart mocked the mainstream media's stalwart defense of the banking industry last night.

"As we all know, every since they innocently crashed our entire economy through purposeful and fraudulent activity, banks and the bankers who...bank them have weathered attacks from all quarters," Stewart teased before showing clips of Larry Kudlow, Stuart Varney and other pundits cheerleading for the banking industry.

Stewart went on to compare the recent guilty plee of Credit Suisse banker Kareem Serageldin to the conviction of Occupy Wall Street protester Cecily McMillan.

Serageldin admitted to looking the other way as his traders lied about the value of mortgage-backed securities, actions which helped lead to the economic meltdown in 2008. McMillan demonstrated against the banks as part of the Occupy protests in 2011. She was convicted of assaulting a New York City police officer by elbowing him after he grabbed her breast. Serageldin faces a 30-month sentence while McMillan faces up to seven years in prison.

Stewart joked that with one banker and one Occupier behind bars, the two sides are now even.
The segment cut to Samanta Bee, reporting from New York's financial district. She corrected Stewart, saying the score between the two sides are not even:

“Wasn’t this about the 99% against the 1%?” she joked. “That means that one banker is worth 99 protesters. And by my count, that puts us 98 convicted hippies short of true justice.”

The Daily Show
Get More: Daily Show Full Episodes,The Daily Show on Facebook,Daily Show Video Archive

It’s Good – no – Great to be the CEO Running a Huge Criminal Bank

noreply@blogger.com (pippinghole) — Thu, 08 May 2014 00:53:00 +0000

By William K. Black
neweconomicperspectives.org

Every day brings multiple new scandals. At least they used to be scandals. Now they’re simply news items strained of ethical content by business journalists who see no evil, hear no evil, and speak not about evil. The Wall Street Journal, our principal U.S. financial journal ran two such stories today.

The first story deals with tax evasion, and begins with this cheery (and tellingly inaccurate) headline:

“U.S. Banks to Help Authorities With Tax Evasion Probe.” Here’s an alternative headline, drawn from the facts of the article: “Senior Officers of Goldman Sachs and Morgan Stanley Aided and Abetted Tax Fraud by Wealthiest Americans, Failed to Make Required Criminal Referrals, and Demanded Immunity from Prosecution for Themselves and the Banks before Complying with the U.S. Subpoenas: U.S. Department of Justice Caves in to Banker’s Demands Continuing its Practice of Effectively Immunizing Fraud by Most Financial Elites.”

Oh, and the feckless DOJ (again) did not require any officer who committed the felony of aiding and abetting tax fraud to resign or to repay the bonuses he “earned” through his crimes. But not to worry, the banks – not the bankers – may have to pay fines as the cost of doing their felonious business. The feckless regulators did not even require Goldman Sachs and Morgan Stanley to disclose to shareholders their participation in the program.

Best of all, the “cooperation” the banks will offer will be of vastly reduced value because under Swiss law they will not report the names or any identifying information of the wealthy U.S. taxpayers that they helped commit felonies. But not to worry says DOJ:

“’Through the program, as well as through ongoing investigations and other law enforcement tools, we are confident that we will obtain information that will lead us to account holders who have thought for too long that they can keep hiding,’” said Dena Iverson, a Justice Department spokeswoman.

And did I mention that there was an U.S. amnesty program for wealthy U.S. tax cheats who used Swiss banks to commit their felonies?

Note that this aspect of Switzerland’s deliberate national policy of aiding tax evasion by the world’s wealthiest tax cheats fits into the article I wrote earlier this week about Dr. Hans Geiger’s rage that FATF is seeking to require banks to make criminal referrals against tax cheats. Geiger is a leader in a Swiss movement to block that requirement. He has also written that requirements that the banks file criminal referrals when they discover evidence indicating that they may have aided money laundering, the funding of terrorists, or international sanctions busting should be eliminated.

The Ethics-Free WSJ Story on the Regulator’s Latest Betrayal of Homeowners

The context of this WSJ story is the broader series of betrayals of homeowners by the regulators and prosecutors led initially by Treasury Secretary Timothy Geithner and his infamous “foam the runways” comment in which he admitted and urged that programs “sold” as benefitting distressed homeowners be used instead to aid the banks (more precisely, the bank CEOs) whose frauds caused the crisis. The WSJ article deals with one of the several settlements with the banks that “service” home mortgages and foreclose on them. Private attorneys first obtained the evidence that the servicers were engaged in massive foreclosure fraud involving knowingly filing hundreds of thousands of false affidavits under (non) penalty of perjury. As a senior former AUSA said publicly at the INET conference a few weeks ago about these cases – they were slam dunk prosecutions. But you know what happened; no senior banker or bank was prosecuted. No banker was sued civilly by the government. No banker had to pay back his bonus that he “earned” through fraud.

Naturally, the WSJ provides none of that context, but what the article does discuss remains a travesty. It is entitled “GAO: U.S. Foreclosure Review Could Have Generated Higher Payments: Review Could Have Delivered $1.5 Billion More to Consumers if Not Halted, Federal Watchdog Finds.”

I’ve added emphasis to the dishonest euphemisms the WSJ employs (and quotes) for the “f” word (fraud).

“The Government Accountability Office, in a report being released Tuesday, evaluated federal bank regulators’ decision last year to cancel a prolonged review of foreclosure-processing and loan-assistance mistakes.”
“The GAO report shows that the settlement ‘was reached without adequate investigation into the harms committed by the servicers,’ Rep. Maxine Waters (D., Calif.) said in a prepared statement.”
“‘Many of the files did not contain complete data, making it impossible to know whether borrowers were disqualified from the possibility of the greatest cash payouts’ [the WSJ quoting Water’s prepared statement].”
But finishing this process would have been a long and complicated affair. Doing so, the GAO said, would have taken up to two more years for consulting firms to scour thousands of foreclosure files for errors, at a cost to banks of about $4.6 billion.
The foreclosure review was ordered three years ago by the Office of the Comptroller of the Currency and the Federal Reserve, which told banks to hire independent consultants to evaluate allegations the firms used shoddy practices when handling a huge volume of foreclosures during the housing bust.

Sadly, I tend to read the underlying documents and the truly bad news is that the GAO report uses the “f” word only once and is otherwise a mass of euphemisms. This sentence will give you an accurate flavor of the Report.

“In September 2010, allegations surfaced that several servicers’ documents in support of judicial foreclosure may have been inappropriately signed or notarized” [GAO 2014: 7, emphasis added].

In addition to the euphemisms and the fact that the sentence reads like it was written by the banks’ criminal defense counsel, it is a sentence crafted to mislead. By that time there were sworn statements by a series of servicer personnel admitting that their offices engaged in systematic foreclosure fraud through filing affidavits that were known to be false. They admitted to tens of thousands of criminal acts by their organizations.

The one time the GAO uses the word fraud is to report that the foreclosure payout program carefully protects itself from fraud by the victims – by providing that the checks expire after 90 days [GAO 2014: 34 n. 51]. In a very dark Irish humor kind of way I find this hysterically funny. By contrast, when the GAO discusses real frauds the passage again reads as if it were drafted by the bank’s criminal defense lawyers.

“Failure to review documents filed in support of a judicial foreclosure may violate consumer protection and foreclosure laws, which vary by state and which establish certain procedures that mortgage servicers must follow when conducting foreclosures” [GAO 2014: 7 n.13].

Everyone involved in the faux foreclosure review – the “consultants” hired who to do the review, the mortgage servicers, the (non) regulators, and the GAO performed abysmally. The “review” was an expensive farce. The regulators did not conduct the review. The servicers did not conduct the review. The consultants were chosen by the servicers, which the regulators should never have allowed. The consultants were allowed to have additional conflicts of interest such as having worked on the loan foreclosures they were reviewing. The “design” of the (non) study was an embarrassment. The (non) study collapsed almost immediately because it turned out that many of the servicers’ files were so pathetic that the study “design” could not be followed. Rather than stop and reconsider the implications of those file defects for the likelihood that the servicers engaged in fraud in order to foreclose the regulators decided to continue. The more severe the file defects the greater the incentive of servicers to engage in foreclosure fraud.

The consultants were soon hopelessly behind schedule and budget because of the severity of the loan file defects. Eventually, the (non) regulators gave up and brought the (non) study to an end, not with a bang but with a whimper. Real regulators would have had great negotiating leverage. The servicers had agreed to conduct the study and failed. It would cost the servicers more to complete the review than simply boost the payout by several billion dollars. The two obvious answers were to continue the study and order interim payouts or to stop the study and in return for a significantly larger payout to homeowners. Naturally, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve found a third, far worse choice. They left the cash on the table that could have gone to the homeowners. The GAO was no stronger. They do agree that the OCC and the Fed left billions on the table but they also give them a pass, saying that the settlement is in the “range” that would emerge from the regulators assumed rate of bad foreclosures. The problem, as the facts disclosed in the GAO’s report make clear, but GAO’s analysis ignores, is that the regulators’ assumed rate of bad foreclosures had no reliable basis and was proven to be far too low an estimate by the fact that the loan files were so incomplete that the consultants could not complete the study.

So, there is no reliable basis for GAO’s claim that there is any “range” of reasonableness for the payments to homeowners. This passage from the GAO report conveys the GAO and the regulators’ unique approach to (non) quantification.

• Failure to maintain sufficient documentation of ownership. Although the 2010 coordinated reviews found that servicers generally had sufficient documentation authority to foreclose, examiners noted instances where documentation in the foreclosure file may not have been sufficient to prove ownership of the mortgage note. Likewise, during the subsequent consent order file reviews, some consultants found cases of insufficient documentation to demonstrate ownership [GAO 2014: 55].

“Generally,” “instances,” and “some consultants found cases” – billions of dollars were spent to produce nothing but these useless, vague phrases. The “study” “results” were so worthless that the GAO reports that the consultants did not even bother to create reports on their work. Instead, and this is hilarious, the OCC and the Fed held “exit interviews” with the consultants. Only a PR “expert” planning to put lipstick on a wild boar would spend even more money on such a useless exercise.” The GAO tells us that many of the regulators’ exam teams given the exit interview materials concluded that they were useless.

Representative Maxine Waters, the ranking Democrat on the House Financial Services Committee, has been trying to get the regulators to do the right thing and has urged the chairman of the committee to investigate the servicers’ and regulators’ actions. Waters has been, rightly, extremely critical of the servicers and the regulators. Here is the link to an interview of her that is well worth reading in its entirety.

Postscript: The WSJ op ed’s Ode to Insider Trading

Henry Manne is back. The WSJ published his op ed on same day these other two stories ran. Manne ran the effort for decades to indoctrinate judges and law professors in theoclassical economics. Manne’s metaphor is that insider trading is like prohibition.

Manne’s op ed asserts that insider trading cases target “low level functionaries.” Manne’s so-called “low level functionaries” consist of millionaires and multi-millionaires that include the head of a major hedge funds and a senior official at Goldman Sachs.

“We see federal prosecutors making names for themselves by convicting mostly low-level functionaries. We see the so-called corruption of otherwise good folks, including medical researchers and high-tech specialists, with valuable information. Yet with so much wealth at stake, this ‘corruption’ surely goes far beyond what prosecutors have been able to demonstrate.”

Manne’s point is that if business officials have an incentive to cheat they will.

“There is about as much chance of stopping trading on undisclosed financial information as there ever was of stopping the consumption of booze. There is simply too much money sloshing around the world’s stock exchanges waiting for an ‘edge.’”

To use Manne’s metaphor, Wall Street is manned by alcoholics who are so addicted to greed and so devoid of ethics that Manne says it is impossible to deter them from committing these felonies even if you put hundreds of them in prison.

“The imagination of wealth seekers in using valuable information in the stock market will always outpace the ability of regulators to cope. The payoffs are too big and too accessible and the number of willing players too great for the practice to be significantly inhibited by scores of convictions.”

So, the financial industry is run by alcoholics who are so addicted to greed that they think they have the right to profit personally from confidential corporate information – and Manne’s answer is to roll out the keg and shout “drinks for everyone.” Manne provides another proof of one of our family rules: it is impossible to compete with unintentional self-parody.

Is anyone on Wall Street horrified by Manne’s “defense” (indictment) of them? Now would be a good time for you to take a public stand and lead a long-term public campaign to clean up the Street.

Fundamentals of Shadow Banking: Dealer Model

noreply@blogger.com (pippinghole) — Thu, 08 May 2014 00:40:00 +0000

Dr. Perry Merhling presented this seminar at UMKC on 4/30/14. He presented on the Shadow Banking System, in particular, the Dealer Model. The slides are immediately below the video.

Fundamentals of Shadow Banking-UMKC from Umkc Economists

Why Does Refusing to Put Fraudulent Banks into Receivership Help the Economy?

noreply@blogger.com (pippinghole) — Wed, 07 May 2014 00:08:00 +0000

By William K. Black
neweconomicperspectives.org

Conservative economists love “creative destruction.” They can’t wait to “get their Schumpeter on” when a business fails and thousands of workers lose their jobs. There is no more “creative destruction” conceivable than when we put a bank that has become a fraudulent enterprise into receivership, remove the controlling officers leading the fraud, and sell the bank through an FDIC-assisted acquisition. Indeed, the pinnacle of creative destruction would be doing this with a systemically dangerous institution (SDI) through a process that split the supposedly “too big to fail” bank into smaller components that (1) were no longer large enough to pose a systemic risk, (2) were more efficient than the bloated SDI, (3) no longer extorted a large (implicit) government subsidy that made real competition impossible, and (4) no longer had dominant political power via crony capitalism. Unlike the situation in which an SDI collapses suddenly in the midst of causing a global crisis when its frauds cause a liquidity crisis, it is vastly easier to put fraudulent SDIs in receivership in today’s circumstances. Unlike Arthur Anderson, the receivership power allows us to keep the enterprise alive and create more competitors rather than fewer.

As I often remarked, it is a testament to the financial and moral sophistication of our successors as financial regulators relative to our primitive era that they have realized that keeping fraudulent CEOs in charge of our largest banks – and virtually never putting such banks into receivership however massive and damaging their serial felonies – is the key to achieving financial stability. Their system, it must be admitted, has proven far superior. GDP losses are merely far more than 100X greater in the current crisis than in the savings and loan debacle. The jihad against effective regulation and prosecution of elite control frauds has been an enormous success. The primary question is whether to classify the resultant epidemics of accounting control fraud as “unintended consequences” of the three “de’s” (deregulation, desupervision, and de facto decriminalization) or as a very “intended consequences.”

I am deliberately violating the fundamental guild rules of theoclassical economists by using the “f” word, by noting that negative “unintended consequences” are the norm when we employ the three “de’s,” and that elite CEOs who use corporate power to produce the three “de’s” frequently intend to use the resultant criminogenic environment to defraud with impunity. It is verboten under guild rules to use the “f” word, to point out that the key to understanding our financial crises is that it is the CEO’s perverse incentives rather than “the bank’s incentives” that matter, to discuss the role of power, to point out that elite class status is important, and to point out that fraudulent CEOs often intend the negative consequences of the three “de’s.” In sum, theoclassical economics is a faith-based creed devoted to the worship of (and service to) the wealthy, particularly elite frauds. They are, of course, well compensated for championing the causes, and puffing the fragile egos, of the fraudulent plutocrats. I mean this literally. George Benston, Daniel Fischel, and Alan Greenspan were three of Charles Keating’s most valuable fraud allies. Lanny Breuer’s infamous “lamentations” speech (while head of DOJ’s Criminal Division) underscored how he fell hook, line, and sinker for the absurd claims of economists hired by today’s most elite fraudulent banksters that banks (and bankers!) should be “too big to prosecute.” By Breuer’s own bumbling admission, he lay awake at night for fear that his (always hypothetical) prosecutions of the major banks might “cause” a fraudulent bank to “fail.” This is, of course, heresy under the Schumpeterian creed of “creative destruction,” but theoclassical economists are very forgiving of their co-religionists who get rich by spreading heresy in the service of fraudulent elites.

Breuer was so bad that he obscured what we primitive regulators and white-collar criminologists had emphasized for decades. First, no banker is “too big to jail.” They are easily replaceable and removing a fraudulent bank CEO from power is the single most productive act that regulators and prosecutors can accomplish. Breuer and Attorney General Eric Holder were involved in a con when they claimed that their failure to prosecute the senior bank officers leading the frauds was in any way related to “too big to fail.” Hilariously, they even applied the “rationale” for non-prosecution to former bank officers – as if a bank would fail “because” its former officers were prosecuted. It is a testament to the weakness of the reportage that this claim was not treated with ridicule.

Second, valid fraud prosecutions do not “cause” a business to fail. The fraud causes them to fail. They should fail when their “profits” arise from fraud. In particular, they should fail in the case of accounting control fraud because their “profits” are the fictional product of accounting fraud. The markets and the economy are greatly improved when fraudulent enterprises are destroyed. There is no more creative form of destruction than removing the frauds that drive the Gresham’s dynamics that cause markets to become so perverse that “bad ethics drive good ethics out of the markets” (and professions).

Third, very little is actually “destroyed,” when we place a fraudulent bank in receivership, fire the crooked CEO, and sell the bank to an acquirer of integrity and competence. The new bank will, net, be greatly improved because it has been freed from control by the fraudulent leadership that was “looting” the bank (George Akerlof and Paul Romer, 1993, “Looting: The Economic Underworld of Bankruptcy for Profit”).

Fourth, there is rarely a need to prosecute a bank. In virtually every case in which the bank’s frauds cause serious harm senior officers of the bank will have led the fraud and profited from it. Everyone in law enforcement realizes that any effective deterrence will come from prosecuting those officers and not only removing their fraud proceeds but also imposing fines that will leave the officers bankrupt.

Fifth, the bank’s controlling officers are in an immense conflict of interest when their frauds are detected. They control the bank and its resources. Their first priority is to prevent their own prosecution. Their second priority is to prevent any substantial “claw back” of their compensation. Their third and fourth priorities are to do the same for less senior officers. This isn’t altruism (though it certainly has an aspect of class-based affinity). Fraudulent CEOs realize that it is risky to allow the prosecutors to gain any leverage over more junior officers who may “flip” and testify against the CEO. The fraudulent officers controlling the bank, therefore, will gladly trade seemingly huge fines in exchange for obtaining their top four priorities.

Sixth, Holder and Breuer were delighted by that trade. They got to report record fines without having to try a single major criminal case against the fraudulent bankers who led the fraud epidemics that caused the financial crisis. Breuer “declared victory and went home” (to Covington & Burling).
Seventh, under the Geithner-Breuer-Holder (GBH) doctrine the fines sought against the SDIs were guaranteed to be large in absolute dollar terms – and non-threatening in real terms. The GBH doctrine compels that result because the rationale is that we must take no regulatory or prosecutorial action that poses any conceivable risk of imperiling an SDI lest we trigger the next global financial crisis.

This means that DOJ (non) prosecutors had very little negotiating leverage because they could not credibly threaten to enforce the rule of law against SDIs (particularly with a boss like Lanny Breuer lying awake at night in fear that he would be blamed for the next global crisis). Fortunately for DOJ, the SDIs are so enormous (as are the bailouts they received) that their officers can agree to fines that sound large but represent merely a (none-too-high) price of doing fraudulent business. The GBH doctrine is intensely criminogenic. It produces what Akerlof and Romer warned was the “sure thing” of CEO “looting” through accounting control fraud plus the assurance that the CEO will not be prosecuted, forced to surrender his fraud proceeds, or forced to pay fines that bankrupt him.

Unsurprisingly, the result has been unprecedented accounting control fraud by elite banksters.

DOJ’s New Strategy of Aggressive Press Leaks

To review the bidding, the appraisers warned three administrations (Clinton, Bush, and Obama) that there was an epidemic of appraisal/mortgage fraud led by the lenders. That warning began, in writing, in 2000 – before Enron failed! The Financial Crisis Inquiry Commission (FCIC) Report emphasizes the point.

“From 2000 to 2007, a coalition of appraisal organizations … delivered to Washington officials a public petition; signed by 11,000 appraisers…. [I]t charged that lenders were pressuring appraisers to place artificially high prices on properties [and] ‘blacklisting honest appraisers’ and instead assigning business only to appraisers who would hit the desired price targets” (FCIC 2011:18).

It took two years to form this “coalition of appraisal organization,” agree on a common strategy, agree on a common text of the petition, and create the web site for the petition. That means that one of the three great epidemics of accounting control fraud that drove the crisis was already sufficiently severe by 1998 that it had been identified as a severe threat 16 years ago. During the 14 years since the appraisers began issuing their public warnings to the (non) regulators and the mortgage industry there have been zero prosecutions of any of the elite bankers for leading the three epidemics of accounting control fraud that drove the financial crisis and the Great Recession. During the decade 1998-2008, the banking regulatory agencies have not publicly identified a single criminal referral they made in response to the three most destructive financial fraud epidemics in history. The anti-regulators literally destroyed the criminal referral process that had once been so effective in prosecuting frauds by senior bank officers. A Pulitzer Prize awaits the investigative journalist who researches who ordered that destruction and when, why, and how it was accomplished. A second prize awaits the reporter who investigates why the Obama administration failed to make its resurrection a major policy initiative that it would tout.

The Bush and Obama administration have already allowed the statute of limitations to run on vast numbers of frauds led by the CEOs of mortgage bankers and the 10 year statute of limitations applicable to federally insured banks (which we obtained in response to the S&L debacle) is rapidly running. The recent DOJ IG report documented the hollow nature of the FBI investigations related to the crisis. Even when the statute of limitations has not run it becomes very difficult to try “old” cases because of the loss of documents and memory and the feeling of judges and juries that the matter cannot have been terribly grave if the FBI ignored it for eight years. Even if Holder had a “Road to Damascus” conversion today and tried to prosecute the elite bank frauds that drove the crisis he would be far too late. The DOJ will commit its greatest strategic failure to uphold the rule of law.

That does not mean that it could not bring a dozen prosecutions against the most destructive and fraudulent bank CEOs during the waning years of the Obama administration, but there is no evidence that the FBI is even investigating those frauds.

Instead, Holder has given up on prosecuting the CEOs that led the frauds that caused our crisis. The new DOJ press leak indicates that DOJ may charge two foreign banks with committing frauds unrelated to the financial crisis. This is hardly a major accomplishment, but it is all that Holder can bring himself to do so it was ballyhooed in “Deal Book” under this sad title “2 Giant Banks, Seen as Immune, Become Targets.”

One might think that DOJ would be mortified that the Nation’s paper of record would put in print that DOJ has operated for over a decade in a manner in which the SDIs are “seen as immune,” but no, DOJ is immune to embarrassment over its policy of granting de facto immunity to elite bankers and banks from the rule of law. The article offers these damning passages about the GBH Doctrine.

“In doing so, prosecutors are confronting the popular belief that Wall Street institutions have grown so important to the economy that they cannot be charged. A lack of criminal prosecutions of banks and their leaders fueled a public outcry over the perception that Wall Street giants are ‘too big to jail.’
Addressing those concerns, prosecutors in Washington and New York have met with regulators about how to criminally punish banks without putting them out of business and damaging the economy, interviews with lawyers and records reviewed by The New York Times show.
The new strategy underpins the decision to seek guilty pleas in two of the most advanced investigations: one into Credit Suisse for offering tax shelters to Americans, and the other against France’s largest bank, BNP Paribas, over doing business with countries like Sudan that the United States has blacklisted. The approach applies to American banks, though those investigations are at an earlier stage.”

“Earlier stage” is a euphemism for “we cannot admit that we only go after foreign banks.” The article eventually refers to one investigation involving a U.S. bank (Citi) – the operations of its Mexican subsidiary. So, if it happens abroad the new DOJ doctrine is that it might ask for a guilty plea from a bank that commits thousands of felonies. To which one must begin by saying: “good.” We would be happy to learn that there is some level of endemic crime by elite foreign bankers, motivated by the worst motives, rising to the level of an important part of the CEO’s strategic plan, and producing staggering harm that even Holder will no longer allow to occur with total impunity. That would be progress. It is pathetic that DOJ admits to reporters that doing so will require them to adopt a “new strategy.” When I worked for DOJ if I had asked for a meeting with my boss to urge him to announce that we were adopting a “new strategy” of enforcing the law against fraudulent bankers and banks he would have referred me to a psychiatrist. No one at DOJ had ever heard of the concept that the rule of law did not apply to everyone.

Deal Book tries to turn this pathetic tale into a new legend of bold prosecutors and regulators. In this telling the OCC head, a leading apologist for Wall Street, is recast as “Thomas J. Curry, a frequent critic of Wall Street.” Hold on to your seats, Deal Book is veering into an alternative universe. I know it has been a very, very long time since the Nation has appointed a real banking regulator to lead an agency, but consider the implications (for regulation and journalism) of this passage in which Deal Book is trying to force Curry into the mold of a tough regulator. Here is the context of Deal Book’s remarks about Curry.

“At a meeting last September, a top federal regulator vowed not to interfere if Mr. Bharara obtained a guilty plea from JPMorgan Chase over its ties to Bernard L. Madoff, according to the lawyers and records of the meeting. But the regulator, Thomas J. Curry, a frequent critic of Wall Street, warned that federal law might require him to reconsider JPMorgan’s charter if the bank was convicted of a crime.
The discussions with regulators, recounted in interviews with the lawyers and in records obtained through a Freedom of Information Act request, offer a lens into the political and legal minefields that prosecutors navigate when investigating big banks. The interviews also demonstrate that defense lawyers continue to push prosecutors not to act without assurances that regulators will keep a bank in business.
In a recent speech to Wall Street lawyers, Mr. Bharara said this dynamic created a ‘gaping liability loophole that blameworthy companies are only too willing to exploit.’
He noted that regulators often possessed many of the same facts, including emails and documents, that underpin a criminal case. The prosecutors and regulators, he said, need to ‘work in concert.’”

Deal Book does not understand the true, revealing implications of these passages.

DOJ is now admitting that from 2009-2014 it operated under the old GBH “strategy” (aka its unilateral disarmament doctrine) of not prosecuting elite banks or bankers even when they committed massive frauds that endangered public safety (HSBC), national security (Standard Chartered), and the global economy (all the SDIs) – and failed even to recover the bankers’ fraud proceeds. Consider how damning DOJ’s assessment is of the costs of DOJ’s unilateral disarmament. “Mr. Bharara said this dynamic created a ‘gaping liability loophole that blameworthy companies are only too willing to exploit.’” I have only one friendly amendment to Bharara’s assessment – it should read “bankers exploit.” The bankers’ frauds will frequently involve looting the bank. Bharara’s prosecutions of insider trading largely involve frauds that made hedge funds more profitable, but I’m sure he would agree with my friendly amendment were he to consider the matter.
DOJ is blaming the GBH Doctrine on the (anti) regulators, with the unstated implication that it came from Geithner. Note that in prior articles Geithner and his fellow anti-regulators have pushed back on this conclusion by saying that DOJ makes the sole decision whether to prosecute. Both statements are almost certainly true – the anti-regulators warn of doom and say that they cannot promise that prosecuting would not cause a global catastrophe. DOJ, inevitably when run by the likes of Mukasey, Holder, and Breuer, decides not to prosecute given the anti-regulators’ (absurd) claims that prosecuting bankers would cause the world’s economy to collapse.
None of this explains why they don’t prosecute bankers (much less ex bankers)
Curry “vowed not to interfere” if DOJ prosecuted JPMorgan – “interfering” with a prosecution is normally a felony (“obstruction of justice”). This is what passes for toughness in a regulator today? To rephrase it in English: Curry: “I won’t try to prevent a successful prosecution of a bank that I know has engaged in over a dozen massive felonies.”
I guess it would sound odd to Curry, but as regulators we did everything possible to encourage, indeed demand, that DOJ prosecute fraudulent banks and bankers. We did so even when it might impair recovery under our civil suits.
And speaking of JPMorgan, Madoff, and obstruction of justice. Banks have a duty under the rules to make criminal referrals when they find “suspicious activities” indicative of likely fraud. JPMorgan found copious evidence that Madoff was running a Ponzi scheme – and reportedly refused to file a criminal referral. When the OCC examiners tried to access JPMorgan’s evidence about Madoff’s frauds JPMorgan reportedly refused to give the examiners access. The bank examiners have a right to access such information, and JPMorgan has a duty to provide that access. The OCC’s IG sought DOJ support to enforce a subpoena – and DOJ reportedly refused to enforce the subpoena to get the information. JPMorgan, DOJ, and the OCC (before and during Curry’s reign) have been interacting in a manner that has allowed Jamie Dimon and Madoff to become apex predators. Madoff’s frauds had nothing to do with causing the crisis. JPMorgan’s frauds were vastly larger and at the core of causing the crisis. Guess which one gets prosecuted.

The entire “I might be forced to pull JPMorgan’s charter if you prosecute” meme was a deliberately disingenuous threat of self-mutilation by Curry designed to prevent the prosecution of JPMorgan. There was zero chance that Curry would have pulled JPMorgan’s charter.
Let’s, solely for purpose of analysis in this bullet point, go with Deal Book’s tale of Curry the fierce critic of Wall Street eager to bring its controlling officers to justice. Put yourself in the place of Deal Book’s Curry the Conqueror. You are critical of Wall Street because its CEOs have led the three most destructive epidemics of financial fraud in world history and those fraud epidemics hyper-inflated the bubble, caused the financial crisis, and caused the Great Recession. You are determined to clean up Wall Street and you do not care about career repercussions. You detest the “too big to fail” concept and you know that JPMorgan poses a grave systemic danger, is vastly too large to be managed efficiently, and receives a massive (implicit) federal subsidy that makes “free market competition” impossible in banking. DOJ is willing to bring a criminal case against JPMorgan and many of its senior officers. You are overjoyed and fully supportive of the prosecution. Indeed, one of the grounds for placing JPMorgan in receivership is “violations of law.” You encourage the prosecution. You “detail” your best examiners to assist the FBI so that they can serve as their internal banking experts and have access to Grand Jury materials under Rule 6 (e). You prepare the receivership recommendation for JPMorgan and the civil suits and enforcement actions against its culpable leaders. Then you and DOJ have a “come to Jesus” meeting with JPMorgan’s board (which is controlled by Dimon rather than the other way around). And you become the man that restored the rule of law, the possibility of real competition, and demonstrated that the largest bank in the world and its leaders could no longer commit frauds with impunity. You end JPMorgan’s record of well over a decision massive frauds under Dimon’s rule.

The thing you would never do if you were the Curry gussied up for Deal Book’s rousing tale of tough regulation is whine “I might have to pull JPMorgan’s charter.” Deal Book’s fictional Curry was a bravely seasoned and spicy meal rich in garam masala. The real Curry is a pale imitation that fears to offend through any bold ingredients.

It is not our job as regulators to “keep a bank in business.” It is our paramount job as regulators to place banks that commit serious felonies led by the controlling officers in receivership. DOJ does not have to worry about creating some new means “to criminally punish banks without putting them out of business and damaging the economy.” A receivership does not have to “put [a bank] out of business.” What it does do is put the corrupt controlling officers out the business of looting the bank. That helps the economy. Indeed, it is the single most important thing we do as regulators that helps the economy.
There are no “political and legal minefields that prosecutors navigate when investigating big banks.” DOJ has ample legal authority to investigate banks. They cannot credibly claim that there is any “legal minefield.” The Swiss do sometimes seek to obstruct U.S. criminal investigations, but that is not a “legal minefield” and the U.S. wins these disputes if we are resolute.

What is the “political … minefield” that prosecutors today feel must be “navigate[d]” if they wish to investigate “big banks?” That would be a fascinating subject for Deal Book to explain, though it would have the danger of pushing them to discuss ethics. (Yes, this Deal Book story is again an ethics-free zone.) I know people will consider me naïve when I say this, but I believe there are no “political minefields” that DOJ must “navigate” “when investigating big banks.” I think it is all an excuse. I doubt seriously that during this crisis DOJ or Curry has ever been called in by the Speaker of the House and yelled at and cursed for moving to remove a fraudulent CEO controlling Vernon (aka Vermin) Savings or had five U.S. Senators try to pressure them not to take an action against Lincoln Savings. My colleagues and I are actually not naïve about real political minefields. We took our advice from that popularly (and almost certainly inaccurately) attributed to Rear Admiral Daniel Farragut at the battle of Mobile: “Damn the torpedoes! Full speed ahead! (The torpedoes he was referring to were naval mines.)

The most destructive “political … minefields” restricting the action of regulators, prosecutors, and members of the armed services are often those that exist only in our own imaginations and fears. Bold action against those that imagine they are immune from accountability is essential. The SAS motto captures this quality: “Who Dares Wins.” (Yes, “bold” and “daring” are not sufficient, you also have to plan and do excellent investigations.)

Bharara’s final comment is the most depressing evidence of the abject failure of the Bush and Obama administrations. They have refused to even do the most basic things, which are not even controversial, that are essential to success in prosecuting epidemics of bank fraud.

“[Bharara] noted that regulators often possessed many of the same facts, including emails and documents, that underpin a criminal case. The prosecutors and regulators, he said, need to ‘work in concert.’”

My readers know at what length I have made the point that criminal referrals by the regulators are the absolute requisite to success against substantial fraud by elite bankers and that the referral only begins the vital transfer of expertise form regulators to prosecutors. Bharara has put in print that the regulators possessed the facts “that underpin a criminal case” but are failing to “work in concert” with the prosecutors. In short, they are not making the criminal referrals and they are not making agency support of criminal investigations and prosecutions a top priority. Instead, they are still discouraging prosecutions (e.g., Curry’s silly claim about having to pull JPMorgan’s charter).

Conclusion

Deal Book has written another article praising a moral and policy travesty. Read beyond the article’s propaganda and you will find that it actually contains admissions by senior DOJ officials confirming that our description of the disgraceful policies that we charged that DOJ and the anti-regulators were following was correct and confirming that our conclusion that such policies were deeply criminogenic had proved correct. Bharara admitted that the GBH Doctrine created a “gaping liability loophole that blameworthy [controlling bank officers] are only too willing to exploit.” Until we appoint regulators with the spines, integrity, brains, and courage to realize that our paramount function is to place banks led by frauds into receivership and end the CEO’s ability to lead a control fraud we will fail to have a sound banking system and we will fail to restore the rule of law.

America Is Declining at the Same Warp Speed That's Minting Billionaires and Destroying the Middle Class

noreply@blogger.com (pippinghole) — Tue, 06 May 2014 23:42:00 +0000

By CJ Werleman
AlterNet

Not a single U.S. city ranks among the world’s most livable cities.

“The game is rigged,” writes Senator Elizabeth Warren in her new book A Fighting Chance . It’s rigged because the rich and their lobbyists have rigged the rules of the game to their favor. The rules are reflected in a tax code and bankruptcy laws that have seen the greatest transfer of wealth from the middle class to the rich in U.S. history.

The result?

America has the most billionaires in the world, but not a single U.S. city ranks among the world’s most livable cities. Not a single U.S. airport is among the top 100 airports in the world. Our bridges, road and rail are falling apart, and our middle class is being guttered out thanks to three decades of stagnant wages, while the top 1 percent enjoys 95 percent of all economic gains.

A rigged tax code and a bloated military budget are starving the federal and state governments of the revenue it needs to invest in infrastructure, which means today America looks increasingly like a Third World nation, and now new data shows America’s intellectual resources are also in decline.

For the past three decades, the Republican Party has waged a dangerous assault on the very idea of public education. Tax cuts for the rich have been balanced with spending cuts to education. During the New Deal era of the 1940s to 1970s, public schools were the great leveler of America. They were our great achievement. It was universal education for all, but today it’s education for those fortunate enough to be born into wealthy families or live in wealthy school districts. The right’s strategy of defunding public education leaves parents with the option of sending their kids to a for-profit school or a theological school that teaches kids our ancestors kept dinosaurs as pets.

“What kind of future society the defectors from the public school rolls envision I cannot say. However, having spent some time in the Democratic Republic of Congo—a war-torn hellhole with one of those much coveted limited central governments, and, not coincidentally, a country in which fewer than half the school-age population goes to public school—I can say with certainty that I don’t want to live there,” writes Chuck Thompson in Better off Without Em.

Comparisons with the Democratic Republic of Congo are not that far-fetched given the results of a recent report by Organization for Economic Co-operation and Development (OECD), which is the first comprehensive survey of the skills adults need to work in today’s world, in literacy, numeracy and technology proficiency. The results are terrifying. According to the report, 36 million American adults have low skills.

It gets worse. In two of the three categories tested, numeracy and technological proficiency, young Americans who are on the cusp of entering the workforce—ages 16 to 24—rank dead last, and is third from the bottom in numeracy for 16- to 65-year-olds.

The United States has a wide gap between its best performers and its worst performers. And it had the widest gap in scores between people with rich, educated parents and poor, undereducated parents, which is exactly what Third World countries look like, i.e. a highly educated super class at the top and a highly undereducated underclass at the bottom, with very little in the middle.

The report shows a relationship between inequalities in skills and inequality in income. “How literacy skills are distributed across a population also has significant implications on how economic and social outcomes are distributed within the society. If large proportions of adults have low reading and numeracy skills, introducing and disseminating productivity-improving technologies and work-organization practices can be hampered; that, in turn, will stall improvements in living standards,” write the authors of the report.

There is a defined correlation between literacy, numeracy and technology skills with jobs, rising wages and productivity, good health, and even civic participation and political engagement. Inequality of skills is closely correlated to inequality of income. In short, our education system is not meeting the demands of the new global environment, and the outlook is grim, given the Right’s solution is to further defund public education while ushering kids into private schools and Christian academies aka “segregation academies.” The Republican-controlled South is where you see the Right’s education strategy in action. “Inspired by home-school superstars such as Creation Museum founder Ken Ham, tens of thousands of other southern families have fled their public-school systems in order to soak their children in the anti-intellectual sitz bath of religious denial.” In other words, we’re dumb and getting dumber.

While charter schools aren’t unique to the South, conservative states tend to respond most enthusiastically to their message, which makes Republican-controlled states ground zero for the further degradation of public education. The U.S. will likely continue to poll like countries like Indonesia and Tanzania, rather than Japan and Sweden when it comes to meeting the demands of a global economy.

Despite their hype and profits, study after study show that kids in charter schools perform no better on achievement tests than kids in public schools. But the correlation between a strong public education system and social mobility is demonstrated clearly in the OECD report. A 2006 report by Michael A. McDaniel of Virginia Commonwealth University showed that states with higher estimated collective IQ have greater gross state product, citizens with better health, more effective state governments, and less violent crime. In other words, were we to invest more in public education, we’d be instantly more intelligent, healthy, safe, and financially sound.

“The principal force for convergence [of wealth] — the diffusion of knowledge — is only partly natural and spontaneous. It also depends in large part on educational policies,” writes Thomas Piketty in his 700-page bestseller Capital in the Twenty-First Century . In other words, if we really want to reduce inequality, and if we really want to be a global leader in the 21st century, we need to invest more into our education system, which requires the federal government to ensure the rich and the mega-corporations pay their share. But we need to act now.

The Vampire Squid Strikes Again: The Mega Banks' Most Devious Scam Yet

noreply@blogger.com (pippinghole) — Tue, 06 May 2014 23:25:00 +0000

By Matt Taibbi
rollingstone.com

Banks are no longer just financing heavy industry. They are actually buying it up and inventing bigger, bolder and scarier scams than ever

Call it the loophole that destroyed the world. It's 1999, the tail end of the Clinton years. While the rest of America obsesses over Monica Lewinsky, Columbine and Mark McGwire's biceps, Congress is feverishly crafting what could yet prove to be one of the most transformative laws in the history of our economy – a law that would make possible a broader concentration of financial and industrial power than we've seen in more than a century.

But the crazy thing is, nobody at the time quite knew it. Most observers on the Hill thought the Financial Services Modernization Act of 1999 – also known as the Gramm-Leach-Bliley Act – was just the latest and boldest in a long line of deregulatory handouts to Wall Street that had begun in the Reagan years.

Wall Street had spent much of that era arguing that America's banks needed to become bigger and badder, in order to compete globally with the German and Japanese-style financial giants, which were supposedly about to swallow up all the world's banking business. So through legislative lackeys like red-faced Republican deregulatory enthusiast Phil Gramm, bank lobbyists were pushing a new law designed to wipe out 60-plus years of bedrock financial regulation. The key was repealing – or "modifying," as bill proponents put it – the famed Glass-Steagall Act separating bankers and brokers, which had been passed in 1933 to prevent conflicts of interest within the finance sector that had led to the Great Depression. Now, commercial banks would be allowed to merge with investment banks and insurance companies, creating financial megafirms potentially far more powerful than had ever existed in America.

All of this was big enough news in itself. But it would take half a generation – till now, basically – to understand the most explosive part of the bill, which additionally legalized new forms of monopoly, allowing banks to merge with heavy industry. A tiny provision in the bill also permitted commercial banks to delve into any activity that is "complementary to a financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally."

Complementary to a financial activity. What the hell did that mean?

The Feds vs. Goldman

"From the perspective of the banks," says Saule Omarova, a law professor at the University of North Carolina, "pretty much everything is considered complementary to a financial activity."
Fifteen years later, in fact, it now looks like Wall Street and its lawyers took the term to be a synonym for ruthless campaigns of world domination. "Nobody knew the reach it would have into the real economy," says Ohio Sen. Sherrod Brown. Now a leading voice on the Hill against the hidden provisions, Brown actually voted for Gramm-Leach-Bliley as a congressman, along with all but 72 other House members. "I bet even some of the people who were the bill's advocates had no idea."

Today, banks like Morgan Stanley, JPMorgan Chase and Goldman Sachs own oil tankers, run airports and control huge quantities of coal, natural gas, heating oil, electric power and precious metals. They likewise can now be found exerting direct control over the supply of a whole galaxy of raw materials crucial to world industry and to society in general, including everything from food products to metals like zinc, copper, tin, nickel and, most infamously thanks to a recent high-profile scandal, aluminum. And they're doing it not just here but abroad as well: In Denmark, thousands took to the streets in protest in recent weeks, vampire-squid banners in hand, when news came out that Goldman Sachs was about to buy a 19 percent stake in Dong Energy, a national electric provider. The furor inspired mass resignations of ministers from the government's ruling coalition, as the Danish public wondered how an American investment bank could possibly hold so much influence over the state energy grid.

There are more eclectic interests, too. After 9/11, we found it worrisome when foreigners started to get into the business of running ports, but there's been little controversy as banks have done the same, or even started dabbling in other activities with national-security implications – Goldman Sachs, for instance, is apparently now in the uranium business, a piece of news that attracted few headlines.

Wall Street's War

But banks aren't just buying stuff, they're buying whole industrial processes. They're buying oil that's still in the ground, the tankers that move it across the sea, the refineries that turn it into fuel, and the pipelines that bring it to your home. Then, just for kicks, they're also betting on the timing and efficiency of these same industrial processes in the financial markets – buying and selling oil stocks on the stock exchange, oil futures on the futures market, swaps on the swaps market, etc.
Allowing one company to control the supply of crucial physical commodities, and also trade in the financial products that might be related to those markets, is an open invitation to commit mass manipulation. It's something akin to letting casino owners who take book on NFL games during the week also coach all the teams on Sundays.

The situation has opened a Pandora's box of horrifying new corruption possibilities, but it's been hard for the public to notice, since regulators have struggled to put even the slightest dent in Wall Street's older, more familiar scams. In just the past few years we've seen an explosion of scandals – from the multitrillion-dollar Libor saga (major international banks gaming world interest rates), to the more recent foreign-currency-exchange fiasco (many of the same banks suspected of rigging prices in the $5.3-trillion-a-day currency markets), to lesser scandals involving manipulation of interest-rate swaps, and gold and silver prices.

But those are purely financial schemes. In these new, even scarier kinds of manipulations, banks that own whole chains of physical business interests have been caught rigging prices in those industries. For instance, in just the past two years, fines in excess of $400 million have been levied against both JPMorgan Chase and Barclays for allegedly manipulating the delivery of electricity in several states, including California. In the case of Barclays, which is contesting the fine, regulators claim prices were manipulated to help the bank win financial bets it had made on those same energy markets.
And last summer, The New York Times described how Goldman Sachs was caught systematically delaying the delivery of metals out of a network of warehouses it owned in order to jack up rents and artificially boost prices.

You might not have been surprised that Goldman got caught scamming the world again, but it was certainly news to a lot of people that an investment bank with no industrial expertise, just five years removed from a federal bailout, stores and controls enough of America's aluminum supply to affect world prices.

How was all of this possible? And who signed off on it?

By exploiting loopholes in a dense, decade-and-a-half-old piece of financial legislation, Wall Street has effected a revolutionary change that American citizens never discussed, debated or prepared for, and certainly never explicitly permitted in any meaningful way: the wholesale merger of high finance with heavy industry. This blitzkrieg reorganization of our economy has left millions of Americans facing a smorgasbord of frightfully unexpected new problems. Do we even have a regulatory structure in place to look out for these new forms of manipulation? (Answer: We don't.) And given that the banking sector that came so close to ruining the world economy five years ago has now vastly expanded its footprint, who's in charge of preventing the next crash?

In this Brave New World, nobody knows. Moreover, whatever we've done, it's too late to have a referendum on it. Garrett Wotkyns, an Arizona-based class-action attorney who has spent more than a year investigating the banks' involvement in the metals markets and is suing Goldman and others over the aluminum case on behalf of two major manufacturers, puts it this way: "It's like that line in The Dark Knight Rises," he says. "'The storm isn't coming. The storm is already here.'"

Read more: http://www.rollingstone.com/politics/news/the-vampire-squid-strikes-again-the-mega-banks-most-devious-scam-yet-20140212

Matt Taibbi on America's 'Injustice System'

noreply@blogger.com (pippinghole) — Tue, 06 May 2014 23:18:00 +0000

rt.com

Journalist Matt Taibbi joins Larry to examine inequality in the U.S. justice system. In his new book, "The Divide-American Injustice in the Age of the Wealth Gap," Taibbi says white-collar criminals walk, while the poor get locked up in record numbers.

http://rt.com/shows/politicking-larry-king/156196-matt-taibi-injustice-system/

The Rise of Corporate Impunity

noreply@blogger.com (pippinghole) — Tue, 06 May 2014 23:04:00 +0000

by Jesse Eisinger
propublica.org

Meet the only Wall St. executive prosecuted as a result of the financial crisis. Has justice been served?

On the evening of Jan. 27, Kareem Serageldin walked out of his Times Square apartment with his brother and an old Yale roommate and took off on the four-hour drive to Philipsburg, a small town smack in the middle of Pennsylvania. Despite once earning nearly $7 million a year as an executive at Credit Suisse, Serageldin, who is 41, had always lived fairly modestly. A previous apartment, overlooking Victoria Station in London, struck his friends as a grown-up dorm room; Serageldin lived with bachelor-pad furniture and little of it — his central piece was a night stand overflowing with economics books, prospectuses and earnings reports. In the years since, his apartments served as places where he would log five or six hours of sleep before going back to work, creating and trading complex financial instruments. One friend called him an "investment-banking monk."
Serageldin's life was about to become more ascetic. Two months earlier, he sat in a Lower Manhattan courtroom adjusting and readjusting his tie as he waited for a judge to deliver his prison sentence. During the worst of the financial crisis, according to prosecutors, Serageldin had approved the concealment of hundreds of millions in losses in Credit Suisse's mortgage-backed securities portfolio.

But on that November morning, the judge seemed almost torn. Serageldin lied about the value of his bank's securities — that was a crime, of course — but other bankers behaved far worse. Serageldin's former employer, for one, had revised its past financial statements to account for $2.7 billion that should have been reported. Lehman Brothers, AIG, Citigroup, Countrywide and many others had also admitted that they were in much worse shape than they initially allowed. Merrill Lynch, in particular, announced a loss of nearly $8 billion three weeks after claiming it was $4.5 billion. Serageldin's conduct was, in the judge's words, "a small piece of an overall evil climate within the bank and with many other banks." Nevertheless, after a brief pause, he eased down his gavel and sentenced Serageldin, an Egyptian-born trader who grew up in the barren pinelands of Michigan's Upper Peninsula, to 30 months in jail. Serageldin would begin serving his time at Moshannon Valley Correctional Center, in Philipsburg, where he would earn the distinction of being the only Wall Street executive sent to jail for his part in the financial crisis.

American financial history has generally unfolded as a series of booms followed by busts followed by crackdowns. After the crash of 1929, the Pecora Hearings seized upon public outrage, and the head of the New York Stock Exchange landed in prison. After the savings-and-loan scandals of the 1980s, 1,100 people were prosecuted, including top executives at many of the largest failed banks. In the '90s and early aughts, when the bursting of the Nasdaq bubble revealed widespread corporate accounting scandals, top executives from WorldCom, Enron, Qwest and Tyco, among others, went to prison.

The credit crisis of 2008 dwarfed those busts, and it was only to be expected that a similar round of crackdowns would ensue. In 2009, the Obama administration appointed Lanny Breuer to lead the Justice Department's criminal division. Breuer quickly focused on professionalizing the operation, introducing the rigor of a prestigious firm like Covington & Burling, where he had spent much of his career. He recruited elite lawyers from corporate firms and the Breu Crew, as they would later be known, were repeatedly urged by Breuer to "take it to the next level."

But the crackdown never happened. Over the past year, I've interviewed Wall Street traders, bank executives, defense lawyers and dozens of current and former prosecutors to understand why the largest man-made economic catastrophe since the Depression resulted in the jailing of a single investment banker — one who happened to be several rungs from the corporate suite at a second-tier financial institution. Many assume that the federal authorities simply lacked the guts to go after powerful Wall Street bankers, but that obscures a far more complicated dynamic. During the past decade, the Justice Department suffered a series of corporate prosecutorial fiascos, which led to critical changes in how it approached white-collar crime. The department began to focus on reaching settlements rather than seeking prison sentences, which over time unintentionally deprived its ranks of the experience needed to win trials against the most formidable law firms. By the time Serageldin committed his crime, Justice Department leadership, as well as prosecutors in integral United States attorney's offices, were de-emphasizing complicated financial cases — even neglecting clues that suggested that Lehman executives knew more than they were letting on about their bank's liquidity problem. In the mid-'90s, white-collar prosecutions represented an average of 17.6 percent of all federal cases. In the three years ending in 2012, the share was 9.4 percent. (Read the Department of Justice's response to ProPublica's inquiries.)

After the evening drive to Philipsburg, Serageldin checked into a motel. He didn't need to report to Moshannon Valley until 2 p.m. the next day, but he was advised to show up early to get a head start on his processing. Moshannon is a low-security facility, with controlled prisoner movements, a bit tougher than the one portrayed on "Orange Is the New Black." Friends of Serageldin's worried about the violence; he was counseled to keep his head down and never change the channel on the TV no matter who seemed to be watching. Serageldin, who is tall and thin with a regal bearing, was largely preoccupied with how, after a decade of 18-hour trading days, he would pass the time. He was planning on doing math-problem sets and studying economics. He had delayed marrying his longtime girlfriend, a private-equity executive in London, but the plan was for her to visit him frequently.

Other bankers have spoken out about feeling unfairly maligned by the financial crisis, pegged as "banksters" by politicians and commentators. But Serageldin was contrite. "I don't feel angry," he told me in early winter. "I made a mistake. I take responsibility. I'm ready to pay my debt to society." Still, the fact that the only top banker to go to jail for his role in the crisis was neither a mortgage executive (who created toxic products) nor the C.E.O. of a bank (who peddled them) is something of a paradox, but it's one that reflects the many paradoxes that got us here in the first place.

Part of the Justice Department's futility can be traced to the rise of its own ambition. Until the 1980s, government prosecutors generally focused on going after individual corporate criminals. But after watching their fellow prosecutors successfully take down entire mafia families, like the Gambino and Bonanno clans, many felt that they should also be going after more high-profile convictions and that the best way to root out corruption was to take on the whole organization. A long-ignored Supreme Court ruling, from 1909, conveniently opened the door for criminal charges against entire corporations. And in 2001, Michael Chertoff, George W. Bush's new criminal division chief, arrived at the Justice Department ready to put it to use.

Chertoff, who worked at the U.S. Attorney's office under Rudolph W. Giuliani, the godfather of the Wall Street perp walk, seemed like just the guy to jump-start the initiative — and he arrived at an opportune moment. Prosecutors were beginning their investigation of Enron and probe into Arthur Andersen, the accounting firm that had blessed the energy-trading giant's phony balance sheets and shredded documents shortly after it detonated. Early in his tenure, Chertoff found himself sitting in a conference room at Justice Department headquarters on Pennsylvania Avenue, listening with growing irritation as lawyers for Arthur Andersen tried to dispose of the Enron case with yet another settlement. The company previously oversaw the fraudulent books of Waste Management and Sunbeam, and it dealt with those previous scrapes by reaching settlements and a consent decree with regulators, vowing never to commit such a crime again. For its Waste Management infractions, the firm paid $7 million. Then, it was the largest civil penalty ever paid.

Andersen was expecting the same kind of wrist-slap. As Chertoff recalls, one high-ranking executive noted brazenly that such settlements were merely "a cost of doing business" — the routine surcharges applied to the nation's largest corporations. That comment enraged Chertoff, and soon after, his prosecutors indicted the firm. "Destroy documents?" he told me. "It's hard to view that as a stumble outside of its core business." In June 2002, Arthur Andersen was convicted by a jury, and within months, the firm closed down, costing tens of thousands of people their jobs.

The Andersen case was supposed to embolden the Justice Department, but it quickly backfired. Chertoff's chutzpah shocked much of the corporate world and even many prosecutors, who thought the department had abused its powers at the cost of thousands of innocent workers. Almost immediately, the Andersen verdict resulted not in more boldness but in more caution on the part of federal prosecutors, including Chertoff himself. In 2003, his investigators were digging into questionable off-balance-sheet deals between the Pittsburgh-based PNC Bank and AIG Financial Products. They contemplated indicting the bank, which spurred Herbert Biern, at the time a top banking-supervision official at the Fed, to demand a meeting with Chertoff to warn him against it.

Chertoff told Biern, according to attendees, that if the Justice Department "can't bring these cases because it may bring harm, then maybe these banks are too big." In the end, though, Chertoff and the Justice Department blinked. They didn't indict, and PNC entered into a deferred prosecution agreement. No bank executives were prosecuted. Two years later, the Supreme Court overturned the Arthur Andersen conviction.

From 2004 to 2012, the Justice Department reached 242 deferred and nonprosecution agreements with corporations, compared with 26 in the previous 12 years, according to a study by David M. Uhlmann, a former prosecutor and law professor at the University of Michigan. And while companies paid large sums in the settlements — the days of $7 million cost-of-doing-business fees were over — several veteran Justice Department officials told me that these settlements emboldened defense lawyers. More crucial, they allowed the Justice Department's lawyers to "succeed" without learning how to develop important prosecutorial skills. Investigations of individuals are more time-consuming and require a different approach than those of a corporation. Indeed, the department now effectively outsources many of its investigations of corporate executives to outside firms, which invariably produce reports that exculpate those at the top. Jed Rakoff, the U.S. District Court judge and former federal prosecutor who has become the most prominent legal critic of the Justice Department, explained the process to me this way: "The report says: 'Mistakes were made. We are here to take our lumps'" — in other words, settlements and, if the transgressions are particularly bad, further oversight. "Lost in that whole thing," Rakoff said, "was anyone trying to investigate whether the individuals did something wrong."

The Bush administration may have earned a reputation as being friendly to business interests, but it wasn't always that way. Around the time of the Andersen investigation, Larry Thompson, the deputy attorney general, was summoned to the White House to defend his department. He and Robert Mueller, the director of the F.B.I., met with the president in the Roosevelt Room of the White House, where they decided not to present legal theory but to show evidence that prosecutors had amassed in matters like the Enron case, demonstrating that executives had made up numbers and lied to the public. Bush seemed stunned. He turned to Mueller and Thompson and said, "Bobby and L.T., continue what you are doing."

If Chertoff had signaled a green light for going after entire companies, Thompson drafted a memo in 2003 that offered a post-Andersen playbook that went right at the heart of how large corporations protected themselves. For years, big businesses, like tobacco companies, shielded questionable conduct by invoking attorney-client privilege, which could render details of troubling executive dealings inadmissible in court. If a company came under federal scrutiny, it typically paid its executives' legal bills, hiring some of the nation's best firms, those who could slow or derail any inquiries. And when multiple executives fell under suspicion, their lawyers would often sign joint defense agreements allowing them to share with one another what they learned about the feds' case.

Thompson's memo declared that prosecutors could, in essence, offer a deal, but it wasn't a very generous one. Companies could win Brownie points for being cooperative only if they eschewed privileges like joint defense agreements. Almost immediately, members of the white-collar bar asserted that this overreach eroded a fundamental right, but they didn't have to argue incessantly; once again, the Justice Department's ambition backfired. In the summer of 2006, the government's once-promising prosecution of executives from KPMG, an accounting and consulting firm suspected of selling illegal tax shelters to wealthy clients, started going bad. (The U.S. attorney's office in Manhattan felt so confident that it indicted 17 KPMG executives.) The case fell apart when the judge ruled that those prosecutors had violated constitutional rights by pressuring the firm to waive attorney-client privilege and stop paying employees' legal fees; the government's zeal, he noted, had gotten "in the way of its judgment." With the "greatest reluctance," he threw out the cases against 13 of the executives. (Two others were convicted.)

Soon after, the counteroffensive to the Justice Department's overreach peaked, led by the white-collar bar and corporate lobbies and aided by The Wall Street Journal's editorial page, the U.S. Chamber of Commerce and even the American Civil Liberties Union. Senator Patrick Leahy, Democrat of Vermont, contended that the department was abusing corporations; his colleague Arlen Specter, then a Republican from Pennsylvania, readied a bill to prevent the Justice Department from receiving attorney-client privilege waivers. To cut that off, Paul McNulty, the deputy attorney general, released a revised set of rules stating, among other things, that no federal prosecutor could ask a company to waive attorney-client privilege without permission from higher-ups.

Over the years, the KPMG debacle and the corporate revolt would lead the Justice Department to roll back the Thompson memo to nearly the point of reversal. Today prosecutors are prohibited from even asking companies to waive their attorney-client privilege. They are also prohibited from pushing a company to cut off the legal fees for indicted executives or pressuring it to forgo joint defense agreements. "It was very much a game-changer in the business of investigating and defending in those cases," says Michael Bromwich, a top white-collar lawyer and former inspector general of the Department of Justice.

In the decade since, the courts dulled other prosecutorial tools. A Supreme Court ruling allowed sentences to be set below previously determined mandatory minimums (which made executives less likely to "flip"). Another narrowed an often-used legal theory that said employees were guilty of fraud if they deprived their companies of "honest services" (which helped nab Enron's former C.E.O., Jeffrey Skilling, among others). No change was momentous on its own — and some may have legitimately restored the rights of defendants — but taken together they marked a significant, if almost unnoted, shift toward the defense. After Lanny Breuer entered the Department of Justice, he testified in front of Congress to restore the honest-services charge for corrupt government officials. But he didn't even try to broach the topic of a private-sector fix.

Life on Wall Street is often portrayed as hours of kinetic fury with billions on the line, but the work is more often suited to wonks who are comfortable digesting Excel spreadsheets. Serageldin, who joined Credit Suisse's information-technology department right out of Yale in 1994, was assigned the late-night job of "cracking tapes" — transferring magnetic tape reels of data, decoding them and running analyses. Senior bankers quickly identified his talent and brought him over to the moneymaking side, where he was soon working in the bank's catastrophe-bonds business, or securities that transfer the risk of earthquakes and hurricanes from seller to investor. It required mastering geology, fault lines and property-damage projections. In order to achieve the kind of informational advantages that Wall Street requires to make money, Serageldin had to put the statistical runs on a personal computer, waking up in the middle of the night for days at a time to reset it. By 2007, he oversaw about 70 people and generated $1.3 billion in trading revenue.

Serageldin's group made so much money that some colleagues believed his bosses gave him a pass on risk controls. But by disposition, and by practice, he was anything but a swashbuckler. When the value of mortgage securities began to crater, on what became known as the Valentine's Day Massacre of February 2007, most traders kept trading, pumping out securities, boosting their personal earnings while endangering — and in some cases destroying — their institutions. Serageldin, however, began ordering his traders to get out of their riskiest positions. The bank's head of fixed income at the time, James Healy, would later note that Serageldin's decisions "took courage and personal conviction, in the face of immense pressure" from the sales force.

Yet Serageldin's caution failed him in one crucial moment. Later that summer, traders in one of his portfolios began to avoid taking the necessary losses on their mortgage-backed securities. Traders are required to hold securities at their current value, known as marking to market, determining how much the portfolio made or lost that day. At one desperate point, one of Serageldin's traders approached a friend at a small regional bank to give him a so-called independent price that happened to be nearly identical to the prices in the portfolio, enabling them to conceal the size of the losses. In early December, that spreadsheet tallying the losses made its way to Serageldin, who would later admit to recognizing that the prices should have been lower. He had assumed the positions were hedged, a friend of his told me, but instead of saying anything, he tried to protect his reputation. By early 2008, he was out at Credit Suisse. The bank reported him to the U.S. attorney's office in the Southern District of New York.

In a matter of months, the markets plummeted in a financial crisis that made Enron look like small-time pilfering. And as tens of millions of Americans lost their jobs or homes, an inchoate but palpable demand for justice — for a crackdown — emerged. Breuer may have come with the right pedigree, but he now faced troubles that hurt as much as the debacles of Arthur Andersen and KPMG, or the retreat from the Thompson memo: austerity. The department faced periodic hiring freezes. The F.B.I., which assigned dozens of agents to Enron, had shifted resources to terrorism. The Postal Service wound down an elite unit that had specialized in complex financial investigations. President Obama's Fraud Enforcement and Recovery Act, which was designed to give hundreds of millions to prosecute financial criminals, was able to deliver only $65 million in 2010 and 2011. Prosecutors reporting to Breuer proposed setting up a mortgage-fraud initiative, a "Prosecutorial Strike Force," as one July 2009 memo put it, but the Justice Department dithered. Finally it set up the Financial Fraud Enforcement Task Force, an enormous coordinating committee with essentially no investigative operation. One former Justice Department official derided it as "the turtle."

Resources aside, the erosion of the department's actual trial skills would soon become apparent. In November 2009, the U.S. attorney's office in Brooklyn lost the first criminal case of the crisis against two Bear Stearns executives accused of misleading investors. The prosecutors rushed into trial, failing to prepare for the exculpatory emails uncovered by the defense team. After two days, the jury acquitted the two money managers. "For sure," one former federal prosecutor told me, "it put a chill" on investigations. "Politicos care about winning and losing."

The fear first wrought by the Andersen case, meanwhile, ossified around financial firms. In early 2009, the Obama administration deliberated over serious tax misconduct by UBS, the Swiss bank, but top Treasury and Justice department officials worried about the effects criminal charges could have on the financial system. UBS settled with the government. Breuer had another shot, in 2012, when the department was moving toward a resolution of a six-year investigation into HSBC, which had become the preferred bank for Mexican and Colombian drug cartels and conducted transactions with countries under American sanctions, including Iran and Libya. Breuer surveyed Washington and London regulators and policy hands and sought assurance that the system could weather an indictment. A top Treasury Department official told Breuer, in carefully couched language, that an indictment could cause broader problems in the financial system. Breuer even went as far as discussing whether banks were too big to indict with H. Rodgin Cohen, a partner at Sullivan & Cromwell, who was representing HSBC in his very own case. Cohen told Breuer that while the Justice Department can't have a rule not to indict a large bank, prosecutors should, well, take into account how the target has cooperated and what changes it has made to fix the problems. Of course, HSBC happened to have taken those very measures. The Justice Department blinked again. That December, the bank was fined $650 million and forfeited almost $1.3 billion in profits. No one went to jail.

It would be easy to blame the Justice Department's ineptitude on past mistakes alone. But again, the very ambitions of its prosecutors played a prominent role. Top governmental lawyers generally don't want to spend their entire careers in the public sector. Many want to score marquee victories and avoid mistakes and eventually leave for prominent corporate firms with starting salaries at 10 times what they make at the Department of Justice. According to numerous former criminal-division employees, Breuer almost immediately signaled his interest in bigger things. In October 2009, Steven Fagell, his deputy chief of staff and former Covington colleague, sent an email to the division. "Do you like giving toasts? Do you think it should have been you accepting the writing Emmy for '30 Rock?'" Fagell wrote. "If so, we need your wit, smarts and gift for the written word! We're putting together a speechwriting team for the assistant attorney general." Prosecutors developing cases against Mexican drug cartels and Al Qaeda members found it more than a little tone deaf. (Fagell says the email request was intended "both to foster internal morale and to send a message of deterrence to the public.")

According to numerous sources from the Justice Department, the Breu Crew instilled a careerist culture that was fearful of sullying its reputation by losing cases. Kathy Ruemmler, who worked on the Enron task force and later became Obama's counsel, would needle Breuer: "How many cases are you dismissing this week?" Later Ruemmler was upset when the Justice Department decided against retrying a case against Merrill Lynch executives who helped Enron boost its earnings with an infamous transaction involving a Nigerian barge. (Breuer was recused from the barge case.) A former prosecutor at the Justice Department in Washington concurred that Breuer's staff didn't "want to pursue cases where they feel the person is 100 percent guilty but they are only 70 percent sure they can win at trial." Prosecutors contrasted that with previous eras, some fondly recalling a line favored by James Comey, who served as one of George W. Bush's deputy attorneys general and emphasized the need for "real-time" white-collar prosecutions. "We have a name for prosecutors who have never lost — the 'Chickenshit Club.'" (In a statement, Breuer said he had a strong record of white-collar enforcement: "Where there were cases to bring, we brought them, and where there were not, we took a pass.")

But given that Washington rejected a unified national task force, these career motivations would prove particularly relevant. When Preet Bharara, former chief counsel for Senator Charles E. Schumer, arrived in the Southern District of New York in 2009, he had a decision to make. There were cases arising from the financial crisis, which could take years to investigate and, after all that, never make it to a jury. Or there were insider-trading cases, which were far more straightforward. Someone improperly learns nonpublic details about a company and makes a killing on the stock market. "You do have a tough choice," one former Southern District prosecutor says. "Am I going to chase after crimes I don't know were committed and don't know who by, or do we go after crimes we do know were committed and by whom?"

Bharara focused on insider trading, and his office has amassed a stunning 80-0 record of prosecutions, locking up the hedge-fund titan Raj Rajaratnam and Rajat Gupta, the former managing director of McKinsey & Company and a director at Goldman Sachs. They took down eight former employees of Steven A. Cohen's notorious SAC Capital hedge fund. (Notably, however, they haven't been able to bring charges against the man himself.) Time magazine put Bharara on its cover, with the bold headline: "This Man Is Busting Wall Street." Yet Bharara didn't touch Wall Street's real players — top bankers. The former prosecutor was almost sheepish about the insider-trading cases when I spoke to him: "They made our careers, but they don't change the world." In fact, several former prosecutors in the office told me that going after bankers was never a real priority. "The government failed," another former prosecutor said. "We didn't do what we needed to do."

As a result, Bharara and his team neglected seemingly winnable cases in their own backyard, including one particularly big one. After Lehman imploded, the Justice Department's Washington headquarters split responsibility investigating what the bank's executives knew among three U.S. attorney's offices: the Southern and Eastern districts of New York and the New Jersey operation. But for all of that manpower, to those closest to the Lehman probe, the government's case was seemingly conducted by one lawyer, Bonnie Jonas, an assistant U.S. attorney for the Southern District. She would make pilgrimages to the offices of Jenner & Block, a prestigious law firm that had been assigned to investigate the Lehman bankruptcy. Jonas would pore over the 40 million-odd pages of Lehman documents the firm assembled. (The Southern District says it devoted multiple people and ample resources to the investigation.)

Nonetheless, the Justice Department never aggressively pursued what may have been the most promising angle. On Sept. 10, 2008, the chief financial officer of Lehman Brothers, Ian Lowitt, told shareholders and the public that the bank had $42 billion of available cash, or liquidity. The bank's position, Lowitt reassured, "remains very strong." Lehman would file for bankruptcy five days later. "What they were saying was not just wrong but materially wrong," Robert Byman, a Jenner & Block partner, told me.

Over 14 months, Jenner & Block would put about 130 lawyers on the case to prepare a report on the collapse. At one point, recalls Stephen Ascher, a partner, one of them discovered "this wonderful chart" breaking down the liquidity figure into three categories: high, moderate and low. Of those billions, $15 billion was in the "low" category, generally because it had been pledged as collateral to other banks. One former Lehman executive told me that several other company managers understood that they could not tap much, if any, of that encumbered money. And at least two executives objected to how the bank was representing its liquidity, including its international treasurer, Carlo Pellerani, according to the Jenner & Block report. The law firm found that regulators, credit-rating agencies and Lehman's outside lawyer had no idea that the liquidity pool wasn't, in fact, all that liquid. When Lowitt came to talk to Jenner & Block, he explained that he had not fully understood the issues when he assured investors of its liquid assets. That may be a reasonable defense, but it does not appear that prosecutors and federal investigators made a serious attempt to test how much Lehman's chief financial officer knew about his own books. Three Lehman executives and one regulator at the Federal Reserve, all of whom were involved in the bank's desperate attempts to keep itself liquid, told me they were never even interviewed by any federal-government officials.

When Wall Street bankers are arrested, they often do what is known in finance as an expected-value analysis: They weigh the cost of fighting, how long it would take and the chances of the best and worst outcomes. Serageldin was a Wall Street banker with a foreign name who helped make securities that played a role in blowing up the global economy. He seemed to reach a logical conclusion: Plead guilty and take his chances with a judge's sentence. Other bankers made the opposite choice. After ignoring the risks of the housing and credit bubbles, they took the high-risk-high-reward gamble again, hiring top lawyers and claiming that they never intended to deceive. As it turned out, they benefited from a decade of subtle changes that favored corporate executives under investigation. Serageldin took the sucker's bet. Prosecutors simply got their man by default.

In his first months in prison, Serageldin has tried to remain upbeat. The investment-banking monk is now spending his nights in a basketball-court-size room with about 70 others. If the problem sets don't occupy him, he is allowed five books at a time. After explaining that he had lived abroad, Serageldin became known as London. The extent of his crime, meanwhile, has been revised. Initially prosecutors implied that the trader had been part of a conspiracy to hide $540 million worth of losses. By the time he was sentenced, the government was down to accusing him of conspiring to hide about $100 million. An internal Credit Suisse analysis put the misstatement at $37 million. "There's not a moment's doubt on my part" that such mismarking happened elsewhere during the crisis, Fiachra O'Driscoll, a friend and former colleague of Serageldin's, who has been an expert witness in private litigation, told me. "I have seen evidence along the way that similar things happened dozens of times."

Federal prosecutors have their own explanation for how only one Wall Street executive landed in jail in the wake of the financial crisis. The cases were complex to investigate and would have been infernally difficult to explain to juries, some told me. Much of the crisis and banker transgressions stemmed from recklessness, not criminality. They also suggest that deferred prosecutions — with their billions in settlements and additional oversights — can be stricter punishments than indictments. Still, while the Department of Justice has not been without its successes — it won a guilty plea from BP in the Deepwater Horizon spill, and it's currently going after traders in the wake of the JPMorgan Chase London Whale trading loss — these remain exceptions even beyond the financial sector.

Federal prosecutors almost never bring criminal charges against top executives of large corporations, from banking to pharmaceuticals to technology. In March, the Justice Department entered into a deferred prosecution against Toyota but did not indict the company or any top executives. As the economy limps back from the Great Recession, compensation has recovered, corporate profits are at record levels and executives see that few, if any, of their peers ever go to prison anymore. Perhaps one reason Americans have come to begrudge the wealthy is a resentment of their culture of impunity.

Larry Thompson became known for his memo, but back in the Clinton administration, the deputy attorney general Eric Holder laid out his own memo for strengthening corporate prosecutions. But he undermined his own words by also explaining that prosecutors needed to take into account the collateral economic consequences. In testimony in front of the Senate in March, Holder, who is now the U.S. attorney general, seemed to lament the position government enforcers had found themselves in. "I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute — if we do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy." Holder quickly walked back the remarks. Soon after, Lanny Breuer returned to Covington & Burling as a vice chairman.

HSBC Whistleblower Speaks, Uncovered Terrorist Financing

noreply@blogger.com (pippinghole) — Wed, 18 Sep 2013 19:54:00 +0000

Government Hands More Than $1 Trillion to Wealthy While Deficit Is $642 Billion

noreply@blogger.com (pippinghole) — Tue, 17 Sep 2013 21:51:00 +0000

By Dave Johnson
Campaign for America's Future

While our government is laying off hundreds and hundreds of thousands and cutting services in the name of cutting deficits, a new report exposes that taxpayers are handing more than $1 trillion a year to the wealthiest.

DC Focused On Deficits Not Jobs

Instead of focusing on jobs, Congress and the White House obsess on how to cut the budget -– the things We the People do to make our lives and economy better. While the “sequester” has already cost 900,000 jobs — 1.6 million thru 2014 — Republicans are threatening to shut down the government and force the country to default on its debt as leverage to force even more cuts.

Republican Speaker of the House John Boehner has repeatedly said the country is “broke.” For example, “We’re broke, broke going on bankrupt,” Boehner said Feb. 28, 2011. Here he is saying it on Dec. 11, 2012, “Let’s be honest. We’re broke.”

So we have to cut and cut and cut, even though the cuts are costing millions of jobs and damaging the economy and the prospects for our country and peoples’ future, because supposedly “we’re broke.”

New Report: More Than $1 Trillion Per Years Handed To Wealthiest

But a report out today from the National Priorities Project (NPP) shows that the country is handing more than $1 trillion to the already-wealthy.

That’s right, the government is cutting services and laying off hundreds upon hundreds of thousands in the name of cutting deficits, while handing more than $1 trillion a year to the wealthiest. The rest of us pay taxes and suffer cuts in jobs and services to make up this lost money.

According to the report, lots of 1%ers will pay no taxes at all this year, while the country cuts jobs and services in the name of cutting the deficit.

“Ten major tax breaks that together total more than $750 billion in tax savings in 2013 are tilted heavily in favor of the top income earners; according to the Congressional Budget Office, 17% of the benefits from these major tax breaks go to the top 1% of households. In fact, according to the Tax Policy Center, nearly 1.2 million taxpayers in the top 1% will owe no income tax at all in 2013, thanks in large part to tax breaks that help them reduce their tax liability down to zero.”

Two of the key findings in the report tell the story:

Corporate tax breaks will total $108 billion in FY2013 – more than 1.5 times what the U.S. government spends on education funding. Between 2007 and 2013, the revenue lost from U.S. corporations deferring taxes on income earned abroad rose 200%, going from $14 billion to $42 billion.
All tax breaks for individuals will exceed $1 trillion this year, with about 17% of the biggest individual tax breaks going to the top 1% of earners. In fact, many individual tax breaks disproportionately benefit wealthy households.

The country’s budget shortfall is not from “entitlements” (things We the People are entitled to as citizens in a prosperous democracy) and “government spending” (the things We the People do to make our lives and economy better). The deficit is down to $640 billion while $1 trillion in tax breaks goes to the 1%. (Actually mostly the 1% of the 1%.)

Click through to read the entire NPP report, and here for a visualization of the impact.

Deficit Talk Is A Rigged Discussion

So why is the country terrified that budget deficits are going to eat us alive? Why don’t people know that the deficit is already down more than 50% from the levels Bush left behind and is falling at the fastest rate since the end of World War II? Why are Republicans able to get away threatening to shut the government and force the country into default in their drive to cut spending on the things that make our lives better?

The reason is that there is a massively-funded PR campaign underway to convince people of these things. Fix The Debt, for example, has pumped at least $60 million into a PR campaign to convince people that we have a deficit emergency and must therefore cut back on the things government does. Wall Street billionaire Pete Peterson has pledged $1 billion toward the same end. These are just two sources of the massively-funded campaign to convince people that the government should be cut back, instead of hiring people to fix the infrastructure, instead of having universal health care, etc.
And those are just two examples. How many headlines like these has the public seen? Budget deficit reaching point of no return, 20 Must-See Charts On America’s Disastrous Level Of Government Spending, Budget, Deficit, Debt Disaster, Deficits Must Be Curbed or It’s Disaster For Economy: Study and on and on and on.

And now we learn that the government is handing more than $1 trillion to the 1% and their corporations, while the deficit in only $640 billion and falling.

A Corruption Spiral

We are witnessing here a corruption spiral. This is big money using money to influence the government to give them even more money. And they then use that more money to influence the government even more to give them even more more money. And they then use that more money to influence the government even more more to give them even more more more money. And they then use that more more money to influence the government even more more more to give them even more more more more money. And then …

What Can We Do About This?

This is about the powerful predatory pigs feeding at the trough and taking it out on the weak. It has to stop.

How do we stop the corruption spiral that is eating our economy, our jobs and the things We the People do to make our lives better? We must get the money out of politics — and out of the national discussion. Money is not “speech.” In a democracy each person having an equal say is “speech.”

Corporate money is supposed to be used to run the corporation, period. Corporations use their money to drive the purposes of the corporation. So corporations by definition cannot use their money without the expectation of getting something in return. Even the use of corporate money to fund a Little League team is for the purpose of advertising and “brand development.” So giving money to a politician is done with the expectation of getting a tax break, a contract, a patent or some other form of advantage over competitors or otherwise increasing its profits. According to the law giving anything of value to any public official with the intent of influencing that official is bribery. It is not speech to give money to a politician, it is bribery. It is corruption.

By the same token, corporations giving their money to lobbying operations is done with the same intent. It is done to influence politicians or use front groups to drive support to politicians (a thing of value) to get them to do something that financially rewards that corporation.

And of course those with the most money are able to have the most influence. Which brings them more money. Which brings them more influence. This increased influence brings them more money, which brings them more influence. This increased influence brings them more money, which brings them more influence. This increased influence brings them more money, which brings them more influence. This increased influence brings them more money, which brings them more influence. This increased influence brings them more money, which brings them more influence. This increased influence brings them more money, which brings them more influence.

Again, a corruption spiral that eats our economy, jobs and democracy.

Corporate money must be banned from politics or otherwise influencing policy. Corporate money should be used to operate the corporation, period.

So how do we stop the influence of the billionaires? We just learned that the Koch brothers ran a group that pumped almost a quarter of a billion dollars into the last election (that we know of). Aside from that, according to the Sunlight Foundation, the 1% of the 1% funded a huge share of the election all by themselves.

The answer here is of course limiting the amounts individuals can put into campaigns and banning efforts to influence elections outside of campaigns themselves. This includes a complete crackdown on the use of special-tax-status organizations in election activities, front groups, etc.

These steps will at least be a start, and will give democracy a bit of breathing room. Then We the People might be able to figure out where to go from there.

Director Jacob Kornbluth on Inequality for All

noreply@blogger.com (pippinghole) — Tue, 17 Sep 2013 20:12:00 +0000

Money is not true wealth (Part I)

noreply@blogger.com (pippinghole) — Tue, 17 Sep 2013 20:07:00 +0000

By Glenn Stehle
http://neweconomicperspectives.org

The events of the 1590s had suddenly brought home to more thoughtful Castilians the harsh truth about their native land – its poverty in the midst of riches, its power that had shown itself impotent…

For this was not only a time of crisis, but a time also of the awareness of crisis – of a bitter realization that things had gone wrong. It was under the influence of the arbitristas that early seventeenth-century Castile surrendered itself to an orgy of national introspection, desperately attempting to discover at what point reality had been exchanged for illusion….

The arbitristas proposed that Government expenditure should be slashed…

Most of the arbitristas recommended the reduction of schools and convents and the clearing of the Court as the solution to the problem. Yet this was really to mistake the symptoms for the cause. MartínGonzález de Cellorigo was almost alone in appreciating that the fundamental problem lay not so much in heavy spending by Crown and upper classes – since this spending itself created a valuable demand for goods and services – as in the disproportion between expenditure and investment. ‘Money is not true wealth,’ he wrote, and his concern was to increase the national wealth by increasing the nation’s productive capacity rather than its stock of precious metals. This could only be achieved by investing more money in agricultural and industrial development. At present, surplus wealth was being unproductively invested – ‘dissipated on thin air – on papers, contracts, censos, and letters of exchange, on cash, and silver, and gold – instead of being expended on things that yield profits and attract riches from outside to augment the riches within. And thus there is no money, gold, or silver in Spain because there is so much; and it is not rich, because of all its riches….’

The Castile of González de Cellorigo was…a society in which both money and labour were misapplied; an unbalanced, top-heavy society, in which, according to González, there were thirty parasites for every one man who did an honestday’s work; a society with a false sense of values, which mistook the shadow for substance, and substance for the shadow.

J.H. Elliott, Imperial Spain: 1469-1716

Austerianism is predicated on the belief that money, and not production, is true wealth. But if we look at the four great hegemonic empires to arise since the advent of capitalism – Spain, Holland, England and the United States – what their histories tell us is something very different.

In 16th-century and early 17th-century imperial Spain money was conceived predominately in the form of specie — silver and gold bullion. But by the time Holland had risen to preeminence in the 17th century and had “transition[ed] from a merchant oligarchy to a rentier oligarchy,” money began taking on a different meaning: “houses, lands, and money at interest” And of that, Holland’s oligarchs had plenty: “Amsterdam was the money-market of the Western World” (C.R. Boxer, The Dutch Seaborne Empire 1600-1800).

From whence did this money come from? To put it quite bluntly, it came out of the hides of either conquered foreign peoples or of domestic workers. C.R. Boxer, for instance, describes the condition of the latter in imperial Holland:

Although adequate unemployment statistics and other relevant materials are lacking, it is clear from numerous contemporary accounts of the Dutch Republic in its ‘Golden Century’ that economic expansion and national prosperity were accompanied by great poverty among many groups of workers, as happened later in England during the Industrial Revolution…. As early as 1566 a Leeuwarden chronicler noted that, in sharp contrast with the wealthy regents and merchants, stood the mass of the ‘humble, distressed, and hungry common people’…. The poor houses and workhouses also supplied women and children for industrial labour, and here again there is an obvious parallel with England during the Industrial Revolution. It is true that some steps were taken to check these abuses, such as fixing the textile operatives’ working day at a maximum of fourteen hours (!) in 1646; but thirteen years later a leading Leiden industrialist noted that many workers were living in overcrowded slums, and that some were forced to burn their beds and furniture to keep themselves warm in winter!
Out of 41,561 households in Amsterdam in 1747, some 19,000 were living in squalid back premises, cellars, and basements.

State mercantilism was the dominant paradigm of the 17^th and most of the 18^th centuries, and the great thinkers of the time went to great lengths to craft ideologies which justified the austere conditions of the workers. Here’s how Carroll Quigley puts it in The Evolution of Civilizations:

Economic aims and economic values were distorted and frequently reversed so that consumption was condemned as an evil, abundance abhorred, work praised as an end in itself, exporting encouraged, and poverty regarded as a good because it was the only way to keep people working. The esteemed Sir William Petty (1662) believed that a country could get richer and richer by exporting more and more and that it would be a good thing “if the products of the labor of a thousand men could be burned” since these men could then keep their skills by having to make the goods over again. Charles Davenant in 1698 wrote, “By what is consumed at home one loseth only what another gets and the nation in general is not all the richer, but all foreign consumption is a clear and certain profit.” More briefly in 1673 Becker wrote, “All selling is good, all buying bad,” while in 1677 John Houghton drew a logical conclusion from these ideas by suggesting that England could get richer by inviting foreigners to come in to “consume our corn, cattle, cloths, coals, and other things.

The demise of state mercantilism and the rise of liberal imperialism (also known as liberal internationalism) towards the end of the 18th century brought about many changes which revolutionized and greatly increased production. Money in the form of specie was replaced by the use of banknotes backed to only a fractional part of their value by specie reserves, the medieval three-field fallow system was replaced with the newer enclosed leguminous rotation systems, the craft system of manufacture was replaced by the industrial system, and man- and animal-power were replaced by water power or coal-fueled steam engines.

But one thing did not change. And that was the abiding faith in the appropriateness of austerity for the working class. Just like those who came before them in the state mercantilist era, all the great thinkers of the liberal imperialist age – e.g. Adam Smith, David Ricardo, and Thomas Malthus – labored long and hard to lend moral and intellectual legitimacy to the austere condition of the workers. As Robert Heilbroner explains of the early 19th century, it was

a world that was not only harsh and cruel but that rationalized its cruelty under the guise of economic law. Necker, the French financier and statesman, said at the turn of the century, “Were it possible to discover a kind of food less agreeable than bread but having double its substance, people would be reduced to eating only once in two days.” Harsh as such a sentiment might have sounded, it did ring with a kind of logic. It was the world that was cruel, not the people in it. For the world was run by economic laws, and economic laws were nothing with which one could or should trifle; they were simply there, and to rail about whatever injustices might be tossed up as an unfortunate consequence of their working was as foolish as to lament the ebb and flow of the tides.
The laws were few but final. We have seen how Adam Smith, Malthus, and Ricardo elaborated the laws of economic distribution. These laws seemed to explain not only how the produce of society tended to be distributed but how it should be distributed. The laws showed that profits were evened out and controlled by competition, that wages were always under pressure from population, and that rent accrued to the landlord as society expanded. And that was that. One might not necessarily like the result, but it was apparent that this result was the natural outcome of society’s dynamics: there was no personal ill-will involved nor any personal manipulation. Economic laws were like the laws of gravitation, and it seemed as nonsensical to challenge one as the other. (Robert Heilbroner, The Worldly Philosophers).

But why the solitary focus of the liberal imperialists on increasing production if austerity meant increased production was not to bring about a general rise of domestic prosperity? The increased production, as Hannah Arendt explains, was not to enhance domestic consumption, but to create a surplus of goods and money for export. The imperialist expansion of the 19^th century had

been touched off by a curious kind of economic crisis, the overproduction of capital and the emergence of “superfluous” money, the result of oversaving, which could no longer find productive investment within the national borders….
After the financiers had opened the channels of capital export to the superfluous wealth, which had been condemned to idleness within the narrow framework of national production, it quickly became apparent that the absentee shareholders did not care to take the tremendous risks which corresponded to their tremendously enlarged profits. Against these risks, the commission-earning financiers, even with the benevolent assistance of the state, did not have enough power to insure them: only the material power of a state could do that. (Hannah Arendt, The Origins of Totalitarianism).

And thus the age of liberal imperialism was born. Britain, France, Germany, Belgium and the United States would come to rule over vast empires, either by direct rule or by establishing client states, and by the time of the Versailles Treaty it was possible for Thorstein Veblen to assert that “the present economic and political order rests on absentee ownership.” Absentee ownership could take two forms, either as loans to the colonies and neo-colonies or as direct investment in these faraway places. “The imperialist policies of the Great Powers, including America,” Veblen explains, “look to the maintenance and extension of absentee ownership as the major and abiding purpose of all their political traffic.” In “all these civilized nations,” he adds, “the security of property rights has become virtually the sole concern of the constituted authorities,” who “at any cost” will strive to make the world safe for “that Democracy of Property Rights on which the existing political and civil order is founded.” (Thorstein Veblen, “Review of John Maynard Keynes, The Economic Consequences of the Peace”).

Making the world safe for the “Democracy of Property Rights,” as Arendt pointed out, requires extensive use of the state’s instruments of violence: the police and the military. In liberal imperialism, however, this is never openly admitted. The result is that, as Reinhold Niebuhr explains, the “moral attitudes of dominant and privileged groups” are thus “characterized by universal self deception and hypocrisy” (Reinhold Niebuhr, Moral Man and Immoral Society). And since “inequalities of privilege are greater than could possibly be defended rationally, the intelligence of privileged groups is usually applied to the task of inventing specious proofs for the theory that universal values spring from, and that general interests are served by, the special privileges which they hold.” Classical and neoclassical economics are perfect examples of this. As Niebuhr goes on to explain:

Practically every moral theory, whether utilitarian or intuitional, insists on the goodness of benevolence, justice, kindness and unselfishness. Even when economic self-seeking is approved, as in the political morality of Adam Smith, the criterion of judgment is the good of the whole…
[….]
Rationalism in morals may persuade men…[to] condone their egoism as a necessary and inevitable element in the total social harmony. The egoistic impulses are so powerful and insistent that they will be quick to take advantage of any such justifications. The utilitarian movement of the nineteenth century had the laudable purpose of persuading men to achieve by diverting egoistic impulse to the most inclusive possible social objectives. It was significant that it merely provided the rising middle class with a nice moral justification for following its own interests.
[….]
Thus, for instance, laissez faire economic theory is maintained in an industrial era through the ignorant belief that the general welfare is best served by placing the least possible political restraints upon economic activity….
When economic power desires to be left alone it uses the philosophy of laissez faire to discourage political restraint upon economic freedom. When it wants to make use of the police power of the state to subdue rebellion and discontent in the ranks of its helots, it justifies the use of political coercion and the resulting suppression of liberties by insisting that peace is more precious than freedom and that its only desire is social peace.

The “universal self-deception and hypocrisy” manifest themselves in foreign relations as well as domestic relations. As Kevin Phillips explains in Wealth and Democracy, the

openness of the world economy from 1870-1913 – reexamined with interest as the debate over the next great globalization heated in 2000 – was less a phenomenon of global fraternity than a projection of British power and its demand that investment and export opportunities remain open….
The notion that Britain did this through laissez-faire rather than government activism is a Victorian fairy tale. From 1845 to 1870, laissez-faire dominated British domestic policy in the sense of denying any role for government in aiding the masses in ameliorating poverty. Globally, however, Britain spent huge sums on the principal supervisory force that watched its world commerce – the Royal Navy. Steel development had more than a little to do with the navy; India was run by mercantilist precepts; the Bank of England was charged with maintaining the pound sterling; and the British government subsidized transatlantic steamers and telegraph cables and bought half the shares in the Suez Canal Company. With that kind of laissez-faire, Britain built an empire and projected the globalization regime of open sea-lanes, open ports, and (relatively) free movement of investment.

After WWII the baton of liberal imperialism was passed from Great Britain to the United States, and the US became the senior partner, with the other “civilized nations” playing the role of junior partners, in keeping the globe safe for “that Democracy of Property Rights.”

The quest of privileged groups for absolute domination and control over not just domestic affairs, but also the planet, runs like a thread through the capitalistic era, which began about 500 years ago. In the successive installments of this series, I would like to explore how the belief that money is true wealth came to dominate elite thinking in Holland, Great Britain and now the United States, and how this belief undermines the very success of the imperial projects undertaken by the privileged groups in these countries.

Bill Black: I Don't Think Holder Takes Holder Seriously Anymore

noreply@blogger.com (pippinghole) — Tue, 17 Sep 2013 19:59:00 +0000

Shocking New Research Reveals Obama's Legacy Could Be an America of Aristocrats and Peons

noreply@blogger.com (pippinghole) — Tue, 17 Sep 2013 19:30:00 +0000

By Lynn Stuart Parramore
AlterNet

Inequality experts Thomas Piketty and Emmanuel Saez reveal the biggest gap between rich and poor ever recorded by economists.

Warning: This story is going to make you very angry.

New research from inequality experts Thomas Piketty and Emmanuel Saez has revealed that we now have the biggest gap between the rich and rest of America since economists began tracking data a century ago.

This isn’t supposed to happen following an economic crisis. After the Great Depression, Roosevelt’s New Deal programs worked to prevent wealth from piling back up at the top. And over the past two decades, the percentage of income claimed by the wealthy dropped after each recession. But in the aftermath of the Great Recession, the top 1 percent has gobbled up nearly all of the income gains in the first three years of the “recovery" — a stupifying 95 percent. Economic inequality is even worse than it was before the crash. In fact, last year the rich took home the largest share of income since 1917 with the exception of only one year: 1928.

Is this an accident?

Let's take a look at the years from 2009 -2012. While working people were sweating it, the richest Americans have enjoyed a fabulous ride. For example, if you were in the top 1 percent in 2012, lucky you — your income soared on average by 20 percent . And if you were in the top 0.01 percent, you probably bought a bigger yacht because your income was up by more than 32 percent on average . As for everybody else? They shared a measly 1 percent rise.

In other words, the rich are getting richer, and the rest of us are frozen in economic purgatory.
For despite all the talk of the Federal Reserve’s “quantitative easing” driving soaring stock markets and a post-crisis economic boom, 99 percenters have seen their real incomes going down and their living standards depressed. Ordinary, hard-working people are not getting a slice of the pie, they're barely getting a sliver. (Cue Obama’s apparent pick for the next Federal Reserve chair, the crony capitalist, bank-loving Larry Summers.)

The bailouts, which handed boatloads of money to bankers, can’t be blamed entirely on President Obama. But ever since then, the policies of his administration have pretty much fixed things so that those who caused the crisis have benefited, while those who didn’t paid for it. He has surrounded himself with Wall Street apologists as economic advisors, despite the existence of extraordinary economic minds like Nobel laureate Joseph Stiglitz who could offer sound and sensible guidance. Every chance Obama has to correct this mistake, he seems to double down and brings on another 1 percenter.

To be fair, Republicans have been the most ardent promoters of “trickle-down” economics and austerity policies that leave regular people behind. But centrist Democrats have done little to forge a different path. A few courageous progressive voices, like Elizabeth Warren's, get drowned out by a chorus of “Let’s Make a Deal” politicians eager to screw the bulk of the population and reward the rich while filling their campaign coffers. Policies like cutting our social insurance programs and allowing the rich to evade taxes are hidden behind clever marketing campaigns: For hedge fund billionaire Pete Peterson, for example, who counts deficit committee co-chairs Alan Simpson and Erskine Bowles as his errand boys, the name of the game is “fixing the debt.”

What these plutocrats are really doing is fixing your financial future so that more money can be sucked out of your pockets to line theirs. Obama’s decision to focus on deficit reduction rather than job creation is the sure sign his administration sings the tune of the wealthy. The wealthy wanted deficit reduction, while the rest of us wanted investment in jobs, schools and infrastructure, as Northwestern University’s Benjamin Page and his team of social scientists have shown in their extensive research on public opinon. But we didn’t get it. Instead we got job insecurity and nightmare retirement prospects.

Making the rich richer is a terrible idea.

Making the rich richer is a terrible idea for several reasons. For one thing, it kills jobs. When regular people have money in their pockets to pay for things like food, clothing, or going to the movies, they are actually creating jobs. The taco stand can hire another cashier when people come in to spend their money on tacos.

But there are only so many tacos you can buy. If you have much more money than you can possibly spend, you’ll likely sock it away or invest in financial assets or start doing risky speculation, which doesn’t create any jobs. With banks deleveraging (cutting back on loans) and many companies fearful of borrowing given anemic rates of economic growth, your savings won’t be recycled. Even if you’re a rich person who builds a company, chances are you’re not creating very good jobs, and you’re also destroying plenty of them. High unemployment makes it easy to hold wages down and squeeze more and more work from desperate workers. Apple executives like to brag about all the American jobs they create, but a great many of them are crappy retail jobs featuring $26,000 salaries and little chance of a long-term career.

An economist might say that the economic return to capitalists has gone up at the expense of economic return to labor.

As Nick Hanauer, founder of Second Avenue Partners, told Bloomberg:

“I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is the feedback loop between customers and businesses. And only consumers can set in motion a virtuous cycle that allows companies to survive and thrive and business owners to hire. An ordinary middle-class consumer is far more of a job creator than I ever have been or ever will be.”

You can see the truth of Hanauer’s statement when you realize that while the concentration of wealth in America has been heating up for the last couple of decades, the job market has been pretty bleak. That’s what happens when Washington policy becomes “Who Wants to Help a Millionaire?”

If making the rich richer is destructive, why do we do it? We’re not supposed to be a country of aristocrats and peasants who labor at the pleasure of the wealthy. We’re supposed to be free and proud citizens whose labor, investment and idea drive the economy.

What’s happened is that the rich have been using the fairy tale of “rugged individualism” and our healthy skepticism of too much government to convince many of us that we shouldn’t have programs designed to promote economic equality and benefit ordinary people rather than the rich. And, of course, they’ve unleashed their bankrolls in Washington, where, since Newt Gingrich came on the scene, Congress has turned into what political economist Thomas Ferguson describes in the Financial Times as a “Best Buy system” where positions of power go to whoever can raise the most cash. “Uniquely among legislatures in the developed world, US congressional parties now post prices for key slots in the lawmaking process,” writes Ferguson. “The practice makes cash flow the basic determinant of the very structure of lawmaking.”

The rich are getting richer in that they control our legal and political systems. They aren’t going to give up this control voluntarily.

If we continue on this path of functional feudalism, we can look to history for hints as to what might happen. In the late 18th century, peasants in France expressed their anger at the brutes who were extracting their wealth by rounding them up in the Place de la Concorde and separating their heads from their bodies. Hopefully we can go a more peaceful route, joining forces in a mass movement that pushes our elected officials to get our economy and society back into balance through fair taxes, a robust social safety net, investment in working people, rules of the road that curb Wall Street’s excesses, and a plan to bring the financial sector back to a manageable size.

The Occupy movement was a hint that this might be possible. It was also a warning that the Powers That Be will do everything they can to shut such a movement down.

But if we maintain the current path, at some point, the 99 percent will be pushed too far.

We've Got a Billionaire Bailout Society—And the 99% May Never Recover From It In Our Lifetimes

noreply@blogger.com (pippinghole) — Tue, 17 Sep 2013 19:20:00 +0000

By Les Leopold
AlterNet

Our financial system is sucking up the wealth of the nation and using it to cover its losses.

The odds are that we in the bottom 99 percent may never see a recovery in our lifetimes. That's because our nation has evolved into something entirely new: a billionaire bailout society.

We are entering a disastrous new era in which all the economic gains go to the top 1 percent, according to data from economists Emmanuel Saez and Thomas Piketty. They report that, "Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery.... In sum, top 1% incomes are close to full recovery while bottom 99% incomes have hardly started to recover." (In 2012, $394,000 is the cutoff to make it into the top 1 percent.)

We see in vivid detail what the new American order looks like. The top 1 percent live in another economic universe of high finance that sucks the wealth from the rest of us. In their world, banks (owned by and for the top 1%) are able to grow larger and larger so there is no chance they will be allowed to fail, even after these same banks took down the economy. (In 1965 they had assets equal to 17% percent of the U.S. economy. Today it's more than 65% percent.)

Free from any meaningful controls, financial gambling (called proprietary trading in polite circles) is now the dominant activity within our largest banks. In fact, in these too-big-to-fail banks, more money goes to financial gambling than to loans for businesses and consumers. These are not banks—they are rigged casinos for the rich. The upside from these corrupt pursuits are kept by the top fraction of the 1 percent, while the 99 percent hold the bag when those phony bets crash the economy.

And who among us doesn't think that will happen again?

Regulation is hapless as billions of dollars slosh through the political troughs. Serious enforcement is virtually non-existent because the enforcers fear that the entire financial system will fail should these criminal banks be prosecuted. Every national policy from the bailouts to "quantitative easing" has further funneled money to the super-rich. Meanwhile, the rest of us are told to plod along until jobs miraculously appear and our incomes finally rise. Dream on.

In sum, our new economic era is characterized by the supremacy of financial capital which vacuums up the productive wealth of the nation, and then uses the nation's wealth as an insurance policy to pay for its inevitable losses.

Entering Uncharted Territory

The billionaire bailout society is quite different than previous gilded ages. This can be seen clearly in comparing the aftermath of the recent Great Recession to what took place during the Great Depression. We need to remember that after the crash of 1929, America went on a crusade to rescue the economy by controlling Wall Street, supporting unions, and fundamentally rebuilding our physical and educational infrastructure. As Harvard economist Claudia Golden put it, a Great Compression took place during which the gap between the rich and the rest of us came down—not by destroying wealth but by making sure working people got their fair share. In 1929, the top 1% grabbed 23 percent of the nation's income. By the late 1960s it was below 9 percent.

During the Great Compression we had our feet planted firmly on the neck of Wall Street. Financial gambling was held to a minimum. Incomes were no higher on Wall Street than in the productive economy. Finance and production more or less were in balance. But after deregulation set in the late 1970s, the income gap began to accelerate yet again, returning to the unconscionable levels of the late 1920s.

Here's the frightening news contained in the Saez/Piketty data: There is no Great Compression emerging this time around. We're not heading toward greater income equality. We're not building up the middle class or supporting unionization. We're not eradicating poverty and hunger. We're not expanding educational opportunity. We're not rebuilding infrastructure. Nothing we're doing looks anything like the society we built from the New Deal through the 1960s. We're not doing any of the things that would lead to a more stable and just economy. In fact, we're doing just the opposite, which means the billionaire bailout society will become even more firmly entrenched.

How do we dismantle the billionaire bailout society?

It starts with recognizing that the political circus in Washington has no chance at all in altering our pell-mell descent into crippling inequality. The Republicans are so blinded by nonexistent big government socialism that they fail to realize, yet alone acknowledge, that the capitalism they so love is long gone. Wall Street ate it for lunch.

While we could single out a handful of decent Democrats who more or less get the picture, the party as a whole is enthralled with Wall Street, many hoping to join the world of high finance after they serve their time in public service. There is no chance whatsoever that these two parties will tame high finance or undermine the growing billionaire bailout society.

But much can still be done, especially on the state and local level. That's where Wall Street is vulnerable to a strong counterattack. And that attack must be aimed at building public banks that can one day replace the Wall Street behemoths. (Many thanks to Ellen Brown and her new book, The Public Bank Solution for opening my eyes to this possibility.)

Here are some key facts we all should know about banks and public banks:

1. There is only one public state bank in the country—the Bank of North Dakota—and it's phenomenally successful. A relic from the Populist era, the BND invests in the people of North Dakota. It doesn't play with derivatives or high-risk mortgages so it didn't get burned during the crash. It doesn't pay its executives high salaries (which are lower than what chauffeurs get on Wall Street). It just builds the state's economy and returns a profit year after year to the people of North Dakota. As a result, the state has the lowest unemployment rate in the country (even after taking into account their oil boom). And this so-called socialist bank resides in one of the most conservative states in the country.

2. Right now, we taxpayers funnel over $1 trillion of our money into Wall Street banks when we pay our state and local taxes and fees. That money does not go into vaults in city hall or the state capital. It goes to Wall Street banks which at the moment are the only ones large enough to provide all the services required...except in North Dakota. There state revenues run through the state bank which in turns supports 80 community banks. If that happened in the other 49 states, we could create more than 10 million additional domestic jobs. Remember, a state bank invests in its state. Wall Street has no allegiance to any state or country.

3. State banks are the answer to funding infrastructure projects. Right now Wall Street preys upon state and local governments that need to borrow money to build schools, roads and other critical public projects. Those loans comes with enormous fees and interest rates that often double and triple the cost of these projects. Not so with public banks, whose job it is to build up the state rather than rip it off.

What will it take to win?

There are some positive signs popping up all over the country. Low-wage workers are organizing. The AFL-CIO is finally coming out of its defensive crouch and opening up to non-traditional worker organizations. More and more co-ops are forming. And more than 20 states are seriously considering moves toward public banks.

But we'll need much more to dent the billionaire bailout society. We will need nothing less than a broad movement that connects all these efforts and many more into a coherent force aimed at high finance. The money labor squanders on meaningless elections should be funding the attack on Wall Street.

It's time we looked more seriously at the last time Americans rose up against Wall Street. That was during the Populist Era of the late 19th century. Then, urban working people and farmers demanded an alternative financial system to the one run by Wall Street. It was a clear-cut struggle pitting private banking against public banking.

Then, like now, the American people were disgusted by the domination of high finance. Then, like now, the two parties were corrupted by concentrated wealth. Then, like now, the modest prosperity of the working people was collapsing. It took great courage and resilience for Americans to rise up. It took thousands of dedicated organizers and educators who believed in the justice of their cause.

Even though the movement was ultimately defeated, it left its indelible mark on America. Many of its policies and programs formed the constructive politics of the New Deal that ultimately tamed Wall Street for nearly a half a century. And it gave North Dakota its public bank.

We will need that kind of massive upheaval again if we hope to undo the billionaire bailout society.

America's Rich Are Getting Richer Even Faster Than You Thought

noreply@blogger.com (pippinghole) — Tue, 17 Sep 2013 19:08:00 +0000

By Sam Pizzigati
Blog for Our Future

We have come, as a nation, almost full circle back to the deeply unequal America of the late 1920s.

The future just keeps getting brighter for Americans with unique specialties.

Randy Stearns has one such specialty: “home-tech integration.” Stearns helps people install and maintain high-tech gadgets. But we’re not talking “geek squad” and hooking up home networks here. We’re talking rich people — and electronic toys that can cost more than houses.

Randy Stearns offers “24/7 white glove” service for clients who typically pay between $150,000 and $450,000 per project. These affluents get plenty for their money. Call Randy and you, too, could end up with a home monitoring system that sends out alerts whenever your wine cellar temperature rises too high.

Annual sales in luxury home-tech integration, Stearns estimates, are going to nearly double — to $3.7 billion — by 2016. He may be underestimating his potential market. America’s rich, two top economists revealed last week, are actually getting richer faster than almost anyone thought possible.
Last year, report Emmanuel Saez from the University of California Berkeley and Thomas Piketty from the Paris School of Economics, the incomes of America’s top 1 percent — families that took home over $393,941 — shot up just under 20 percent over the year before. America’s really rich, families in the top 0.01 percent, saw their incomes soar by over 32 percent.

The just over 16,000 families that make up our top 0.01 percent finished up last year averaging $30,785,699 in income each.

And the rest of America? The incomes of the nation’s bottom 99 percent rose all of 1 percent last year. Since 2009, bottom 99 percent incomes have barely bumped up at all, just 0.4 percent on average, after taking inflation into account.

Emmanuel Saez has a stat that puts the matter even more starkly. America’s top 1 percent, he notes, has “captured 95 percent” of all income gains over the first three years of the recovery. Overall, since 1993, top 1 percenters have grabbed “just over two-thirds” of total family income growth.
This massive surge at the top has — no surprise — significantly hiked the share of national income that’s flowing into the pockets of America’s most comfortable.

For most of the middle of the 20th century, America’s most affluent 1 percent took in less than $1 of every $10 in national income. In some of these years, the top 1 percent share even dipped under 9 percent.

Those days now come across as almost mythic ancient history. In 2007, the year before the Great Recession hit, the share of the nation’s income the top 1 percent claimed hit 23.5 percent, or nearly $1 out of every $4.

This top 1 percent share did dip with the Great Recession, down to 18.1 percent in 2009. But the “recovery” — for the rich — has since then been almost total. Last year, the top 1 percent income share jumped back to 22.5 percent.

We have come, as a nation, almost full circle back to the deeply unequal America of the late 1920s. That America’s deep economic divides ushered in the Great Depression of the 1930s.

We finally ended the Great Depression, Berkeley’s Saez points out, by nurturing a set of institutions that narrowed the gaps between America’s wealthiest and everyone else.

The two most fundamental of these institutions: a vibrant labor movement that established new social norms about fair pay and a steeply progressive tax system that subjected the nation’s wealthy to tax rates that topped 90 percent on income over $400,000.

These two institutions have both withered over recent decades, and the Great Recession hasn’t yet done much to reverse that withering.

Recent equalizing policy changes — like the higher federal income tax rates on the rich that came in earlier this year — remain, notes Saez, “modest relative to the policy changes that took place coming out of the Great Depression.”

And this reality has insightful observers like the Atlanta Journal-Constitution’s Jay Bookman deeply worried. The nation’s most affluent 10 percent, Bookman notes, took in just a third of the nation’s income four decades ago. The top tenth last year, for the first time ever, took in over half the nation’s income dollars.

“Great concentrations of wealth” like this, Bookman wrote last week, “create great concentrations of political power and distort the terms of debate.”

How distorted has our debate become? Our lawmakers, observes Bookman, now see no problem cutting food stamps at the same time they refuse to raise taxes higher on America’s ever-richer rich “because that wouldn’t be fair.”

The bright side? In an America growing more unequal, people like Randy Stearns won’t have any trouble finding clients.

Labor journalist Sam Pizzigati, an Institute for Policy Studies associate fellow, writes widely about inequality. His latest book: The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class, 1900-1970

Too Big Has Failed: 3 Ways Wall Street Hurts You, In 3 Minutes

noreply@blogger.com (pippinghole) — Tue, 17 Sep 2013 18:57:00 +0000

Inequality for All: Robert Reich Warns Record Income Gap Is Undermining Our Democracy

noreply@blogger.com (pippinghole) — Fri, 13 Sep 2013 21:53:00 +0000

Help Kickstart World War III!

noreply@blogger.com (pippinghole) — Fri, 13 Sep 2013 21:46:00 +0000

Nonsense jobs prevent revolutions

noreply@blogger.com (pippinghole) — Fri, 13 Sep 2013 20:53:00 +0000

The "Real" America: Near Record 20% Struggle To Afford Food, Highest Since Crisis Began

noreply@blogger.com (pippinghole) — Thu, 12 Sep 2013 19:22:00 +0000

by Tyler Durden
zerohedge.com

With US equity markets on a 7-day roll and excited TV anchors proclaiming the worst over and new all-time highs must signal recovery as they 'celebrate' five years on from Lehman, the following two charts of the state of real America should open a few eyes to just how blinded American has become to the truth (unless you live it). A stunning 20.0% of Americans were found to have struggled to afford food in the last year - surging in recent months to its highest since the peak of the crisis in 2008 - as American's ability to consistently afford food has not recovered to pre-recession levels. Furthermore, Americans access to basic needs (13 factors including housing, healthcare, and food) hovers near record lows - dramatically lower than pre-recession levels. The Gallup polls point to a very different image of American than Dow 15,000 - and is set to get worse as the food stamp program is set to be cut in November.

More Americans are struggling to afford food -- nearly as many as did during the recent recession. The 20.0% who reported in August that they have, at times, lacked enough money to buy the food that they or their families needed during the past year, is up from 17.7% in June, and is the highest percentage recorded since October 2011. The percentage who struggle to afford food now is close to the peak of 20.4% measured in November 2008, as the global economic crisis unfolded.

Americans remain as likely to have access to basic necessities in general now as they were in October 2011, when it was at its lowest point. The Basic Access Index, which includes 13 questions about topics including Americans' ability to afford food, housing, and healthcare, was 81.4 in August, on par with the all-time low of 81.2 recorded in October 2011.

Gallup Implications

One in five Americans reported in August that they did not have enough money to buy the food that they or their family needed in the past year, more than said so earlier this year and near highs seen since 2008. Similarly, Americans' overall access to basic necessities has not recovered to the levels seen before the economic crisis. These findings suggest that the economic recovery may be disproportionately benefitting upper-income Americans rather than those who are struggling to fulfill their basic needs.

Stagnant wages are one possible reason why Americans' ability to afford food and other basic needs has not improved since the recession. According to an August 2013 Wall Street Journal analysis of Labor Department data, "the average hourly pay for a nongovernment, non-supervisory worker, adjusted for price increases, declined to $8.77 [in July 2013] from $8.85 at the end of the recession in June 2009." Depressed wages are likely negatively affecting the economic recovery by reducing consumer spending, but another serious and costly implication may be that fewer Americans are able to consistently afford food and meet other basic needs.

Increasing wages alone, however, is not enough to significantly increase the percentage of Americans who have the ability to afford food. Federal government programs also play a role in addressing this issue. As food stamp (SNAP) enrollment increases, Republicans in Congress are proposing substantial cuts and reforms to the program, while Democrats are resisting such reductions. Regardless, food stamp benefits are set to be reduced in November after a provision of the 2009 fiscal stimulus program expires. Therefore, it is possible that even more Americans may struggle to afford food in the immediate future.

Via Gallup

Andrew Bacevich on Taking Action in Syria

noreply@blogger.com (pippinghole) — Thu, 12 Sep 2013 19:11:00 +0000

http://billmoyers.com/segment/andrew-bacevich-on-taking-action-in-syria/

5 Years Later, Wall Street Still Sucking Life Out of America Like Vampires at a Blood Drive

noreply@blogger.com (pippinghole) — Thu, 12 Sep 2013 17:25:00 +0000

By Lynn Stuart Parramore
AlterNet

Only massive reform and no-holds-barred prosecutorial assault will drive a stake into the heart of this monster.

On Sept. 15, 2008, the Lehman Brothers collapse became the 9/11 of the financial world, sending the global economy into panic. Stocks plunged, credit dried up and working people were forced out of their homes. Jobs and pensions were wiped out in the ugliest financial episode since the Great Depression—mostly because the financial sector had gotten out of control.

Five years later, the big banks continue the most expansive crime spree in the history of capitalism, getting bigger, richer and bolder every day. Like undead creatures from a horror film, financial predators have spread themselves into every corner of society, preying and feeding and making us weaker. In an epic fail on the part of federal prosecutors and the SEC, no one at Lehman was ever prosecuted for financial shenanigans that included shady accounting practices former CEO Dick Fuld claims he didn't know about. As the five-year anniversary approaches and the statute of limitations runs out, we can be sure that no one will ever pay for Lehmans' crimes—except for us.

You could wallpaper your house with the list of dirty deals that have gone down since the financial crisis. JPMorgan sent $6 billion up in smoke in a bad bet, then lied about it to regulators. HSBC laundered money for drug cartels. Big banks manipulated the world’s benchmark interest rates. Every day, bankers defraud municipal and state finances with rigged deals that enrich them as schools crumble and children go without healthcare. There’s insider trading, racketeering, tax evasion, usury, and creative financial products set to explode in your face. Everything you can think of, and, alas, much that you can’t.

Oh, well, say the regulators. Stuff happens.

It’s perfectly obvious that if ginormous Wall Street banks don’t fear prosecution— and Attorney General Eric Holder told us flat-out they needn’t—then the cheating, lying, casino games, and law-breaking will continue. Jim Chanos, an early detector of the Enron fraud, warns that today’s Wall Street executives have even embraced the perverse logic that they have a fiduciary duty to cheat — if everybody else is doing it, says the executive, then I have an obligation to get in on the action.

Nothing but massive reform and no-holds-barred prosecutorial assault will drive a stake into the heart of this monster.

Yet on Tuesday, the smart financial reformer Eliot Spitzer lost his bid for NYC comptroller, a role in which he could keep public money out of the hands of financial predators, whose scams he understands. It can't escape notice that NYC is the home of several of the most powerful banking institutions on Earth: Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citigroup. Or that newspapers, presumably on different sides of the political spectrum, melted into one giant anti-Spitzer bullhorn; ignoring positive polls, running biased stories and denouncing him on their editorial pages.

Economist and former regulator Bill Black noted in an email that “Wall Street was obsessed with defeating Eliot Spitzer in the Democratic primary election for Comptroller" and pointed out that his anti-financial fraud prosecution was extremely effective when he served as New York's attorney general: "An economic study found that victims of financial frauds received a substantially greater recovery of their losses when Spitzer's office was involved in cases compared to securities fraud cases where only the SEC brought an action." Clearly Wall Street doesn't like that kind of outcome.

It's not easy to find potent weapons against Wall Street predators, and in the meantime, we’re still waiting for reform. We wanted it so badly that we pitched tents in city parks during the Occupy movement to send the message, but the politicians wouldn’t hear us, because their ears were stuffed with Wall Street money. Thanks to an army of lobbyists unleashed in Washington, we can’t even seem to get the relatively timid Dodd-Frank rules designed to stop bankers from playing casino games with our savings.

The Federal Reserve could rein in the banks by splitting them up through antitrust laws, as economist Robert Reich has suggested. But we’d need someone at the Fed who is actually willing to take on this project. Unfortunately, over at the White House, we have Obama pushing crony capitalist poster boy Larry Summers for Fed chair—a man who played a key role in deregulating the financial sector, who has gleefully gorged himself on Wall Street money, and who, while in the White House, opposed even the weak Volcker Rule to curb risky trading contained in Dodd-Frank.

The banks continue to bigfoot their way around our legal and political systems, buying up whatever support they require to keep the show going.

If you think things have gotten pretty ugly, just stick around. Another financial crisis is likely. Former Treasury Secretary Hank Paulson just told a group of bankers and economists in Manhattan to expect it, and he has a unique perspective on the topic, having helped bring on the last one.

Paulson knows something else: This time the Democrats will likely be held responsible.

The SEC Flacks Paint Lehman’s Looters as the Victims of a “Political” SEC

noreply@blogger.com (pippinghole) — Wed, 11 Sep 2013 22:31:00 +0000

By William K. Black
http://neweconomicperspectives.org/

This is the second installment in a three-part series correcting the NYT propaganda that seeks to transmute the SEC’s refusal to hold any of Lehman’s looters accountable for their myriad frauds. For the purposes of this article I assume that the reporters have accurately represented the SEC officials’ positions. I discuss the journalists’ analytical flaws. In my next column I’ll address critical facts excluded by the SEC and the reporters. Those facts demonstrate that Lehman was an “accounting control fraud.” The NYT article ends with this morality play about the SEC’s anti-enforcement “team”:

“The S.E.C. team also concluded that Repo 105 would not have been ‘material’ to investors because the firm’s leverage ratio was trending downward regardless of Repo 105.
That conclusion set off a wave of dissent inside the S.E.C. Senior accountants and the head of the S.E.C. unit that oversaw corporate disclosures questioned the findings. Ms. Schapiro urged Mr. Canellos to keep digging.
But Mr. Canellos, a former federal prosecutor who is now the co-head of the S.E.C.’s enforcement unit, did not budge. Despite the political pressure, he told colleagues at one of the meetings, they could not bring a case if the evidence was lacking.
‘Our job is to seek justice,’ he said.”

It gets better, the reporters claim that Cannelos and his teams’ “careers likely would have benefited from bringing such a prominent case.” So, they are not only uniquely ethical, they are selfless. As I will explain in the next installment, Cannelos failed to investigate Lehman’s largest frauds and concluded he would lose the case if he brought it. That would have harmed his career. But the article unintentionally allows us to see how the SEC leakers spun their heroic morality tale and how the reporters swallowed it whole. I am a former enforcement director and head of litigation for a federal financial regulatory agency that conducted real investigations.

To understand this example of non-enforcers pretending to virtue requires a bit of context. The Department of Justice (DOJ) and the SEC focused their “investigations” solely on Lehman’s quarter-end “Repo 105” transactions that were entered into for the sole purpose of deceiving investors and the SEC about Lehman’s liquidity, earnings, and leverage crises – crises that would soon cause it to collapse. A “repurchase obligation” (REPO) is a short-term borrowing that is nominally structured as a “sale” with a “repurchase obligation.” Lehman improperly treated these short-term borrowings as if they were a true sale with no repurchase obligation, which caused Lehman to report lower debt levels.

Note that the journalists report that the SEC’s experts on whether such deceit was “material” to investors (“senior accountants and the head of the S.E.C. unit that oversaw corporate disclosures”) concluded that it was material. The fact that Lehman was so desperate to deceive its investors about the crises that would soon cause it to collapse that it sought out a legal opinion in the City of London (which “won” the ethical race to the bottom) to bless the deceit and proceeded to recurrently make large transactions near the end of quarters for the sole purpose of deceiving its investors and the SEC demonstrates that Lehman knew its deceit was material to its investors. That is a central reason why publicly traded firms engage in accounting fraud.

If you are wondering, no, it is not (remotely) normal for a U.S. investment bank to go to a UK firm to obtain a legal opinion on U.S. law. Nevertheless, the cynical act by Lehman’s leaders of legal dumpster diving to obtain a legal opinion blessing an obvious fraud was not treated by the Department of Justice (DOJ) as it should have been as an aggravating factor, but rather as a “get out of jail free card.” Consider the implications of that DOJ policy briefly so that you can, unlike the NYT reporters, test the depth of the rot at DOJ and why they embraced “too big to jail” as their mantra. Under the DOJ position reported by the journalists, a large publicly traded company can search all over the world for the least ethical law firms and buy an opinion from them that will immunize the company and its officers from liability for any act of fraud because they “relied” on the legal opinion. Let’s extend that doctrine to street gangs. I’m sure they could get legal opinions on justifiable homicide in advance of their next murders.

Cannelos’ reported basis for denying that investors would have considered Lehman’s REPO 105 fraud scheme to be “material” is that “the firm’s leverage ratio was trending downward regardless of Repo 105.” It is difficult to respond to a claim that is a non sequitur because it has no logical relationship to the conclusion. As best one can guess, Cannelos is claiming that investors would have considered it irrelevant what Lehman’s true leverage ratio (debt:equity) was and would have only been interested in the direction of the trend in that ratio. Because Cannelos (falsely, as I will explain in my next column) believes that Lehman’s leverage ratio was falling as it approached collapse he asserts that investors would have considered the actual leverage ratio irrelevant. That assertion assumes that investors are incompetent. A rational investor would care about the actual ratio, not simply the direction of the trend in the ratio. Lehman collapsed due to the interaction of its severe credit losses and a liquidity crisis. As its credit losses surged its liquidity needs became far more acute because of collateral demands by its creditors and, eventually, the unwillingness of creditors to roll their loans to Lehman. Lehman’s true leverage ratio, therefore, would have provided critical information to its investors, which is precisely why it used the REPO 105 scam to deceive its investors about its debt exposure.

The reporters try to picture the scam as trivial, with this unsourced claim about the DOJ and the FBI’s alleged findings about Lehman’s Repo 105 scam.

“They discovered that Repo 105 had nothing to do with Lehman’s failure and was technically allowed under an obscure accounting rule. Noting that London lawyers had approved Repo 105, prosecutors in Manhattan also worried they could not prove that executives intended to mislead investors.”

First, an accounting scam does not have to “cause” a “failure” to be a crime or a violation of rules. Accounting frauds are frequently undertaken to cover up the failing firm’s problems. That is why Lehman engaged in the REPO 105 scam. So the first sentence was fed to the NYT reporters for the purpose of deceiving the reader. REPO 105 is an obscure accounting rule – that does not mean that Lehman was allowed to use it to deceive investors. I’ve explained why the desperate search by Lehman’s officers for an attorney willing to give them the opinion they were shopping to obtain. The attorney shopping actually confirms that Lehman’s officers intent to deceive investors.

Canellos, an SEC enforcement attorney, overruled the SEC’s experts on interpreting “materiality” and insisted on employing his own idiosyncratic view that investors would not have considered it important to know the truth that Lehman’s officers intended to hide through deceit. The journalists do not understand the implications of an enforcement attorney arrogating onto himself the ability to determine the agency’s interpretation of the agency’s rules. Instead, they mischaracterize Cannelos’ actions as evidence of his brave devotion to justice in the face of improper pressures from the head of his agency. Under the version of the facts presented by the journalists, however, this interpretation is untenable.

Cannelos is an attorney representing a client, the SEC. The SEC has experts in what “material” means. Cannelos’ ethical duty is to represent his client’s position unless that position cannot be argued in good faith. Cannelos is wrong – terribly wrong – about materiality for the reasons I have explained, but that does not begin to capture how wrong his refusal to act against Lehman’s senior officers’ recurrent frauds was. Cannelos’ refusal to enforce the law as his clients interpret the law could only be justified if there was no good faith basis for arguing that Lehman’s frauds were “material” to investors. The reality as I have said is that the SEC’s experts were correct about materiality, but Cannelos could not have believed that the SEC’s position that Lehman’s frauds were material was an interpretation of the agency’s rules that was so unreasonable that he could not ethically represent his client’s views. Even then, his proper course of action was to step aside and let another enforcement attorney present the agency’s position. Only if he believed that Lehman’s senior officers were the victim of some deliberate form of abuse prompted by illegal considerations (e.g., discrimination or a politically-driven effort at retaliation) should he have sought to block the agency from bringing the action against Lehman’s senior officers by blowing the whistle to the SEC’s Inspector General.

I have been a senior official in an agency in which the enforcement head followed Cannelos’ practice of arrogating to the enforcement attorney the client’s right to define its interpretation of its rules. Our enforcement head asserted that this action meant the enforcement attorney was uniquely virtuous for refusing to act against the senior officers leading the most notorious S&L control frauds. The enforcement head was particularly proud about refusing to bring an enforcement action that the supervisory client requested against Charles Keating’s frauds. The results were disastrous and played a critical role in producing the worst losses of any S&L failure during the debacle. It was only after the enforcement head’s monopoly on bringing enforcement actions was broken by delegating authority to the regions’ enforcement counsel that the Office of Thrift Supervision (OTS) made enormous strides in bringing effective enforcement actions.

It is disgraceful that the SEC enforcement team has been leaking to the NYT reporters the false claim (under their own account of the facts) that they bravely resisted “SEC Chair Mary Schapiro[’s] ‘political pressure [to] bring a case [where] the evidence was lacking.’” Cannelos and his teams were not brave martyrs for “justice” and Schapiro was not exerting “political pressure” to force them to bring an abusive suit motivated by the Obama administration’s (non-existent) desire to punish Lehman’s looters for their politics. Under the facts found by Cannelos, the SEC’s experts on materiality and fraud concluded that Lehman’s officers had engaged in a very large fraud that was material to investors. Schapiro and the SEC’s experts on materiality believed that Cannelos was wrong about materiality and that it was improper for him to override the client’s interpretation of “material.” Schapiro’s and the SEC’s experts’ positions were not “political.” They were substantive, and they were correct. Cannelos was in the wrong and he compounded his failure by making false claims that those who disagreed with him were “political” and “unethical.”

Let me be clear that the ultimate responsibility for the SEC fiasco lies with Schapiro. She was appointed to head the SEC by Obama for his traditional reason – she was an abject failure as the leader of securities industry’s self-regulatory body that took no effective action against the epidemics of accounting control fraud that devastated that industry and our Nation. Ultimately, Schapiro deferred to “Canellos’s team, which was closest to the evidence” rather than appoint a competent team and team leader to investigate Lehman’s looters. The issue as to “materiality,” however was not “close[ness] to the evidence” but the analysis of whether only the direction of the (dishonestly) reported trend in the leverage ratio (v. the actual leverage ratio) was “material” to investors. The experts on that issue were the “senior accountants and the head of the S.E.C. unit that oversaw corporate disclosures” and they understood correctly that the actual leverage ratio was material to investors.

Schapiro lacked the courage to replace an enforcement attorney who arrogated to himself the clients decision and who would have attacked Schapiro had he been replaced as unethical and political. The reporters claim: “Ms. Schapiro did not override [Cannelos’] judgment after S.E.C. officials cautioned her that it could be unethical for a political appointee like herself to do so.” But the relevant question was not overriding Cannelos’ judgment – it was Cannelos who was overriding the judgment of the client. That was contrary to the ethical obligations of an attorney, including an enforcement attorney unless the client was pressing a bad faith interpretation of “material.” Allowing Cannelos to override his client’s (eminently correct) interpretation of “material” was a dereliction of duty on the part of Schapiro and her head of enforcement. The SEC was so weak under Schapiro because she was such a weak leader.

Cannelos was so out of control in his devotion to Lehman’s looters’ cause that he was insubordinate.

“But at a 2011 meeting of senior S.E.C. officials, Lorin L. Reisner, then the No. 2 enforcement official, suggested preparing a draft of potential charges so the agency could have a concrete document to review. Mr. Canellos’s team balked, officials who attended the meeting said.
Mr. Canellos, the officials said, instead proposed that the S.E.C. publish a report that would publicly explain the decision to forgo charges. Ms. Schapiro and other S.E.C. officials rejected that option, concerned that Mr. Canellos’s first draft was too sympathetic to Lehman.”

It was a perfectly reasonable and normal “suggest[ion]” by Cannelos’ boss that Cannelos’ team prepare a draft of potential charges against Lehman’s officers. When your boss makes a “suggest[ion]” of this nature you prepare the document. There is no “ethical” issue in providing your superior with the strongest notice of charges you believe is supported by the evidence. Cannelos’ real problem was that had he drafted such a notice of charges it would have been obvious that the evidence did support a finding of materiality under the agency’s interpretation of materiality. The limited nature of his draft would also reveal how little about Lehman’s far larger frauds Cannelos’ team had actually investigated.

Instead, Cannelos had already begun drafting the propaganda that has now become the NYT article. He wanted the SEC to publicly endorse his defense of Lehman’s officers’ fraudulent conduct as immaterial. Note that this would set a terrible precedent that was contrary to the agency’s much broader interpretation of “materiality” – a precedent that would allow many frauds to escape sanction and impair deterrence. No enforcement lawyer whose concern was the agency, rather than his personal reputation, would make such a self-serving suggestion. Naturally, after Cannelos caused the SEC to allow Lehman’s controlling officers to escape all accountability for growing obscenely wealthy by committing widespread fraud and arrogated to Cannelos the interpretation of an accounting provision where an attorney’s duty is to represent the client’s position rather than his own he was promoted for his failures and now co-leads the SEC’s exceptionally weak enforcement effort.

The SEC leakers and the NYT reporters almost have to be admired for their audacity. Admittedly, the SEC enforcement staff, as my first column explained in detail, has nothing to be brag about in their entire response to the fraud epidemics that drove the crisis and caused the worst epidemic of securities fraud in history. Not a single elite banker who led a control fraud has had his fraud proceeds removed by the SEC. Not a single elite banker who became immensely wealthy by leading a control fraud has even had to personally pay a non-trivial portion of his fraud proceeds to the SEC.

In this long list of failures Lehman stands out as a glaring failure. Lehman was destroyed by widespread looting that made it senior officers exceptionally wealthy. Lehman’s failure triggered the global financial crisis. The SEC allowed Lehman’s securities frauds to continue for many years when it was not only reviewing Lehman’s securities filings but also serving as Lehman’s “consolidated supervision” authority. The SEC compounded its total failure as Lehman’s supervisor through a total failure as an enforcer of the securities laws and its supervisory rules even after Lehman’s control fraud caused its failure. The mortgage fraud crisis represents the worst enforcement failure by the SEC in its history.

Cannelos and the SEC flacks now have the chutzpah to try to spin one of the SEC’s worst enforcement failures into a morality play in which Cannelos is the hero precisely because he refused to hold Lehman’s looters accountable for their violations and allowed them to walk away wealthy with the proceeds of numerous insider fraud schemes. The villain becomes Ms. Schapiro who is reimagined as a would-be unethical official who tried to sue the poor, innocent Lehman officers for “political” reasons but was blocked from doing so by Cannelos’ selfless valor and dedication to “justice.” It is an odd form of “justice” in which the most elite frauds became wealthy by scams that caused a $11 trillion loss to American households and cost over 10 million Americans their jobs and avoid all accountability for their frauds. But that is Cannelos’ definition of “justice” and the NYT reporters are so credulous that they have become the propagandists for Cannelos and Lehman’s looters.

Americans don’t deserve Apple’s profits, Chinese do?

noreply@blogger.com (pippinghole) — Wed, 11 Sep 2013 22:07:00 +0000